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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 001-13003
SILVERLEAF RESORTS, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-2259890
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1221 RIVER BEND DRIVE, SUITE 120 75247
DALLAS, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 214-631-1166
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
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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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the last sales price of the Common Stock on November 13,
2002 as reported by the Electronic Quotation Service of Pink Sheets LLC, was
approximately $3,224,300 (based on 17,913,004 Shares held by non-affiliates).
At November 13, 2002, there were 36,826,906 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference: None
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FORM 10-K INDEX
<Table>
<Caption>
PAGE
----
Explanatory Note......................................................... 3
PART I
Items 1. and 2. Business and Properties.................................................. 7
Item 3. Legal Proceedings........................................................ 43
Item 4. Submission of Matters to a Vote of Security Holders...................... 44
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 45
Item 6. Selected Financial Data.................................................. 46
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 48
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............... 58
Item 8. Financial Statements and Supplementary Data.............................. 59
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 60
Item 11. Executive Compensation................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 66
Item 13. Certain Relationships and Related Transactions........................... 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 68
Index to Consolidated Financial Statements............................... F-1
</Table>
2
EXPLANATORY NOTE
The Company has undergone material operational and financial changes since
December 31, 2000. The disclosures contained in this annual report on Form 10-K
for the year ended December 31, 2001 should be read in conjunction with the
summary set forth below of certain material events regarding the Company that
have occurred since December 31, 2000, as well as the more detailed descriptions
of subsequent events that appear throughout the text of this annual report for
2001.
CLOSING OF EXCHANGE OFFER
On May 2, 2002, the Company completed an exchange offer (the "Exchange
Offer") commenced on March 15, 2002 regarding its 10 1/2% senior subordinated
notes due 2008 (the "Old Notes"). A total of $56,934,000 in principal amount of
the Company's Old Notes were exchanged for a combination of $28,467,000 in
principal amount of the Company's new class of 6.0% senior subordinated notes
due 2007 ("Exchange Notes") and 23,937,489 shares of the Company's common stock
representing approximately 65% of the common stock outstanding immediately
following the Exchange Offer. Under the terms of the Exchange Offer, tendering
holders collectively received cash payments of $1,335,545 on May 16, 2002, and
received a further cash payment of $334,455 on October 1, 2002. A total of
$9,766,000 in principal amount of the Company's Old Notes were not tendered and
remain outstanding. As a condition of the Exchange Offer, the Company paid all
past due interest to non-tendering holders of its Old Notes. Under the terms of
the Exchange Offer, the acceleration of the maturity date on the Old Notes which
occurred in May 2001 was rescinded, and the original maturity date in 2008 for
the Old Notes was reinstated. Past due interest paid to nontendering holders of
the Old Notes was $1,827,806 The indenture under which the Old Notes were issued
(the "Old Indenture") was also consensually amended as a part of the Exchange
Offer. As a result of the Exchange Offer, the number of issued and outstanding
shares of the Company's common stock increased from 12,889,417 on December 31,
2001 to 36,826,906 on May 2, 2002.
The Company also completed amendments to its credit facilities with its
principal senior lenders as well as amendments to a $100 million conduit
facility through one of its unconsolidated subsidiaries. Finalization of the
Exchange Offer and the amendment of its principal credit facilities effective in
May 2002, marks the completion of the Company's debt restructuring plan
announced on March 15, 2002, which was necessitated by severe liquidity problems
first announced by the Company on February 27, 2001. As a part of the debt
restructuring, the Company's noteholders and senior lenders waived all
previously declared events of default.
As a result of the change in stock ownership resulting from the issuance of
23,937,489 new shares of common stock, and in accordance with the terms of the
Exchange Offer, three new independent directors joined the Company's board in
May 2002. These new independent directors now comprise three of the five members
of the Company's board of directors.
EVENTS LEADING TO THE EXCHANGE OFFER
On February 27, 2001, the Company publicly disclosed that its negotiations
for expansion and extension of certain credit facilities with a principal lender
as well as negotiations with other financing sources had proven unsuccessful and
that the Company did not have sufficient financing in place to sustain its
operations at then existing levels. As a result of its liquidity concerns, it
became clear to the Company that conditions either then existed, or soon would
exist, which would constitute defaults under all of its existing credit
facilities and under the Old Indenture. Consequently, the Company also publicly
announced on February 27, 2001 that it was reducing its sales and marketing
operations in an attempt to conserve cash, downsize its business to a
sustainable level, and thereby attempt to maintain itself as a going concern
until all available alternatives could be explored. The Company further
disclosed that it would pursue funding alternatives with its principal lenders
and others to provide adequate financial resources for a reduced level of
operations. In accordance with its public announcement of February 27, 2001, the
Company immediately commenced a downsizing of its operations. The Company's
principal downsizing activities included the following:
o a 50% projected reduction in vacation interval sales in order to operate
within existing liquidity restraints;
o a reduction in Company employees from approximately 2,900 on February
27, 2001 to approximately 1,800 at December 31, 2001;
o the closing of three of the Company's five telemarketing call centers;
o the slowing of new construction at the fully developed timeshare resorts
owned by the Company;
3
o the Company's proposed sale of the Kansas City, Missouri and Las Vegas,
Nevada undeveloped timeshare resort locations; and
o a reduction of general and administrative expenses in all departments.
Additionally, during 2001 the Company implemented other downsizing measures
it deemed prudent in order to position itself for a reduced and sustainable
level of operations. While its downsizing measures during 2001 reduced the
Company's projected costs of operations in periods after the first quarter of
2001, the Company also sustained substantial restructuring costs during the year
ended December 31, 2001 in order to implement its corporate downsizing and to
develop a plan for the restructuring of its debt (the "Restructuring Plan"). The
Company continued to incur further restructuring costs in connection with the
Restructuring Plan in the first two quarters of 2002.
On April 1, 2001, the Company was unable to make the regularly scheduled
interest payment on the Old Notes as a result of defaults which had occurred
under one or more of its senior credit facilities. As it was required to do
under the Old Indenture, the Company issued a Payment Blockage Notice to the Old
Indenture Trustee advising that the payment due April 1 could not be made. The
Old Indenture Trustee delivered a notice of default to the Company on May 1,
2001 when the Company failed to cure the April 1 interest payment default. The
Old Indenture Trustee further notified the Company on May 21, 2001 that it had
been instructed by holders of more than 25% of the principal amount of the Old
Notes outstanding to accelerate payment of the principal, interest, and other
charges due under the Old Notes.
As a result of the Company's announcements in February 2001 concerning its
liquidity and financial condition, the price of the Company's common stock
dropped below the continued listing requirements of the New York Stock Exchange
("NYSE"). On April 27, 2001, the Company announced that it intended to file a
plan with the NYSE by June 4, 2001 to advise the NYSE how the Company would be
able to return to compliance with the continued listing requirements. However,
due to the Company's inability to restructure its financial affairs before that
date, the Company was unable to file a plan with the NYSE, and the Company's
common stock was suspended from trading in June 2001 and subsequently delisted
from trading with the NYSE in August 2001. Bid and ask quotations regarding the
Company's common stock are now reported by the Electronic Quotation Service
operated by Pink Sheets LLC; however, these quotations are not necessarily
indicative of actual trading activity.
RESTRUCTURING PLAN
Commencing in March 2001, the Company explored strategic alternatives,
including the possibility of a sale of the Company or its assets and/or
reorganizing under court-supervised proceedings. None of these explorations
resulted in options which the Company believed were viable or in the best
interest of the Company, its shareholders or its creditors. On September 19,
2001, the Board of Directors of the Company determined it would be in the best
interests of the Company to focus its attention on the process of formulating an
out of court reorganization of its indebtedness to its principal creditors; this
process ultimately resulted in the Restructuring Plan.
In order to develop the Restructuring Plan, the Company engaged in extended
negotiations during the third and fourth quarters of 2001 with the Senior
Lenders and DZ Bank, which resulted in amendments to the senior credit
facilities ("Amended Senior Credit Facilities") and the DZ Bank facility
("Amended DZ Bank Facility"). The Company also engaged in extensive discussions
with an ad hoc committee of holders of the Old Notes (the "Noteholders'
Committee"). As a result of these discussions, the Company and the Noteholders'
Committee negotiated the basic terms of the Exchange Offer. An Offer to Exchange
was distributed to holders of the Old Notes on March 15, 2002, and on May 2,
2002, the Company completed the Exchange Offer and the Restructuring Plan.
While the purpose of the Restructuring Plan is to provide the Company with a
sufficient level of liquidity from its operations to meet future requirements,
there is no certainty that the Company will be able to comply with the terms of
the Amended Senior Credit Facility, the Amended DZ Bank Facility, the Exchange
Notes or the Old Notes, and continue to operate as a going concern. See
"Cautionary Statements " beginning on page 34 of the following annual report.
DELAYED AUDITS AND DELINQUENT REPORTS
On April 2, 2001, the Company notified the Commission that it would be
unable to timely file its Annual Report on Form 10-K for the year ended December
31, 2000 due to the Company's announced liquidity and going concern issues.
Until the Company was able to finalize the terms of the Restructuring Plan in
December 2001, it was unable, due to uncertainties, to finalize its accounting
records and financial statements for the year ended December 31, 2000.
Nevertheless, the Company did announce on April 2, 2001 that it anticipated that
it would record a substantial non-cash charge related to various items which
would result in a loss for the fourth
4
quarter and year ended December 31, 2000. The uncertainties preventing the
Company from finalizing its accounting records and financial statements related
primarily to the Company's need to fully assess the impact of (i) the downsizing
of its operations, (ii) the availability or unavailability of additional
financing from new or existing sources to sustain its downsized operations, and
(iii) the Company's assessment of the value of its assets at December 31, 2000.
The Company finalized its financial statements for the year ended December 31,
2000, during the first quarter of 2002 and its auditors completed work on the
audit of the Company's financial statements for the year ended December 31, 2000
on March 12, 2002.
On November 19, 2002, the Company simultaneously filed the following
delinquent and/or amended reports with the Securities and Exchange Commission:
o Forms 10-Q for each of the quarterly periods ended June 30, 2002 and
March 31, 2002;
o Form 10-K for the year ended December 31, 2001;
o Forms 10-Q for each of the quarterly periods ended September 30, 2001,
June 30, 2001, and March 31, 2001;
o Form 10-K for the year ended December 31, 2000;
o Forms 10-Q/A for each of the quarterly periods ended September 30, 2000,
June 30, 2000, and March 31, 2000.
The disclosures contained in this Form 10-K for the year ended December 31, 2001
should be read in conjunction with the other SEC reports set forth above also
filed on November 19, 2002. While the Company has now filed the above
referenced reports, this report and the Company's Form 10-K for 2000 do not
fully comply with SEC requirements, because of the disclaimer of opinion
discussed below concerning the Company's 2000 financial statements.
DISCLAIMER OF OPINION BY PRIOR INDEPENDENT AUDITORS CONCERNING 2000 FINANCIAL
STATEMENTS
On March 12, 2002, the Company's former independent auditors, Deloitte &
Touche LLP, disclaimed an opinion on the consolidated balance sheet of the
Company and its consolidated subsidiaries as of December 31, 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 2000. Deloitte & Touche LLP disclaimed an
opinion because of pervasive uncertainties regarding the Company's ability to
continue as a going concern. These pervasive uncertainties were related to the
Company's pre-Exchange Offer difficulties in meeting its loan agreement
covenants and financing needs, its losses from operations, and its negative cash
flows from operating activities which raised substantial doubt about the
Company's ability to continue as a going concern. Deloitte & Touche LLP's report
dated March 12, 2002 on the Company's consolidated financial statements for the
year ended December 31, 1999 did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. See "Management's Discussion and Analysis of Financial
condition and Results of Operations."
On June 19, 2002, the Company terminated Deloitte & Touche LLP and retained
BDO Seidman LLP as its independent auditor. The Company filed a Form 8-K with
the Securities and Exchange Commission on June 25, 2002 disclosing this change
of auditors. In connection with the Company's audits for the years ended
December 31, 1999 and 2000 and subsequently through the date of its dismissal,
the company had no disagreements with Deloitte & Touche LLP on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused it to make reference to the subject
matter of the disagreement in its report on the consolidated financial
statements of the Company.
INDEPENDENT AUDITOR'S REPORT ON 2001 FINANCIAL STATEMENTS - - GOING CONCERN
EXPLANATORY PARAGRAPH
On September 12, 2002, the Company's new independent auditors, BDO Seidman
LLP, issued its report expressing its opinion on the consolidated balance sheet
of the Company and its consolidated subsidiaries as of December 31, 2001 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 2001. While the report of BDO Seidman LLP
does contain an explanatory paragraph about the Company's ability to continue as
a going concern, the report does not disclaim an opinion as to the Company's
financial statements for the year ended December 31, 2001, nor is the report
qualified or modified as to audit scope or accounting principles. The Company
believes it can comply with the terms and conditions of its Restructuring Plan
consummated on May 2, 2002 and thereby continue as a going concern. However,
uncertainties remain. See
5
"Business and Properties - Cautionary Statements" beginning on page 34. The
accompanying consolidated financial statements which appear beginning at page
F-1 of this annual report do not include any adjustments that may be necessary
if the Company is not able to continue as a going concern.
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K UNDER ITEMS 1, 2, AND 7, IN
ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-K, INCLUDING
STATEMENTS QUALIFIED BY THE WORDS "BELIEVE," "INTEND," "ANTICIPATE," "EXPECTS"
AND WORDS OF SIMILAR IMPORT, ARE "FORWARD-LOOKING STATEMENTS" AND ARE THUS
PROSPECTIVE. THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY
REGARDING ITS FUTURE PROFITABILITY, PROSPECTS AND RESULTS OF OPERATIONS. ALL
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS,
UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "CAUTIONARY
STATEMENTS" BEGINNING ON PAGE 34 IN PART I, ITEM 1 OF THIS REPORT. ALL
FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS REPORT ON FORM 10-K
AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS
OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN
THE FORWARD-LOOKING STATEMENTS.
6
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
OVERVIEW
The principal business of Silverleaf Resorts, Inc. ("Silverleaf" or the
"Company") is the development, marketing, and operation of "drive-to" timeshare
resorts. Silverleaf currently owns and/or manages fourteen "drive-to resorts" in
Texas, Missouri, Illinois, Alabama, Georgia, South Carolina, Pennsylvania, and
Tennessee (the "Drive-to Resorts"). Eight of the Drive-to Resorts are owned and
managed by the Company (the "Owned Drive-to Resorts") and six of the Drive-to
Resorts are only managed by the Company (the "Managed Drive-to Resorts").
Silverleaf also owns and/or manages five "destination resorts" in Texas,
Missouri, Mississippi, and Massachusetts (the "Destination Resorts"). Four of
the Destination Resorts are owned by Silverleaf (the "Owned Destination
Resorts") and one Destination Resort is only managed by the Company (the
"Managed Destination Resort").
The Owned Drive-to Resorts are designed to appeal to vacationers seeking
comfortable and affordable accommodations in locations convenient to their
residences and are located proximate to major metropolitan areas. Silverleaf
locates its Owned Drive-to Resorts near principal market areas to facilitate
more frequent "short stay" getaways, which it believes is a growing vacation
trend. Silverleaf's Owned Destination Resorts, which are located in or near
areas with national tourist appeal, offer Silverleaf customers the opportunity
to upgrade into a more upscale resort area as their lifestyles and travel
budgets permit. Both the Owned Drive-to Resorts and the Owned Destination
Resorts (collectively, the "Existing Owned Resorts") provide a quiet, relaxing
vacation environment. Silverleaf believes its resorts offer its customers an
economical alternative to commercial vacation lodging. The average price for an
annual one-week vacation ownership ("Vacation Interval") for a two-bedroom unit
at the Existing Owned Resorts was $9,688 for 2001 and $9,768 for 2000.
The six Managed Drive-to Resorts and the Managed Destination Resort
(collectively, the "Managed Existing Resorts") are managed by Silverleaf under
the terms of long-term management contracts. See "Business and
Properties--Description of Timeshare Resorts Owned and Operated by the Company"
beginning at page 13.
Owners of Silverleaf Vacation Intervals at the Existing Owned Resorts
("Silverleaf Owners") enjoy benefits which are uncommon in the timeshare
industry. These benefits include (i) use of vacant lodging facilities at the
Existing Owned Resorts through Silverleaf's "Bonus Time" Program; (ii)
year-round access to the Existing Owned Resorts' non-lodging amenities such as
fishing, boating, horseback riding, tennis, or golf on a daily basis for little
or no additional charge; and (iii) the right to exchange a Vacation Interval for
a different time period or different Existing Resort through Silverleaf's
internal exchange program. These benefits are subject to availability and other
limitations. Most Silverleaf Owners may also enroll in the Vacation Interval
exchange network operated by Resort Condominiums International ("RCI"). One of
the Company's Owned Destination Resorts, Oak N' Spruce Resort, is under contract
with Interval International, a competitor of RCI.
OPERATIONS
Silverleaf is in the business of marketing and selling Vacation Intervals
from its inventory to individual consumers. Silverleaf's principal activities in
this regard include (i) acquiring and developing timeshare resorts; (ii)
marketing and selling one week annual and biennial Vacation Intervals to
prospective first-time owners; (iii) marketing and selling upgraded Vacation
Intervals to existing Silverleaf Owners; (iv) providing financing for the
purchase of Vacation Intervals; and (v) managing timeshare resorts. The Company
has in-house capabilities which enable it to coordinate all aspects of
development and expansion of the Existing Owned Resorts and the potential
development of any future resorts, including site selection, design, and
construction pursuant to standardized plans and specifications. The Company
performs substantial marketing and sales functions internally and has made
significant investments in operating technology, including telemarketing and
computer systems and proprietary software applications. The Company identifies
potential purchasers through internally developed marketing techniques, and
sells Vacation Intervals through on-site sales offices located at certain of its
resorts which are located in close proximity to major metropolitan areas. This
practice allows the Company an alternative to marketing costs of subsidized
airfare and lodging which are typically associated with the timeshare industry.
As part of the Vacation Interval sales process, the Company offers potential
purchasers financing of up to 90% of the purchase price over a seven-year to
ten-year period. The Company has historically financed its operations by
borrowing from third-party lending institutions at an advance rate of up to 85%
of eligible customer receivables. At December 31, 2001 and 2000, the Company had
a portfolio of approximately 39,684 and 39,530 customer promissory notes,
respectively, totaling approximately $335.7 and $336.4 million with an average
yield of 13.7% and 13.4% per annum, respectively, which compares favorably to
the Company's weighted average cost of borrowings of 8.1% per annum. The Company
ceases
7
recognition of interest income when collection is no longer deemed probable. At
December 31, 2001 and 2000, approximately $6.7 million and $26.0 million in
principal, or 2.0% and 7.7%, respectively, of the Company's loans to Silverleaf
Owners were 61 to 120 days past due, and $0.0 and approximately $7.1 million in
principal, or 0.0% and 2.1%, respectively, of the Company's loans to Silverleaf
Owners were more than 120 days past due. However, the Company does continue
collection efforts with regard to all notes deemed uncollectable until all
collection techniques utilized by the Company have been exhausted. The Company
provides for uncollectible notes by reserving an estimated amount which
management believes is sufficient to cover anticipated losses from customer
defaults.
Each timeshare resort that is owned and/or managed by Silverleaf has a
timeshare owners' association (a "Club"). Each Club operates through a
centralized organization to manage their respective resorts on a collective
basis. The principal such organization is Silverleaf Club. Certain resorts which
are not owned by the Company, but only managed by the Company, are operated
through "Crown Club." Crown Club is not actually a separate entity, but consists
of several individual Club management agreements which have terms of three to
five years. Silverleaf Club and Crown Club, in turn, have contracted with the
Company to perform for them the supervisory, management, and maintenance
functions at the Existing Owned Resorts on a collective basis. All costs of
operating the timeshare resorts, including management fees to the Company, are
to be covered by monthly dues paid by the timeshare owners to their respective
Clubs as well as income generated by the operation of certain amenities at the
timeshare resorts.
DEVELOPMENTS DURING 2001 AND THEREAFTER
Since February 2001, when the Company disclosed significant liquidity issues
arising primarily from the failure to close a credit facility with its largest
secured creditor, management and its financial advisors have been attempting to
develop and implement a plan to return the Company to sound financial condition.
During this period, the Company negotiated and closed short-term secured
financing arrangements with three lenders, which allowed it to operate at
reduced sales levels as compared to original plans and prior years. With the
exception of the Company's inability to pay interest due on the Senior
Subordinated Notes, these short-term arrangements were adequate to keep the
Company's unsecured creditors current on amounts owed.
Under the Exchange Offer that was closed on May 2, 2002, $56,934,000 in
principal amount of the Company's 10 1/2% senior subordinated notes were
exchanged for a combination of $28,467,000 in principal amount of the Company's
new class of 6.0% senior subordinated notes due 2007 and 23,937,489 shares of
the Company's common stock, representing approximately 65% of the common stock
outstanding after the Exchange Offer. As a result of the exchange, the Company
recorded a pre-tax extraordinary gain of $17.9 million in the second quarter of
2002. Under the terms of the Exchange Offer, tendering holders received cash
payments of $1,335,545 on May 16, 2002, and $334,455 on October 1, 2002. A total
of $9,766,000 in principal amount of the Company's 10 1/2% notes were not
tendered and remain outstanding. As a condition of the Exchange Offer, the
Company has paid all past due interest to non-tendering holders of its 10 1/2%
notes. Under the terms of the Exchange Offer, the acceleration of the maturity
date on the 10 1/2% notes which occurred in May 2001 has been rescinded, and the
original maturity date in 2008 for the 10 1/2% notes has been reinstated. Past
due interest paid to non-tendering holders of the 10 1/2% notes was $1,827,806.
The indenture under which the 10 1/2% notes were issued was also consensually
amended as a part of the Exchange Offer.
Management has also negotiated two-year revolving, three-year term out
arrangements for $214 million with its three principal secured lenders, which
were closed at the same time as of the Exchange Offer. In addition, the Company
amended its $100 million off-balance-sheet credit facility through the Company's
SPE. Under these revised credit arrangements, two of the three creditors
converted $42.1 million of existing debt to a subordinated Tranche B. Tranche A
is secured by a first lien on currently pledged notes receivable. Tranche B is
secured by a second lien on the notes, a lien on resort assets, an assignment of
the Company's management contracts with the Clubs, a portfolio of unpledged
receivables currently ineligible for pledge under the existing facility, and a
security interest in the stock of Silverleaf Finance I, Inc., the Company's
special purpose entity ("SPE"). Among other aspects of these revised
arrangements, the Company will be required to operate within certain parameters
of a revised business model and satisfy the financial covenants set forth in the
Amended Senior Credit Facilities, including maintaining a minimum tangible net
worth of $100 million or greater, as defined, sales and marketing expenses as a
percentage of sales below 55.0% for the last three quarters of 2002 and below
52.5% thereafter, notes receivable delinquency rate below 25%, a minimum
interest coverage ratio of 1.1 to 1.0 (increasing to 1.25 to 1 in 2003), and
positive net income. However, compliance with the terms of these financial
covenants cannot be assured.
As long as the Company is able to comply with the financial covenants in its
agreements with its senior lenders, the Company believes it will have adequate
financing to operate for the two-year revolving term of the proposed financing
with the senior lenders. At that time, management will be required to replace or
renegotiate the revolving arrangements subject to availability.
GOING CONCERN ISSUES. As previously described, the Company has completed
refinancing and restructuring transactions related to its debt designed to
return it to a liquid financial condition. However, the Company experienced
significant losses in 2000 and 2001. The Company has also reported a loss for
the first quarter of 2002 but reported net income for the second quarter of
2002. The Company's results for the first and second quarter of 2002 have not
been audited. Under the terms of the proposed debt refinancing
8
and restructuring, future results must be within certain parameters of a revised
business model, which assumes significant improvements over 2000 and 2001
results, and the results reported for the quarters ended June 30 and March 31,
2002.
The principal changes in operations necessary to accomplish the results in
the business model are sustained Vacation Interval sales at reduced levels,
reduced sales and marketing expense as a percentage of sales, reduced operating,
general and administrative expense, and improved customer credit quality which
the Company believes will result in a reduced provision for uncollectible notes.
During the second and third quarters of 2001, the Company closed three outside
sales offices, closed three telemarketing centers, and reduced headcount in
sales, marketing, and general and administrative functions. As a result of these
reductions, management believes that the necessary operating changes needed to
achieve the desired sales, sales and marketing expense, and operating, general
and administrative expense are substantially complete. However, there can be no
assurance that the Company will be able to achieve the financial results
necessary to comply with the financial covenants contained in the Amended Senior
Credit Facilities and the Amended DZ Bank Facility.
Due to the 2000 increase in the Company's provision for uncollectible notes
and the high level of defaults experienced in customer receivables throughout
2001, its provision for uncollectible notes represent approximately 46.3% of
Vacation Interval sales for the year ended December 31, 2000 and 25.2% for the
year ended December 31, 2001. The significant increase in the 2000 provision was
due to a substantial reduction by the Company in two programs that were
previously used to bring delinquent notes receivable current, and the
deterioration of the general U.S. economy that came to public awareness in late
2000. Had neither of the two discontinued programs been in place in 1998 and
1999, the provision for uncollectible notes as a percentage of sales would have
been significantly higher. Management believes the high provision percentage
remained necessary in 2001 because overall consumer confidence in the economy
continued to decline in 2001 and customers concerned about the Company's
liquidity issues began defaulting on their notes after the Company's liquidity
announcement in February 2001.
Since the third quarter of 2001, the Company has been operating under new
sales practices whereby no sales are permitted unless the touring customer has
represented a minimum income level beyond that previously required by each
market, has a valid major credit card, and, further, the marketing division is
employing a program, which should facilitate marketing to customers more likely
to be better credit risks. The Company believes it has made the improvements in
its sales practices necessary to achieve the provision for uncollectible notes
assumed in its revised business model. However, should the economy continue to
deteriorate, and if enhanced sales practices do not result in sufficiently
improved collections, the Company may not realize the improvements contemplated
in its revised business model. If the Company is unable to significantly reduce
the existing levels of defaults on customer receivables (and thereby reduce its
allowance for doubtful accounts), it may not be able to comply with the
financial covenants in its Amended Senior Credit Facilities, which would have a
material adverse effect on the Company and its operations.
While the Company announced the completion of its restructuring and
refinancing transactions on May 2, 2002, the Company's ability to continue as a
going concern is dependent on other factors as well, including the achievement
of the improvements to the Company's operations described above. In addition,
the Amended Senior Credit Facilities require the Company to satisfy certain
financial covenants. Management believes that if the improvements to its
operations are successful, the Company will be able to improve its operating
results to achieve compliance with the financial covenants during the term of
the Amended Senior Credit Facilities. However, the Company's plan to utilize
certain of its assets, predominantly inventory, extends for periods of up to
fifteen years. Accordingly, the Company will need to either extend the Amended
Senior Credit Facilities or obtain new sources of financing through the issuance
of other debt, equity, or collateralized mortgage-backed securities, the
proceeds of which would be used to refinance the debt under the Amended Senior
Credit Facilities, finance mortgages receivable, or for other purposes. The
Company may not have these additional sources of financing available to it at
the times when such financings are necessary.
PROPERTIES
At December 31, 2001, the Company owned and/or managed a total of 19
timeshare resorts. Principal developmental activity which occurred during 2001
is summarized below.
CONTINUED DEVELOPMENT OF OAK N' SPRUCE RESORT. Oak N' Spruce Resort, located
134 miles west of Boston, Massachusetts, has 224 existing units. Silverleaf
intends to develop approximately 240 additional units (12,480 Vacation
Intervals) at this resort in the future. During 2001, the Company added 20 units
at this resort. The Company currently has land use applications pending before
local planning and zoning authorities for approximately 240 additional units. If
for any reason the Company is unsuccessful in obtaining authorizations to build
additional units at Oak N' Spruce Resort it may materially and adversely affect
the Company's ability to develop this resort and to sustain sales of Vacation
Intervals at Oak N' Spruce at existing levels.
9
CONTINUED DEVELOPMENT OF HOLIDAY HILLS RESORT. Holiday Hills Resort, located
two miles east of Branson, Missouri, in Taney County, has 326 existing units.
Silverleaf intends to develop in the future approximately 462 additional units
(23,996 Vacation Intervals) at this resort as of December 31, 2001. During 2001,
the Company added 42 units at the resort.
CONTINUED DEVELOPMENT OF PINEY SHORES RESORT. Piney Shores Resort, located
near Conroe, Texas, north of Houston, has 166 existing units. Silverleaf intends
to develop in the future approximately 126 additional units (6,552 Vacation
Intervals) at this resort. During 2001, the Company added 6 units at this
resort.
CONTINUED DEVELOPMENT OF SILVERLEAF'S SEASIDE RESORT. Silverleaf's Seaside
Resort, located in Galveston, Texas, has 72 existing units. Silverleaf intends
to develop in the future approximately 210 additional units (10,920 Vacation
Intervals) at this resort as of December 31, 2001. During 2001, the Company
added 12 units at this resort.
POSSIBLE DEVELOPMENT OF NEW RESORTS. In December 1998, the Company purchased
1,940 acres of undeveloped land near Philadelphia, Pennsylvania, for
approximately $1.9 million. The property may be developed as a Drive-to Resort
(i.e., Beech Mountain Resort). At December 31, 2001, the Company had received
regulatory approval to develop 408 units (21,216 Vacation Intervals), but had
not scheduled target dates for construction, completion of initial units, or
commencement of marketing and sales efforts.
DISCONTINUED DEVELOPMENT OF CERTAIN RESORTS. As a result of its liquidity
problems announced during 2001, the Company discontinued its development plans
for its undeveloped timeshare resorts in Kansas City, Missouri and Las Vegas,
Nevada and has placed each property for sale. All net sales proceeds, if any,
will be used exclusively to retire outstanding debt to certain of the Company's
senior lenders. As of August 17, 2002, the Las Vegas property was under contract
to sell for $3.15 million; however, there can be no assurance that the sale will
close.
FUTURE GROWTH STRATEGY
Because of various limitations placed on the Company by the terms and
conditions of its Amended Credit Facilities, it will be very difficult for the
Company to significantly increase beyond existing levels its revenues from sales
of Vacation Intervals. Silverleaf intends to capitalize on its significant
expansion capacity at the Existing Owned Resorts by maintaining marketing,
sales, and development activities in accordance with its downsized business
model. Furthermore, Silverleaf continues to emphasize its secondary products,
such as biennial (alternate year) intervals, which are designed to broaden
Silverleaf's potential market with a wider price range of product. The Company
also intends to concentrate more on marketing to existing members including
sales of upgraded Vacation Intervals, second weeks, and existing owner referral
programs.
COMPETITIVE ADVANTAGES
Silverleaf believes the following characteristics of its business afford it
certain competitive advantages:
CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Owned Drive-to Resorts are
located within a two-hour drive of a majority of the target customers'
residences, which accommodates the growing demand for shorter, more frequent,
close-to-home vacations. This proximity facilitates use of Silverleaf's Bonus
Time Program, allowing Silverleaf Owners to use vacant units, subject to
availability and certain limitations. Silverleaf believes it is the only
timeshare operator in the industry which offers its customers these benefits.
Silverleaf Owners can also conveniently enjoy non-lodging resort amenities
year-round on a "country-club" basis.
SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 2001, Silverleaf had
an inventory of 20,913 Vacation Intervals and a master plan to construct new
units which will result in up to 101,060 additional Vacation Intervals at the
Existing Owned Resorts. Silverleaf's master plan for construction of new units
is contingent upon future sales at the Existing Owned Resorts and the
availability of financing, granting of governmental permits, and future
land-planning and site-layout considerations.
IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing,
development, and property management capabilities. While Silverleaf utilizes
outside contractors to supplement internal resources, when appropriate, the
breadth of Silverleaf's internal capabilities allows greater control over all
phases of its operations and helps maintain operating standards and reduce
overall costs.
LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and
generally employs standard architectural designs and operating procedures which
it believes significantly reduce construction and operating expenses.
Standardization and integration also allow Silverleaf to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing Owned
Resorts can normally be constructed on an "as needed" basis within 180 to 270
days.
CENTRALIZED PROPERTY MANAGEMENT. Silverleaf presently operates all of the
Existing Owned Resorts on a centralized and collective basis, with operating and
maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes
that consolidation of resort operations benefits Silverleaf Owners by providing
them with a uniform level of service, accommodations, and amenities on a
standardized, cost-effective basis. Integration also facilitates Silverleaf's
internal exchange program, and the Bonus Time Program.
EXPERIENCED MANAGEMENT. The Company's senior management has extensive
experience in the acquisition, development, and operation of timeshare resorts.
The Company's senior officers have an average of seventeen years of experience
in the timeshare industry.
10
RESORTS SUMMARY
The following tables set forth certain information regarding each of the
Existing Owned Resorts at December 31, 2001, unless otherwise indicated.
EXISTING OWNED RESORTS
<Table>
<Caption>
VACATION INTERVALS
UNITS AT RESORTS AT RESORTS
------------------------- ----------------------
PRIMARY INVENTORY INVENTORY DATE
MARKET AT PLANNED AT PLANNED SALES
RESORT/LOCATION SERVED 12/31/01 EXPANSION(b) 12/31/01 EXPANSION COMMENCED
- ---------------------- --------------- --------- ------------ --------- --------- ---------
DRIVE-TO RESORTS
Holly Lake Dallas- 130 -- 1,305 -- 1982
Hawkins, TX Ft. Worth, TX
The Villages Dallas- 334 96 3,832 4,992(h) 1980
Flint, TX Ft. Worth, TX
Lake O' The Woods Dallas- 64 -- 871 -- 1987
Flint, TX Ft. Worth, TX
Piney Shores Houston, TX 166 126(h) 1,804 6,552(h) 1988
Conroe, TX
Hill Country Austin-San 254(g) 258(h) 1,709 13,416(h) 1984
Canyon Lake, TX Antonio, TX
Timber Creek St. Louis, 72 84(h) 1,255 4,368(h) 1997
DeSoto, MO MO
Fox River Chicago, IL 174 276(h) 1,241 14,352(h) 1997
Sheridan, IL
Apple Mountain Atlanta, GA 60 192(h) 852 9,984(h) 1999
Clarkesville, GA
Treasure Lake Central PA 145 --(e) 1,097 --(e) 1998
Dubois, PA
Alpine Bay Central AL 54 --(e) 8 --(e) 1998
Alpine, AL
Beech Mountain Lakes Eastern PA, 54 --(e) 139 --(e) 1998
Drums, PA NY
Foxwood Hills Eastern SC, 114 --(e) 437 --(e) 1998
Westminster, SC Western GA
Tansi Resort Nashville- 124 --(e) 381 --(e) 1998
Crossville, TN Knoxville, TN
Westwind Manor Dallas- 37 --(e) 350 --(e) 1998
Bridgeport, TX Ft. Worth, TX
DESTINATION RESORTS LOCATIONS
Ozark Mountain Branson, 136 --(h) 697 --(h) 1982
Kimberling City, MO MO
Holiday Hills Branson, 326 462(h) 2,339 23,996(h) 1984
Branson, MO MO
Oak N' Spruce Boston, MA 224 240(h) 1,245 12,480(h) 1998
South Lee, MA New York, NY
Silverleaf's Seaside Galveston, 72 210(h) 1,183 10,920(h) 2000
Galveston, TX TX
Hickory Hills Gulf Coast, 80 --(e) 168 --(e) 1998
Gautier, MS MS
--------- -------- --------- --------
Total 2,620 1,944 20,913 101,060
========= ======== ========= ========
<Caption>
VACATION INTERVALS
SOLD
------------------------- AVERAGE
IN SALES
THROUGH 2001 PRICE AMENITIES/
RESORT/LOCATION 12/31/01(c) ONLY(a) IN 2001 ACTIVITIES(d)
- ---------------------- ----------- -------- ------- -------------
DRIVE-TO RESORTS
Holly Lake 5,195 496 $ 8,973 B,F,G,H,M,S,T
Hawkins, TX
The Villages 13,128 1,383 8,899 B,F,H,M,S,T
Flint, TX
Lake O' The Woods 2,329 135 8,358 F,M,S,T(f)
Flint, TX
Piney Shores 6,636 1,080 9,602 B,F,H,M,S,T
Conroe, TX
Hill Country 11,127 1,396 9,617 H,M,S,T(f)
Canyon Lake, TX
Timber Creek 2,489 521 10,168 B,F,G,M,S,T
DeSoto, MO
Fox River 7,807 1,985 10,080 B,F,G,M,S,T
Sheridan, IL
Apple Mountain 2,269 444 10,079 G,H,M,S,T
Clarkesville, GA
Treasure Lake 6,234 -- -- G,B,F,S,T,M
Dubois, PA
Alpine Bay 2,746 -- -- G,S,T,M(f)
Alpine, AL
Beech Mountain Lakes 2,615 -- -- B,F,S,T
Drums, PA
Foxwood Hills 5,281 -- -- G,T,S,M(f)
Westminster, SC
Tansi Resort 5,891 -- -- T,G,F,B,M, S
Crossville, TN
Westwind Manor 1,537 -- -- G,F,M,S,T
Bridgeport, TX
DESTINATION RESORTS
Ozark Mountain 6,151 181 10,019 B,F,M,S,T
Kimberling City, MO
Holiday Hills 14,477 712 9,817 G,S,T(f)
Branson, MO
Oak N' Spruce 10,403 1,376 10,034 F,G,S,T
South Lee, MA
Silverleaf's Seaside 2,561 32 9,242 S,T
Galveston, TX
Hickory Hills 3,912 -- -- B,F,G,M,S,T
Gautier, MS
--------- --------- ---------
Total 112,788 9,741 $ 9,688
========= ========= =========
</Table>
11
(a) These totals do not reflect sales of upgraded Vacation Intervals to
Silverleaf Owners. In this context, a sale of an "upgraded Vacation
Interval" refers to an exchange of a lower priced interval for a higher
priced interval in which the Silverleaf Owner is given credit for all
principal payments previously made toward the purchase of the lower priced
interval. For the year ended December 31, 2001, upgrade sales at the
Existing Owned Resorts were as follows:
<Table>
<Caption>
AVERAGE SALES PRICE
FOR THE YEAR
ENDED 12/31/01
UPGRADED VACATION -- NET OF
RESORT INTERVALS SOLD EXCHANGED INTERVAL
- ------------------------- ------------------- ------------------
Holly Lake....................... 120 $ 3,577
The Villages..................... 988 4,417
Lake O' The Woods................ 67 3,605
Piney Shores..................... 801 4,146
Hill Country..................... 1,442 4,415
Timber Creek..................... 304 3,842
Fox River........................ 671 4,209
Ozark Mountain................... 253 4,695
Holiday Hills.................... 2,711 5,006
Oak N' Spruce.................... 2,020 2,626
Apple Mountain................... 383 4,690
Silverleaf's Seaside............. 816 5,408
----------
10,576
</Table>
The average sales price for the 10,576 upgraded Vacation Intervals sold was
$4,254 for the year ended December 31, 2001.
(b) Represents units included in the Company's master plan. This plan is subject
to change based upon various factors, including consumer demand, the
availability of financing, grant of governmental land-use permits, and
future land-planning and site layout considerations. The following chart
reflects the status of certain planned units at December 31, 2001:
<Table>
<Caption>
LAND-USE LAND-USE LAND-USE
PROCESS PROCESS PROCESS CURRENTLY IN SHELL
NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL
------------ --------- --------- ------------ -------- ------
The Villages.............. -- -- 96 -- -- 96
Piney Shores.............. -- -- 108 18 -- 126
Hill Country.............. -- -- 246 12 -- 258
Timber Creek.............. -- -- 84 -- -- 84
Fox River................. -- -- 264 12 -- 276
Holiday Hills............. -- -- 438 24 -- 462
Oak N' Spruce............. -- 192 36 12 -- 240
Apple Mountain............ 126 -- 48 18 -- 192
Silverleaf's Seaside...... -- -- 198 12 -- 210
------------ --------- --------- ------------ -------- ------
126 192 1,518 108 -- 1,944
============ ========= ========= ============ ======== ======
</Table>
"Land-Use Process Pending" means that the Company has commenced the
process which the Company believes is required under current law in order to
obtain the necessary land-use authorizations from the applicable local
governmental authority with jurisdiction, including submitting for approval
any architectural drawings, preliminary plats, or other attendant items as
may be required.
"Land-Use Process Complete" means either that (i) the Company believes
that it has obtained all necessary land-use authorizations under current law
from the applicable local governmental authority with jurisdiction,
including the approval and filing of any required preliminary or final plat
and the issuance of building permit(s), in each case to the extent
applicable, or (ii) upon payment of any required filing or other fees, the
Company believes that it will under current law obtain such necessary
authorizations without further process.
"Shell Complete" units are currently devoted to such uses as a general
store, registration office, sales office, activity center, construction
office, or pro shop. The Company anticipates that these units will continue
to be used for such purposes during 2002.
(c) These totals are net of intervals received from upgrading customers and from
intervals received from cancellations.
(d) Principal amenities available to Silverleaf Owners at each resort are
indicated by the following symbols: B -- boating; F -- fishing; G -- golf; H
-- horseback riding; M -- miniature golf; S -- swimming pool; and T --
tennis.
(e) The Company has management rights with respect to these resorts and
presently has no ability to expand the resorts. In 2000, the Company
discontinued plans to sell Vacation Intervals at these resorts and the
Company's costs associated with its unsold inventory of Vacation Intervals
at these resorts were written off.
12
(f) Boating is available near the resort.
(g) Includes three units which have not been finished-out for accommodations and
which are currently used for other purposes.
(h) Engineering, architectural, and construction estimates have not been
completed by the Company, and there can be no assurance that the Company
will develop these properties at the unit numbers currently projected.
FEATURES COMMON TO EXISTING OWNED RESORTS
Owned Drive-to Resorts are primarily located in rustic areas offering
Silverleaf Owners a quiet, relaxing vacation environment. Furthermore, the
resorts offer different vacation activities, including golf, fishing, boating,
swimming, horseback riding, tennis, and archery. Owned Destination Resorts are
located in or near areas with national tourist appeal. Features common to the
Existing Owned Resorts include the following:
BONUS TIME PROGRAM. The Company's Bonus Time Program offers Silverleaf Club
members a benefit not typically enjoyed by many other timeshare owners. In
addition to the right to use a unit one week per year, the Bonus Time Program
allows Silverleaf Club members to also use vacant units at any of the Company's
owned resorts. The Bonus Time Program is limited based on the availability of
units. Silverleaf Owners who have utilized the resort less frequently are given
priority to use the program and may only use an interval with an equal or lower
rating than the owned Vacation Interval. The Company believes this program is
important as many vacationers prefer shorter two to three day vacations.
YEAR-ROUND USE OF AMENITIES. Even when not using the lodging facilities,
Silverleaf Owners have unlimited year-round day usage of the amenities located
at the Existing Owned Resorts, such as boating, fishing, miniature golf, tennis,
swimming, or hiking, for little or no additional cost. Certain amenities,
however, such as golf, horseback riding, or watercraft rentals, may require a
usage fee.
EXCHANGE PRIVILEGES. Each Silverleaf Owner has certain exchange privileges
which may be used on an annual basis to (i) exchange an interval for a different
interval (week) at the same resort so long as the different interval is of an
equal or lower rating; or (ii) exchange an interval for the same interval (week)
at any other of the Existing Owned Resorts. These intra-company exchange rights
are a convenience Silverleaf provides its members as an accommodation to them,
and are conditioned upon availability of the desired interval or resort.
Approximately 2,629 intra-company exchanges occurred in 2001. Silverleaf Owners
pay an exchange fee of $75 to the Silverleaf Club for each such internal
exchange. In addition, for an annual fee of approximately $84, most Silverleaf
Owners may join the exchange program administered by RCI. Silverleaf Owners at
Oak N' Spruce Resort may pay an annual fee of $79 to join the exchange program
administered by Interval International. Both RCI and Interval International also
charge an additional exchange fee for each exchange.
DEEDED OWNERSHIP. The Company typically sells a Vacation Interval which
entitles the owner to use a specific unit for a designated one-week interval
each year. The Vacation Interval purchaser receives a recorded deed which grants
the purchaser a percentage interest in a specific unit for a designated week.
The Company also sells a biennial (alternate year) Vacation Interval, which
allows the owner to use a unit for a one-week interval every other year with
reduced dues.
MANAGEMENT CLUBS. Each of the Existing Owned Resorts and the Existing
Managed Resorts has a Club for the benefit of the timeshare owners. The Clubs
operate under either Silverleaf Club or Crown Club to manage the Existing Owned
Resorts on a centralized and collective basis. Silverleaf Club and Crown Club
have contracted with the Company to perform the supervisory, management, and
maintenance functions granted by the Clubs. Costs of these operations are
covered by monthly dues paid by timeshare owners to their respective Clubs
together with income generated by the operation of certain amenities at each
respective resort.
ON-SITE SECURITY. Each of the Resorts is patrolled by security personnel who
are either employees of the Management Clubs or personnel of independent
security service companies which have contracted with the Clubs.
DESCRIPTION OF TIMESHARE RESORTS OWNED AND OPERATED BY THE COMPANY
HOLLY LAKE RESORT. Holly Lake is a family-oriented golf resort located in
the Piney Woods of east Texas, approximately 105 miles east of Dallas, Texas.
The timeshare portion of Holly Lake is part of a 4,300 acre mixed-use
development of single-family lots
13
and timeshare units with other third-party developers. The Company owns
approximately 2,740 acres within Holly Lake, of which approximately 2,667 acres
may not be developed due to deed restrictions. At December 31, 2001,
approximately 27 acres were developed. The Company has no future development
plans.
At December 31, 2001, 130 units were completed and no additional units are
planned for development. Three different types of units are offered at the
resort: (i) two bedroom, two bath, wood siding, fourplexes; (ii) one bedroom,
one bath, one sleeping loft, log construction duplexes; and (iii) two bedroom,
two bath, log construction fourplexes. Each unit has a living room with sleeper
sofa and full kitchen. Other amenities within each unit include whirlpool tub,
color television, and vaulted ceilings. Certain units include interior ceiling
fans, imported ceramic tile, over-sized sliding glass doors, and rattan and pine
furnishings.
Amenities at the resort include an 18-hole golf course with pro shop,
19th-hole private club and restaurant, country store, indoor rodeo arena and
stables, five tennis courts (four lighted), two different lakes (one with sandy
swimming beach and swimming dock, one with boat launch for water-skiing), three
outdoor swimming pools with bathhouses, and pavilion, recently completed
hiking/nature trails, children's playground area, two miniature golf courses,
five picnic areas, activity center with grill, big screen television, game room
with arcade games and pool tables, horseback trails, and activity areas for
basketball, horseshoes, volleyball, shuffleboard, and archery. Silverleaf Owners
can also rent canoes, bicycles, and water trikes. Homeowners in neighboring
subdivisions are entitled to use the amenities at Holly Lake pursuant to
easements or use agreements.
At December 31, 2001, the resort contained 6,500 Vacation Intervals, of
which 1,305 intervals remained available for sale. The Company has no plans to
build additional units. Vacation Intervals at the resort are currently priced
from $7,400 to $11,300 for one-week stays. During 2001, 496 Vacation Intervals
were sold.
THE VILLAGES AND LAKE O' THE WOODS RESORTS. The Villages and Lake O' The
Woods are sister resorts located on the shores of Lake Palestine, approximately
100 miles east of Dallas, Texas. The Villages, located approximately five miles
northwest of Lake O' The Woods, is an active sports resort popular for
water-skiing and boating. Lake O' The Woods is a quiet wooded resort where
Silverleaf Owners can enjoy the seclusion of dense pine forests less than two
hours from the Dallas-Fort Worth metroplex. The Villages is a mixed-use
development of single-family lots and timeshare units, while Lake O' The Woods
has been developed solely as a timeshare resort. The two resorts contain
approximately 652 acres, of which approximately 379 may not be developed due to
deed restrictions. At December 31, 2001, approximately 181 acres were developed
and 18 acres are currently planned by the Company to be used for future
development.
At December 31, 2001, 334 units were completed at The Villages and 64 units
were completed at Lake O' The Woods. An additional 96 units are planned for
development at The Villages and no additional units are planned for development
at Lake O' The Woods. There are five different types of units at these resorts:
(i) three bedroom, two and one-half bath, wood siding exterior duplexes and
fourplexes (two units); (ii) two bedroom, two and one-half bath, wood siding
exterior duplexes and fourplexes; (iii) two bedroom, two bath, brick and siding
exterior fourplexes; (iv) two bedroom, two bath, wood and vinyl siding exterior
fourplexes, sixplexes, twelveplexes and a sixteenplex; and (v) one bedroom, one
bath with two-bed loft sleeping area, log construction duplexes. Amenities
within each unit include full kitchen, whirlpool tub, and color television.
Certain units include interior ceiling fans, ceramic tile, and/or a fireplace.
"Presidents Harbor" units feature a larger, more spacious floor plan (1,255
square feet), back veranda, washer and dryer, and a more elegant decor.
Both resorts are situated on Lake Palestine, a 27,000 acre public lake.
Recreational facilities and improvements at The Villages include a full service
marina with convenience store, gas dock, boat launch, water-craft rentals, and
covered and locked rental boat stalls; three swimming pools; two lighted tennis
courts; miniature golf course; nature trails; camp sites; riding stables;
soccer/softball field; children's playground; RV sites; a new 9,445 square foot
activity center with theater room wide-screen television, reading room, grill,
tanning beds, pool table, sauna, and small indoor gym; and competitive sports
facilities which include horseshoe pits, archery range, and shuffleboard,
volleyball, and basketball courts. Silverleaf Owners at The Villages can also
rent or use jet skis, motor boats, paddle boats, and pontoon boats. Neighboring
homeowners are also entitled to use these amenities pursuant to a use agreement.
Recreational facilities at Lake O' The Woods include swimming pool,
bathhouse, lighted tennis court, a recreational beach area with picnic areas, a
fishing pier on Lake Palestine, nature trails, soccer/softball field, children's
playground, RV sites, an activity center with wide-screen television and pool
table, horseshoe pits, archery range, miniature golf course, shuffleboard,
volleyball, and basketball courts.
At December 31, 2001, The Villages contained 16,960 total Vacation
Intervals, of which 3,832 remained available for sale. The Company plans to
build 96 additional units at The Villages, which would yield an additional 4,992
Vacation Intervals available for sale. At December 31, 2001, Lake O' The Woods
contained 3,200 total Vacation Intervals, of which 871 remained available for
sale. The Company has no plans to build additional units at Lake O' The Woods.
Vacation Intervals at The Villages and Lake O' The
14
Woods are currently priced from $7,000 to $12,300 for one-week stays (and start
at $5,000 for biennial intervals), while one-week "Presidents Harbor" intervals
are priced at $8,900 to $19,500 depending on the value rating of the interval.
During 2001, 1,383 and 135 Vacation Intervals were sold at The Villages and Lake
O' The Woods, respectively.
PINEY SHORES RESORT. Piney Shores Resort is a quiet, wooded resort ideally
located for day-trips from metropolitan areas in the southeastern Gulf Coast
area of Texas. Piney Shores Resort is located on the shores of Lake Conroe,
approximately 40 miles north of Houston, Texas. The resort contains
approximately 113 acres. At December 31, 2001, approximately 72 acres were
developed and 11 acres are currently planned by the Company to be used for
future development.
At December 31, 2001, 166 units were completed and 126 units are planned for
development at Piney Shores Resort. All units are two bedroom, two bath units
and will comfortably accommodate up to six people. Amenities include a living
room with sleeper, full kitchen, whirlpool tub, color television, and interior
ceiling fans. Certain "lodge-style" units feature stone fireplaces, white-washed
pine wall coverings, "age-worn" paint finishes, and antique furnishings.
President's Cove units feature a larger, more spacious floor plan (1255 square
feet) with a back veranda, washer and dryer, and a more elegant decor.
The primary recreational amenity at the resort is Lake Conroe, a 21,000 acre
public lake. Other recreational facilities and improvements available at the
resort include two swimming pools with two spas, a bathhouse complete with
outdoor shower and restrooms, lighted tennis court, miniature golf course,
stables, horseback riding trails, children's playground, picnic areas, boat
launch, beach area for swimming, 4,626-square foot activity center with
big-screen television, 32-seat theatre room with big screen television), covered
wagon rides, and facilities for horseshoes, archery, shuffleboard, and
basketball.
At December 31, 2001, the resort contained 8,440 Vacation Intervals, of
which 1,804 remained available for sale. The Company intends to build 126
additional units, which would yield an additional 6,552 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,000 to $12,300 for one-week stays (and start at $5,000 for biennial
intervals). During 2001, 1,080 Vacation Intervals were sold.
HILL COUNTRY RESORT. Hill Country Resort is located near Canyon Lake in the
hill country of central Texas between Austin and San Antonio. The resort
contains approximately 110 acres. At December 31, 2001, approximately 38 acres
were developed and 19 acres are currently planned by the Company to be used for
future development.
At December 31, 2001, 254 units were completed and 258 units are planned for
development at Hill Country Resort. Some units are single story, while certain
other units are two-story structures in which the bedrooms and baths are located
on the second story. Each unit contains two bedrooms, two bathrooms, living room
with sleeper sofa, and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and interior design details such as vaulted
ceilings. Certain units include interior ceiling fans, imported ceramic tile,
over-sized sliding glass doors, rattan and pine furnishings, or fireplace. 134
units feature the Company's new "lodge style." 32 "Presidents Villas" units
feature a larger, more spacious floor plan (1,255 square feet), back veranda,
washer and dryer, and a more elegant decor.
Amenities at the resort include a 7,943-square foot activity center with
electronic games, pool table, and wide-screen television, miniature golf course,
a children's playground areas, barbecue and picnic area, enclosed swimming pool
and heated spa, children's wading pool, newly-constructed tennis court, and
activity areas for basketball, horseshoes, shuffleboard and sand volleyball
court. Area sights and activities include water-tubing on the nearby Guadeloupe
River and visiting the many tourist attractions in San Antonio, such as Sea
World, The Alamo, The River Walk, and the San Antonio Zoo.
At December 31, 2001, the resort contained 12,836 Vacation Intervals, of
which 1,709 remained available for sale. The Company plans to build 258
additional units, which collectively would yield 13,416 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $7,000 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals), while one-week "Presidents Villas" intervals are priced at
$8,900 to $21,500 depending on the value rating of the interval. During 2001,
1,396 Vacation Intervals were sold.
OZARK MOUNTAIN RESORT. Ozark Mountain Resort is a family-oriented resort
located on the shores of Table Rock Lake, which features bass fishing. The
resort is located approximately 15 miles from Branson, Missouri, a family music
and entertainment center, 233 miles from Kansas City, and 276 miles from St.
Louis. Ozark Mountain Resort is a mixed-use development of timeshare and
condominium units. At December 31, 2001, the resort contained approximately 116
acres. The Company has no future development plans.
At December 31, 2001, 136 units were completed and no additional units are
planned for development. There are two types of units at the resort: (i) two
bedroom, two bath, one-story fourplexes and (ii) two bedroom, two bath,
three-story sixplexes. Each
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standard unit includes two large bedrooms, two bathrooms, living room with
sleeper sofa, and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and vaulted ceilings. Certain units contain
interior ceiling fans, imported ceramic tile, oversized sliding glass doors,
rattan or pine furnishings, or fireplace. "Presidents View" units feature a
panoramic view of Table Rock Lake, a larger, more spacious floor plan (1,255
square feet), front and back verandas, washer and dryer, and a more elegant
decor.
The primary recreational amenity available at the resort is Table Rock Lake,
a 43,100-acre public lake. Other recreational facilities and improvements at the
resort include a swimming beach with dock, an activities center with pool table,
covered boat dock and launch ramp, olympic-sized swimming pool, lighted tennis
court, nature trails, two picnic areas, playground, miniature golf course, and a
competitive sports area accommodating volleyball, basketball, tetherball,
horseshoes, shuffleboard, and archery. Guests can also rent or use canoes, or
paddle boats. Owners of neighboring condominium units developed by the Company
in the past are also entitled to use these amenities pursuant to use agreements
with the Company. Similarly, owners of Vacation Intervals are entitled to use
certain amenities of these condominium developments, including a wellness center
featuring a small pool, hot tub, sauna, and exercise equipment.
At December 31, 2001, the resort contained 6,848 Vacation Intervals, of
which 697 remained available for sale. The Company has no plans to build
additional units. Vacation Intervals at the resort are currently priced from
$8,500 to $13,500 for one-week stays, while one-week "Presidents View" intervals
are priced at $9,500 to $21,500 depending on the value rating of the interval.
During 2001, 181 Vacation Intervals were sold.
HOLIDAY HILLS RESORT. Holiday Hills Resort is a resort community located in
Taney County, Missouri, two miles east of Branson, Missouri. The resort is 224
miles from Kansas City and 267 miles from St. Louis. The resort is heavily
wooded by cedar, pine, and hardwood trees, and is favored by Silverleaf Owners
seeking quality golf and nightly entertainment in nearby Branson. Holiday Hills
Resort is a mixed-use development of single-family lots, condominiums, and
timeshare units. The resort contains approximately 405 acres, including a
91-acre golf course. At December 31, 2001, approximately 296 acres were
developed and 68 acres are currently planned by the Company to be used for
future development.
At December 31, 2001, 326 units were completed and an additional 462 units
are planned for future development. There are four types of timeshare units at
this resort: (i) two bedroom, two bath, one-story fourplexes, (ii) one bedroom,
one bath, with upstairs loft, log construction duplexes, (iii) two bedroom, two
bath, two-story fourplexes, and (iv) two bedroom, two bath, three-story
sixplexes and twelveplexes. Each unit includes a living room with sleeper sofa,
full kitchen, whirlpool tub, and color television. Certain units will include a
fireplace, ceiling fans, imported tile, oversized sliding glass doors, vaulted
ceilings, and rattan or pine furniture. "Presidents Fairways" units feature a
larger, more spacious floor plan (1,255 square feet), back veranda, washer and
dryer, and a more elegant decor.
Taneycomo Lake, a popular lake for trout fishing, is approximately three
miles from the resort, and Table Rock Lake is approximately ten miles from the
resort. Amenities at the resort include an 18-hole golf course, tennis court,
picnic areas, camp sites, basketball court, activity area which includes
shuffleboard, horseshoes, and a children's playground, a 5,356 square foot
clubhouse that includes a pro shop, restaurant, and meeting space, and a 2,800
square foot outdoor swimming pool. Lot and condominium unit owners are also
entitled to use these amenities pursuant to use agreements between the Company
and certain homeowners' associations.
At December 31, 2001, the resort contained 16,816 Vacation Intervals, of
which 2,339 remained available for sale. The Company plans to build 462
additional units, which would yield an additional 23,996 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,800 to $14,500 for one-week stays (and start at $6,500 for biennial
intervals), while one-week "Presidents Fairways" intervals are priced at $9,500
to $21,500 depending on the value rating of the interval. During 2001, 712
Vacation Intervals were sold.
TIMBER CREEK RESORT. Timber Creek Resort, in Desoto, Missouri, is located
approximately 50 miles south of St. Louis, Missouri. The resort contains
approximately 332 acres. At December 31, 2001, approximately 180 acres were
developed and 6 acres are currently planned by the Company to be used for future
development.
At December 31, 2001, 72 units were completed and an additional 84 units are
planned for future development at Timber Creek Resort. All units are two
bedroom, two bath units. Amenities within each new unit include a living room
with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
units include a fireplace, ceiling fans, imported ceramic tile, French doors,
and rattan or pine furniture.
The primary recreational amenity available at the resort is a 40-acre
fishing lake. Other amenities include a clubhouse, a five-hole par three
executive golf course, swimming pool, two lighted tennis courts, themed
miniature golf course, volleyball court,
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shuffleboard/multi-use sports court, fitness center, horseshoes, archery, a
welcome center, playground, arcade, movie room, tanning bed, cedar sauna, sales
and registration building, hook-ups for recreational vehicles, and boat docks.
The Company is obligated to maintain and provide campground facilities for
members of the previous owner's campground system.
At December 31, 2001, the resort contained 3,744 Vacation Intervals and
1,255 Vacation Intervals remained available for sale. The Company plans to build
84 additional units, which would collectively yield 4,368 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $7,000 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals). During 2001, 521 Vacation Intervals were sold.
FOX RIVER RESORT. Fox River Resort, in Sheridan, Illinois, is located
approximately 70 miles southwest of Chicago, Illinois. The resort contains
approximately 372 acres. At December 31, 2001, approximately 156 acres were
developed and 26 acres are currently planned by the Company to be used for
future development.
At December 31, 2001, 174 units are completed and 276 units are planned for
future development at Fox River Resort. All units are two bedroom, two bath
units. Amenities within each unit include a living room with sleeper sofa, full
kitchen, whirlpool tub, and color television. Certain units include ceiling
fans, ceramic tile, and rattan or pine furniture.
Amenities currently available at the resort include five-hole par three
executive golf course, outdoor swimming pool, clubhouse, covered pool, miniature
golf course, horseback riding trails, stable and corral, welcome center, sales
and registration buildings, hook-ups for recreational vehicles, a tennis court,
a basketball court / seasonal ice-skating rink, shuffleboard courts, sand
volleyball court, outdoor pavilion, and playgrounds. The Company also offers
winter recreational activities at this resort, including ice-skating,
snowmobiling, and cross-country skiing. The Company is obligated to maintain and
provide campground facilities for members of the previous owner's campground
system.
At December 31, 2001, the resort contained 9,048 Vacation Intervals and
1,241 Vacation Intervals remained available for sale. The Company plans to build
276 additional units, which would collectively yield 14,352 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,900 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals). During 2001, 1,985 Vacation Intervals were sold.
OAK N' SPRUCE RESORT. In December 1997, the Company acquired the Oak N'
Spruce Resort in the Berkshire mountains of western Massachusetts. The resort is
located approximately 134 miles west of Boston, Massachusetts, and 114 miles
north of New York City. Oak N' Spruce Resort is a mixed-use development which
includes a hotel and timeshare units. The resort contains approximately 244
acres. At December 31, 2001, approximately 37 acres were developed and 10 acres
are currently planned by the Company to be used for future development. The
Company currently has land use applications pending before local planning and
zoning authorities for approximately 240 additional timeshare units. If for any
reason the Company is unsuccessful in obtaining authorizations to build
additional units at Oak N' Spruce Resort, it may materially and adversely affect
the Company's ability to develop this resort and to sustain sales of Vacation
Intervals at Oak N' Spruce at existing levels.
At December 31, 2001, the resort had 224 units and the above described
additional 240 units are planned for development. There are seven types of
existing units at the resort: (i) one-bedroom flat, (ii) one-bedroom townhouse,
(iii) two-bedroom flat, (iv) two-bedroom townhouse, (v) two-bedroom, flex-time,
and (vi) two-bedroom lodge style and President's style units. There is also a
21-room hotel at the resort which could be converted to timeshare use. Amenities
within each new unit include a living room with sleeper sofa, full kitchen,
whirlpool tub, and color television. Certain units include ceiling fans, ceramic
tile, and rattan or pine furniture.
Amenities at the resort include two indoor heated swimming pools with hot
tubs, an outdoor pool with sauna, health club, lounge, three-hole pitch and putt
golf course, ski rentals, miniature golf, shuffleboard, basketball and tennis
courts, horseshoe pits, hiking and ski trails, and an activity area for
badminton. The resort is also near Beartown State Forest.
At December 31, 2001, the resort contained 11,648 Vacation Intervals, of
which 1,245 remained available for sale. The Company plans to build 240
additional "lodge-style" units, which would yield an additional 12,480 Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $8,150 to $14,500 for one-week stays (and start at $4,200 for
biennial intervals). During 2001, 1,376 Vacation Intervals were sold.
APPLE MOUNTAIN RESORT. Apple Mountain Resort, in Clarkesville, Georgia, is
located approximately 125 miles north of Atlanta, Georgia. The resort is
situated on 285 acres of beautiful open pastures and rolling hills, with 150
acres being the resort's golf course. At December 31, 2001, approximately 191
acres were developed and 16 acres are currently planned by the Company to be
used for future development.
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At December 31, 2001, 60 units are completed and 192 units are planned for
development at Apple Mountain Resort. The "Lodge Get-A-Way" units were the first
units developed. Each unit is approximately 824 square feet with all units being
two bedrooms, two full baths. Amenities within each unit include a living room
with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
units include ceiling fans, imported ceramic tile, electronic door locks, and
rattan or pine furniture.
Amenities at the resort include a 9,445 square foot administration building
and activity center featuring a theatre room with a wide screen television, a
member services building, pool tables, arcade games, snack area, and movie
theatre. Other amenities at the resort include two tennis courts, swimming pool,
shuffleboard, miniature golf course, and volleyball and basketball courts. This
resort is located in the Blue Ridge Mountains and offers accessibility to many
other outdoor recreational activities, including Class 5 white water rapids.
The primary recreational amenity available to the resort is an established
18-hole golf course situated on approximately 150 acres of open fairways and
rolling hills. Elevation of the course is 1,530 feet at the lowest point and
1,600 feet at the highest point. The course is designed with approximately
104,000 square feet of bent grass greens. The course's tees total approximately
2 acres, fairways total approximately 24 acres, and primary roughs total
approximately 29 acres, all covered with TIF 419 Bermuda. The balance of grass
totals approximately 95 acres and is covered with Fescue. The course has 19 sand
bunkers totaling 19,800 square feet and there are approximately seven miles of
cart paths. Lining the course are apple orchards totaling approximately four
acres, with white pine roughs along twelve of the fairways. The course has a
five-acre irrigation lake and a pond approximately 900 square feet and located
on the fifteenth hole. The driving range covers approximately nine acres and has
20,000 square feet of tee area covered in TIF 419 Bermuda. The pro shop offers a
full line of golfing accessories and equipment. There is also a golf
professional on site to offer lessons and to plan events for the club.
At December 31, 2001, the resort contained 3,120 Vacation Intervals, of
which 852 remained available for sale. The Company plans to build 192 additional
"lodge-style" units, which would yield an additional 9,984 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,000 to $12,300 for one-week stays (and start at $4,500 for biennial
intervals). During 2001, 444 Vacation Intervals were sold.
SILVERLEAF'S SEASIDE RESORT. Silverleaf's Seaside Resort is located in
Galveston, Texas, approximately 50 miles south of Houston, Texas. The resort
contains approximately 87 acres. At December 31, 2001, approximately 45 acres
were developed and 42 acres are currently planned by the Company to be used for
future development.
At December 31, 2001, the resort had 72 units and an additional 210 are
planned for development. The two bedroom, two bath units are situated in
three-story twelveplex buildings. Amenities within each unit include two large
bedrooms, two bathrooms (one with a whirlpool tub), living room with sleeper
sofa, full kitchen, color television, and electronic locks.
With 635 feet of beachfront, the primary amenity at the resort is the Gulf
of Mexico. Other amenities include a lodge with kitchen, tennis court, swimming
pool, sand volleyball court, playground, picnic pavilion, horseshoes, and
shuffleboard. The Company is obligated to maintain and provide campground
facilities for members of the previous owner's campground system.
At December 31, 2001, the resort contained 3,744 Vacation Intervals of which
1,183 remained available for sale. The Company plans to build 138 additional
units which would yield an additional 7,176 Vacation Intervals for sale.
Vacation Intervals at the resort are currently priced from $8,500 to $20,500 for
one-week stays. During 2001, 32 Vacation Intervals were sold.
DESCRIPTION OF TIMESHARE RESORTS MANAGED BY THE COMPANY
The management rights and an inventory of unsold Vacation Intervals to the
following resorts were acquired by the Company via the acquisition of Crown
Resort Co., LLC in May 1998. The Company manages each of these resorts for a
fee; however, the Company determined during 2001 that there will be no further
sales efforts related to the unsold inventory of Vacation Intervals at these
resorts, and has therefore written off all associated inventory costs.
ALPINE BAY RESORT. Alpine Bay Resort is located in Talledega County,
Alabama, near Lake Logan Martin and is approximately 50 miles east of
Birmingham. The resort contains 54 units and includes a golf course, pro shop
lounge, outdoor pool, and tennis courts. During 2001, no Vacation Intervals were
sold. No further development or sales are planned at this resort.
HICKORY HILLS RESORT. Hickory Hills is located in Jackson County,
Mississippi, near the Pascagoula River and is approximately 20 miles east of
Biloxi. The resort contains 80 units and has a golf course, restaurant/lounge,
outdoor pool, clubhouse, fitness center, miniature golf course, tennis courts,
and playground. During 2001, no Vacation Intervals were sold. No further
development or sales are planned at this resort.
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BEECH MOUNTAIN LAKES RESORT. Beech Mountain Lakes is located in Butler
Township, Luzerne County, Pennsylvania, and is approximately 30 miles south of
Wilkes Barre-Scranton. The resort contains 54 units and has a restaurant/lounge,
indoor pool/sauna, clubhouse, fitness center and tennis courts. During 2001, no
Vacation Intervals were sold. No further development or sales are planned at
this resort.
TREASURE LAKE RESORT. Treasure Lake is located in Sandy Township, Clearfield
County, Pennsylvania, and is approximately 160 miles northeast of Pittsburgh.
The resort contains 145 units and has two golf courses, two lakes, four beaches,
campground, two restaurant/lounges, indoor pool/sauna, outdoor pool, clubhouse,
four playgrounds, tennis courts, and pontoon boat. During 2001, no Vacation
Intervals were sold. No further development or sales are planned at this resort.
FOXWOOD HILLS RESORT. Foxwood Hills is located in Oconee County, South
Carolina, near Lake Hartwell, and is approximately 100 miles northeast of
Atlanta. The resort contains 114 units and has a golf course, restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, miniature golf course, tennis
courts, pontoon boat, and playground. During 2001, no Vacation Intervals were
sold. No further development or sales are planned at this resort.
TANSI RESORT. Tansi Resort is located in Cumberland County, Tennessee, and
is approximately 75 miles west of Knoxville. The resort contains 124 units and
has a golf course, restaurant/lounge, indoor pool/sauna, outdoor pool,
clubhouse, fitness center, miniature golf course, tennis courts, and playground.
During 2001, no Vacation Intervals were sold. No further development or sales
are planned at this resort.
WESTWIND MANOR RESORT. Westwind Manor is located in Wise County, Texas, on
Lake Bridgeport and is approximately 65 miles northwest of the Dallas-Fort Worth
metroplex. The resort contains 37 units and has a golf course,
restaurant/lounge, outdoor pool, clubhouse, miniature golf course, tennis
courts, and playground. During 2001, no Vacation Intervals were sold. No further
development or sales are planned at this resort.
POTENTIAL NEW RESORT
BEECH MOUNTAIN RESORT. In December 1998, the Company acquired 1,998 acres of
undeveloped land near Philadelphia, Pennsylvania, which could be developed as a
Drive-to Resort. The primary recreational amenity available at this site is a
fishing lake. The Company has received regulatory approval to develop 408 units,
which would yield 21,216 Vacation Intervals for sale. The Company has not
scheduled target dates for construction, completion of initial units, or
commencement of marketing and sales efforts for this location.
MARKETING AND SALES
Marketing is the process by which the Company attracts potential customers
to visit and tour an Existing Resort or attend a sales presentation. Sales is
the process by which the Company seeks to sell a Vacation Interval to a
potential customer once he arrives for a tour at an Existing Resort or attends a
sales presentation.
MARKETING. The Company's in-house marketing staff creates databases of new
prospects which are principally developed through cooperative arrangements with
outside vendors to identify prospects who meet the Company's marketing criteria.
Using the Company's automated dialing and bulk mailing equipment, in-house
marketing specialists conduct coordinated telemarketing and direct mail
procedures which invite prospects to tour one of the Company's resorts and
receive an incentive, such as a free gift. On a limited basis, the Company
retains outside vendors to arrange tours at the Company's resorts.
SALES. The Company actively sells its Vacation Intervals primarily through
on-site salespersons at certain Existing Owned Resorts. Upon arrival at an
Existing Owned Resort for a scheduled tour, the prospect is met by a member of
the Company's on-site sales force who conducts the prospect on a 90 minute tour
of the resort and its related amenities. At the conclusion of the tour, the
sales representative explains the benefits and costs of becoming a Silverleaf
Owner. The presentation also includes a description of the financing
alternatives offered by the Company. Prior to the closing of any sale, a
verification officer interviews each prospect to ensure compliance with Company
sales policies and regulatory agency requirements. The verification officer also
plays a Bonus Time video for the customer to explain the limitations on the
Bonus Time Program. No sale becomes final until a statutory waiting period
(which varies from state to state) of three to fifteen calendar days has passed.
Sales representatives receive commissions ranging from 2% to 14% of the
sales price depending on established guidelines. Sales managers also receive
commissions of 1.5% to 3.5% and are subject to commission chargebacks in the
event the purchaser fails to make the first required payment. Sales directors
also receive commissions of 1.5% to 3.5%, which are also subject to chargebacks.
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Prospects who are interested in a lower priced product are offered biennial
(alternate year) intervals or other low priced products, which entitle the
prospect to sample a resort for a specified number of nights. The prospect may
apply the cost of a lower priced product against the down payment on a Vacation
Interval if purchased by a later fixed date. In addition, the Company actively
markets both on-site and off-site upgraded Vacation Intervals to existing
Silverleaf Owners. Although most upgrades are sold by the Company's in-house
sales staff, the Company has contracted with a third party to assist in offsite
marketing of upgrades at the Owned Destination Resorts. These upgrade programs
have been well received by Silverleaf Owners and accounted for approximately
32.3% and 32.5% of the Company's gross revenues from Vacation Interval sales for
the years ended December 31, 2001 and 2000, respectively. By offering lower
price products and upgraded Vacation Intervals, the Company believes it offers
an affordable product for all prospects in its target market. Also, by offering
products with a range of prices, the Company attempts to broaden its market with
its lower-priced products and gradually upgrade such purchasers over time.
Because the Company's sales representatives are a critical component of the
sales and marketing effort, the Company continually strives to attract, train,
and retain a dedicated sales force. The Company provides intensive sales
instruction and training which, coupled with the representative's valuable local
knowledge, assists the sales representatives in acquainting prospects with the
resort's benefits. Each sales representative is an employee of the Company and
receives some employment benefits. At December 31, 2001, the Company employed
approximately 317 sales representatives at its Existing Owned Resorts.
As a result of the Company's aforementioned liquidity concerns, the Company
closed three outside sales offices, closed three telemarketing centers, and
reduced headcount in sales and marketing functions during the second and third
quarters of 2001. Since the third quarter of 2001, the Company has been
operating under new sales practices whereby no sales are permitted unless the
touring customer has a minimum income level beyond that previously required and
has a valid major credit card. Further, the marketing division is employing a
program, which should facilitate marketing to customers more likely to be better
credit risks. As a result of these changes, the standardized FICO ("Fair Isaac
Credit Opinion") score for weekly sales has improved from below 620 on a
850-point scale in February 2001 to over 640 in December 2001.
CUSTOMER FINANCING
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers typically make down payments of at least 10% of
the purchase prices and deliver promissory notes to the Company for the
balances. The promissory notes generally bear interest at a fixed rate, are
generally payable over a seven-year to ten-year period, and are secured by a
first mortgage on the Vacation Interval. The Company bears the risk of defaults
on these promissory notes, and this risk is heightened inasmuch as the Company
generally does not verify the credit history of its customers prior to purchase
and will provide financing if the customer is presently employed and meets
certain income and buyer profile criteria.
The Company's credit experience is such that in 2001 it provided 25.2% of
the purchase price of Vacation Intervals as a provision for uncollectible notes.
In addition, for the year ended December 31, 2001, the Company decreased sales
by $9.1 million for customer returns (cancellations of sales transactions in
which the customer fails to make the first installment payment). If a buyer of a
Vacation Interval defaults, the Company generally must foreclose on the Vacation
Interval and attempt to resell it; the associated marketing, selling, and
administrative costs from the original sale are not recovered; and sales and
marketing costs must be incurred again to resell the Vacation Interval. Although
the Company, in many cases, may have recourse against a Vacation Interval buyer
for the unpaid price, certain states have laws which limit or hinder the
Company's ability to recover personal judgments against customers who have
defaulted on their loans. For example, under Texas law, if the Company were to
pursue a post-foreclosure deficiency claim against a customer, the customer may
file a court proceeding to determine the fair market value of the property
foreclosed upon. In such event, the Company may not recover a personal judgment
against the customer for the full amount of the deficiency, but may recover only
to the extent that the indebtedness owed to the Company exceeds the fair market
value of the property. Accordingly, the Company has generally not pursued this
remedy because the Company has not found it to be cost effective.
At December 31, 2001, the Company had notes receivable (including notes
unrelated to Vacation Intervals) in the approximate principal amount of $333.3
million, was contingently liable with respect to approximately $366,000
principal amount of customer notes sold with recourse, and had an allowance for
uncollectible notes of approximately $54.7 million.
Effective October 30, 2000, the Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
a wholly-owned off-balance-sheet SPE, formed on October 16, 2000. The agreement
presently has a term of 5 years. However, on the second anniversary date of the
amended facility, the SPE's lender under the credit agreement shall have the
right to put, transfer, and assign to the SPE all of its rights, title, and
interest in and to all of the assets securing the facility at a price equal to
the then outstanding principal balance under the facility. During 2000, the
Company sold $74 million of notes receivable to the SPE, which the Company
services for a fee. The SPE funded these purchases through advances under a
credit agreement arranged
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for this purpose. In conjunction with these sales, the Company received cash
consideration of $62.9 million, which was used to pay down borrowings under its
revolving loan facilities. During 2001, the Company made no sales of notes
receivable to the SPE.
At December 31, 2001, the SPE held notes receivable totaling $50.4 million,
with related borrowings of $43.6 million. Except for the repurchase of notes
that fail to meet initial eligibility requirements, the Company is not obligated
to repurchase defaulted or any other contracts sold to the SPE. It is
anticipated, however, that the Company will place bids in accordance with the
terms of the conduit agreement to repurchase some defaulted contracts in public
auctions to facilitate the re-marketing of the underlying collateral. The
investment in the SPE was valued at $4.8 million at December 31, 2001.
Effective April 30, 2002, the Company and its SPE entered into amendments to
the DZ Bank Facility and the Company received $48.5 million in May 2002, in cash
proceeds from the sale of Vacation Interval notes receivable to its SPE with
financing supplied by DZ Bank. All of these cash proceeds were used to pay down
the revolving credit facilities with two of the Company's senior lenders.
It is vitally important to the Company's liquidity plan that this credit
facility, or another new facility, continue beyond the two-year period. In
addition, the Company's business model assumes that expanded off-balance-sheet
financing will be available to the Company in 2003 and 2004. Such an expanded
facility will be necessary to reduce outstanding balances on non-revolving
credit facilities and to finance future sales. Factors that could affect the
Company's ability to obtain additional off-balance-sheet financing are as
follows:
o Capital market credit facilities may not be available to fund
off-balance-sheet financings; and
o The Company's customer notes receivable may not meet capital market
requirements.
Management believes that the expanded facilities necessary in 2003 and 2004 will
require enhanced eligibility requirements for customer notes receivable.
Management has implemented revised sales practices that it believes will result
in higher quality notes receivable by 2003 and 2004. If the quality of the notes
receivable portfolio does not improve significantly by 2003, it is unlikely that
the Company will be able to secure additional off-balance-sheet facilities. In
this case, the Company will attempt to secure additional secured credit
facilities.
The Company recognizes interest income as earned. Interest income is accrued
on notes receivable, net of an estimated amount that will not be collected,
until the individual notes receivable become 90 days delinquent. Once a note
receivable becomes 90 days delinquent, the accrual of additional interest income
ceases until collection is deemed probable. When inventory is returned to the
Company, any unpaid note receivable balances are charged against the allowance
for uncollectible notes net of the amount at which the Vacation Interval is
restored to inventory.
The Company intends to borrow additional funds under its existing revolving
credit facilities and sell notes to its SPE to finance its operations. At
December 31, 2001, the Company had borrowings under credit facilities in the
approximate principal amount of $266.7 million. These facilities permit
borrowings up to 85% of the principal amount of performing notes, and payments
from Silverleaf Owners on such notes are credited directly to the lender and
applied against the Company's loan balance. At December 31, 2001, the Company
had a portfolio of approximately 39,684 Vacation Interval customer promissory
notes in the approximate principal amount of $335.7 million, of which
approximately $6.7 million in principal amount was 61 days or more past due and
therefore ineligible as collateral.
At December 31, 2001, the Company's portfolio of customer notes receivable
had an average yield of 13.7%. At such date, the Company's borrowings, which
bear interest at variable rates, had a weighted average cost of 8.1%. The
Company has historically derived net interest income from its financing
activities because the interest rates it charges its customers who finance the
purchase of their Vacation Intervals exceed the interest rates the Company pays
to its lenders. Because the Company's existing indebtedness currently bears
interest at variable rates and the Company's customer notes receivable bear
interest at fixed rates, increases in interest rates would erode the spread in
interest rates that the Company has historically experienced and could cause the
interest expense on the Company's borrowings to exceed its interest income on
its portfolio of customer loans. The Company has not engaged in interest rate
hedging transactions. Therefore, any increase in interest rates, particularly if
sustained, could have a material adverse effect on the Company's results of
operations, liquidity, and financial position.
Limitations on availability of financing would inhibit sales of Vacation
Intervals due to (i) the lack of funds to finance the initial negative cash flow
that results from sales that are financed by the Company, and (ii) reduced
demand if the Company is unable to provide financing to purchasers of Vacation
Intervals. The Company ordinarily receives only 10% of the purchase price on the
sale of a Vacation Interval but must pay in full the costs of development,
marketing, and sale of the Vacation Interval. Maximum borrowings available under
the Company's current credit agreements may not be sufficient to cover these
costs, thereby straining capital resources,
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liquidity, and capacity to grow. In addition, to the extent interest rates
decrease generally on loans available to the Company's customers, the Company
faces an increased risk that customers will pre-pay their loans and reduce the
Company's income from financing activities.
The Company typically provides financing to customers over a seven-year to
ten-year period, and customer notes had an average maturity of 6.2 years at
December 31, 2001. Considering the Exchange Offer completed May 2, 2002, the
Company's revolving credit facilities have scheduled maturities between August
2003 and March 2007. Additionally, the Company's revolving credit facilities
could be declared immediately due and payable as a result of a default by the
Company. Accordingly, there could be a mismatch between the Company's cash
receipts and the Company's cash disbursements obligations in 2002 and subsequent
periods. Although the Company has historically been able to secure financing
sufficient to fund its operations, it does not presently have agreements with
its lenders to extend the term of its existing funding commitments or to replace
such commitments upon their expiration. Failure to obtain such refinancing
facilities would require the Company to seek other alternatives to enable it to
continue in business. Due to the uncertainties inherent in the Company's current
financial condition, as well as capital market uncertainties, the Company may
not have viable alternatives available if its current lenders are unwilling to
extend refinancing to replace existing credit facilities.
DEVELOPMENT AND ACQUISITION PROCESS
As part of its current business model, the Company intends to develop at its
Existing Owned Resorts and/or acquire new resorts only to the extent the capital
markets and the covenants of its existing facilities permit.
Assuming the Company is successful in implementing its revised business
model, it would only consider developing or acquiring new resorts under its
established development policies. Before committing capital to a site, the
Company tests the market using certain marketing techniques developed by the
Company. The Company also explores the zoning and land-use laws applicable to
the potential site and the regulatory issues pertaining to licenses and permits
for timeshare sales and operations. The Company will also contact various
governmental entities and review applications for necessary governmental permits
and approvals. If the Company is satisfied with its market and regulatory
review, it will prepare a conceptual layout of the resort, including building
site plans and resort amenities. After the Company applies its standard lodging
unit design and amenity package, the Company prepares a budget which estimates
the cost of developing the resort, including costs of lodging facilities,
infrastructure, and amenities, as well as projected sales, marketing, and
general and administrative costs. Purchase contracts typically provide for
additional due diligence by the Company, including obtaining an environmental
report by an environmental consulting firm, a survey of the property, and a
title commitment. The Company employs legal counsel to review such documents and
to also review pertinent legal issues. If the Company continues to be satisfied
with the site after the environmental and legal review, the Company will
complete the purchase of the property.
All construction activities are managed internally by the Company. The
Company typically completes the development of a new resort's basic
infrastructure and models within one year, with additional units to be added
within 180 to 270 days based on demand, weather permitting. A normal part of the
development process is the establishment of a functional sales office at the new
resort.
CLUBS / MANAGEMENT CLUBS
The Company has the right to appoint the directors of the Silverleaf Club.
However, the Company does not have this right related to the Crown Club. The
Silverleaf Club and the Crown Club are collectively sometimes referred to as the
"Management Clubs." The Silverleaf Owners are obligated to pay monthly dues to
their respective Clubs, which obligation is secured by a lien on their Vacation
Interval in favor of the Club. If a Silverleaf Owner fails to pay his monthly
dues, the Club may institute foreclosure proceedings regarding the delinquent
Silverleaf Owner's Vacation Interval. The number of foreclosures that occurred
as a result of Silverleaf Owners failing to pay monthly dues were 1,258 in 2001
and 556 in 2000. Typically, the Company purchases at foreclosure all Vacation
Intervals that are the subject of foreclosure proceedings instituted by the Club
because of delinquent dues.
Each timeshare resort has a Club that operates through a centralized
organization to manage the resorts on a collective basis. The consolidation of
resort operations through the Management Clubs permits: (i) a centralized
reservation system for all resorts; (ii) substantial cost savings by purchasing
goods and services for all resorts on a group basis, which generally results in
a lower cost of goods and services than if such goods and services were
purchased by each resort on an individual basis; (iii) centralized management
for the entire resort system; (iv) centralized legal, accounting, and
administrative services for the entire resort system; and (v) uniform
implementation of various rules and regulations governing all resorts. All
furniture, furnishings, recreational equipment, and other personal property used
in connection with the operation of the Existing Owned Resorts are owned by
either that resort's Club or the Silverleaf Club, rather than the Company.
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At December 31, 2001, the Management Clubs had 613 full-time employees, and
are solely responsible for their salaries. The Management Clubs are also
responsible for the direct expenses of operating the Existing Owned Resorts,
while the Company is responsible for the direct expenses of new development and
all marketing and sales activities. To the extent the Management Clubs provide
payroll, administrative, and other services that directly benefit the Company,
the Company reimburses the Management Clubs for such services and vice versa.
The Management Clubs collect dues from Silverleaf Owners, plus certain other
amounts assessed against the Silverleaf Owners from time to time, together with
all income generated by the operation of certain amenities at the Existing Owned
Resorts. Silverleaf Club dues are currently $49.98 per month ($24.99 for
biennial owners), except for certain members of Oak N' Spruce Resort which
prepay dues at an annual rate of approximately $350. Crown Club dues range from
$285 to $390 annually. Such amounts are used by the Management Clubs to pay the
costs of operating the Existing Owned Resorts and the management fees due to the
Company pursuant to Management Agreements between the Company and the Management
Clubs. These Management Agreements authorize the Company to manage and operate
the resorts and provide for a maximum management fee equal to 15% of gross
revenues for Silverleaf Club or 10% to 15% of dues collected for Clubs within
Crown Club, but the Company's right to receive such fee on an annual basis is
limited to the amount of each Management Club's net income. However, if the
Company does not receive the maximum fee, such deficiency is deferred for
payment to succeeding year(s), subject again to the net income limitation. Due
to anticipated refurbishment of units at the Existing Owned Resorts, together
with the operational and maintenance expenses associated with the Company's
current expansion and development plans, the Company's 2001 management fees were
subject to the net income limitation. Accordingly, for the year ended December
31, 2001, management fees recognized were $2.5 million. For financial reporting
purposes, management fees from the Management Clubs are recognized based on the
lower of (i) the aforementioned maximum fees or (ii) each Management Club's net
income. The Silverleaf Club Management Agreement is effective through March
2010, and will continue year-to-year thereafter unless cancelled by either
party. As a result of the performance of the Silverleaf Club it is uncertain
when the Silverleaf Club will be able to generate positive net income.
Therefore, future income to the Company could be limited. Additionally, in 2000
the Company determined that the receivable from Silverleaf Club for certain
expenses advanced by the Company was not collectible and was therefore written
off resulting in a charge to expense of $7.5 million. Crown Club consists of
several individual Club agreements which have terms of two to five years with a
minimum of two renewal options remaining. At December 31, 2001, there were
approximately 96,000 and 24,000 Vacation Interval owners who pay dues to
Silverleaf Club and Crown Club, respectively. As the Company develops new
resorts, their respective Clubs are expected to be added to the Silverleaf Club
Management Agreement.
OTHER OPERATIONS
OPERATION OF AMENITIES. The Company owns, operates, and receives the
revenues from the marina at The Villages, the golf course and pro shop at
Holiday Hills, and the golf course and pro shop at Apple Mountain. Although the
Company owns the golf course at Holly Lake, a homeowners association in the
development operates the golf course. In general, the Management Clubs receive
revenues from the various amenities which require a usage fee, such as
watercraft rentals, horseback rides, and restaurants.
UNIT LEASING. The Company also recognizes revenues from sales of Samplers
which allow prospective Vacation Interval purchasers to sample a resort for a
specified number of nights. A five night Sampler package currently sells for
$595. For the years ended December 31, 2001 and 2000, the Company recognized
$3.9 million and $3.6 million, respectively, in revenues from Sampler sales.
UTILITY SERVICES. The Company owns its own water supply facilities at Piney
Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills,
Timber Creek, and Fox River resorts. The Company also currently owns its own
waste-water treatment facilities at The Villages, Piney Shores, Ozark Mountain,
Holly Lake, Timber Creek, and Fox River resorts. The Company is in the process
of applying for permits to build expanded water supply and waste-water
facilities at the Timber Creek and Fox River resorts. The Company has permits to
supply and charge third parties for the water supply facilities at The Villages,
Holly Lake, Holiday Hills, Ozark Mountain, Hill Country, Piney Shores, and
Timber Creek resorts, and the waste-water facilities at the Ozark Mountain,
Holly Lake, Piney Shores, Hill Country, and The Villages resorts.
OTHER PROPERTY. At December 31, 2001 the Company owned an undeveloped
five-acre tract of land in Pass Christian, Mississippi, which was sold in August
2002 for $800,000. The Company had planned to develop this property as a
Destination Resort. However, in a survey, Silverleaf Owners expressed a strong
interest in a Texas resort on the Gulf of Mexico. In response, the Company
acquired land in Galveston, Texas, which opened in 2000 as Silverleaf's Seaside
Resort. This resort was developed in lieu of the Pass Christian property.
Additionally, the Company owns approximately 11 more acres in Mississippi, and
the Company is entitled to 85% of any profits from this land. An affiliate of a
director of the Company owns a 10% net profits interest in this land.
23
The Company also owns 260 acres of land near Kansas City, Missouri, and two
acres of undeveloped land in Las Vegas, Nevada, two blocks off the "strip." Both
properties are now held for sale as a result of the Company's aforementioned
liquidity concerns.
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORKS
INTERNAL EXCHANGES. As a convenience to Silverleaf Owners, each purchaser of
a Vacation Interval from the Company has certain exchange privileges which may
be used to: (i) exchange an interval for a different interval (week) at the same
resort so long as the different interval is of an equal or lower rating; and
(ii) exchange an interval for the same interval of equal or lower rating at any
other Existing Resort. These intra-company exchange rights are conditioned upon
availability of the desired interval or resort.
EXCHANGES. The Company believes that its Vacation Intervals are made more
attractive by the Company's participation in Vacation Interval exchange networks
operated by RCI. The Existing Owned Resorts, except Oak N' Spruce Resort, are
registered with RCI, and approximately one-third of Silverleaf Owners
participate in RCI's exchange network. Oak N' Spruce Resort is currently under
contract with a different network exchange company, Interval International.
Membership in RCI allows participating Silverleaf Owners to exchange their
occupancy right in a unit in a particular year for an occupancy right at the
same time or a different time of the same or lower color rating in another
participating resort, based upon availability and the payment of a variable
exchange fee. A member may exchange a Vacation Interval for an occupancy right
in another participating resort by listing the Vacation Interval as available
with the exchange organization and by requesting occupancy at another
participating resort, indicating the particular resort or geographic area to
which the member desires to travel, the size of the unit desired, and the period
during which occupancy is desired.
RCI assigns a rating of "red," "white," or "blue" to each Vacation Interval
for participating resorts based upon a number of factors, including the location
and size of the unit, the quality of the resort, and the period during which the
Vacation Interval is available, and attempts to satisfy exchange requests by
providing an occupancy right in another Vacation Interval with a similar rating.
For example, an owner of a red Vacation Interval may exchange his interval for a
red, white, or blue interval. An owner of a white Vacation Interval may exchange
only for a white or blue interval, and an owner of a blue interval may exchange
only for a blue interval. If RCI is unable to meet the member's initial request,
it suggests alternative resorts based on availability. The cost of the annual
membership fee in RCI and II, which is at the option and expense of the owner of
the Vacation Interval, are currently $84 per year, $79 per year, respectively.
Exchange rights with RCI require an additional fee of approximately $129 for
domestic exchanges and $169 for foreign exchanges. Exchange rights with Interval
International are $121 for domestic exchanges and $149 for foreign exchanges.
Silverleaf Club charges an exchange fee of $75 for each exchange through its
internal exchange program.
COMPETITION
The timeshare industry is highly fragmented and includes a large number of
local and regional resort developers and operators. However, some of the world's
most recognized lodging, hospitality, and entertainment companies, such as
Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"),
Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), and Four
Seasons Resorts ("Four Seasons") have entered the industry. Other companies in
the timeshare industry, including Sunterra Corporation ("Sunterra"), Fairfield
Resorts, Inc. ("Fairfield"), Starwood Hotels & Resorts Worldwide Inc.
("Starwood"), Ramada Vacation Suites ("Ramada"), TrendWest Resorts, Inc.
("TrendWest"), and Bluegreen Corporation ("Bluegreen") are, or are subsidiaries
of, public companies, with the enhanced access to capital and other resources
that public ownership implies.
Fairfield, Sunterra, and Bluegreen own timeshare resorts in or near Branson,
Missouri, which compete with the Company's Holiday Hills and Ozark Mountain
resorts, and to a lesser extent with the Company's Timber Creek Resort. Sunterra
also owns a resort which is located near and competes with the Company's Piney
Shores Resort. Additionally, the Company believes there are a number of public
or privately-owned and operated timeshare resorts in most states in which the
Company owns resorts which will compete with the Company's Existing Owned
Resorts.
The Company believes Marriott, Disney, Hilton, Hyatt, and Four Seasons
generally target consumers with higher annual incomes than the Company's target
market. The Company believes the other competitors named above target consumers
with similar income levels as the Company's target market. The Company's
competitors may possess significantly greater financial, marketing, personnel,
and other resources than the Company, and there can be no assurance that such
competitors will not significantly reduce the price of their Vacation Intervals
or offer greater convenience, services, or amenities than the Company.
While the Company's principal competitors are developers of timeshare
resorts, the Company is also subject to competition from other entities engaged
in the commercial lodging business, including condominiums, hotels, and motels;
others engaged in the leisure business; and, to a lesser extent, from
campgrounds, recreational vehicles, tour packages, and second home sales. A
reduction in the product costs associated with any of these competitors, or an
increase in the Company's costs relative to such competitors' costs, could have
a material adverse effect on the Company's results of operations, liquidity, and
financial position.
24
Numerous businesses, individuals, and other entities compete with the
Company in seeking properties for acquisition and development of new resorts.
Some of these competitors are larger and have greater financial and other
resources than the Company. Such competition may result in a higher cost for
properties the Company wishes to acquire or may cause the Company to be unable
to acquire suitable properties for the development of new resorts.
GOVERNMENTAL REGULATION
GENERAL. The Company's marketing and sales of Vacation Intervals and other
operations are subject to extensive regulation by the federal government and the
states and jurisdictions in which the Existing Owned Resorts are located and in
which Vacation Intervals are marketed and sold. On a federal level, the Federal
Trade Commission has taken the most active regulatory role through the Federal
Trade Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-in-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer Credit
Protection Act, the Telephone Consumer Protection Act, the Telemarketing and
Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, and the Civil
Rights Acts of 1964 and 1968.
In response to certain fraudulent marketing practices in the timeshare
industry in the 1980's, various states enacted legislation aimed at curbing such
abuses. Certain states in which the Company operates have adopted specific laws
and regulations regarding the marketing and sale of Vacation Intervals. The laws
of most states require the Company to file a detailed offering statement and
supporting documents with a designated state authority, which describe the
Company, the project, and the promotion and sale of Vacation Intervals. The
offering statement must be approved by the appropriate state agency before the
Company may solicit residents of such state. The laws of certain states require
the Company to deliver an offering statement (or disclosure statement), together
with certain additional information concerning the terms of the purchase, to
prospective purchasers of Vacation Intervals who are residents of such state,
even if the resort is not located in such state. The laws of Missouri generally
only require certain disclosures in sales documents for prospective purchasers.
There are also laws in each state where the Company currently sells Vacation
Intervals which grant the purchaser of a Vacation Interval the right to cancel a
contract of purchase at any time within three to fifteen calendar days following
the sale.
The Company markets and sells its Vacation Intervals to residents of certain
states adjacent or proximate to the states where the Company's resorts are
located. Many of these neighboring states also regulate the marketing and sale
of Vacation Intervals to their residents. Most states have additional laws which
regulate the Company's activities and protect purchasers, such as real estate
licensure laws; travel sales licensure laws; anti-fraud laws; consumer
protection laws; telemarketing laws; prize, gift, and sweepstakes laws; and
other related laws. The Company does not register all of its resorts in each of
the states where it registers certain resorts.
The Company believes it is in material compliance with applicable federal
and state laws and regulations relating to the sales and marketing of Vacation
Intervals. However, the Company is normally and currently the subject of a
number of consumer complaints generally relating to marketing or sales practices
filed with relevant authorities, and there can be no assurance that all of these
complaints can be resolved without adverse regulatory actions or other
consequences. The Company expects some level of consumer complaints in the
ordinary course of its business as the Company aggressively markets and sells
Vacation Intervals to households, which may include individuals who may not be
financially sophisticated. There can be no assurance that the costs of resolving
consumer complaints or of qualifying under Vacation Interval ownership
regulations in all jurisdictions in which the Company desires to conduct sales
will not be significant, that the Company is in material compliance with
applicable federal and state laws and regulations, or that violations of law
will not have adverse implications for the Company, including negative public
relations, potential litigation, and regulatory sanctions. The expense, negative
publicity, and potential sanctions associated with the failure to comply with
applicable laws or regulations could have a material adverse effect on the
Company's results of operations, liquidity, or financial position. Further,
there can be no assurance that either the federal government or states having
jurisdiction over the Company's business will not adopt additional regulations
or take other actions which would adversely affect the Company's results of
operations, liquidity, and financial position.
During the 1980's and continuing through the present, the timeshare industry
has been and continues to be afflicted with negative publicity and prosecutorial
attention due to, among other things, marketing practices which were widely
viewed as deceptive or fraudulent. Among the many timeshare companies which have
been the subject of federal, state, and local enforcement actions and
investigations in the past were certain of the partnerships and corporations
that were merged into the Company prior to 1996 (the "Merged Companies," or
individually "Merged Company"). Some of the settlements, injunctions, and
decrees resulting from litigation and enforcement actions (the "Orders") to
which certain of the Merged Companies consented purport to bind all successors
and assigns, and accordingly binds the Company. In addition, at that time the
Company was directly a party to one such Order issued in Missouri. No past or
present officers, directors, or employees of the Company or any Merged Company
were named as subjects or
25
respondents in any of these Orders; however, each Order purports to bind
generically unnamed "officers, directors, and employees" of certain Merged
Companies. Therefore, certain of these Orders may be interpreted to be
enforceable against the present officers, directors, and employees of the
Company even though they were not individually named as subjects of the
enforcement actions which resulted in these Orders. These Orders require, among
other things, that all parties bound by the Orders, including the Company,
refrain from engaging in deceptive sales practices in connection with the offer
and sale of Vacation Intervals. In one particular case in 1988, a Merged Company
pled guilty to deceptive uses of the mails in connection with promotional sales
literature mailed to prospective timeshare purchasers and agreed to pay a
judicially imposed fine of $1.5 million and restitution of $100,000. The
requirements of the Orders are substantially what applicable state and federal
laws and regulations mandate, but the consequence of violating the Orders may be
that sanctions (including possible financial penalties and suspension or loss of
licensure) may be imposed more summarily and may be harsher than would be the
case if the Orders did not bind the Company. In addition, the existence of the
Orders may be viewed negatively by prospective regulators in jurisdictions where
the Company does not now do business, with attendant risks of increased costs
and reduced opportunities.
In early 1997, the Company was the subject of some consumer complaints which
triggered governmental investigations into the Company's affairs. In March 1997,
the Company entered into an Assurance of Voluntary Compliance with the Texas
Attorney General, in which the Company agreed to make additional disclosure to
purchasers of Vacation Intervals regarding the limited availability of its Bonus
Time Program during certain periods. The Company paid $15,200 for investigatory
costs and attorneys' fees of the Attorney General in connection with this
matter. Also, in March 1997, the Company entered into an agreed order (the
"Agreed Order") with the Texas Real Estate Commission requiring the Company to
comply with certain aspects of the Texas Timeshare Act, Texas Real Estate
License Act, and Rules of the Texas Real Estate Commission, with which it had
allegedly been in non-compliance until mid-1995. The allegations included (i)
the Company's admitted failure to register the Missouri Destination Resorts in
Texas (due to its misunderstanding of the reach of the Texas Timeshare Act);
(ii) payment of referral fees for Vacation Interval sales, the receipt of which
was improper on the part of the recipients; and (iii) miscellaneous other
actions alleged to violate the Texas Timeshare Act, which the Company denied.
While the Agreed Order acknowledged that Silverleaf independently resolved ten
consumer complaints referenced in the Agreed Order, discontinued the practices
complained of, and registered the Missouri Destination Resorts during 1995 and
1996, the Texas Real Estate Commission ordered Silverleaf to cease its
discontinued practices and enhance its disclosure to purchasers of Vacation
Intervals. In the Agreed Order, Silverleaf agreed to make a voluntary donation
of $30,000 to the State of Texas. The Agreed Order also directed Silverleaf to
revise its training manual for timeshare salespersons and verification officers.
While the Agreed Order resolved all of the alleged violations contained in
complaints received by the Texas Real Estate Commission through December 31,
1996, the Company has encountered and expects to encounter some level of
additional consumer complaints in the ordinary course of its business.
The Company employs the following methods in training sales and marketing
personnel as to legal requirements. With regard to direct mailings, a designated
compliance employee of the Company reviews all mailings to determine if they
comply with applicable state legal requirements. With regard to telemarketing,
the Company's Vice President -- Marketing prepares a script for telemarketers
based upon applicable state legal requirements. All telemarketers receive
training which includes, among other things, directions to adhere strictly to
the Company approved script. Telemarketers are also monitored by their
supervisors to ensure that they do not deviate from the Company approved script.
With regard to sales functions, the Company distributes sales manuals which
summarize applicable state legal requirements. Additionally, such sales
personnel receive training as to such applicable legal requirements. The Company
has a salaried employee at each sales office who reviews the sales documents
prior to closing a sale to review compliance with legal requirements.
Periodically, the Company is notified by regulatory agencies to revise its
disclosures to consumers and to remedy other alleged inadequacies regarding the
sales and marketing process. In such cases, the Company revises its direct
mailings, telemarketing scripts, or sales disclosure documents, as appropriate,
to comply with such requests.
ENVIRONMENTAL MATTERS. Under various federal, state, and local environmental
laws, ordinances, and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and tort
liability and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The cost of
investigation, remediation, or removal of such substances may be substantial,
and the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner or operator of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site or from
26
environmental regulatory violations. In connection with its ownership and
operation of its properties, the Company may be potentially liable for such
claims.
Certain federal, state, and local laws, regulations, and ordinances govern
the removal, encapsulation, or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation, or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. In 1994, the
Company conducted a limited asbestos survey at each of the Existing Owned
Resorts, which surveys did not reveal material potential losses associated with
ACMs at certain of the Existing Owned Resorts.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to sell Vacation Intervals at such properties and the market
value of such property. The Company has not tested its properties for radon.
Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at the Company's resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify.
Electric transmission lines are located in the vicinity of some of the
Company's properties. Electric transmission lines are one of many sources of
electromagnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the Company
understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse health effects. In addition, fear of adverse health effects
from transmission lines has been a factor considered in determining property
value in obtaining financing and in condemnation and eminent domain proceedings
brought by power companies seeking to construct transmission lines. Therefore,
there is a potential for the value of a property to be adversely affected as a
result of its proximity to a transmission line and for the Company to be exposed
to damage claims by persons exposed to EMFs.
In 2000, the Company conducted Phase I environmental assessments at each of
the Company-owned resorts in order to identify potential environmental concerns.
These Phase I assessments were carried out in accordance with accepted industry
practices and consisted of non-invasive investigations of environmental
conditions at the properties, including a preliminary investigation of the sites
and identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, and the
preparation and issuance of written reports. The Company's Phase I assessments
of the properties have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business, assets,
or results of operations taken as a whole; nor is the Company aware of any such
material environmental liability. Nevertheless, it is possible that the
Company's Phase I assessments do not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware. Moreover, there can be no assurance that (i) future laws, ordinances,
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the properties will not be affected by the
condition of land or operations in the vicinity of the properties (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company. The Company does not believe that compliance with applicable
environmental laws or regulations will have a material adverse effect on the
Company's results of operations, liquidity, or financial position.
The Company believes that its properties are in compliance in all material
respects with all federal, state, and local laws, ordinances, and regulations
regarding hazardous or toxic substances. The Company has not been notified by
any governmental authority or any third party, and is not otherwise aware, of
any material noncompliance, liability, or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
UTILITY REGULATION. The Company owns its own water supply and waste-water
treatment facilities at several of the Existing Owned Resorts, which are
regulated by various governmental agencies. The Texas Natural Resource
Conservation Commission is the primary state umbrella agency regulating
utilities at the resorts in Texas; and the Missouri Department of Natural
Resources and Public Service Commission of Missouri are the primary state
umbrella agencies regulating utilities at the resorts in Missouri. The
Environmental Protection Agency, division of Water Pollution Control, and the
Illinois Commerce Commission are the primary state
27
agencies regulating water utilities in Illinois. These agencies regulate the
rates and charges for the services (allowing a reasonable rate of return in
relation to invested capital and other factors), the size and quality of the
plants, the quality of water supplied, the efficacy of waste-water treatment,
and many other aspects of the utilities' operations. The agencies have approval
rights regarding the entity owning the utilities (including its financial
strength) and the right to approve a transfer of the applicable permits upon any
change in control of the entity holding the permits. Other federal, state,
regional, and local environmental, health, and other agencies also regulate
various aspects of the provision of water and waste-water treatment services.
OTHER REGULATION. Under various state and federal laws governing housing and
places of public accommodation, the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities are generally in
compliance with present requirements of such laws, the Company is aware of
certain of its properties that are not in full compliance with all aspects of
such laws. The Company is presently responding, and expects to respond in the
future, to inquiries, claims, and concerns from consumers and regulators
regarding its compliance with existing state and federal regulations affording
the disabled access to housing and accommodations. It is the Company's practice
to respond positively to all such inquiries, claims and concerns and to work
with regulators and consumers to resolve all issues arising under existing
regulations concerning access and use of the Company's properties by disabled
persons. The Company believes that it will incur additional costs of compliance
and/or remediation in the future with regard to the requirements of such
existing regulations. Future legislation may also impose new or further burdens
or restrictions on owners of timeshare resort properties with respect to access
by the disabled. The ultimate cost of compliance with such legislation and/or
remediation of conditions found to be non-compliant is not currently
ascertainable, and while such costs are not expected to have a material effect
on the Company, such costs could be substantial. Limitations or restrictions on
the completion of certain renovations may limit application of the Company's
growth strategy in certain instances or reduce profit margins on the Company's
operations.
EMPLOYEES
At December 31, 2001, the Company had 1,770 employees, and the Clubs
collectively had 613 employees. The Company believes employee relations are
good, both at the Company and at the Management Clubs. None of the employees are
represented by a labor union.
INSURANCE
The Company carries comprehensive liability, fire, hurricane, and storm
insurance with respect to the Company's resorts, with policy specifications,
insured limits, and deductibles customarily carried for similar properties which
the Company believes are adequate. There are, however, certain types of losses
(such as losses arising from floods and acts of war) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose its capital invested in a resort, as well as the anticipated
future revenues from such resort, and would continue to be obligated on any
mortgage indebtedness or other obligations related to the property. Any such
loss could have a material adverse effect on the Company's results of operation,
liquidity, or financial position. The Company self-insures for employee medical
and dental claims reduced by certain stop-loss provisions. The Company also
self-insures for property damage to certain vehicles and heavy equipment.
DESCRIPTION OF CERTAIN INDEBTEDNESS
EXISTING INDEBTEDNESS. As of December 31, 2001, the Company had revolving
credit agreements with four lenders providing for loans up to an aggregate of
$289.8 million, which the Company uses to finance the sale of Vacation
Intervals, to finance construction, and for working capital needs. In addition,
the Company had $66.7 million of senior subordinated notes due 2008, with
interest payable semi-annually on April 1 and October 1, guaranteed by all of
the Company's present and future domestic restricted subsidiaries. The loans
mature between August 2002 and April 2006, and are collateralized (or
cross-collateralized) by customer notes receivable, construction in process,
land, improvements, and related equipment of certain of the Existing Owned
Resorts. These credit facilities bear interest at variable rates tied to the
prime rate, LIBOR, or the corporate rate charged by certain banks. The credit
facilities secured by customer notes receivable limit advances to 85% of the
unpaid balance of certain eligible customer notes receivable.
The Company was in default of the agreements with four of its senior lenders
during 2001. Three of these lenders agreed to forebear taking any action as a
result of the Company's defaults and to continue funding pending the completion
of the Restructuring Plan. The fourth senior lender agreed as part of the
Restructuring Plan to modify and extend through August 2003 the maturity date on
its loan.
28
The Company was unable to make the interest payment due April 1, 2001 on the
senior subordinated notes as a result of a non-payment default under one of its
senior credit facilities. The trustee for the senior subordinated notes
accelerated payment of the principal, interest, and other charges on May 22,
2001. Interest on the notes began to accrue at the default rate of 11.5% per
annum on the principal balance of the notes outstanding and the accrued but
unpaid interest. In addition, interest of $3.5 million and $3.9 million was not
paid when due on April 1, 2001 and October 1, 2001, respectively.
Effective October 30, 2000, the Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
a wholly-owned off-balance-sheet SPE, formed on October 16, 2000. The agreement
presently has a term of 5 years. However, on the second anniversary date of the
amended facility, the SPE's lender under the credit agreement shall have the
right to put, transfer, and assign to the SPE all of its rights, title, and
interest in and to all of the assets securing the facility at a price equal to
the then outstanding principal balance under the facility. During 2000, the
Company sold $74 million of notes receivable to the SPE, which the Company
services for a fee. The SPE funded these purchases through advances under a
credit agreement arranged for this purpose. In conjunction with these sales, the
Company received cash consideration of $62.9 million, which was used to pay down
borrowings under its revolving loan facilities. During 2001, the Company made no
sales of notes receivable to the SPE.
At December 31, 2001, the SPE held notes receivable totaling $50.4 million,
with related borrowings of $43.6 million. Except for the repurchase of notes
that fail to meet initial eligibility requirements, the Company is not obligated
to repurchase defaulted or any other contracts sold to the SPE. It is
anticipated, however, that the Company will place bids in accordance with the
terms of the conduit agreement to repurchase some defaulted contracts in public
auctions to facilitate the re-marketing of the underlying collateral. The
investment in the SPE was valued at $4.8 million at December 31, 2001.
Certain of the above debt agreements include restrictions on the Company's
ability to pay dividends based on minimum levels of net income and cash flow.
The debt agreements contain covenants including requirements that the Company
(i) preserve and maintain the collateral securing the loans; (ii) pay all taxes
and other obligations relating to the collateral; and (iii) refrain from selling
or transferring the collateral or permitting any encumbrances on the collateral.
The debt agreements also contain restrictive covenants which include (i)
restrictions on liens against and dispositions of collateral, (ii) restrictions
on distributions to affiliates and prepayments of loans from affiliates, (iii)
restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and (v)
restrictions on mergers, consolidations, or other reorganizations of the
Company. Under certain credit facilities, a sale of all or substantially all of
the assets of the Company, a merger, consolidation, or reorganization of the
Company, or other changes of control of the ownership of the Company, would
constitute an event of default and permit the lenders to accelerate the maturity
thereof.
Such credit facilities also contain operating covenants requiring the
Company to (i) maintain an aggregate minimum tangible net worth ranging from
$17.5 million to $110 million, minimum liquidity, including a debt to equity
ratio of not greater than 2.5 to 1 and a liquidity ratio of not less than 5%, an
interest coverage ratio of at least 2.0 to 1, a marketing expense ratio of no
more than 0.55 to 1, a consolidated cash flow to consolidated interest expense
ratio of at least 2.0 to 1, and total tangible capital funds greater than $200
million plus 75% of net income beginning October 1999; (ii) maintain its legal
existence and be in good standing in any jurisdiction where it conducts
business; (iii) remain in the active management of the Resorts; and (iv) refrain
from modifying or terminating certain timeshare documents. The credit facilities
also include customary events of default, including, without limitation (i)
failure to pay principal, interest, or fees when due, (ii) untruth of any
representation of warranty, (iii) failure to perform or timely observe
covenants, (iv) defaults under other indebtedness, and (v) bankruptcy.
The following table summarizes the Company's notes payable, capital lease
obligations, and senior subordinated notes at December 31, 2000 and 2001 (in
thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------------
2000 2001
---------- ---------
$60 million loan agreement, which contains certain financial covenants, due
August 2002, principal and interest payable from the proceeds obtained on
customer notes receivable pledged as collateral for the note, at an interest
rate of LIBOR plus 3.55% (additional draws are no longer available under this
facility; upon the completion of the debt restructuring described in Note 3,
maturity was extended to August 2003)............................................. $ 23,049 $ 15,969
$70 million loan agreement, capacity reduced by amounts outstanding under the
$10 million inventory loan agreement (and the $10 million supplemental
revolving loan agreement as of December 31, 2001), which contains certain
financial covenants, due August 2004, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral for the
note, at an interest rate of LIBOR plus 2.65% (operating under forbearance at
December 31, 2001; additional draws are no longer available under this
facility)......................................................................... 41,319 35,614
</Table>
29
<Table>
$10 million supplemental revolving loan agreement, which contains certain
financial covenants, due August 2002 (extended to March 2007 upon completion
of the debt restructuring described in Note 3), principal and interest
payable from the proceeds obtained on customer notes receivable pledged as
collateral for the note, at an interest rate of LIBOR plus 2.67% (revolving
under forbearance at December 31, 2001)........................................... -- 9,468
$75 million revolving loan agreement, which contains certain financial
covenants, due April 2005, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the note, at
an interest rate of LIBOR plus 3.00% (revolving under forbearance at December
31, 2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to limit the outstanding balance to $72
million, consisting of $56.9 million revolver with an interest rate of LIBOR
plus 3% with a 6% floor and a $15.1 million term loan with an interest rate
of 8%; both facilities mature March 2007)......................................... 57,133 71,072
$75 million revolving loan agreement, which contains certain financial covenants,
due November 2005, principal and interest payable from the proceeds obtained
on customer notes receivable pledged as collateral for the note, at an
interest rate of LIBOR plus 2.67% (revolving under forbearance at December
31, 2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to limit the outstanding balance to $71
million, consisting of $56.1 million revolver with an interest rate of LIBOR
plus 3% with a 6% floor and a $14.9 million term loan with an interest rate
of 8%; both facilities mature March 2007)......................................... 74,101 69,734
$10.2 million revolving loan agreement, which contains certain financial
covenants, due April 2006, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the note, at
an interest rate of Prime plus 2.00% (revolving under forbearance at December
31, 2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to form a $8.1 million revolver with an
interest rate of Prime plus 3% and a $2.1 million term loan with an interest
rate of 8%; both facilities mature March 2007).................................... -- 10,200
$45 million revolving loan agreement ($55 million as of December 31, 2001),
which contains certain financial covenants, due August 2005, principal and
interest payable from the proceeds obtained on customer notes receivable
pledged as collateral for the note, at an interest rate of Prime (Prime plus
2.00% as of December 31, 2001) (revolving under forbearance at December 31,
2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to limit the outstanding balance to $48
million, consisting of $38.0 million revolver with an interest rate of
Federal Funds plus 2.75% with a 6% floor and a $10.0 million term loan with
an interest rate of 8%; both facilities mature March 2007)........................ 41,817 54,641
$10 million inventory loan agreement, which contains certain financial
covenants, due August 2002 (extended to March 2007 upon completion of the
debt restructuring described in Note 3), interest payable monthly, at an
interest rate of LIBOR plus 3.50% (revolving under
forbearance at December 31, 2001)................................................. 9,936 9,936
$10 million inventory loan agreement, which contains certain financial covenants,
due March 31, 2002 (extended to March 2007 upon completion of the debt
restructuring described in Note 3), interest payable monthly, at an interest
rate of LIBOR plus 3.25% (revolving under forbearance at December 31, 2001)....... 8,175 9,375
Various notes, due from January 2002 through November 2009, collateralized
by various assets with interest rates ranging from 0.9% to 17.0%.................. 4,044 3,227
---------- ---------
Total notes payable............................................................ 259,574 289,236
Capital lease obligations............................................................ 11,023 5,220
---------- ---------
Total notes payable and capital lease obligations.............................. 270,597 294,456
10 1/2% senior subordinated notes, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Company's present and future
domestic restricted subsidiaries (in default at December 31, 2001) (See debt
restructuring described in Note 3)
66,700 66,700
---------- ---------
Total.......................................................................... $ 337,297 $ 361,156
========== =========
</Table>
At December 31, 2001, LIBOR rates were from 1.86% to 1.90%, and the Prime
rate was 5.0%.
RESTRUCTURING PLAN COMPLETED MAY 2, 2002
The purpose of the Company's Restructuring Plan completed May 2, 2002 was
to reduce the Company's existing debt and provide liquidity to finance its
operations. Upon completion of the Reorganization Plan, the Company completed a
sale of Vacation Interval receivables to the Company's subsidiary Silverleaf
Finance I, Inc. ("SFI") with financing provided through the Amended DZ Bank
Facility. The $48.5 million net proceeds from the sale of Vacation Interval
receivables was used to pay down the balance due under the Amended Senior Credit
Facilities with Textron, and Sovereign. The Company expects to borrow additional
amounts under its Amended Senior Credit Facilities with Textron, Sovereign, and
Heller and sell additional customer notes receivable to SFI under the Amended DZ
Bank Facility to finance its operations.
30
The Restructuring Plan had three principal components, each of which had to
be implemented in order for the Restructuring Plan to be consummated:
o the four Amended Senior Credit Facilities with Textron, Sovereign,
Heller and CSFB;
o the $100 million Amended DZ Bank Facility; and
o the Exchange Offer and Solicitation of Consents.
The principal purpose of the Exchange Offer was to convert not less than 80%
of the aggregate principal amount of the Old Notes into (i) Exchange Notes and
(ii) equity of the Company in the form of the Exchange Stock. The principal
purpose of the Solicitation of Consents from the holders of the Old Notes was to
adopt the proposed amendments to the Old Indenture to eliminate substantially
all of the restrictive covenants and certain other provisions contained in the
Old Indenture, which together with the somewhat less restrictive provisions of
the New Indenture, will give the Company greater operational and financial
flexibility. In addition, the Consents also provide for: (i) waiver of all
existing defaults under the Old Notes and the Old Indenture, (ii) rescission of
the acceleration of the Old Notes which occurred on May 22, 2001, (iii) release
of the Company, its officers, directors and affiliates from claims arising
before the Exchange Date, and (iv) approval of the terms and conditions of the
Exchange Notes and the indenture under which the Exchange Notes were to be
issued. The Exchange Offer was closed on May 2, 2002.
A DESCRIPTION OF EACH OF THE AMENDED CREDIT FACILITIES THAT FORMED AN
INTEGRAL PART OF THE RESTRUCTURING PLAN IS SET FORTH BELOW.
AMENDED DZ BANK FACILITY
Effective as of October 30, 2000, the Company entered into a Receivables
Loan and Security Agreement (the "RLSA") with its wholly-owned subsidiary,
Silverleaf Finance I, Inc. ("SFI"), as Borrower, and Autobahn Funding Company
LLC ("Autobahn"), as Lender, DZ Bank, as Agent, and other parties. SFI is a
special purpose entity ("SPE") of the Company. Pursuant to the DZ Bank facility,
the Company services receivables which were sold by the Company to SFI under a
separate agreement and which SFI pledged as collateral for funds borrowed from
Autobahn. The facility ("DZ Bank Facility") has a maximum borrowing capacity of
$100 million, of which SFI borrowed approximately $74 million during the fourth
quarter of 2000. At December 31, 2001, the outstanding balance due under the
RLSA was $43.6 million. The RLSA established certain financial conditions which
the Company must satisfy in order for SFI to borrow additional funds under the
facility. The Company was unable to meet these financial covenants during 2001,
as a result SFI has been unable to purchase additional receivables from the
Company.
Effective April 30, 2002, the RLSA was amended and restated (the "Amended DZ
Bank Facility") with modifications to the term of the facility and the financial
covenants imposed on the Company thereunder. The principal balance of the loan,
which was originally scheduled to mature on October 30, 2005, will now mature on
the fifth anniversary date of the date of the amendment; however, Autobahn has
the right to put the receivables back to SFI at the end of two years following
the date of the Amended DZ Bank Facility. Financial covenants which the Company
must maintain under the Amended DZ Bank Facility include a minimum tangible net
worth of $100 million, and an Interest Coverage Ratio of 1.1 to 1 until the
first anniversary date of the Amended DZ Bank Facility, with an increase to 1.25
to 1 thereafter. "Interest Coverage Ratio" is defined as "the ratio of (i)
EBITDA for such period less Capital Expenditures for such period to (ii) the
Cash Interest Expense for such period." Additional amendments to the agreement
with Autobahn include (i) a reduction in the borrowing limits on an eligible
receivable from a range of 80.0% to 85.0% of the principal balance outstanding
to a range of 77.5% to 82.5% of the principal balance outstanding, and (ii) the
requirement that from and after consummation of the Exchange Offer the
receivables pledged by SFI as collateral must have received a weighted average
score of 650 and, individually, a minimum score of 500 under a nationally
recognized credit rating developed by Fair, Isaac and Co. at the time the
original obligor purchased the Vacation Interval related to the pledged
receivable.
AMENDED AGREEMENTS WITH SENIOR LENDERS
CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC. The Company entered into a
Revolving Loan and Security Agreement in October 1996 with Credit Suisse First
Boston Mortgage Capital LLC ("CSFB"). The agreement has been amended several
times since that date, with the maturity date being extended to August 2002. The
facility is currently in default due to under-collateralization. The agreement
was amended, effective upon completion of the Restructuring Plan to extend the
maturity date to August 2003 and to revise the collateralization requirements.
The facility had an outstanding principal balance of approximately $16.0 million
at December 31, 2001. No additional borrowing capacity is available to the
Company under this agreement.
31
TEXTRON FACILITY. The Company originally entered into a Loan and Security
Agreement (the "Original Loan Agreement") with Textron in August 1995 pursuant
to which the Company borrowed $5 million from Textron. Since that time, the
Original Loan Agreement has been amended various times to provide an increase in
the amount of the facility up to $75 million. Effective April 30, 2002, the
Company and Textron entered into an amendment (the "Textron Amendment") to the
Original Loan Agreement.
Pursuant to the Textron Amendment, the facility (the "Textron Tranche A
Facility") will provide the Company with a revolving loan ("Revolving Loan
Component") in the amount of $56.9 million, all of which will be outstanding at
the date of closing. The Textron Tranche A Facility also provides for a term
loan ("Term Loan Component") of $15.1 million, all of which will be outstanding
as of the date of the closing. The interest rate on the Revolving Loan Component
is a variable rate equal to LIBOR plus 3% per annum, but at no time less than 6%
per annum. The rate on the Term Loan Component is a fixed rate equal to 8% per
annum. The maturity date of the Revolving Loan Component of the Textron Tranche
A Facility will be the earlier of March 31, 2007 or the weighted average
maturity date of the eligible consumer loans pledged as collateral as of the end
of the Revolving Loan Term. The maturity date of the Term Loan Component will be
March 31, 2007.
The Textron Amendment also provides for a Textron Tranche B Facility in the
amount of $71 million, which is comprised of a revolving loan component of $56.1
million and a term loan component of $14.9 million. The Textron Tranche B
Facility will be substantially identical to the Textron Tranche A Facility. The
maturity of the revolving loan component of the Textron Tranche B Facility will
also be the earlier of March 31, 2007 or the weighted average maturity date of
the eligible consumer loans pledged as collateral. The maturity date of the term
loan component is also March 31, 2007.
The Inventory Loan in the amount of $10 million which the Company initially
entered into with Textron in December 1999, as amended in April 2001, will be
further amended to extend the final maturity date to March 31, 2007. The
Inventory Loan is collateralized by a first priority security interest in
certain of the inventory of the Company and a second priority security interest
in the stock of SFI and the customer notes receivable pledged as collateral
under the other Textron loan agreements.
In April 2001, the Company entered into another Loan and Security Agreement
with Textron for a $10,200,000 credit facility. The original note issued in
April 2001 will be replaced with a Revolving Loan Component Note equal to $8.1
million and a Term Loan Component Note equal to $ 2.1 million. ("Textron Tranche
C Facility"). The Textron Tranche C Facility will also be substantially
identical to the Textron Tranche A Facility. The maturity date of the Revolving
Loan Component Note will also be the earlier of March 31, 2007 or the weighted
average maturity date of the eligible consumer loans pledged as collateral. The
maturity date of the Term Loan Component Note will be March 31, 2007.
The Textron Amendment includes a "change of control" provision which
provides that Textron would have no obligation to make any advances under the
facilities if there is a change in more than fifty percent of the executive
management of the Company, as such management is designated in a schedule to the
Textron Amendment, unless Textron determines that the replacement management
personnel's experience, ability and reputation is equal to or greater than that
of the members of management specified. Additionally, Textron would have no
obligation to make any additional advances under the facility if more than two
of the five members of the Company's Board of Directors are controlled by the
holders of the Exchange Notes.
SOVEREIGN FACILITY. The Revolving Credit Agreement ("Sovereign Facility")
between the Company and a group of lenders led by Sovereign Bank (collectively,
"Sovereign") was amended effective April 30, 2002 to provide a two-tranche
receivables financing arrangement for the Company in an aggregate amount not to
exceed $48.0 million. The first tranche ("Sovereign Tranche A") is approximately
$36.5 million. The Sovereign Tranche A maturity date is the earlier of March 31,
2007 or the weighted average maturity date of the eligible consumer loans
pledged as collateral as of the Sovereign Tranche A Conversion Date. Sovereign
Tranche A will bear interest at a base rate equal to the higher of (i) a
variable annual rate of interest equal to the prime rate charged by Sovereign or
(ii) 2.75% above the rate established by the Federal Reserve Bank of New York on
overnight federal funds transactions with members of the Federal Reserve System;
provided, that in no event shall the base rate be less than 6%.
The second tranche ("Sovereign Tranche B") is approximately $10.0 million.
Sovereign Tranche B shall be reduced automatically on a monthly basis as of the
first day of each calendar month based on a 20-year amortization schedule.
Sovereign Tranche B shall bear interest at the rate of 8% per annum. Interest is
payable on the first day of each month. The Sovereign Tranche B maturity date is
March 31, 2007. Sovereign Tranche B will be secured by the same collateral
pledged under Sovereign Tranche A.
HELLER FACILITY. The Company originally entered into a Loan and Security
Agreement ("Heller Receivables Loan") with Heller in October 1994 pursuant to
which the Company has pledged notes receivable as collateral. The Heller
Receivables Loan has been amended several times to increase the amount of
borrowing capacity to $70 million. The Company also entered into a Loan and
32
Security Agreement ("Heller Inventory Loan") in December 1999 for $10 million.
The Heller Inventory Loan is secured by the Company's unsold inventory of
Vacation Intervals. In March 2001, the Company obtained a supplemental $10
million inventory and receivables loan ("Heller Supplemental Loan").
There is currently no availability under the Heller Receivable Loan. The
Heller Receivable Loan will mature on August 31, 2004.
The Heller Inventory Loan was amended effective April 30, 2002 to extend the
availability period to March 31, 2004, and the maturity date to March 31, 2007.
The maturity date of the Heller Supplemental Loan was amended effective April
30, 2002 to extend the maturity to March 31, 2007.
FEATURES COMMON TO AMENDED SENIOR CREDIT FACILITIES WITH TEXTRON, SOVEREIGN, AND
HELLER.
The Amended Senior Credit Facilities with Textron, Sovereign and Heller
described above provide for either a first or second priority security interest
in (i) substantially all of the Company's customer notes receivable that have
been pledged to one of the senior secured lenders previously, and the mortgages
attached thereto (except for a portfolio of notes and related mortgages pledged
to CSFB), (ii) substantially all of the real and personal property of the
Company, including the Company's rights under the management agreements for the
Existing Owned Resorts, (iii) the stock of Silverleaf Finance, I, Inc., the SPE
owned by the Company, (iv) the agreement with the Standby Manager (as defined
below), (v) all collateral under each of the other Amended Senior Credit
Facilities (except for the Amended Senior Credit Facility with CSFB); (vi) all
books, records, reports, computer tapes, disks and software relating to the
collateral pledged to Textron, Sovereign, and Heller; and (vii) all extensions,
additions, improvements, betterments, renewals, substitutions and replacements
of, for or to any of the collateral pledged to Textron, Sovereign, and Heller,
together with the products, proceeds, issues, rents and profits thereof.
The Amended Senior Credit Facilities with Textron, Sovereign, and Heller
also provide that the Company shall retain, at its expense, a "Standby Manager"
approved by the Senior Lenders who shall at any time that an event of default
occurs and the Senior Lenders so direct, assume full control of the management
of the Existing Owned Resorts. The Company may also be replaced at the sole
discretion of these Senior Lenders as servicing agent for the customer notes
receivable pledged under the Amended Senior Credit Facilities. The Standby
Manager designated by Textron, Sovereign and Heller under the Amended Senior
Credit Facilities is J&J Limited, Inc. located in Windermere, Florida.
FINANCIAL COVENANTS UNDER AMENDED SENIOR CREDIT FACILITIES.
The Amended Senior Credit Facilities with Heller, Textron and Sovereign
provide certain financial covenants which the Company must satisfy. Any failure
to comply with the financial covenants will result in a default under such
Amended Senior Credit Facilities. The financial covenants are described below.
TANGIBLE NET WORTH COVENANT. The Company must maintain a Tangible Net Worth
at all times equal to (i) the greater of (A) $100,000,000 and (B) an amount
equal to 90% of the Tangible Net Worth of the Company as of September 30, 2001,
plus (ii) (A) on a cumulative basis, 100% of the positive Consolidated Net
Income after January 1, 2002, plus (B) 100% of the proceeds of (1) any sale by
the Company of (x) equity securities issued by the Company or (y) warrants or
subscriptions rights for equity securities issued by the Company or (2) any
indebtedness incurred by the Company, other than the loans under the Heller
Facility, the Textron Facility or the Sovereign Facility, in the case of each of
(1) and (2) above occurring after January 1, 2002. For purposes of the three
Amended Senior Credit Facilities, "Tangible Net Worth" is (i) the consolidated
net worth of the Company and its consolidated subsidiaries, plus (ii) to the
extent not otherwise included in the such consolidated net worth, unsecured
subordinated indebtedness of the Company and its consolidated subsidiaries the
terms and conditions of which are reasonably satisfactory to the Required Banks,
minus (iii) the consolidated intangibles of the Company and its consolidated
subsidiaries, including, without limitation, goodwill, trademarks, tradenames,
copyrights, patents, patent applications, licenses and rights in any of the
foregoing and other items treated as intangibles in accordance with generally
accepted accounting principles. "Consolidated Net Income" is the consolidated
net income of the Company and its subsidiaries, after deduction of all expenses,
taxes, and other proper charges (but excluding any extraordinary profits or
losses), determined in accordance with generally accepted accounting principles.
MARKETING AND SALES EXPENSES COVENANT. As of the last day of each fiscal
quarter, commencing with the fiscal quarter ending March 31, 2002, the Company
will not permit the ratio of marketing expenses to the Company's net proceeds
from the sale of Vacation Intervals for the quarter then ending to equal or
exceed (i) .550 to 1 for each quarter through December 31, 2002 or (ii) .525 to
1 for each quarter thereafter.
33
MINIMUM LOAN DELINQUENCY COVENANT. The Company will not permit as of the
last day of each fiscal quarter its over 30-day delinquency rate on its entire
consumer loan portfolio to be greater than 25%. In the event that such
delinquency rate is over 20% on the last day of the quarter, one or more Senior
Lenders may conduct an audit of the Company.
DEBT SERVICE. The Company will not permit the ratio of (i) EBITDA less
capital expenditures as determined in accordance with generally accepted
accounting principles to (ii) the interest expense minus all non-cash items
constituting interest expense for such period, for
o the fiscal quarter ending June 30, 2002 to be less than 1.1 to 1;
o the two consecutive fiscal quarters ending September 30, 2002 to be less
than 1.1 to 1;
o the three consecutive fiscal quarters ending December 31, 2002 to be
less than 1.1 to 1; and
o each period of four consecutive fiscal quarters ending on or after March
31, 2003 to be less than 1.25 to 1.
PROFITABLE OPERATIONS COVENANT. The Company will not permit Consolidated Net
Income (i) for any fiscal year, commencing with the fiscal year ending December
31, 2002, to be less than $1.00 and (ii) for any two consecutive fiscal quarters
(treated as a single accounting period) to be less than $1.00.
CAUTIONARY STATEMENTS
The Company is currently delinquent in its required filings with the
Securities and Exchange Commission and faces an uncertain future due to a
variety of factors, including its need to obtain additional financing in the
near future which is not currently in place. All forward looking statements in
this annual report should be carefully considered in view of the cautionary
statements described below and the other information included herein.
RISKS RELATED TO THE RESTRUCTURING PLAN
While the Company has recently completed the Restructuring Plan, it still
may not be able to comply with all of the terms and conditions of either the
Amended Senior Credit Facilities, the Amended DZ Bank Facility, the New
Indenture, or the Amended Indenture. If this occurs, the following undesirable
events may happen:
o the Company may not be able to finance its continued operations because
it will not be able to access its Amended Senior Credit Facilities with
its Senior Lenders nor will DZ Bank be obligated to advance funds under
the Amended DZ Bank Facility;
o the Company could lose business if its customers and suppliers doubt its
ability to satisfy obligations on a timely or long-term basis;
o the Company may be unable to invest adequate capital in its business;
o an involuntary bankruptcy petition could be filed against the Company by
its creditors;
o the Company may need to commence a bankruptcy proceeding to attempt to
reorganize under applicable provisions of the Bankruptcy Code.
GOING CONCERN ISSUES AND RESTATEMENT OF FINANCIAL STATEMENTS
The independent auditors report on the Company's financial statements for
the period ended December 31, 2001 contains an explanatory paragraph concerning
the Company's ability to continue as a going concern. While the Company believes
that the closing of its Restructuring Plan on May 2, 2002 will allow it to
continue as a going concern, there can be no assurance that this will occur, or
that even if the Company is able to continue as a going concern, that its
auditors will agree to issue an independent auditors' report on the Company's
financial statements for the period ended December 31, 2002, or any succeeding
periods, that does not contain an explanatory paragraph concerning the Company's
ability to continue as a going concern.
The inability to obtain independent audit reports on its financial
statements for the period ended December 31, 2002, or succeeding periods, that
do not contain an explanatory paragraph concerning the ability of the Company to
continue as a going concern could adversely affect the Company's ability to (a)
obtain, or retain, various necessary licenses and permits from governmental
authorities, (b) achieve full compliance with applicable federal and state
securities laws and regulations, (c) be admitted
34
for listing or quotation purposes on any recognized securities exchange; and (d)
comply with the terms of its credit facilities amended in connection with the
Reorganization Plan.
On March 15, 2002, the Company announced that it would restate its
consolidated financial statements for the fiscal years ended December 31, 1998
and 1999, the 1999 quarters and the quarters ended March 31, 2000, June 30,
2000, and September 30, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company's restatement of its
consolidated financial statements for these periods could result in claims
against the Company and its affiliates by regulatory authorities, shareholders
or others. There can be no assurance that such claims would not have a material
adverse affect on the Company and its operations.
Additionally, the Company's prior auditors disclaimed an opinion in their
report with regard to the Company's financial statements for the year ended
December 31, 2000. Because the Company's prior auditors disclaimed an opinion in
their report for the year ended December 31, 2000, the Company's reports filed
with the Securities and Exchange Commission will not be in compliance with
applicable SEC rules and regulations with regard to the content and presentation
of financial statements. The Company's noncompliance with these rules and
regulations will have a material adverse effect on the Company's ability to list
its shares on any recognized exchange and on the ability of the Company's shares
to be freely traded. Additionally, unless the Company's prior auditors agree to
reissue their audit report for 2000 without a disclaimer of opinion, or unless
the Company is able to retain another firm of independent auditors who can
reaudit the Company's 2000 financial statements and issue an audit report
without a disclaimer of opinion, the Company's ability to fully comply with SEC
reporting requirements, obtain new financing, or a rating from a major rating
agency will be adversely affected.
FINANCIAL COVENANTS BASED UPON ASSUMPTIONS AND ESTIMATES IN BUSINESS MODEL
All of the financial covenants in the Company's Amended Senior Credit
Facilities with its Senior Lenders and the Amended DZ Bank Facility are based
upon substantial compliance with a business model prepared by the Company and
approved by the Senior Lenders. Neither the Company's past or present
independent auditors have compiled, examined, or performed any procedures with
respect to the Company's business model, nor have they expressed an opinion or
any other form of assurance as to such business model or its achievability and
the Company's past and present auditors assume no responsibility for, and
disclaim any association with the Company's business model. The financial
projections in the business model, which have not been reviewed by the Company's
auditors or any one else outside the Company, are based upon a number of
assumptions and estimates. For example, the Company is estimating that it will
be able to sell its existing and planned inventory of Vacation Intervals within
15 years. The Company is also assuming that it will be able to obtain
approximately $100 million in additional off-balance sheet financing during
2003, either through an expansion of the Amended DZ Bank Facility or through
some other source. The Company has also made specific assumptions about its
ability to (a) maintain levels of sales and operating profits, (b) control costs
(c) significantly reduce its existing levels of defaults on customer notes
receivable, and (d) raise the prices on its products and services when market
conditions allow. Some or all of these assumptions and estimates may be
incorrect and, as a result, the Company may not achieve the financial results,
including the level of cash flow, that management projects. The assumptions and
estimates underlying the projections are inherently uncertain and are subject to
significant business, economic and competitive risks and uncertainties.
Accordingly, the Company's future financial condition and results of operations
may vary significantly from those projected in the business model. If the
projected results are not substantially achieved, a default would result under
the terms of the financial covenants of the Company's Amended Senior Credit
Facilities and the Amended DZ Bank Facility. In that event, the Company's Senior
Lenders and DZ Bank would have the right to cease all further funding in which
case, it is likely that the Company would be forced to seek protection from its
creditors through a court supervised reorganization.
CONCENTRATION IN TIMESHARE INDUSTRY
Because the Company's operations are conducted solely within the timeshare
industry, any adverse changes affecting the timeshare industry such as an
oversupply of timeshare units, a reduction in demand for timeshare units,
changes in travel and vacation patterns, a decrease in popularity of any of the
Company's resorts with consumers, changes in governmental regulations or
taxation of the timeshare industry, as well as negative publicity about the
timeshare industry, could have a material adverse effect on the Company's
results of operations, liquidity, and financial position.
35
POSSIBLE FUTURE CHANGES IN ACCOUNTING FOR REAL ESTATE TIME-SHARING TRANSACTIONS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has approved a draft of a proposed AICPA Statement
of Position (the "Proposed SOP") providing guidance for the accounting for real
estate time-sharing transactions in financial statements prepared in conformity
with generally accepted accounting principles. The Proposed SOP provides
comprehensive guidance and makes many changes and clarifications to the current
accounting for real estate time-sharing transactions. The Proposed SOP (i)
provides guidance for when a time-sharing transaction should be accounted for as
a sale; (ii) limits the use of the full accrual method for revenue recognition
and provides that, under various conditions, the percentage-of-completion
method, the cash received method, the deposit method or a combination thereof
must be used; and (iii) provides further guidance on accounting for various
other items such as sales incentives, costs incurred to sell time-shares, cost
of sales and time-sharing inventory, credit losses, rental and other operations
during the holding periods for inventory, special purpose entities, points
systems, vacation clubs, sampler programs and mini-vacations, reloads, upgrades,
and payments to owners associations. In its present form, the Proposed SOP would
be generally effective for financial statements for fiscal years beginning after
December 15, 2003. The Proposed SOP, however, has not been released for public
comment as of the date of this Annual Report on Form 10-K, although there are
indications that an exposure draft may be released for comment during calendar
year 2002. Accordingly, there is no way to predict what the final version may
contain or when, if ever, any final version may be effective. Nevertheless, in
its present form, there would be substantial material adverse effects on the
accounting for many time-share sellers, such as the Company, including
significant deferrals under the revenue recognition provisions mandated by the
Proposed SOP. If adopted in its present form, the Proposed SOP may make it
impossible for the Company to comply with certain financial covenants contained
in the Amended Senior Credit Facilities. In that event, it would be necessary
for the Company to negotiate waiver or forbearance agreements with its Senior
Lenders concerning such covenants.
ABILITY TO OBTAIN ADDITIONAL FINANCING
Several unpredictable factors may cause the Company's adjusted earnings
before interest, income taxes, depreciation and amortization to be insufficient
to meet debt service requirements or satisfy financial covenants. The Company
incurred net losses for the years ended December 31, 2000 and 2001, and the
first quarter of 2002. Should the Company's net losses continue in future
periods, the Company's cash flow and its ability to obtain additional financing
could be materially and adversely impacted.
Many of the factors that will determine whether or not the Company
generates sufficient earnings before interest, income taxes, depreciation and
amortization to meet current or future debt service requirements and satisfy
financial covenants are inherently difficult to predict. These include a
decrease in the number of sales of Vacation Intervals and the average purchase
price per interval, an increase in the number of customer defaults, an increase
in the costs to the Company of borrowing, and an increase in the sales and
marketing costs and other operating expenses of the Company.
Future fluctuations in the Company's revenues and operating results may
occur due to many factors, particularly a decreased sale of Vacation Intervals
and an increased rate of customer defaults. The Company's current and planned
expenses and debt repayment levels are and will be to a large extent fixed in
the short term, and are based in part on past expectations as to future revenues
and cash flows. The Company has previously reduced its costs of operations
through a reduction in workforce and other cost-savings measures. The Company
may be unable to further reduce spending in a timely manner to compensate for
any past or future revenue or cash flow shortfall. It is possible that the
Company's revenue, cash flow or operating results may not meet the expectations
of the financial forecast approved by Senior Lenders, and may even result in the
Company being unable to meet the debt repayment schedules or financial covenants
contained in the Company's other debt instruments, including the Old and New
Indentures.
Even after the implementation of the Reorganization Plan, the Company's
leverage is still significant and may continue to burden its operations, impair
its ability to obtain additional financing, reduce the amount of cash available
for operations and required debt payments, and make the Company more vulnerable
to financial downturns.
The Amended Senior Credit Facilities of the Company may:
o require a substantial portion of the Company's cash flow to be used to pay
interest expense and principal to Senior Lenders;
o impair the Company's ability to obtain on acceptable terms, if at all,
additional financing that might be necessary for working capital, capital
expenditures or other purposes; and
o limit the Company's ability to further refinance or amend the terms of its
existing debt obligations, if necessary or advisable.
36
The Company may not be able to reduce its financial leverage as it intends, and
it may not be able to achieve an appropriate balance between the rate of growth
which it considers acceptable and future reductions in financial leverage. If
the Company is not able to achieve growth in adjusted earnings before interest,
income taxes, depreciation and amortization, it may not be able to amend or
refinance its existing debt obligations and it may be precluded from incurring
additional indebtedness due to cash flow coverage requirements under existing or
future debt instruments.
SENSITIVITY OF CUSTOMERS TO GENERAL ECONOMIC CONDITIONS.
The Company's customers may be more vulnerable to deteriorating economic
conditions than consumers in the luxury or upscale markets. The present economic
slowdown in the United States could depress spending for Vacation Intervals,
limit the availability, or increase the cost of financing for the Company and
its customers, and adversely affect the collectibility of the Company's loans to
Vacation Interval buyers. During the present economic slowdown and in past
economic slowdowns and recessions, the Company and/or its affiliates have
experienced increased delinquencies in the payment of Vacation Interval
promissory notes and monthly Club dues and consequently increased foreclosures
and loan losses. During the present economic slowdown and during any future
economic slowdown or recession, the Company projects that increased
delinquencies, foreclosures, and loan losses are likely to occur. Similar
adverse consequences could result from significant increases in transportation
costs. Any or all of the foregoing conditions could have a material adverse
effect on the Company's results of operations, liquidity, and financial
position.
CUSTOMER DEFAULTS
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers make down payments of at least 10% of the
purchase price and deliver promissory notes to the Company for the balances. The
promissory notes generally bear interest at a fixed rate, are payable over a
seven-year to ten-year period, and are secured by a first mortgage on the
Vacation Interval. The Company bears the risk of defaults on these promissory
notes, and this risk is heightened as the Company generally does not verify the
credit history of its customers.
The Company's credit experience is such that for the year ended December
31, 2001, it recorded 25.2% of the purchase price of Vacation Intervals as a
provision for uncollectible notes. In addition, for the year ended December 31,
2001, the Company's sales decreased by $9.1 million for customer returns. If a
buyer of a Vacation Interval defaults, the Company generally must foreclose on
the Vacation Interval and attempt to resell it; the associated marketing,
selling, and administrative costs from the original sale are not recovered; and
such costs must be incurred again to resell the Vacation Interval. Although the
Company, in many cases, may have recourse against a Vacation Interval buyer for
the unpaid price, certain states have laws which limit or hinder the Company's
ability to recover personal judgments against customers who have defaulted on
their loans. For example, if the Company were to pursue a post-foreclosure
deficiency claim in Texas (where approximately 39% of Vacation Interval sales
took place in 2001) against a customer, the customer may file a court proceeding
to determine the fair market value of the property foreclosed upon. In such
event, the Company may not recover a personal judgment against the customer for
the full amount of the deficiency, but may recover only to the extent that the
indebtedness owed to the Company exceeds the fair market value of the property.
Accordingly, the Company has generally not pursued this remedy.
At December 31, 2001, the Company had Vacation Interval customer notes
receivable in the approximate principal amount of $335.7 million, and had an
allowance for uncollectible notes of approximately $54.7 million. There can be
no assurance that such allowances are adequate. In addition, the Company was
contingently liable with respect to approximately $366,000 for notes receivable
sold with recourse at December 31, 2001.
FINANCING CUSTOMER BORROWINGS
To finance its operations, the Company borrows funds under existing or
future credit arrangements and is dependent on its ability to finance customer
notes receivable through third party lenders to conduct its business.
BORROWING BASE. To finance Vacation Interval customer notes
receivable, the Company has entered into agreements with lenders to
borrow up to approximately $269.8 million collateralized by customer
promissory notes and mortgages. At December 31, 2001, the Company had
such borrowings from lenders in the approximate principal amount of
$266.7 million. The Company's lenders typically lend the Company up to
85% of the principal amount of performing notes, and payments from
Silverleaf Owners on such notes are credited directly to the lender and
applied against the Company's loan balance. At December 31, 2001, the
Company had a portfolio of approximately 39,684 Vacation Interval
customer notes receivable in the approximate principal amount of $335.7
million, of which approximately $6.7 million in principal amount were 61
days or more past due and therefore ineligible as collateral.
37
NEGATIVE CASH FLOW. The Company ordinarily receives only 10% of the
purchase price on the sale of a Vacation Interval but must pay in full
the costs of development, marketing, and sale of the interval. Maximum
borrowings available under the Company's credit facilities may not be
sufficient to cover these costs, thereby straining the Company's capital
resources, liquidity, and capacity to grow.
INTEREST RATE MISMATCH. At December 31, 2001, the Company's
portfolio of customer loans had a weighted average fixed interest rate
of 13.7%. At such date, the Company's borrowings (which bear interest at
variable rates) against the portfolio had a weighted average cost of
funds of 8.1%. The Company has historically derived net interest income
from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed
the interest rates the Company pays to its lenders. Because the
Company's existing indebtedness currently bears interest at variable
rates and the Company's customer notes receivable bear interest at fixed
rates, increases in interest rates would erode the spread in interest
rates that the Company has historically enjoyed and could cause the
interest expense on the Company's borrowings to exceed its interest
income on its portfolio of customer notes receivable. The Company has
not engaged in interest rate hedging transactions. Therefore, any
increase in interest rates, particularly if sustained, could have a
material adverse effect on the Company's results of operations,
liquidity, and financial position. To the extent interest rates decrease
generally on loans available to the Company's customers, the Company
faces an increased risk that customers will pre-pay their loans and
reduce the Company's income from financing activities.
MATURITY MISMATCH. The Company typically provides financing to
customers over a seven-year to ten-year period, and customer notes had
an average maturity of 6.2 years at December 31, 2001. Considering the
Exchange Offer completed May 2, 2002, the Company's related revolving
credit facilities have scheduled maturity dates between August 2003 and
March 2007, with $16.0 million of these credit facilities maturing in
2003. Additionally, should the Company's revolving credit facilities be
declared in default, the amount outstanding could be declared to be
immediately due and payable. Accordingly, there could be a mismatch
between the Company's anticipated cash receipts and cash disbursements
in 2002 and subsequent periods. Although the Company has historically
been able to secure financing sufficient to fund its operations, it does
not presently have agreements with its lenders to extend the term of its
existing funding commitments or to replace such commitments upon their
expiration. Failure to obtain such refinancing facilities could require
the Company to sell its portfolio of customer notes receivable, probably
at a substantial discount, or to seek other alternatives to enable it to
continue in business. There is no assurance that the Company will be
able to obtain required financing in the future.
IMPACT ON SALES. Limitations on the availability of financing would
inhibit sales of Vacation Intervals due to (i) the lack of funds to
finance the initial negative cash flow that results from sales that are
financed by the Company and (ii) reduced demand if the Company is unable
to provide financing to purchasers of Vacation Intervals.
EFFECTS OF DOWNSIZING AND DEPENDENCE ON KEY PERSONNEL
During 2001, the Company was forced to downsize its staff and had to
terminate many employees with extended in-depth experience of its business and
operations. However, the Company has retained key members of management. The
loss of the services of any one of the key members of management could have a
material adverse effect on the Company. Should the Company's business develop
and expand again in the future, the Company would require additional management
and employees. Inability to hire when needed, retain, and integrate needed new
or replacement management and employees could have a material adverse effect on
the Company's results of operations, liquidity, and financial position in future
periods.
DEVELOPMENT AND CONSTRUCTION ACTIVITIES
The Company intends to continue to develop the Existing Owned Resorts;
however, continued development of its resorts places substantial demands on the
Company's liquidity and capital resources, as well as on its personnel and
administrative capabilities. Risks associated with the Company's development and
construction activities include the following: construction costs or delays at a
property may exceed original estimates, possibly making the development
uneconomical or unprofitable; sales of Vacation Intervals at a newly completed
property may not be sufficient to make the property profitable; and financing
may be unavailable or may not be available on favorable terms for development of
or the continued sales of Vacation Intervals at a property. There can be no
assurance the Company will have the liquidity and capital resources to develop
and expand the Existing Owned Resorts.
In addition, the Company's development and construction activities, as well
as its ownership and management of real estate, are subject to comprehensive
federal, state, and local laws regulating such matters as environmental and
health concerns, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction, marketing and sales,
and other matters. Such laws and difficulties in obtaining, or failing to
obtain, the requisite licenses, permits, allocations, authorizations, and other
entitlements pursuant to such laws could impact the development, completion, and
sale of the Company's projects. The
38
enactment of "slow growth" or "no-growth" initiatives or changes in labor or
other laws in any area where the Company's projects are located could also
delay, affect the cost or feasibility of, or preclude entirely the expansion
planned at each of the Existing Owned Resorts.
Most of the Company's resorts are located in rustic areas, often requiring
the Company to provide public utility water and sanitation services in order to
proceed with development. Such activities are subject to permission and
regulation by governmental agencies, the denial or conditioning of which could
limit or preclude development. Operation of the utilities also subjects the
Company to risk of liability in connection with both the quality of fresh water
provided and the treatment and discharge of waste-water.
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO DISABLED
PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons of a variety of public accommodations and
facilities. The ADA requirements did not become effective until after January 1,
1991. Although the Company believes the Existing Owned Resorts are substantially
in compliance with laws governing the accessibility of its facilities to
disabled persons, the Company will incur additional costs of complying with such
laws. Additional federal, state, and local legislation may impose further
burdens or restrictions on the Company, the Clubs, or the Management Clubs at
the Existing Owned Resorts or other resorts, with respect to access by disabled
persons. The ultimate cost of compliance with such legislation is not currently
ascertainable, and, while such costs are not expected to have a material effect
on the Company's results of operations, liquidity, and financial position, such
costs could be substantial.
VULNERABILITY TO REGIONAL CONDITIONS
Prior to August 1997, all of the Company's operating resorts and
substantially all of the Company's customers and borrowers were located in Texas
and Missouri. Since August 1997, the Company has expanded into other states. The
Company's performance and the value of its properties is affected by regional
factors, including local economic conditions (which may be adversely impacted by
business layoffs or downsizing, industry slowdowns, changing demographics, and
other factors) and the local regulatory climate. The Company's current
geographic concentration could make the Company more susceptible to adverse
events or conditions which affect these areas in particular.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state, and local laws, ordinances, and regulations,
as well as common law, the owner or operator of real property generally is
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on, in, or emanating from, such property, as well as related
costs of investigation and property damage. Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the
presence of the hazardous or toxic substances. The presence of such substances,
or the failure to properly remediate such substances, may adversely affect the
owner's ability to sell or lease a property or to borrow money using such real
property as collateral. Other federal and state laws require the removal or
encapsulation of asbestos-containing material when such material is in poor
condition or in the event of construction, demolition, remodeling, or
renovation. Other statutes may require the removal of underground storage tanks.
Noncompliance with these and other environmental, health, or safety requirements
may result in the need to cease or alter operations at a property. Further, the
owner or operator of a site may be subject to common law claims by third parties
based on damages and costs resulting from violations of environmental
regulations or from contamination associated with the site. Phase I
environmental reports (which typically involve inspection without soil sampling
or ground water analysis) were prepared in 2000 by independent environmental
consultants for all of the Existing Owned Resorts owned by the Company. The
reports did not reveal, nor is the Company aware of, any environmental liability
that would have a material adverse effect on the Company's results of
operations, liquidity, or financial position. No assurance, however, can be
given that these reports reveal all environmental liabilities or that no prior
owner created any material environmental condition not known to the Company.
Certain environmental laws impose liability on a previous owner of property
to the extent hazardous or toxic substances were present during the prior
ownership period. A transfer of the property may not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by it or by its predecessors.
The Company believes that it is in compliance in all material respects with
all federal, state, and local ordinances and regulations regarding hazardous or
toxic substances. The Company has not been notified by any governmental
authority or third party of any non-compliance, liability, or other claim in
connection with any of its present or former properties.
39
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; POSSIBLE INABILITY TO QUALIFY
RESORTS
The attractiveness of Vacation Interval ownership is enhanced by the
availability of exchange networks that allow Silverleaf Owners to exchange in a
particular year the occupancy right in their Vacation Interval for an occupancy
right in another participating network resort. According to ARDA, the ability to
exchange Vacation Intervals was cited by many buyers as an important reason for
purchasing a Vacation Interval. Several companies, including RCI, provide
broad-based Vacation Interval exchange services, and the Existing Owned Resorts,
except Oak N' Spruce Resort, are currently qualified for participation in the
RCI exchange network. Oak N' Spruce Resort is currently under contract with
another exchange network provider, Interval International. However, no assurance
can be given that the Company will continue to be able to qualify such resorts
or any other future resorts for participation in these networks or any other
exchange network. If such exchange networks cease to function effectively, or if
the Company's resorts are not accepted as exchanges for other desirable resorts,
the Company's sales of Vacation Intervals could be materially adversely
affected.
RESALE MARKET FOR VACATION INTERVALS
Based on its experience at the Existing Owned Resorts, the Company believes
the market for resale of Vacation Intervals by the owners of such intervals is
very limited and that resale prices are substantially below their original
purchase price. This may make ownership of Vacation Intervals less attractive to
prospective buyers. Also, attempts by buyers to resell their Vacation Intervals
compete with sales of Vacation Intervals by the Company. While Vacation Interval
resale clearing houses or brokers do not currently have a material impact, if
the secondary market for Vacation Intervals were to become more organized and
liquid, the availability of resale intervals at lower prices could materially
adversely affect the prices and number of sales of new Vacation Intervals by the
Company.
SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS
Sales of Vacation Intervals have generally been lower in the months of
November and December. Cash flow and earnings may be impacted by the timing of
development, the completion of future resorts, and the potential impact of
weather or other conditions in the regions where the Company operates. The above
may cause significant variations in quarterly operating results.
NATURAL DISASTERS; UNINSURED LOSS
There are certain types of losses (such as losses arising from floods and
acts of war) that are not generally insured because they are either uninsurable
or not economically insurable and for which neither the Company, the Clubs, nor
the Management Clubs has insurance coverage. Should an uninsured loss or a loss
in excess of insured limits occur, the Company could be required to repair
damage at its expense or lose its capital invested in a resort, as well as the
anticipated future revenues from such resort. The Company would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could have a material adverse effect on the Company's
results of operations, liquidity, and financial position. Additionally,
disasters such as the terrorist attacks on the United States which occurred on
September 11, 2001 may indirectly have a material adverse effect on the Company
by causing a general increase in property and casualty insurance rates, or
causing certain types of coverages to become unavailable.
LEVERAGE
The Company's future lending and development activities will likely be
financed with indebtedness obtained under the Company's existing credit
facilities or under credit facilities to be obtained by the Company in the
future. Such credit facilities are and would be collateralized by the Company's
assets and contain restrictive covenants.
The New Indenture pertaining to the exchanged senior subordinated notes
permits the Company to incur additional indebtedness, including indebtedness
secured by the Company's customer notes receivable. Accordingly, to the extent
customer notes receivable of the Company increase and the Company has sufficient
credit facilities available to it, the Company may be able to borrow additional
funds. The New Indenture pertaining to the exchanged senior subordinated notes
also permits the Company to borrow additional funds in order to finance
development of the Company's resorts. Future construction loans will likely
result in liens against the respective properties.
The level of the Company's indebtedness could have important consequences to
holders of the Common Stock, including, but not limited to, (i) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on the Exchange Notes and other indebtedness;
(ii) the Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures or acquisitions may be limited; (iii) the
Company's level of indebtedness could limit its
40
flexibility in reacting to changes in the industry and economic conditions
generally; (iv) certain of the Company's borrowings are at variable rates of
interest, and a substantial increase in interest rates could adversely affect
the Company's ability to meet debt service obligations; and (v) increased
interest expense will reduce earnings, if any. In addition, the New Indenture
and the Amended Senior Credit Facilities contain, and future credit facilities
could contain, financial and other restrictive covenants that will limit the
ability of the Company to, among other things, borrow additional funds. Failure
by the Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company's results of operations, liquidity, and financial position.
POSSIBLE LOSS OF CONTROL OVER CLUBS
Each Existing Resort has a Club that operates through a centralized
organization to manage the Existing Owned Resorts on a collective basis. The
consolidation of resort operations through the Silverleaf Club permits: (i) a
centralized reservation system for all resorts; (ii) substantial cost savings by
purchasing goods and services for all resorts on a group basis, which generally
results in a lower cost of goods and services than if such goods and services
were purchased by each resort on an individual basis; (iii) centralized
management for the entire resort system; (iv) centralized legal, accounting, and
administrative services for the entire resort system; and (v) uniform
implementation of various rules and regulations governing all resorts.
The Company currently has the right to unilaterally appoint the board of
directors or governors of the Clubs until the respective control periods have
expired (typically triggered by the percentage of sales of the planned
development), unless otherwise provided by the bylaws of the association or
under applicable law. Thereafter, the bylaws of certain of the Clubs require
that a majority of the members of the board of directors or governors of the
Club be owners of Vacation Intervals of that resort. The loss of control of the
board of directors or governors of a Club could result in the Company being
unable to unilaterally cause the renewal of the collective Management Agreement
with that Club when it expires in 2010.
PREFERRED STOCK OF THE COMPANY
The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
establish the preferences and rights (including the right to vote and the right
to convert into Common Stock) of any series of Preferred Stock issued. Such
preferences and rights would likely grant to the holders of the Preferred Stock
certain preferences in right of payment upon a dissolution of the Company and
the liquidation of its assets. To the extent that the Company's credit
facilities would permit, the Board could also establish a dividend payable to
the holders of the Preferred Stock that would not be available to the holders of
the Common Stock.
ACCELERATION OF DEFERRED TAXES
While the Company reports sales of Vacation Intervals as income for
financial reporting purposes, for federal income tax purposes the Company
reports substantially all Vacation Interval sales on the installment method.
Under the installment method, the Company recognizes income for federal income
tax purposes on the sale of Vacation Intervals when cash is received in the form
of a down payment and as payments on customer loans are received. The Company's
December 31, 2001 liability for deferred taxes (i.e., taxes owed to taxing
authorities in the future in consequence of income previously reported in the
financial statements) was $96.6 million, primarily attributable to this method
of reporting Vacation Interval sales, before utilization of any available
deferred tax benefits (up to $116.0 million at December 31, 2001), including net
operating loss carryforwards, limitations on the use of which are discussed
below. These amounts do not include accrued interest on such deferred taxes
which also will be payable when the taxes are due, the amount of which is not
now reasonably ascertainable. In addition, the net deferred tax benefit is
fully-reserved at December 31, 2001. If the Company should sell the installment
notes or be required to factor them or if the notes were foreclosed on by a
lender of the Company or otherwise disposed of, the deferred gain would be
reportable for tax purposes and the deferred taxes, including interest on the
taxes for the period the taxes were deferred, as computed under Section 453 of
the Internal Revenue Code of 1986, as amended (the "Code"), would become due.
There can be no assurance that the Company would have sufficient cash resources
to pay those taxes and interest. Furthermore, if the Company's sales of Vacation
Intervals should decrease in the future, the Company's diminished operations may
not generate either sufficient tax losses to offset taxable income or funds to
pay the deferred tax liability from prior periods.
ALTERNATIVE MINIMUM TAXES
For purposes of computing the 20% alternative minimum tax imposed under
Section 55 of the Code ("AMT") on the Company's alternative minimum taxable
income ("AMTI"), the installment sale method is generally not allowed. The Code
requires an adjustment to the Company's AMTI for a portion of the Company's
adjusted current earnings ("ACE"). The Company's ACE must be computed without
application of the installment sale method. Prior to 1997, the Company used the
installment method for the
41
calculation of ACE for federal alternative minimum tax purposes. In 1998, the
Company received a ruling from the Internal Revenue Service granting the
Company's request for permission to change to the accrual method for this
computation effective January 1, 1997. As a result, the Company's alternative
minimum taxable income for 1997 through 1999 was increased each year by
approximately $9 million, which resulted in the Company paying substantial
additional federal and state taxes in those years. As a result of this change,
the Company paid $641,000, $4.9 million, and $4.3 million of federal alternative
minimum tax for 1997, 1998, and 1999, respectively. Due to losses incurred in
2000, the Company received refunds totaling $8.3 million during 2001 and $1.6
million during 2002 as a result of the carryback of its 2000 AMT loss to 1999,
1998, and 1997. However, as of December 31, 2000, a limitation imposed by
Section 172(b) of the Code limited the carryback of corporate net operating
losses to 90% of the preceding two years. Hence, credits for prior years'
minimum tax liabilities of $641,000 for 1997, $494,000 for 1998, and $428,000
for 1999 were not refunded until the limitation was lifted in 2002.
As a result of the use of the accrual method in computing the Company's
alternative minimum tax liability and other specifics regarding such
computation, the Company anticipates that it will have an alternative minimum
tax liability. Due to the Exchange Offer previously described, an ownership
change within the meaning of Section 382(g) of the Internal Revenue Code ("the
Code") has occurred. The ownership change may limit the use of the Company's
minimum tax credit, described above, as provided in Section 383 of the Code.
Under Section 383, the amount of the excess credits which exist as of the date
of the ownership change can be used to offset the Company's tax liability for
post-change years only to the extent of the Section 383 Credit Limitation, which
amount is defined as the tax liability which is attributable to so much of the
taxable income of the Company as does not exceed the Section 382 limitation for
such post-change year to the extent available after the application of Sections
382 and 383(b) and (c). Additionally, there can be no assurance that additional
"ownership changes" within the meaning of Section 382(g) of the Code will not
occur in the future.
LIMITATIONS ON USE OF CARRYOVERS FROM OWNERSHIP CHANGE
The Company had net operating loss carryforwards of approximately $266.1
million at December 31, 2001, for regular federal income tax purposes, related
primarily to the deferral of installment sale gains. In addition to the general
limitations on the carryback and carryforward of net operating losses under
Section 172 of the Code, Section 382 of the Code imposes additional limitations
on the utilization of a net operating loss by a corporation following various
types of ownership changes which result in more than a 50 percentage point
change in ownership of a corporation within a three year period. As described
above, the Exchange Offer resulted in an ownership change within the meaning of
Section 382(g) of the Code. As a result, a portion of the Company's NOL is
subject to an annual limitation for taxable years beginning after the date of
the exchange ("change date"), and a portion of the taxable year which includes
the change date. The annual limitation will be equal to the value of the stock
of the Company immediately before the ownership change, multiplied by the
long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term
rates in effect for any month in the three-calendar-month period ending with the
calendar month in which the change date occurs). This annual limitation may be
increased for any recognized built-in gain to the extent allowed in Section
382(h) of the Code. Additionally, there can be no assurance that additional
"ownership changes" within the meaning of Section 382(g) of the Code will not
occur in the future.
There can be no assurance that the limitations of Section 382 will not limit
or deny the future utilization of the net operating loss by the Company,
resulting in the Company paying substantial additional federal and state taxes
and interest for any periods following a change in ownership as described above.
Moreover, when such an ownership change occurs, Section 383 of the Code may also
limit or deny the future utilization of certain carryover excess credits,
including any unused minimum tax credit attributable to payment of alternative
minimum taxes, as described above.
Accordingly, there can be no assurance that these additional limitations
will not limit or deny the future utilization of any net operating loss and/or
excess tax credits of the Company, resulting in the Company paying substantial
additional federal and state taxes and interest for any periods following
applicable changes in ownership as described above.
TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX LIABILITY
Although all on-site sales personnel are treated as employees of the Company
for payroll tax purposes, the Company does have independent contractor
agreements with certain sales and marketing persons or entities. The Company has
not treated these independent contractors as employees; accordingly, the Company
does not withhold payroll taxes from the amounts paid to such persons or
entities. In the event the Internal Revenue Service or any state or local taxing
authority were to successfully classify such persons or entities as employees of
the Company, rather than as independent contractors, and hold the Company liable
for back payroll taxes, such action may have a material adverse effect on the
Company's results of operations, liquidity and financial position.
42
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation arising in the normal course of its
business. Litigation has been initiated from time to time by persons seeking
individual recoveries for themselves, as well as, in some instances, persons
seeking recoveries on behalf of an alleged class. The Company has been able to
settle such claims in the past upon terms that it believes were immaterial to
its operations and financial condition. Such litigation includes claims
regarding matters concerning employment, tort, contract, truth-in-lending,
marketing and sale of Vacation Intervals, and other consumer protection related
matters.
CERTAIN ALLEGED CLASS ACTION CLAIMS. In September 1999, an action was
commenced against the Company by various named Plaintiffs who brought the action
on behalf of themselves and on behalf of a purported class of plaintiffs made up
of persons who purchased Vacation Intervals from the Company between 1995 and
1999. The case was filed in federal court in reliance upon alleged violations of
the federal truth in lending statutes. The asserted claims involved an alleged
inconsistency between the way a certain handling and recording fee was described
in the contract signed by each alleged class member and the form of the
settlement statement utilized by the Company to close the sales. While the
Company believes that the case was without merit and that it would have been
successful in defending the action in court, the Company determined that it
would be less expensive to settle the matter than to defend it. The Company and
the named Plaintiffs settled the claim through mediation. The settlement was
later approved by the court. Except for the costs of setting aside sales of
approximately fifteen Vacation Intervals and a $75,000 lump sum payment to named
Plaintiffs, the Company paid no money; however, the Company did agree to
certification of a class so that it could receive a release in a form which
bound the entire class concerning the allegations raised in the complaint. The
Company believes that the value of the recovered Vacation Intervals essentially
offset the payments made to the twenty-seven named Plaintiffs. Additionally, the
Company granted upgrade credits ranging from $20 to $350 per Vacation Interval
to class members to upgrade their Vacation Interval to a higher price interval.
The upgrade credits may not be used for any other purpose and are
non-transferable, non-assignable and expire if unused in 2002. The Company also
paid the legal fees of the counsel for the named Plaintiffs in an amount of
approximately $514,000.
A second purported class action suit was filed against the Company in March
2000 by various Named Plaintiffs who brought the action on behalf of themselves
and on behalf of a purported class of Plaintiffs made up of persons who owned a
Vacation Interval, with Bonus Time Privileges. The Plaintiffs asserted various
claims against the Company based primarily on the Company's sale of Vacation
Intervals with Bonus Time Program benefits. The Plaintiffs asserted there were
various misrepresentations regarding the limitations on the use of the Bonus
Time, as well as other similar allegations. The Company believes it had
substantial defenses to the claims asserted by the Plaintiffs and had made more
than adequate written disclosures as well as signed acknowledgments from each
purported class member regarding the limitations of the Bonus Time Program,
which would have prevented any recovery under the various theories relied upon.
In addition, the Company believes that the court would not have certified the
case as a class action because there were too many fact issues applicable to
each putative class member. The case was successfully submitted to mediation and
a Mediation Settlement Agreement and Memorandum of Understanding was signed by
the parties. This out of court settlement was subsequently approved by the
court. All members of the class, including the Named Plaintiffs, released the
Company and the Silverleaf Club from any and all claims they held in regards to
the suit. In return, the Company and Silverleaf Club released the Named
Plaintiffs, and Silverleaf Club provided all Class Members with one Preferred
Guest Reservation Certificate. These Certificates allow the holder to receive a
five night and six day reservation (Sunday through Thursday and during white or
blue color times only) at one of the Company's resorts during a four year
period, so long as the holder is current on their dues and note payable
obligations. Each Certificate is guaranteed by the Company but only to the
extent of $100 per Certificate if the reservation cannot be fulfilled. In
addition to the Certificates the Company and the Silverleaf Club, agreed to make
various changes to its sales, operating and marketing procedures, including
changes to its Bonus Time Program which the Company implemented in 2001. As part
of the settlement, the Company also paid the Class Representatives $8,000 for
each time share week owned for a total of $120,000 and set aside fifteen
Vacation Interval sales to the Class Representatives. Finally, in order to
facilitate a prompt conclusion to this matter on grounds deemed to be favorable,
the Company paid $1,000,000 in attorneys fees, plus court costs. The Company
also paid Plaintiff's counsel $30,000 for all expenses.
An additional purported class action was filed against the Company on
October 19, 2001 by Plaintiffs who each purchased Vacation Intervals from the
Company. The Plaintiffs allege that the Company violated the Texas Deceptive
Trade Practices Act and the Texas Timeshare Act by failing to deliver to them
complete copies of the contracts for the purchase of the Vacation Intervals as
they did not receive a complete legal description of the Hill Country Resort as
attached to the Declaration of Restrictions, Covenants and Conditions of the
Resort. The Plaintiffs also claim that the Company violated various provisions
of the Texas Deceptive Trade Practices Act with respect to the maintenance fees
charged by the Company to its Vacation Interval owners. The Petition asserts
Texas class action allegations and alleges actual damages in the amount of
$34,536,505 plus consequential damages in an unspecified amount and all
attorneys' fees, expenses and costs. A hearing on the Plaintiffs' request for
class certification will be held in November 2002.
43
The Company intends to vigorously defend against the Plaintiffs' claims and
believes it has valid defenses to the claims. Discovery with regard to the
Plaintiffs' claims is ongoing. Based upon the Company's understanding of the
Plaintiffs' claims, the Company believes the outcome of this litigation will not
have a material adverse effect on the Company's operations or financial
condition.
A further purported class action was filed against the Company on February
26, 2002, by a couple who purchased a Vacation Interval from the Company. The
Company was served with this action via U. S. Mail and first received a copy of
the Plaintiff's original petition on or about March 5, 2002. The Plaintiffs
allege that the Company violated the Texas Government Code by charging a
document preparation fee in regard to instruments affecting title to real
estate. Alternatively, the Plaintiffs allege that the document preparation fee
constituted a partial prepayment that should have been credited against their
note and additionally seek a declaratory judgment. The petition asserts Texas
class action allegations and seeks recovery of the $275.00 document preparation
fee and treble damages for a total of $1,100.00, and injunctive relief
preventing the Company from engaging in the unauthorized practice of law in
connection with the sale of its Vacation Intervals in Texas. The Company has not
yet determined the merits of the case.
CERTAIN CONSTRUCTION CLAIMS BY CONDOMINIUM OWNERS. The homeowner
associations of three condominium projects that a former subsidiary of the
Company constructed in Missouri filed separate actions against the Company and
one of its subsidiaries alleging construction defects and breach of management
agreements pursuant to which the Company is responsible for the management of
the projects. Two of the suits have been consolidated. One of the Company's
insurers has agreed to provided a defense to the Company, subject to a
reservation of rights. The Company paid approximately $1.3 million in 1999 and
2000 correcting a portion of the problems alleged by the Plaintiffs. The Company
believes that a substantial portion of these costs may be reimbursed by its
insurance carrier though the Company continues to contest additional claims
alleged by the Plaintiffs. The Company cannot predict the final outcome of these
claims and cannot estimate the additional costs it could incur.
Additional claims may be made against the Company in the future. Following a
complete assessment of such claims, the Company will either defend the claims or
attempt to settle such claims out of court if management believes that the cost
of settlement would be less than the cost to defend such matters.
Various legal actions and claims may be instituted or asserted in the future
against the Company and its subsidiaries, including those arising out of the
Company's sales and marketing activities and contractual arrangements. Some of
the matters may involve compensatory, punitive or other treble damage claims in
very large amounts, which, if granted, could be materially adverse to the
Company's financial condition.
Litigation is subject to many uncertainties, and the outcome of individual
litigated matters is not predictable with assurance. Reserves will be
established from time to time by the Company when deemed appropriate under
generally acceptable accounting principles. However, the outcome of a claim for
which the Company has not deemed a reserve to be necessary may be decided
unfavorably to the Company and could require the Company to pay damages or make
other expenditures in amounts or a range of amounts that could be materially
adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low closing prices of the
Company's Common Stock for the quarterly periods indicated, which correspond to
the quarterly fiscal periods for financial reporting purposes. Prices for the
Common Stock are closing prices on the NYSE through June 2001 and closing bid
prices on the Pink Sheets after that date.
<Table>
<Caption>
HIGH LOW
----------- ---------
Year Ended December 31, 1999:
First Quarter.................................. $ 10.25 $ 6.38
Second Quarter ................................ 8.56 6.44
Third Quarter.................................. 8.88 6.06
Fourth Quarter................................. 7.50 5.69
Year Ended December 31, 2000:
First Quarter.................................. $ 7.19 $ 4.00
Second Quarter ................................ 4.94 2.69
Third Quarter.................................. 4.06 2.69
Fourth Quarter................................. 3.88 2.50
Year Ended December 31, 2001:
First Quarter.................................. $ 3.88 $ .89
Second Quarter ................................ 1.01 .35
Third Quarter.................................. .65 .22
Fourth Quarter................................. .30 .06
Year Ended December 31, 2002:
First Quarter.................................. $ .39 $ .07
Second Quarter................................. .52 .19
Third Quarter.................................. .45 .23
</Table>
The Company's Common Stock was traded on the NYSE until June 2001 when it
was suspended from trading and subsequently delisted in August 2001. The Common
Stock has been quoted since then on the Electronic Quotation Service of Pink
Sheets LLC under the symbol "SVLF." Because of the various uncertainties related
to the Company's future prospects, it is unlikely that an active public trading
market will develop for the Common Stock in the foreseeable future and the
Common Stock may be illiquid or experience significant price and volume
volatility. As a part of the May 2, 2002 Exchange Offer, the Company agreed to
use its reasonable efforts to obtain a listing of the Common Stock on the OTC
Bulletin Board as soon as practicable after the closing of the Exchange Offer.
DIVIDEND POLICY
The Company is, and will continue to be, restricted from paying dividends
and, therefore, does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
and other restrictions in respect of the payment of dividends, and other factors
that the Company's Board of Directors deems relevant.
45
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING INFORMATION
The Selected Consolidated Historical Financial and Operating Information
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this report on Form 10-K.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1997 1998 1999 2000 2001
---------- ----------- ----------- ------------ ------------
STATEMENT OF INCOME DATA:
Revenues:
Vacation Interval sales .............................. $ 68,820 $ 134,413 $ 192,767 $ 234,781 $ 139,359
Sampler sales ........................................ 1,176 1,356 1,665 3,574 3,904
---------- ----------- ----------- ------------ ------------
Total sales ........................................ 69,996 135,769 194,432 238,355 143,263
Interest income ...................................... 9,396 16,885 28,271 37,807 41,220
Management fee income ................................ 2,331 2,540 2,811 462 2,516
Other income ......................................... 3,234 3,214 4,929 4,912 4,334
Gain on sale of notes receivable ..................... -- -- -- 4,299 --
---------- ----------- ----------- ------------ ------------
Total revenues ..................................... 84,957 158,408 230,443 285,835 191,333
---------- ----------- ----------- ------------ ------------
Costs and Operating Expenses:
Cost of Vacation Interval sales ...................... 6,498 19,841 30,576 59,169 27,377
Sales and marketing .................................. 30,481 66,581 101,823 125,456 78,597
Provision for uncollectible notes .................... 10,447 16,205 19,441 108,751 30,311
Operating, general and administrative ................ 12,222 17,187 27,263 36,879 35,435
Depreciation and amortization ........................ 1,501 3,442 5,692 7,537 6,463
Interest expense and lender fees ..................... 4,333 6,961 16,847 32,750 35,016
Impairment loss of long-lived assets ................. -- -- -- 6,320 5,442
Write-off of affiliate receivable .................... -- -- -- 7,499 --
---------- ----------- ----------- ------------ ------------
Total costs and operating expenses ................. 65,482 130,217 201,642 384,361 218,641
---------- ----------- ----------- ------------ ------------
Income (loss) before provision (benefit) for income
taxes and extraordinary item ........................ 19,475 28,191 28,801 (98,526) (27,308)
Provision (benefit) for income taxes ................... 7,206 10,810 11,090 (36,521) (99)
---------- ----------- ----------- ------------ ------------
Income (loss) before extraordinary item ................ 12,269 17,381 17,711 (62,005) (27,209)
Extraordinary gain on extinguishment of debt (net of
income taxes of $1,330) ............................. -- -- -- 2,125 --
---------- ----------- ----------- ------------ ------------
Net income (loss) ...................................... $ 12,269 $ 17,381 $ 17,711 $ (59,880) $ (27,209)
========== =========== =========== ============ ============
Earnings (loss) per share -- Basic and Diluted (a)
Income (loss) before extraordinary item ................ $ 1.26 $ 1.38 $ 1.37 $ (4.81) $ (2.11)
Extraordinary item ..................................... -- -- -- .16 --
---------- ----------- ----------- ------------ ------------
Net income (loss) per share -- Basic and Diluted (a) ... $ 1.26 $ 1.38 $ 1.37 $ (4.65) $ (2.11)
========== =========== =========== ============ ============
Weighted average number of shares
outstanding -- Basic ................................. 9,767,407 12,633,751 12,889,417 12,889,417 12,889,417
========== =========== =========== ============ ============
Weighted average number of shares
outstanding -- Diluted ............................... 9,816,819 12,682,982 12,890,044 12,889,417 12,889,417
========== =========== =========== ============ ============
</Table>
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ..................... $ 4,970 $ 11,355 $ 4,814 $ 6,800 $ 6,204
Amounts due from affiliates ................... 1,389 4,115 6,596 671 2,234
Total assets .................................. 156,312 311,895 477,942 467,614 458,100
Amounts due to affiliates ..................... -- -- -- 3,285 565
Notes payable and capital lease obligations ... 48,559 57,752 194,468 270,597 294,456
Senior subordinated notes ..................... -- 75,000 75,000 66,700 66,700
Total liabilities ............................. 73,171 171,590 319,926 369,478 387,173
Shareholders' equity .......................... 83,141 140,305 158,016 98,136 70,927
</Table>
46
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
Adjusted EBITDA(b) $ 25,309 $ 38,594 $ 51,340 $ (51,919) $ 19,613
OTHER OPERATING DATA:
Number of Existing Owned Resorts at period end 10 18 18 19 19
Number of Vacation Intervals sold (excluding
Upgrades)(c) 6,592 13,046 15,996 16,216 9,741
Number of in house Vacation Intervals sold 3,908 6,817 11,400 16,112 10,576
Number of Vacation Intervals in inventory 10,931 14,453 17,073 15,554 20,913
Average price of Vacation Intervals sold (excluding
Upgrades)(c)(d) $ 7,854 $ 8,042 $ 8,901 $ 9,768 $ 9,688
Average price of upgraded Vacation Intervals sold
(net of exchanged interval) $ 4,326 $ 4,396 $ 4,420 $ 4,741 $ 4,254
</Table>
- ----------
(a) Earnings (loss) per share is based on the weighted average number of shares
outstanding.
(b) Adjusted EBITDA represents income (loss) from operations before interest
expense, income taxes and depreciation and amortization and impairment loss
of long lived assets. Adjusted EBITDA is presented because it is a widely
accepted indicator of a company's financial performance. However, Adjusted
EBITDA should not be construed as an alternative to net income (loss) as a
measure of the Company's operating results or to cash flows from operating
activities (determined in accordance with generally accepted accounting
principles) as a measure of liquidity. Since revenues from Vacation
Interval sales include promissory notes received by the Company, Adjusted
EBITDA does not reflect cash flow available to the Company. Additionally,
due to varying methods of reporting Adjusted EBITDA within the timeshare
industry, the computation of EBITDA for the Company may not be comparable
to other companies in the timeshare industry which compute EBITDA in a
different manner. The Company's management interprets trends in EBITDA to
be an indicator of the Company's financial performance, in addition to net
income (loss) and cash flows from operating activities (determined in
accordance with generally accepted accounting principles). The following
table reconciles EBITDA to net income (loss):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Net income (loss) before extraordinary item ...... $12,269 $17,381 $17,711 $(62,005) $(27,209)
Depreciation and amortization .................... 1,501 3,442 5,692 7,537 6,463
Interest expense and lender fees ................. 4,333 6,961 16,847 32,750 35,016
Impairment loss of long-lived assets ............. -- -- -- 6,320 5,442
Provision (benefit) for income taxes ............. 7,206 10,810 11,090 (36,521) (99)
------- ------- ------- -------- --------
EBITDA ........................................... $25,309 $38,594 $51,340 $(51,919) $ 19,613
======= ======= ======= ======== ========
</Table>
(c) Vacation Intervals sold during the years ended December 31, 1997, 1998,
1999, 2000, and 2001, include 1,517 biennial intervals (counted as 759
annual Vacation Intervals), 3,860 biennial intervals (counted as 1,930
annual Vacation Intervals), 5,936 biennial intervals (counted as 2,968
annual Vacation Intervals), 6,230 biennial intervals (counted as 3,115
annual Vacation Intervals), and 3,061 biennial intervals (counted as 1,531
annual Vacation Intervals), respectively.
(d) Includes annual and biennial Vacation Interval sales for one-bedroom and
two-bedroom units.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's Financial Statements and the notes thereto and
other financial data included elsewhere herein. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements.
CLOSING OF EXCHANGE OFFER AND DEBT RESTRUCTURING
On May 2, 2002, the Company completed an exchange offer (the "Exchange
Offer") commenced on March 15, 2002 regarding its 10 1/2% senior subordinated
notes due 2008 (the "Old Notes"). A total of $56,934,000 in principal amount of
the Company's Old Notes were exchanged for a combination of $28,467,000 in
principal amount of the Company's new class of 6.0% senior subordinated notes
due 2007 ("Exchange Notes") and 23,937,489 shares of the Company's common stock
representing approximately 65% of the common stock outstanding immediately
following the Exchange Offer. As a result of the exchange, the Company recorded
a pre-tax extraordinary gain of $17.9 million in the second quarter of 2002.
Under the terms of the Exchange Offer, tendering holders collectively received
cash payments of $1,335,545 on May 16, 2002, and will receive a further cash
payment of $334,455 on October 1, 2002. A total of $9,766,000 in principal
amount of the Company's Old Notes were not tendered and remain outstanding. As a
condition of the Exchange Offer, the Company paid all past due interest to
non-tendering holders of its Old Notes. Under the terms of the Exchange Offer,
the acceleration of the maturity date on the Old Notes which occurred in May
2001 was rescinded, and the original maturity date in 2008 for the Old Notes was
reinstated. Past due interest paid to nontendering holders of the Old Notes was
$1,827,806. The indenture under which the Old Notes were issued was also
consensually amended as a part of the Exchange Offer.
The Company also completed amendments to its credit facilities with its
principal senior lenders as well as amendments to a $100 million conduit
facility through its SPE. Finalization of the Exchange Offer and the amendment
of its principal credit facilities marks the completion of the Company's debt
restructuring announced on March 15, 2002, which was necessitated by severe
liquidity problems first announced by the Company on February 27, 2001. As a
part of the debt restructuring, the Company's noteholders and senior lenders
waived all previously declared events of default.
CRITICAL ACCOUNTING POLICIES
The Company generates revenues primarily from the sale and financing of
Vacation Intervals, including upgraded intervals. Additional revenues are
generated from management fees from the Management Clubs, lease income from
Sampler sales, and utility operations.
The Company recognizes Vacation Interval sales revenues on the accrual
method in accordance with Staff Accounting Bulletin No. 101 "Revenue
Recognition." A sale is recognized after a binding sales contract has been
executed, the buyer's price is fixed, the buyer has made a down payment of at
least 10%, the statutory rescission period has expired, and collectibility is
reasonably assured. If all accrual method criteria are met except that
construction is not substantially complete, revenues are recognized on the
percentage-of-completion basis. Under this method, the portion of revenue
applicable to costs incurred, as compared to total estimated construction and
direct selling costs, is recognized in the period of sale. The remaining amount
is deferred and recognized as Vacation Interval sales in future periods as the
remaining costs are incurred. Certain Vacation Interval sales transactions are
deferred until the minimum down payment has been received. The Company accounts
for these transactions utilizing the deposit method. Under this method, the sale
is not recognized, a receivable is not recorded, and inventory is not relieved.
Any cash received is carried as a deposit until the sale can be recognized. When
these types of sales are cancelled without a refund, deposits forfeited are
recognized as income and the interest portion is recognized as interest income.
Sales of notes receivable from the Company to a wholly-owned SPE that meet
certain underwriting criteria occur on a periodic basis. The Company allocates
the carrying amount between assets sold and retained interest based on their
relative fair values at the date of sale. The gain or loss on the sale is
determined based on the proceeds received and the recorded value of notes
receivable sold. The investment in the SPE is recorded at fair value. The fair
value of the investment in the SPE is estimated based on the present value of
future expected cash flows of the SPE's residual interest in the notes
receivable sold. The Company utilized the following key assumptions to estimate
the fair value of such cash flows: customer prepayment rate - 4.3%; expected
accounts paid in full as a result of upgrades - 6.2%; expected credit losses -
8.1%; discount rate - 19%; base interest rate - 4.4%, agent fee - 2%, and loan
servicing fees - 1%. The Company's assumptions are based on experience with its
notes receivable portfolio, available market data, estimated prepayments, the
cost of servicing, and net transaction costs.
48
The provision for uncollectible notes is recorded in an amount sufficient
to maintain the allowance for uncollectible notes at a level management
considers adequate to provide for anticipated losses resulting from customers'
failure to fulfill their obligations under the terms of their notes. The
allowance for uncollectible notes takes into consideration both notes held by
the Company and those sold with recourse. Such allowance for uncollectible notes
is adjusted based upon periodic analysis of the notes receivable portfolio,
historical credit loss experience, and current economic factors. In estimating
the allowance, the Company projects future cancellations related to each sales
year by using historical cancellations experience.
The allowance for uncollectible notes is reduced by actual cancellations
and losses experienced, including losses related to previously sold notes
receivable which became delinquent and were reacquired pursuant to the recourse
obligations discussed herein. Actual cancellations and losses experienced
represents all notes identified by management as being probable of cancellation.
Recourse to the Company on sales of customer notes receivable is governed by the
agreements between the purchasers and the Company.
The Company classifies the components of the provision for uncollectible
notes into the following three categories based on the nature of the item:
credit losses, customer returns (cancellations of sales whereby the customer
fails to make the first installment payment), and customer releases (voluntary
cancellations of properly recorded sales transactions which in the opinion of
management is consistent with the maintenance of overall customer goodwill). The
provision for uncollectible notes pertaining to credit losses, customer returns,
and customer releases are classified in provision for uncollectible notes,
Vacation Interval sales, and operating, general and administrative expenses,
respectively. Beginning in 2001, the Company ceased allocating a portion of the
provision to operating, general and administrative expenses.
Inventories are stated at the lower of cost or net realizable value. Cost
includes amounts for land, construction materials, direct labor and overhead,
taxes, and capitalized interest incurred in the construction or through the
acquisition of resort dwellings held for timeshare sale. These costs are
capitalized as inventory and are allocated to Vacation Intervals based upon
their relative sales values. Upon sale of a Vacation Interval, these costs are
charged to cost of sales on a specific identification basis. Vacation Intervals
reacquired are placed back into inventory at the lower of their original
historical cost basis or market value. Company management periodically reviews
the carrying value of its inventory on an individual project basis to determine
that the carrying value does not exceed market value.
Vacation Intervals may be reacquired as a result of (i) foreclosure (or
deed in lieu of foreclosure) and (ii) trade-in associated with the purchase of
an upgraded or downgraded Vacation Interval. Vacation Intervals reacquired are
recorded in inventory at the lower of their original cost or market value.
Vacation Intervals that have been reacquired are relieved from inventory on a
specific identification basis when resold. Inventory acquired prior to 1996
through the Company's program to reacquire Vacation Intervals owned but not
actively used by Silverleaf Owners has a significantly lower average cost basis
than recently constructed inventory, contributing significantly to historical
operating margins. New inventory added through the Company's construction and
acquisition programs has a higher average cost than the Company's pre-1996
inventory.
The Company recognizes interest income as earned. Interest income is not
recognized on notes receivable that are four-plus payments late. The Company
reserves 75% of accrued interest income for notes that are three payments late,
50% for notes that are two payments late, 25% for notes that are one payment
late, and 10% for all current notes.
The Company recognizes a maximum management fee of 15% of Silverleaf Club's
gross revenues and 10% to 15% of Crown Club's dues collected, subject to a
limitation of each Club's net income. However, if the Company does not receive
the maximum management fees, such deficiency is deferred for payment in
succeeding years, subject again to the net income limitation.
LIQUIDITY AND CAPITAL RESOURCES
Since February 2001, when the Company disclosed significant liquidity
issues arising primarily from the failure to close a credit facility with its
largest secured creditor, management and its financial advisors have been
attempting to develop and implement a plan to return the Company to sound
financial condition. During this period, the Company negotiated and closed
short-term secured financing arrangements with three lenders, which allowed it
to operate at reduced sales levels as compared to original plans and prior
years. With the exception of the Company's inability to pay interest due on the
Senior Subordinated Notes, these short-term arrangements were adequate to keep
the Company's unsecured creditors current on amounts owed.
Under the Exchange Offer that was closed on May 2, 2002, $56,934,000 in
principal amount of the Company's 10 1/2% senior subordinated notes were
exchanged for a combination of $28,467,000 in principal amount of the Company's
new class of 6.0% senior subordinated notes due 2007 and 23,937,489 shares of
the Company's common stock, representing approximately 65% of the common stock
outstanding after the Exchange Offer. Under the terms of the Exchange Offer,
tendering holders received cash
49
payments of $1,335,545 on May 16, 2002, and $334,455 on October 1, 2002. A total
of $9,766,000 in principal amount of the Company's 10 1/2% notes were not
tendered and remain outstanding. As a condition of the Exchange Offer, the
Company has paid all past due interest to non-tendering holders of its 10 1/2%
notes. Under the terms of the Exchange Offer, the acceleration of the maturity
date on the 10 1/2% notes which occurred in May 2001 has been rescinded, and the
original maturity date in 2008 for the 10 1/2% notes has been reinstated. Past
due interest paid to non-tendering holders of the 10 1/2% notes was $1,827,806.
The indenture under which the 10 1/2% notes were issued was also consensually
amended as a part of the Exchange Offer.
Management has also negotiated two-year revolving, three-year term out
arrangements for $214 million with its three principal secured lenders, which
were closed at the same time as of the Exchange Offer. In addition, the Company
amended its $100 million off-balance-sheet credit facility through the Company's
SPE. Under these revised credit arrangements, two of the three creditors
converted $42.1 million of existing debt to a subordinated Tranche B. Tranche A
is secured by a first lien on currently pledged notes receivable. Tranche B is
secured by a second lien on the notes, a lien on resort assets, and an
assignment of the Company's management contracts with the Clubs, a portfolio of
unpledged receivables currently ineligible for pledge under the existing
facility, and a security interest in the stock of Silverleaf Finance I, Inc.,
the Company's SPE. Among other aspects of these revised arrangements, the
Company will be required to operate within certain parameters of a revised
business model and satisfy the financial covenants set forth in the Amended
Senior Credit Facilities, including maintaining a minimum tangible net worth of
$100 million or greater, as defined, sales and marketing expenses as a
percentage of sales below 55.0% for the last three quarters of 2002 and below
52.5% thereafter, notes receivable delinquency rate below 25%, a minimum
interest coverage ratio of 1.1 to 1.0 (increasing to 1.25 to 1 in 2003), and
positive net income. However, such results cannot be assured.
Due to the uncertainties mentioned above, the independent auditors report
on the Company's financial statements for the period ended December 31, 2001
contains an explanatory paragraph concerning the Company's ability to continue
as a going concern.
Assuming that the Company's financial performance in future periods
improves substantially as projected in its business model, the Company believes
it will have adequate financing to operate for the two-year revolving term of
the proposed financing with the senior lenders. At that time, management will be
required to replace or renegotiate the revolving arrangements subject to
availability.
Realization of inventory is dependent upon execution of management's
long-term sales plan for each resort, which extend for up to fifteen years. Such
sales plans depend upon management's ability to obtain financing to facilitate
the build-out of each resort and marketing of the Vacation Intervals over the
planned time period.
SOURCES OF CASH. The Company generates cash primarily from the cash
received on the sale of Vacation Intervals, the financing of customer notes
receivable from Silverleaf Owners, management fees, sampler sales, and resort
and utility operations. The Company typically receives a 10% down payment on
sales of Vacation Intervals and finances the remainder by receipt of a
seven-year to ten-year customer promissory note. The Company generates cash from
the financing of customer notes receivable by (i) borrowing at an advance rate
of up to 85% of eligible customer notes receivable and (ii) from the spread
between interest received on customer notes receivable and interest paid on
related borrowings. Because the Company uses significant amounts of cash in the
development and marketing of Vacation Intervals, but collects cash on customer
notes receivable over a seven-year to ten-year period, borrowing against
receivables has historically been a necessary part of normal operations. During
the years ended December 31, 1999, 2000, and 2001, the Company's operating
activities reflected net cash used in operating activities of $121.0 million,
$62.2 million, and $23.9 million, respectively. In 2001, cash used in operating
activities decreased compared to 2000 as a result of a decrease in notes
receivable financed and income tax refunds received during the year. The
decrease in cash used in operating activities in 2000 compared to 1999 is
primarily the result of $62.9 million in proceeds from sales of notes
receivable.
Net cash provided by financing activities for the years ended December 31,
1999, 2000, and 2001 was $124.9 million, $67.2 million, and $24.9 million,
respectively. In 2001, the decrease in cash provided by financing activities
compared to 2000 is primarily the result of a $93.3 million decrease in
borrowings against pledged notes receivable, offset by a $51.0 million decrease
in payments on borrowings against pledged notes receivable. During 2000, the
decrease in cash provided by financing activities compared to 1999 was primarily
due to increased payments on borrowings against pledged notes receivable
resulting from funds received from sales of notes receivable to the SPE. At
December 31, 2001, the Company's revolving credit facilities provided for loans
of up to $289.8 million, of which approximately $287.2 million of principal and
interest related to advances under the credit facilities was outstanding. For
the year ended December 31, 2001, the weighted average cost of funds for all
borrowings, including the senior subordinated debt, was 8.1%. Customer defaults
have a significant impact on cash available to the Company from financing
customer notes receivable in that notes more than 60 days past due are not
eligible as collateral. As a result, the Company must repay borrowings against
such delinquent notes.
Effective October 30, 2000, the Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
an off-balance-sheet SPE, formed on October 16, 2000. The agreement presently
has a term of 5 years. However,
50
on the second anniversary date of the amended facility, the SPE's lender under
the credit agreement shall have the right to put, transfer, and assign to the
SPE all of its rights, title, and interest in and to all of the assets securing
the facility at a price equal to the then outstanding principal balance under
the facility. During 2000, the Company sold $74 million of notes receivable to
the SPE, which the Company services for a fee. The SPE funded these purchases
through advances under a credit agreement arranged for this purpose. In
conjunction with these sales, the Company received cash consideration of $62.9
million, which was used to pay down borrowings under its revolving loan
facilities. During 2001, the Company made no sales of notes receivable to the
SPE.
At December 31, 2001, the SPE held notes receivable totaling $50.4 million,
with related borrowings of $43.6 million. Except for the repurchase of notes
that fail to meet initial eligibility requirements, the Company is not obligated
to repurchase defaulted or any other contracts sold to the SPE. It is
anticipated, however, that the Company will place bids in accordance with the
terms of the conduit agreement to repurchase some defaulted contracts in public
auctions to facilitate the re-marketing of the underlying collateral. The
investment in the SPE was valued at $5.3 million at December 31, 2001.
For regular federal income tax purposes, the Company reports substantially
all of the Vacation Interval sales it finances under the installment method.
Under this method, income on sales of Vacation Intervals is not recognized until
cash is received, either in the form of a down payment or as installment
payments on customer notes receivable. The deferral of income tax liability
conserves cash resources on a current basis. Interest is imposed, however, on
the amount of tax attributable to the installment payments for the period
beginning on the date of sale and ending on the date the related tax is paid. If
the Company is otherwise not subject to tax in a particular year, no interest is
imposed since the interest is based on the amount of tax paid in that year. The
consolidated financial statements do not contain an accrual for any interest
expense that would be paid on the deferred taxes related to the installment
method as the interest expense is not estimable. In addition, the Company is
subject to current alternative minimum tax ("AMT") as a result of the deferred
income that results from the installment sales treatment. Payment of AMT reduces
the future regular tax liability attributable to Vacation Interval sales, and
creates a deferred tax asset. In 1998, the Internal Revenue Service approved a
change in the method of accounting for installment sales effective as of January
1, 1997. As a result, the Company's alternative minimum taxable income for 1997
through 1999 was increased each year by approximately $9.0 million for the
pre-1997 adjustment, which resulted in the Company paying substantial additional
federal and state taxes in those years. The Company's AMT loss for 2000 was
decreased by such amount. Subsequent to December 31, 2000, the Company applied
for and received refunds of $8.3 million during 2001 and $1.6 million during
2002 as the result of the carryback of its 2000 AMT loss to 1999, 1998, and
1997.
The net operating losses ("NOL") expire between 2007 through 2021.
Realization of the deferred tax assets arising from NOL is dependent on
generating sufficient taxable income prior to the expiration of the loss
carryforwards. Management currently does not believe that it will be able to
utilize its NOL from normal operations. At present, future NOL utilization is
expected to be limited to the temporary differences creating deferred tax
liabilities. If necessary, management could implement a strategy to accelerate
income recognition for federal income tax purposes to utilize the existing NOL.
The amount of the deferred tax asset considered realizable could be decreased if
estimates of future taxable income during the carryforward period are reduced.
Due to the Exchange Offer described in Footnote 3 of the financial
statements, an ownership change within the meaning of Section 382(g) of the
Internal Revenue Code ("the Code") has occurred. As a result, a portion of the
Company's NOL is subject to an annual limitation for taxable years beginning
after the date of the exchange ("change date"), and a portion of the taxable
year which includes the change date. The annual limitation will be equal to the
value of the stock of the Company immediately before the ownership change,
multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted
Federal long-term rates in effect for any month in the three-calendar-month
period ending with the calendar month in which the change date occurs). This
annual limitation may be increased for any recognized built-in gain to the
extent allowed in Section 382(h) of the Code. The ownership change may also
limit the use of the Company's minimum tax credit, described above, as provided
in Section 383 of the Code.
Given its current economic condition, the Company's access to capital and
other financial markets is anticipated to be limited. However, to finance the
Company's growth, development, and any future expansion plans, the Company may
at some time be required to consider the issuance of other debt, equity, or
collateralized mortgage-backed securities, the proceeds of which would be used
to finance future acquisitions, refinance debt, finance mortgage receivables, or
for other purposes. Any debt incurred or issued by the Company may be secured or
unsecured, have fixed or variable rate interest, and may be subject to such
terms as management deems prudent.
USES OF CASH. Investing activities typically reflect a net use of cash due
to capital additions and property acquisitions. Net cash used in investing
activities for the years ended December 31, 1999, 2000, and 2001 was $10.5
million, $3.1 million, and $1.6 million, respectively. In 2001 and 2000, the
cash used in investing activities decreased compared to 2000 and 1999,
respectively, due to reduced purchases of property and equipment. In 1999, cash
used in investing activities included proceeds from property sales, offset by
investments in a new central telemarketing facility and related automated
dialers and computer equipment, and investments in undeveloped land, including
$1.5 million of undeveloped land near The Villages Resort in Tyler, Texas,
$500,000 of undeveloped
51
land near Holiday Hills Resort in Branson, Missouri, and $805,000 of undeveloped
land near Fox River Resort in Sheridan, Illinois. The Company evaluates sites
for additional new resorts or acquisitions on an ongoing basis. As of December
31, 2001, the Company had construction commitments of approximately $7.8
million. Certain debt agreements include restrictions on the Company's ability
to pay dividends based on minimum levels of net income and cash flow. The
payment of dividends might also be restricted by the Texas Business Corporation
Act.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
------ ------ ------
As a percentage of total revenues:
Vacation Interval sales .............................. 83.7% 82.1% 72.8%
Sampler sales ........................................ 0.7 1.3 2.1
------ ------ ------
Total sales .................................. 84.4 83.4 74.9
Interest income ...................................... 12.3 13.2 21.5
Management fee income ................................ 1.2 0.2 1.3
Other income ......................................... 2.1 1.7 2.3
Gain on sale of notes receivable ..................... -- 1.5 --
------ ------ ------
Total revenues ............................... 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales ...................... 15.9% 25.2% 19.6%
Provision for uncollectible notes .................... 10.1 46.3 21.8%
As a percentage of total sales:
Sales and marketing .................................. 52.4% 52.6% 54.9%
As a percentage of total revenues:
Operating, general and administrative ................ 11.8% 12.9% 18.5%
Depreciation and amortization ........................ 2.5 2.6 3.4
Impairment loss of long-lived assets ................. -- 2.2 2.8
Write-off of affiliate receivable .................... -- 2.6 --
Total costs and operating expenses ................... 87.5 134.5 114.3%
As a percentage of interest income:
Interest expense and lender fees ..................... 59.6% 86.6% 84.9%
</Table>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31,
2000
Revenues
Revenues in 2001 were $191.3 million, representing a $94.5 million, or
33.1%, decrease compared to revenues of $285.8 million for the year ended
December 31, 2000. In February 2001, the Company failed to secure a new credit
facility with its largest secured creditor, which created significant liquidity
concerns. In addition, the Company's three primary secured lenders have only
provided the Company sufficient secured financing to sell at rates substantially
reduced from 1999 and 2000 levels.
As a result, Vacation Intervals sales decreased $95.4 million to $139.4
million, down from $234.8 million in 2000. For the year ended December 31, 2001,
the number of Vacation Intervals sold, exclusive of in-house Vacation Intervals,
decreased 39.9% to 9,741 from 16,216 in 2000; and the average price per interval
remained fairly unchanged at $9,688 versus $9,768 in the same period of 2000.
Total interval sales for 2001 included 3,061 biennial intervals (counted as
1,531 Vacation Intervals) compared to 6,230 biennial intervals (counted as 3,115
Vacation Intervals) in 2000. During 2001, 10,576 in-house Vacation Intervals
were sold at an average price of $4,254, compared to 16,112 in-house Vacation
Intervals sold at an average price of $4,741 during the year ended December 31,
2000.
Sampler sales increased to $3.9 million in 2001 compared to $3.6 million in
2000. Consistent with the overall decrease in Company operations, fewer samplers
were sold in 2001 compared to 2000. However, sampler sales are not recognized as
revenue until the Company's obligation has elapsed, which often does not occur
until the sampler contract expires eighteen months after the sale is
consummated. Hence, a significant portion of sampler sales recognized in 2001
relate to 2000 sales.
Interest income increased 9.0% to $41.2 million for the year ended December
31, 2001 from $37.8 million for 2000. This increase primarily resulted from an
increase in notes receivable, net of allowance for doubtful notes, in 2001
compared to 2000.
52
Management fee income, which consists of management fees collected from the
resorts' management clubs, cannot exceed the management clubs' net income.
Management fee income increased $2.1 million for the year ended December 31,
2001 versus the same period of 2000, due primarily to decreased operating
expenses at the management clubs in 2001 versus 2000.
Other income consists of water and utilities income, condominium rental
income, marina income, golf course and pro shop income, and other miscellaneous
items. Other income decreased $578,000 to $4.3 million for the year ended
December 31, 2001, compared to $4.9 million for the year ended December 31,
2000. The decrease relates to a $317,000 gain associated with the sale of land
recognized in the third quarter of 2000 and to the discontinuance of condominium
rentals.
Gain on sale of notes receivable was $0 for the year ended December 31,
2001, compared to $4.3 million in 2000, which resulted from the sale of $74
million of notes receivable to a special purpose entity ("SPE") in the fourth
quarter of 2000.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 19.6%
in 2001 from 25.2% in 2000. Due to liquidity concerns experienced in the fourth
quarter of 2000, the Company reduced its future sales plan for most resorts and
discontinued its efforts to sell Crown intervals. As a result, the Company
recorded an inventory write-down of $15.5 million based on a lower of cost or
market assessment and wrote-off $3.1 million of unsold Crown inventory intervals
in 2000. Excluding these items, cost of sales as a percentage of sales increased
as the Company's sales mix has shifted to more recently constructed units, which
were built at a higher average cost per Vacation Interval.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 54.9%
for the year ended December 31, 2001, from 52.6% for 2000. As a result of the
aforementioned liquidity issues, the Company made several changes during 2001,
including the closure of three outside sales offices, closing three
telemarketing centers, discontinuing certain lead generation programs, and
reducing headcount in both sales and marketing functions. Despite the cost
saving measures, sales and marketing costs as a percentage of total sales
increased due to the substantial decrease in sales and $2.0 million of
nonrecurring transition costs associated with these changes.
Since the third quarter of 2001, the Company has been operating under new
sales practices whereby no sales are permitted unless the touring customer has a
minimum income level beyond that previously required and has a valid major
credit card. Further, the marketing division is employing a best practices
program, which should facilitate marketing to customers who management believes
are more likely to be a good credit risk.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 21.8% for the year ended December 31, 2001 from 46.3% for
2000. This decrease is primarily attributable to the deterioration of the
economy that came to public awareness in late 2000 and the Company's decision to
substantially reduce two programs in 2000 that had previously been used to
remedy defaulted notes receivable. The assumptions program, which had been used
by the Company since December 1997 to allow delinquent loans to be assumed by
other customers, was virtually eliminated due to its high cost of operation. The
downgrade program, which was implemented in April 2000 to supplement the
assumptions program, allows delinquent customers to downgrade to a more
affordable product. In late 2000, the downgrade program was reduced as it became
apparent that this program did not significantly reduce delinquencies. As a
result of these changes, the Company recognized additional reserves in 2000.
Due to the high level of defaults experienced in customer receivables
throughout 2001, the provision for uncollectible notes remained relatively high
during 2001. Management believes the high provision percentage remained
necessary in 2001 because of continuing economic concerns and customers
concerned about the Company's liquidity issues began defaulting on their notes
after the Company's liquidity announcement in February 2001. Management will
continue its current collection programs and seek new programs to reduce note
defaults. However, there can be no assurance that these efforts will be
successful.
Operating, General and Administrative
The Company substantially reduced its employee headcount in 2001 to align
its salary expense with its reduced sales levels. However, total operating,
general and administrative expenses as a percentage of total revenues increased
to 18.5% in 2001 from 12.9% in 2000. Even though certain operating, general and
administrative expenses were reduced as part of the Company's downsizing efforts
in 2001, total operating, general and administrative expense only decreased by
$1.4 million for the year ended December 31, 2001, as compared to 2000. This was
due primarily to (i) $4.0 million of professional fees for financial consulting
and
53
legal fees of the Company and certain of its principal creditors incurred in
2001 associated with the restructuring of the Company's debt, and (ii) $1.2
million in auditing fees incurred in 2001.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 3.4% in 2001 from 2.6% in 2000, due to the decrease in revenues.
Overall, depreciation and amortization expense decreased $1.1 million for the
year ended December 31, 2001, as compared to 2000, primarily due to the
write-off of $1.3 million of fixed assets previously used in the sales and
marketing functions in the first quarter of 2001 and a general reduction in
capital expenditures in 2001.
Impairment Loss of Long-Lived Assets
The Company recognized an impairment loss of long-lived assets of $5.4
million in 2001, compared to $6.3 million in 2000. The 2001 impairment loss
primarily consisted of a $1.3 million write-off of fixed assets related to the
closure of three outside sales offices and three telemarketing centers, a $1.4
million write-off of prepaid marketing costs related to the discontinuance of
certain lead generation programs, a $230,000 loss related to the renegotiation
and transfer of a capital lease to Silverleaf Club, and a $2.3 million
impairment to write-down both corporate planes to their estimated sales prices.
Due to liquidity concerns experienced in the fourth quarter of 2000, the
Company was required to abandon plans to develop two resorts already in
predevelopment status, place one resort in predevelopment status on hold, and
abandon plans to sell at the Crown resorts. As a result, the Company recorded an
impairment of $5.4 million to write-down land to its estimated fair value and
land held for sale to its estimated sales price less estimated disposal costs.
Due to its decision to discontinue sales efforts of Crown intervals, the Company
also wrote-off $922,000 of intangible assets, originally recorded with the
acquisition of Crown resorts in May 1998, which management believes are not
recoverable under its new business model.
Interest Expense
Interest expense as a percentage of interest income remained relatively
flat at 84.9% for the year ended December 31, 2001, compared to 86.6% for the
year ended December 31, 2000. In 2001, the Company incurred $3.3 million of
costs related to restructuring the Company's debt, which offset the decrease in
the Company's weighted average cost of borrowing from 9.6% in 2000 to 8.1% in
2001.
Write-off of Affiliate Receivable
At December 31, 2000, due to the liquidity concerns and the planned
reduction in future sales, the Company anticipated that future membership dues
would not be sufficient to recover its advances to Silverleaf Club. Hence, the
Company's Board of Directors approved the write-off of $7.5 million of
uncollectible receivables from Silverleaf Club.
Loss before Benefit for Income Taxes and Extraordinary Item
Loss before benefit for income taxes and extraordinary item was a loss of
$27.3 million for the year ended December 31, 2001, as compared to a loss of
$98.5 million for the year ended December 31, 2000, as a result of the
aforementioned operating results.
Benefit for Income Taxes
Benefit for income taxes as a percentage of loss before benefit for income
taxes and extraordinary item was 0.3% for the year ended December 31, 2001, as
compared to 37.1% for 2000. The decrease in the effective income tax rate is the
result of the 2001 projected income tax benefit being reduced by the effect of a
valuation allowance, which reduces the projected net deferred tax assets to zero
due to the unpredictability of recovery.
Extraordinary Item
There were no extraordinary items during the year ended December 31, 2001.
The Company recognized an extraordinary gain of $2.1 million, net of income tax
of $1.3 million, related to the early extinguishment of $8.3 million of 10 1/2%
senior subordinated notes during the year ended December 31, 2000.
54
Net Loss
Net loss was $27.2 million for the year ended December 31, 2001, as
compared to $59.9 million for the year ended December 31, 2000, as a result of
the aforementioned operating results.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31,
1999
Revenues
Revenues in 2000 were $285.8 million, representing a $55.4 million, or
24.0%, increase over revenues of $230.4 million for the year ended December 31,
1999. The increase was primarily due to a $42.0 million increase in sales of
Vacation Intervals and a $9.5 million increase in interest income. The strong
increase in Vacation Interval revenues primarily resulted from increased sales
at Holiday Hills Resort in Branson, Missouri, Silverleaf's Seaside Resort in
Galveston, Texas, which opened a sales office in the first quarter of 2000, and
Apple Mountain Resort near Atlanta, Georgia, which opened a sales office in
1999. Also contributing to increased Vacation Interval revenues were improved
closing percentages and higher sales prices. In 2000 and 1999, sales were
reduced by $7.0 million and $3.7 million, respectively, for cancellations
related to customer returns (i.e., customers who failed to make their first
installment payment).
In 2000, the number of Vacation Intervals sold, exclusive of upgraded
Vacation Intervals, increased 1.4% to 16,216 from 15,996 in 1999; the average
price per interval increased 9.7% to $9,768 from $8,901. Total interval sales
for 2000 included 6,230 biennial intervals (counted as 3,115 Vacation Intervals)
compared to 5,936 biennial intervals (counted as 2,968 Vacation Intervals) in
1999. The Company also experienced increased sales of upgraded intervals through
the continued implementation of marketing and sales programs focused on selling
upgraded intervals to the Company's existing Vacation Interval owners. In 2000,
the number of upgraded Vacation Intervals sold was 16,112 at an average price of
$4,741 compared to 11,400 upgraded Vacation Intervals sold in 1999 at an average
price of $4,420. In addition, Vacation Interval sales at Existing Owned Resorts
increased as a result of enhanced telemarketing capacity, arising from
investments in computer and automated dialing technology.
Sampler sales increased to $3.6 million in 2000 compared to $1.7 million in
1999. The increase is consistent with the overall growth in Company sales
resulting from increased marketing efforts and an expanded sales force.
Interest income increased 33.7% to $37.8 million for the year ended
December 31, 2000 from $28.3 million for 1999. This increase primarily resulted
from an increase in notes receivable, net of allowance for uncollectible notes,
in 2000 compared to 1999.
Management fee income decreased 83.6% to $462,000 in 2000 from $2.8 million
in 1999. The decrease in management fee income was primarily the result of
increased operating expenses at the management clubs.
Other income consists of water and utilities income, condominium rental
income, marina income, golf course and pro shop income, and other miscellaneous
items. Other income was $4.9 million for both the years ended December 31, 2000
and December 31, 1999. In 2000, a $317,000 gain associated with the sale of
land, growth in water and utilities income, and increased pro shop income at two
resorts was offset by a reduction in sales of Bonus Time Program upgrades to
owners of seven resorts managed by the Company since May 1998.
Gain on sale of notes receivable was $4.3 million for the year ended
December 31, 2000, compared to $0 in 1999. This gain resulted from the sale of
$74 million of notes receivable to a special purpose entity ("SPE") in the
fourth quarter of 2000.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 25.2%
in 2000 from 15.9% in 1999. Due to liquidity concerns experienced in the fourth
quarter of 2000, the Company reduced its future sales plan for most resorts and
discontinued its efforts to sell Crown intervals. As a result, the Company
recorded an inventory write-down of $15.5 million based on a lower of cost or
market assessment and wrote-off $3.1 million of unsold Crown inventory
intervals. In addition, as the Company continues to deplete its inventory of
low-cost Vacation Intervals acquired primarily in 1995 and 1996, the Company's
sales mix has shifted to more recently constructed units, which were built at a
higher average cost per Vacation Interval. Hence, the cost of sales as a
percentage of Vacation Interval sales has increased compared to 1999 regardless
of the impairments recorded. These percentage increases, however, were partially
offset by increased sales prices since the third quarter of 1999.
55
Sales and Marketing
Sales and marketing costs as a percentage of total sales was 52.6% for the
year ended December 31, 2000 compared to 52.4% for 1999. Due to 2000 growth
rates and implementation of new lead generation programs, the Company
experienced relatively higher marketing costs in 2000 compared to 1999. The
Company increased its headcount at the call centers significantly since the
third quarter of 1999, which created inefficiencies due to temporary lack of
available training resources in the first half of the year. The Company also
moved towards reliance on national retail chains for its lead generation
efforts, in addition to the traditional local programs. The transition to
national programs was slower in generating leads than originally planned.
Provision for Uncollectible Notes
Provision for uncollectible notes as a percentage of Vacation Interval
sales increased to 46.3% for the year ended December 31, 2000 from 10.1% for
1999. The provision for uncollectible notes in 2000 related to sales originating
in 2000 was approximately 26%, with the remainder relating to an additional
provision needed for notes related to sales from prior years. The increase in
the provision is the result of the deterioration in the economy that came to
public awareness in late 2000 and the Company's decision to substantially reduce
two programs during 2000 that had previously been used to remedy defaulted notes
receivable. The assumptions program, which had been used by the Company since
December 1997 to allow delinquent loans to be assumed by other customers, was
virtually eliminated due to its high cost of operation. The downgrade program,
which was implemented in April 2000 to supplement the assumptions program,
allows delinquent customers to downgrade to a more affordable product. Late in
2000, the downgrade program was reduced as it became apparent that this program
did not significantly reduce delinquencies. As a result of these issues, the
provision for uncollectible notes recognized in 2000 was increased by
approximately $85 million.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total
revenues increased to 12.9% in 2000 from 11.8% in 1999. The increase is
primarily attributable to higher salaries, increased headcount, increased legal
expense, and increased title and recording fees due to increased borrowings
against pledged notes receivable. In addition, the Company incurred $3.5 million
in 2000 related to three lawsuits.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 2.6% in 2000 from 2.5% in 1999. Overall, depreciation and
amortization expense increased $1.8 million from 1999, primarily due to
investments in new automated dialers, investments in telephone systems, and
investments in a central marketing facility, which opened in September 1999.
Interest Expense
Interest expense as a percentage of interest income increased to 86.6% for
the year ended December 31, 2000 from 59.6% in 1999. This increase is primarily
the result of interest expense related to increased borrowings against pledged
notes receivable.
Impairment Loss of Long-Lived Assets
Due to liquidity concerns experienced in the fourth quarter of 2000, the
Company was required to abandon plans to develop two resorts already in
predevelopment status, place one resort in predevelopment status on hold, and
abandon plans to sell at the Crown resorts. As a result, the Company recorded an
impairment of $5.4 million to write-down land to its estimated fair value and
land held for sale to its estimated sales price less estimated disposal costs.
Due to its decision to discontinue sales efforts of Crown intervals, the Company
also wrote-off $922,000 of intangible assets, originally recorded with the
acquisition of Crown resorts in May 1998, which management believes are not
recoverable under its new business model.
Write-off of Affiliate Receivable
At December 31, 2000, due to the liquidity concerns and the planned
reduction in future sales, the Company anticipated that future membership dues
would not be sufficient to recover its advances to Silverleaf Club. Hence, the
Company's Board of Directors approved the write-off of $7.5 million of
uncollectible receivables from Silverleaf Club.
56
Income (Loss) Before Provision (Benefit) for Income Taxes and Extraordinary Item
Income (loss) before provision (benefit) for income taxes and extraordinary
item decreased to a loss of $98.5 million for the year ended December 31, 2000,
from income of $28.8 million for the year ended December 31, 1999, as a result
of the above mentioned operating results.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes as a percentage of income (loss)
before provision (benefit) for income taxes and extraordinary item was 37.1% in
2000 versus 38.5% in 1999. The decrease in effective income tax rate was
primarily the result of permanent differences in 2000 lowering the benefit
recognized from losses incurred.
Extraordinary Item
The Company recognized an extraordinary gain of $2.1 million, net of income
tax of $1.3 million, related to the early extinguishment of $8.3 million of 10
1/2% senior subordinated notes during the year ended December 31, 2000. There
were no extraordinary items during the year ended December 31, 1999.
Net Income (Loss)
Net income (loss) was a net loss of $59.9 million for the year ended
December 31, 2000, as compared to net income of $17.7 million for the year ended
December 31, 1999, as a result of the above mentioned operating results.
FUTURE CASH PAYMENTS
Principal maturities of notes payable, capital lease obligations, and
senior subordinated notes, including acceleration of loans in default, are as
follows at December 31, 2001 (in thousands):
<Table>
2002................................................................ $ 356,075
2003................................................................ 1,620
2004................................................................ 1,493
2005................................................................ 635
2006................................................................ 436
Thereafter.......................................................... 897
-----------
Total..................................................... $ 361,156
===========
</Table>
Considering the debt restructuring completed in May 2002, principal
maturities of notes payable, capital lease obligations, and senior subordinated
notes are as follows at December 31, 2001 (in thousands):
<Table>
2002................................................................ $ 123,063
2003................................................................ 64,545
2004................................................................ 56,280
2005................................................................ 48,834
2006................................................................ 48,060
Thereafter.......................................................... 20,374
-----------
Total..................................................... $ 361,156
===========
</Table>
The future minimum annual commitments for the noncancelable lease
agreements are as follows at December 31, 2001 (in thousands):
<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
2002................................................................. $ 3,172 $ 2,083
2003................................................................. 1,399 1,889
2004................................................................. 1,201 1,542
2005................................................................. 238 1,443
2006................................................................. 3 1,409
Thereafter........................................................... -- 3,300
--------- -----------
Total minimum future lease payments.................................. 6,013 $ 11,666
===========
Less amounts representing interest................................... (793)
---------
Present value of future minimum lease payments....................... $ 5,220
=========
</Table>
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income, and net income during any of the Company's
three most recent fiscal years. However, to the extent inflationary trends
affect short-term interest rates, a portion of the Company's debt service costs
may be affected as well as the rates the Company charges on its customer notes
receivable.
57
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 140 - In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 140"), which replaces SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
revises SFAS No. 125's standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of the SFAS No. 125's provisions without
reconsideration. SFAS No. 140 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001 and for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. SFAS No. 140 is to be applied prospectively with
certain exceptions. The Company adopted the new disclosures required under SFAS
No. 140 as of December 31, 2000. The adoption of SFAS No. 140 in 2001 did not
have a material impact on the Company's results of operations, financial
position, or cash flows.
SFAS No. 144 - In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 was
effective for the Company for the quarter ending March 31, 2002. The adoption of
SFAS No. 144 in 2002 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
SFAS No. 145 - In April 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the current
requirement that gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and losses will
be classified as extraordinary items only if they are deemed to be unusual and
infrequent, in accordance with the current GAAP criteria for extraordinary
classification. In addition, SFAS No. 145 eliminates an inconsistency in lease
accounting by requiring that modifications of capital leases that result in
reclassification as operating leases be accounted for consistent with
sale-leaseback accounting rules. SFAS No. 145 also contains other
non-substantive corrections to authoritative accounting literature. The changes
related to debt extinguishment will be effective for fiscal years beginning
after May 15, 2002, and the changes related to lease accounting will be
effective for transactions occurring after May 15, 2002. The adoption of SFAS
No. 145 will require the Company to reclassify its extraordinary gains to
ordinary.
SFAS No. 146 - In June 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS
No. 146 supersedes previous accounting guidance, principally Emerging Issues
Task Force (EITF) Issue No. 94-3. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized. SFAS No. 146 is
effective after fiscal years beginning after December 31, 2002. The adoption of
SFAS No. 146 will not have any immediate impact on the Company's results of
operations, financial position or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of and for the year ended December 31, 2001, the Company had no
significant derivative financial instruments or foreign operations. Interest on
the Company's notes receivable portfolio, senior subordinated debt, capital
leases, and miscellaneous notes is fixed, whereas interest on the Company's
primary loan agreements, which totaled $286 million at December 31, 2001, is
variable. The impact of a one-point interest rate change on the outstanding
balance of variable-rate financial instruments at December 31, 2001, on the
Company's annual results of operations would be approximately $2.9 million. In
addition, if interest rates increase, the fair market value of the Company's
fixed-rate notes will decline, which may negatively impact the Company's ability
to sell new notes.
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Consolidated Financial Statements
appearing on page F-1 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item 9 is incorporated by reference to the
information provided by the Company in its Form 8-K dated June 25, 2002.
59
PART III
MANAGEMENT
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AT DECEMBER 31, 2001
The following table sets forth certain information concerning each person
who was a director or executive officer of the Company as of December 31, 2001.
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Robert E. Mead 55 Chairman of the Board and Chief Executive Officer
Sharon K. Brayfield* 41 Director and President
David T. O'Connor 59 Executive Vice President -- Sales
Thomas C. Franks** 48 Executive Vice President-Corporate Affairs
Harry J. White, Jr. 47 Chief Financial Officer, Treasurer
Larry H. Fritz 49 Vice President -- Marketing
Michael L. Jones 35 Vice President -- Information Services
Edward L. Lahart 37 Vice President -- Corporate Operations
Robert G. Levy 53 Vice President -- Resort Operations
Darla Cordova 37 Vice President -- Employee and Marketing Services
Lelori ("Buzz") Marconi 49 Vice President -- Marketing Operations
Sandra G. Cearley 40 Secretary
James B. Francis, Jr. 53 Director
Michael A. Jenkins* 59 Director
</Table>
- ----------
* resigned as a director effective May 15, 2002
** resigned as an officer effective December 31, 2001
ROBERT E. MEAD, founded the Company, has served as its Chairman of the
Board since its inception, and has served as its Chief Executive Officer since
May 1990. Mr. Mead began his career in hotel and motel management and also
operated his own construction company. Mr. Mead has over 23 years of experience
in the timeshare industry, with special expertise in the areas of consumer
finance, hospitality management, and real estate development.
SHARON K. BRAYFIELD, has served as the President of the Company since 1992
and manages all of the Company's day to day activities. Ms. Brayfield began her
career with an affiliated company in 1982 as the Public Relations Director of
Ozark Mountain Resort. In 1989, she was promoted to Executive Vice President of
Resort Operations for an affiliated company and in 1991 was named Chief
Operations Officer of the Company. Ms. Brayfield resigned as a director on May
15, 2002.
DAVID T. O'CONNOR, has over 23 years of experience in real estate and
timeshare sales and has worked periodically with Mr. Mead over the past 17
years. Mr. O'Connor has served as the Company's Executive Vice President --
Sales for the past five years and as Vice President -- Sales since 1991. In such
capacities he directed all field sales, including the design and preparation of
all training materials, incentive programs, and follow-up sales procedures.
THOMAS C. FRANKS was hired in August 1997 as President of a newly-formed,
wholly-owned subsidiary of the Company, Silverleaf Resort Acquisitions, Inc. In
February 1998, Mr. Franks was named as Vice President--Investor Relations and
Government Affairs for the Company, and in October 1998 he was named Executive
Vice President--Corporate Affairs. Mr. Franks has more than 17 years of
experience in the timeshare industry and is responsible for acquisitions and
industry and government relations. Mr. Franks served as the President of ARDA
from February 1991 through July 1997. Mr. Franks resigned as an executive
officer of the Company effective December 31, 2001.
HARRY J. WHITE, JR., joined the Company in June 1998 as Chief Financial
Officer and has responsibility for all accounting, financial reporting, and
taxation issues. Prior to joining the Company, Mr. White was Chief Financial
Officer of Thousand Trails, Inc. from 1992 to 1998 and previously was a senior
manager with Deloitte & Touche LLP.
LARRY H. FRITZ, has been employed by the Company (or an affiliated company)
in various marketing management positions. Since 1991, Mr. Fritz has served as
the Company's chief marketing officer, with responsibility for daily marketing
operations, and currently serves as the Company's Vice President -- Marketing.
60
MICHAEL L. JONES, was appointed Vice President -- Information Services in
May 1999. For more than five years prior to that time, Mr. Jones served in
various positions with the Company, including Network Manager, Payroll Manager,
and Director of Information Services.
EDWARD L. LAHART, has served as Vice President -- Corporate Operations
since June 1998. Prior to June 1998, Mr. Lahart served in various capacities in
the Company's Credit and Collections department.
ROBERT G. LEVY, was appointed Vice President -- Resort Operations in March
1997 and administers the Company's Management Agreement with the Silverleaf
Club. Since 1990, Mr. Levy has held a variety of managerial positions with
Silverleaf Club including Project Manager, General Manager, Texas Regional
Manager, and Director of Operations. Prior thereto, Mr. Levy spent 18 years in
hotel, motel, and resort management, and was associated with the Sheraton,
Ramada Inn, and Holiday Inn hotel chains.
DARLA CORDOVA, was elected as Vice President -- Employee and Marketing
Services in May 2001. Prior to that time, Ms. Cordova served as Controller -
Sales and Marketing.
LELORI ("BUZZ") MARCONI was elected as Vice President -- Marketing
Operations in August 2001. Prior to that time, Mr. Marconi served as Call Center
Director since 1997.
SANDRA G. CEARLEY, has served as Secretary of the Company since its
inception. Ms. Cearley maintains corporate minute books, oversees regulatory
filings, and coordinates legal matters with the Company's attorneys.
JAMES B. FRANCIS, JR., was elected as a Director of the Company in July
1997. During 1996, Mr. Francis' company, Francis Enterprises, Inc., served as a
consultant to the Company in connection with governmental and public affairs.
From 1980 to 1996, Mr. Francis was a partner in the firm of Bright & Co., which
managed various business investments, including the Dallas Cowboys Football
Club.
MICHAEL A. JENKINS, was elected as a Director of the Company in July 1997.
In 1971, Mr. Jenkins founded and became the President of Leisure and Recreation
Concepts, Inc., which has planned and designed over 850 theme parks, resorts,
retail areas, and major attractions worldwide. Mr. Jenkins has more than 35
years in the leisure industry and serves on the Board of Directors of Leisure
and Recreation Concepts, Inc. Mr. Jenkins also serves as President of the Dallas
Summer Musicals, Inc., and the Broadway Contemporary Series. Mr. Jenkins
resigned as a director on May 15, 2002.
RECONSTITUTION OF BOARD OF DIRECTORS AFTER DECEMBER 31, 2001
The composition of the Company's Board of Directors has changed
materially since December 31, 2001. One of the principal conditions of the
Exchange Offer consummated on May 2, 2002, was a reconstitution of the Company's
existing Board of Directors to add three new independent directors. On May 16,
2002, three new independent directors were added to the Board of Directors in
accordance with the terms of the Exchange Offer. Messrs. Mead and Francis remain
as two of the Company five directors.
The three new directors who joined Messrs. Mead and Francis on the
Board on May 16, 2002 are:
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
J Richard Budd, III 50 Director
Herbert B. Hirsch 66 Director
R. Janet Whitmore 47 Director
</Table>
J. RICHARD BUDD III, was elected as a director of the Company in May
2002 under the terms of the Exchange Offer. Since January 2001, Mr. Budd has
been a partner in the restructuring advisory firm of Marotta Gund Budd & Dzera,
LLC. From 1998 until 2001, Mr. Budd served as an independent advisor to troubled
companies and to creditors of troubled companies. From 1996 to 1998 Mr. Budd was
Senior Vice President of Metallurg, Inc., an international specialty metals
producer. Mr. Budd is also a director of APW, Ltd.
HERBERT B. HIRSCH, was elected as a director of the Company in May 2002
under the terms of the Exchange Offer. From 1988 to January 2002, Mr. Hirsch
served as Senior Vice President and Chief Financial Officer of Mego Financial
Corp., a developer and operator of timeshare resort properties.
61
R. JANET WHITMORE, was elected a director of the Company in May 2002
under the terms of the Exchange Offer. Ms. Whitmore has provided consulting
services to Divi Resorts, a resort and timeshare sales and marketing company in
the Caribbean, since 2000. From 1976 to 2000, Ms. Whitmore was employed by Mobil
Corporation in various engineering and financial positions, including Controller
of Global Petrochemicals and Chief Financial Analyst.
Additional material changes to the Company's corporate governance
structure also occurred on May 16, 2002, including abolition of the executive
committee of the Board of Directors and designation of new committee assignments
for the Board's other two principal standing committees, the audit committee and
the compensation committee.
Since May 16, 2002, the members of the audit committee have been Ms.
Whitmore and Messrs. Budd and Francis. Mr. Budd serves as the chairman of the
audit committee.
The composition of the compensation committee of the Board also changed
on May 16, 2002. Ms. Whitmore now serves as chairman of the compensation
committee. The other two members of the compensation committee are Messrs. Budd
and Hirsch.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual base salary and other annual
compensation earned in 1999, 2000 and 2001 by the Company's Chief Executive
Officer and each of the other four most highly compensated executive officers
whose cash compensation (salary and bonus) exceeded $100,000 (the "Named
Executive Officers").
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION($) COMPENSATION
---------------------- ------------
OTHER # OF SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING
POSITION YEAR SALARY(a) Bonus COMPENSATION(b) OPTIONS/SARS
------------------ ---- ---------- ---------- --------------- ---------------
Robert E. Mead, ............... 1999 $ 500,011 -- -- --
Chief Executive Officer 2000 $ 499,857 -- -- --
2001 $ 500,000 -- -- --
Sharon K. Brayfield, .......... 1999 $ 435,004 $ 38,321 $ 107,806 25,000
President 2000 $ 435,000 $ 74,729 -- 20,000
2001 $ 435,000 $ 6,525 -- --
David T. O'Connor, ............ 1999 -- $ 80,259 $1,272,648(c) 50,000
Executive Vice President - 2000 -- $ 101,916 $1,016,895 --
Sales 2001 -- $ 40,940 $ 722,874 --
Thomas C. Franks(d) ........... 1999 $ 368,751 $ 31,080 -- 25,000
Executive Vice President - 2000 $ 375,000 $ 42,230 -- 20,000
Corporate Affairs 2001 $ 325,000 $ 42,687 -- --
Harry J. White, Jr ............ 1999 $ 210,001 -- -- 10,000
Chief Financial Officer, 2000 $ 220,000 $ 22,994 -- 10,000
Treasurer 2001 $ 225,000 -- -- --
</Table>
- ----------
(a) The amounts shown are before elective contributions by the Named
Executive Officers in the form of salary reductions under the Company's
Section 125 Flexible Benefit Plan. Such plan is available to all
employees, including the Named Executive Officers.
(b) Except as otherwise noted, these amounts represent additional
compensation based on sales of Vacation Intervals and other sales related
criteria. See "Executive Compensation -- Employment and Noncompetition
Agreements" for a discussion of other annual compensation.
(c) A portion of this amount was paid as sales commissions to Recreational
Consultants, Inc., a corporation of which Mr. O'Connor is the principal.
See "Certain Relationships and Related Transactions."
(d) Effective as of January 1, 2002, Mr. Franks was no longer employed by the
Company.
62
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Effective January 1, 2000, Mr. Mead entered into a three-year employment
agreement with the Company which provides for an annual base salary of $500,000,
a company vehicle, and other fringe benefits such as health insurance, vacation,
and sick leave as determined by the Board of Directors of the Company from time
to time.
Effective January 1, 2000, Ms. Brayfield entered into a three-year
employment agreement with the Company which provides for an annual base salary
of $435,000, a company vehicle, and other fringe benefits such as health
insurance, vacation, and sick leave as determined by the Board of Directors of
the Company from time to time.
Effective January 1, 2000, Mr. O'Connor entered into a three-year
employment agreement with the Company which, as amended, provides for base
compensation payable equal to five tenths percent (0.5%) of the Company's net
sales from outside sales and six tenths percent (0.6%) of the Company's net
sales from in-house sales, plus incentive bonuses based upon performance, a
company vehicle, and other fringe benefits such as health insurance, vacation,
and sick leave as determined by the Board of Directors of the Company from time
to time.
Effective June 29, 1998, Mr. White entered into an employment agreement
with the Company which provides for an annual base salary, currently $250,000, a
company vehicle, and other fringe benefits such as health insurance, vacation,
and sick leave as determined by the Board of Directors of the Company from time
to time. The agreement provides for severance pay equal to six months of Mr.
White's then current salary if his services are terminated at any time for a
reason other than good cause.
Effective May 24, 2001, Ms. Cordova entered into a one-year employment
agreement with the Company which provides for an annual base salary of $107,000,
and other fringe benefits such as health insurance, vacation, and sick leave as
determined by the Board of Directors of the Company from time to time.
Effective May 31, 2001, Mr. Jones entered into a one-year employment
agreement with the Company which provides for an annual base salary of $150,000,
and other fringe benefits such as health insurance, vacation, and sick leave as
determined by the Board of Directors of the Company from time to time.
Effective May 24, 2001, Mr. Lahart entered into a one-year employment
agreement with the Company which provides for an annual base salary of $100,000,
plus an incentive bonus based on performance, and other fringe benefits such as
health insurance, vacation, and sick leave as determined by the Board of
Directors of the Company from time to time.
The agreements with Ms. Brayfield and Messrs. Mead and O'Connor also
provide that for a period of two years following the termination of his or her
services with the Company, he or she will not engage in or carry on, directly or
indirectly, either for himself or herself or as a member of a partnership or
other entity or as a stockholder, investor, officer or director of a corporation
or as an employee, agent, associate or contractor of any person, partnership,
corporation or other entity, any business in competition with the business of
the Company or its affiliates in any county of any state of the United States in
which the Company or its affiliates conduct such business or market the products
of such business immediately prior to the effective date of termination.
The agreements with Ms. Brayfield, Ms. Cordova and Messrs. Jones and
Lahart also provide that each employee shall be entitled to severance pay equal
to six months of his or her then current salary if his or her services are
terminated within a year of a change of control of the Company. A "Change of
Control" shall be deemed to have occurred if either (i) Robert E. Mead ceases to
own a majority of the issued and outstanding common stock of the Company or (ii)
the Company files a petition in a court of bankruptcy or is adjudicated a
bankrupt. Each of the agreements also provides that such employees will not (i)
influence any employee or independent contractor to terminate its relationship
with the Company or (ii) disclose any confidential information of the Company at
any time.
EMPLOYEE BENEFIT PLANS
1997 STOCK OPTION PLAN. The Company adopted the 1997 Stock Option Plan
(the "Plan") in May 1997 to attract and retain directors, officers, and key
employees of the Company. The Plan was amended by the Company's shareholders at
the 1998 Annual Meeting of Shareholders to increase the number of options which
may be granted under the Plan to 1,600,000 and to modify the number of outside
directors who, as members of the Compensation Committee, may administer the
Plan. The following is a summary of the provisions of the Plan. This summary
does not purport to be a complete statement of the provisions of the Plan and is
qualified in its entirety by the full text of the Plan.
63
The purpose of the Plan is to afford certain of the Company's directors,
officers and key employees and the directors, officers and key employees of any
subsidiary corporation or parent corporation of the Company who are responsible
for the continued growth of the Company, an opportunity to acquire a proprietary
interest in the Company, and thus to create in such directors, officers and key
employees an increased interest in and a greater concern for the welfare of the
Company. The Company, by means of the Plan, seeks to retain the services of
persons now holding key positions and to secure the services of persons capable
of filling such positions. The Plan provides for the award to directors,
officers, and key employees of nonqualified stock options and provides for the
grant to salaried key employees of options intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company has filed a Registration Statement to register
such shares.
Nonqualified stock options provide for the right to purchase common stock
at a specified price which may be less than fair market value on the date of
grant (but not less than par value). "Fair market value" per share shall be
deemed to be the average of the high and low quotations at which the Company's
shares of common stock are sold on a national securities exchange, or if not
sold on a national securities exchange, the closing bid and asked quotations in
the over-the-counter market for the Company's shares on such date. If no public
market exists for the Company's shares on any date on which the fair market
value per share is to be determined, the Compensation Committee shall, in its
sole discretion and best, good faith judgment, determine the fair market value
of a share. Nonqualified stock options may be granted for any term and upon such
conditions determined by the Compensation Committee.
Incentive stock options are designed to comply with the provisions of the
Code and are subject to restrictions contained therein, including exercise
prices equal to at least 100% of fair market value of common stock on the grant
date and a ten year restriction on their term; however, incentive stock options
granted to any person owning more than 10% of the voting power of the stock of
the Company shall have exercise prices equal to at least 110% of the fair market
value of the common stock on the grant date and shall not be exercisable after
five years from the date the option is granted. Except as otherwise provided
under the Code, to the extent that the aggregate fair market value of Shares
with respect to which Incentive Options are exercisable for the first time by an
employee during any calendar year exceeds $100,000, such Incentive Options shall
be treated as Non-Qualified Options.
The Plan may either be administered by the Compensation Committee or the
Board of Directors which selects the individuals to whom options are to be
granted and determines the number of shares granted to each optionee. For the
period ending December 31, 2000, the Compensation Committee and the Board of
Directors made all decisions concerning administration of the Plan.
An optionee may exercise all or any portion of an option that is
exercisable by providing written notice of such exercise to the Corporate
Secretary of the Company at the principal business office of the Company,
specifying the number of shares to be purchased and specifying a business day
not more than fifteen days from the date such notice is given, for the payment
of the purchase price in cash or by certified check. Options are not
transferable by the optionee other than by will or the laws of descent and
distribution, and an option may be exercised only by the optionee.
The following are the federal tax rules generally applicable to options
granted under the Plan. The grant of a stock option will not be a taxable event
for the participant nor a tax deduction for the Company. The participant will
have no taxable income upon exercising an incentive stock option within the
meaning of section 422 of the Internal Revenue Code of 1986, as amended (except
that the alternative minimum tax may apply). Upon exercising a stock option that
is not an incentive option, the participant must recognize ordinary income in an
amount equal to the difference between the exercise price and the fair market
value of the stock on the exercise date and the Company receives a tax deduction
equal to the amount of ordinary income recognized by the participant. The tax
treatment upon disposition of shares of the Company's Common Stock acquired
under the Plan through the exercise of a stock option will depend on how long
such shares have been held, and on whether or not such shares were acquired by
exercising an incentive stock option.
An option shall terminate upon termination of the directorship, office or
employment of an optionee with the Company or its subsidiary, except that if an
optionee dies while serving as a director or officer or while in the employ of
the Company or one of its subsidiaries, the optionee's estate may exercise the
unexercised portion of the option. If the directorship, office or employment of
an optionee is terminated by reason of the optionee's retirement, disability, or
dismissal other than "for cause" while such optionee is entitled to exercise all
or any portion of an option, the optionee shall have the right to exercise the
option, to the extent not theretofore exercised, at any time up to and including
(i) three months after the date of such termination of directorship, office or
employment in the case of termination by reason of retirement or dismissal other
than for cause and (ii) one year after the date of termination of directorship,
office, or employment in the case of termination by reason of disability. If an
optionee voluntarily terminates his directorship, office or employment, or is
discharged for cause, any option granted shall, unless otherwise specified by
the Compensation Committee pursuant to the terms and condition of the grant of
the option, forthwith terminate with respect to any unexercised portion thereof.
All terminated options shall be returned to the Plan and shall be available for
future grants to other optionees.
64
The Plan will terminate on May 15, 2007 (the "Termination Date"), the
tenth anniversary of the day the Plan was adopted by the Board of Directors of
the Company and approved by its shareholders. Any options granted prior to the
Termination Date and which remain unexercised may extend beyond that date in
accordance with the terms of the grant thereof.
Under the Plan, the Board of Directors of the Company reserves the right
to exercise the powers and functions of the Compensation Committee. Also, the
Board of Directors reserves the right to amend the Plan at any time; however,
the Board of Directors may not, without the approval of the shareholders of the
Company (i) increase the total number of shares reserved for options under the
Plan (other than for certain changes in the capital structure of the Company),
(ii) reduce the required exercise price of any incentive stock options, or (iii)
modify the provisions of the Plan regarding eligibility.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 2001. No options were granted
to and no options were exercised during 2001 by any of the Named Executive
Officers.
OPTIONS/SARS EXERCISES AND DECEMBER 31, 2001 YEAR-END VALUE TABLE.
<Table>
<Caption>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL
ACQUIRED ON FISCAL YEAR-END(#)(a) YEAR-END($)(a)
EXERCISE VALUE ---------------------------- ----------------------------
NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Robert E. Mead........... -- -- -- -- -- --
Sharon K. Brayfield...... -- -- 111,250 58,750 -- --
David T. O'Connor........ -- -- 300,000 50,000 -- --
Thomas C. Franks(b)...... -- -- 136,250 33,750 -- --
Harry J. White, Jr....... -- -- 45,000 25,000 -- --
</Table>
- ----------
(a) The Unexercised Options of the Named Executive Officers were not
in-the-money at fiscal year end; therefore, the options had no value as
of December 31, 2001.
(b) As of January 1, 2002, Mr. Franks is no longer employed by the Company.
SECTION 162(m) LIMITATION. In general, under Section 162(m) of the Code,
income tax deductions of publicly-held corporations may be limited to the extent
total compensation (including base salary, annual bonus, stock option exercises
and non-qualified benefits paid) for certain executive officers exceeds $1
million (less the amount of any "excess parachute payments" as defined in
Section 280G of the Code) in any one year. However, under Section 162(m), the
deduction limit does not apply to certain "performance-based compensation"
established by an independent compensation committee which is adequately
disclosed to, and approved by, the shareholders.
DISCRETIONARY PERFORMANCE AWARDS. Performance awards, including bonuses,
may be granted by the Compensation Committee on an individual or group basis.
Generally, these awards will be based upon specific agreements or performance
criteria and will be paid in cash.
401(k) PLAN. Effective January 1, 1999, the Company established the
Silverleaf Resorts, Inc. 401(k) Plan (the "401(k) Plan"), a qualified defined
contribution retirement plan covering employees 21 years of age or older who
have completed one year of service. The Plan allows eligible employees to defer
receipt of up to 15% of their compensation and contribute such amounts to
various investment funds. The employee contributions vest immediately. Other
than normal costs of administration, the Company has no obligation to make any
payments under the 401(k) Plan.
65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of the
Company's Common Stock as of December 31, 2001 by (i) those persons known to the
Company to be the beneficial owners of more than five percent of the outstanding
shares, (ii) each current director and the five executive officers of the
Company named under the table titled "Executive Compensation" and (iii) all
directors and executive officers as a group.
<Table>
<Caption>
PERCENT PERCENT
OF OF
SHARES CLASS PRIOR CLASS AFTER
BENEFICIALLY TO EXCHANGE EXCHANGE
NAME OF BENEFICIAL OWNER(a) POSITION OWNED OFFER(b) OFFER(b)
--------------------------- -------- ------------ ----------- -----------
Robert E. Mead(c)................................ Chairman of the Board and Chief 7,250,100 56.25 19.69
Executive Officer
Sharon K. Brayfield (c)(d)....................... President and Director 197,767 1.52 *
David T. O'Connor (c)(e)......................... Executive Vice President -- Sales 300,000 2.32 *
Harry J. White, Jr. (c)(f)....................... Chief Financial Officer and Treasurer 48,000 * *
James B. Francis, Jr. (g)(h)..................... Director 55,334 * *
Michael A. Jenkins (g)(i)........................ Director 54,334 * *
All Directors and Executive Officers as a *
Group (13 persons)....................................................................... 8,050,020 59.28 21.45
Dimensional Fund Advisors, Inc. (j)...................................................... 773,000 6.00 2.10
</Table>
- ----------
* Less than 1%
(a) Except as otherwise indicated, each beneficial owner has the sole power
to vote and to dispose of all shares of Common Stock owned by such
beneficial owner.
(b) Pursuant to the rules of the Securities and Exchange Commission, in
calculating percentage ownership, each person is deemed to beneficially
own his own shares subject to options exercisable within sixty days, but
options owned by others (even if exercisable within sixty days) are
deemed not to be outstanding shares. In calculating the percentage
ownership of the directors and officers as a group, the shares subject to
options exercisable by directors and officers within sixty days are
included within the number of shares beneficially owned.
(c) The address of such person is 1221 River Bend Drive, Suite 120, Dallas,
Texas 75247.
(d) Includes options to purchase 111,250 shares which options are exercisable
within sixty days from the date hereof.
(e) Comprised of options to purchase shares which options are exercisable
within sixty days from the date hereof.
(f) Includes options to purchase 45,000 shares which options are exercisable
within sixty days from the date hereof.
(g) Includes options to purchase 53,334 shares which options are exercisable
within sixty days from the date hereof.
(h) The address of such person is 2911 Turtle Creek Boulevard, Suite 925,
Dallas, Texas 75219.
(i) The address of such person is 2151 Fort Worth Avenue, Dallas, Texas
75211-1812.
(j) Dimensional Fund Advisors, Inc. ("Dimensional") furnishes investment
advice to four investment companies and serves as investment manager to
certain other commingled group trusts and separate accounts (the
"Funds"). The shares described are owned by the Funds. In its role as
investment adviser or manager to the Funds, Dimensional possesses voting
and/or investment power over the shares described, but disclaims
beneficial ownership of such securities. The address for Dimensional is
1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. This
information is based upon information provided by Dimensional on Schedule
13G dated January 30, 2002.
66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each timeshare owners association has entered into a management agreement,
which authorizes the Management Clubs to manage the resorts. The Management
Clubs, in turn, have entered into management agreements with the Company,
whereby the Company manages the operations of the resorts. Pursuant to the
management agreements, the Company receives a management fee equal to the lesser
of 15% of gross revenues for Silverleaf Club and 10% to 15% of dues collected
for owners associations within Crown Club or the net income of each Management
Club. However, if the Company does not receive the aforementioned maximum fee,
such deficiency is deferred for payment in the succeeding year(s), subject again
to the net income limitation. The Silverleaf Club Management Agreement is
effective through March 2010, and will continue year-to-year thereafter unless
cancelled by either party. Crown Club consists of several individual Club
agreements that have terms of two to five years with a minimum of two renewal
options remaining. During the years ended December 31, 1999, 2000, and 2001, the
Company recorded management fees of $2.8 million, $462,000, and $2.5 million,
respectively, in management fee income.
The direct expenses of operating the resorts are paid by the Management
Clubs. To the extent the Management Clubs provide payroll, administrative, and
other services that directly benefit the Company, a separate allocation charge
is generated and paid by the Company to the Management Clubs. During the years
ended December 31, 1999, 2000, and 2001, the Company incurred $10.3 million,
$155,000, and $147,000, respectively, of expenses under these agreements. As of
January 1, 2000, certain employees were transferred from the Management Clubs to
the Company. Hence, the allocation of overhead from the Management Clubs to the
Company was substantially reduced in 2000. As a result of the payroll changes
implemented January 1, 2000, the Company allocated overhead to the Management
Clubs of $1.7 million and $1.7 million during the years ended December 31, 2000
and 2001, respectively.
The following schedule represents amounts due from (to) affiliates at
December 31, 2000 and 2001 (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------
2000 2001
------ ------
Timeshare owners associations and other, net ..... $ 216 $ 102
Amount due from Silverleaf Club .................. -- 1,555
Amount due from Crown Club ....................... 455 577
------ ------
Total amounts due from affiliates ...... $ 671 $2,234
====== ======
Amount due to Silverleaf Club .................... 689 261
Amount due to SPE ................................ 2,596 304
------ ------
Total amounts due to affiliates ........ $3,285 $ 565
====== ======
</Table>
In December 2000, the Company wrote-off its receivable from Silverleaf
Club and incurred a charge of $7.5 million. At December 31, 2000, due to
liquidity concerns and the planned reduction in future sales, the Company
anticipated that future membership dues would not be sufficient to pay down the
receivable. Hence, the Company's Board of Directors approved the write-off of
this amount.
During 2001, Silverleaf Club entered into a loan agreement for $1.8
million, whereby the Company guaranteed such debt with certain of its assets. As
of December 31, 2001, Silverleaf Club's related note payable balance was $1.7
million.
At December 31, 2000, the amount due to SPE primarily relates to upgrades
of sold notes receivable, which was subsequently paid. Upgrades represent sold
notes that are replaced by new notes when holders of said notes upgrade to a
more valuable Vacation Interval.
An affiliate of a director of the Company is entitled to a 10% net profits
interest from sales of certain land in Mississippi. During 2000, the affiliate
of the director was paid $49,637 under this agreement. During 2001, the Company
sold additional parcels of this land and accrued a liability of $17,286 to the
affiliate. As of December 31, 2001, the Company owns approximately 11 acres of
land that is subject to this net profits interest.
In 1997, the Company, as lessor, entered into a ten-year lease agreement
with an individual who is an executive officer and director of the Company for
personal recreational use of undeveloped flood plain land adjacent to one of the
Company's resorts in exchange for an annual payment equal to the property taxes
attributable to the undeveloped flood plain land. These property taxes were
approximately $7,500 for the year ended December 31, 2001. The lease has four
renewal options of ten years at the option of the lessee.
In August 1997, subject to an employment agreement with an officer, the
Company purchased a house for $531,000 and leased the house, with an option to
purchase, to the officer for 13 months at a rental rate equal to the Company's
expense for interest, insurance, and taxes, which was approximately $3,000 per
month. In September 1998, the officer exercised his option to purchase the house
at the end of the lease for $531,000. In March 2001, the Company forgave the
remaining $48,000 balance on a note due from the officer.
67
In June 1998, the Company entered an employment agreement, whereby the
Company paid $108,000 for an employee's condominium in Branson, Missouri, upon
his relocation to Dallas, Texas, and paid $500,000 over a three-year period as
compensation for and in consideration of the exclusivity of his services. Prior
to becoming an employee in June 1998, the Company paid this employee's former
architectural firm $246,000 during 1998 for architectural services rendered to
the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Charter of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
3.2 -- Bylaws of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.2 to Registrant's Form 10-K for
year ended December 31, 1997).
4.1 -- Form of Stock Certificate of Registrant (incorporated by
reference to Exhibit 4.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
4.2 -- Indenture dated April 1, 1998, between the Company and
Norwest Bank Minnesota, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.3 -- Certificate No. 001 of 10 1/2 % Senior Subordinated
Notes due 2008 in the amount of $75,000,000
(incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.4 -- Subsidiary Guarantee dated April 8, 1998 by Silverleaf
Berkshires, Inc.; Bull's Eye Marketing, Inc.; Silverleaf
Resort Acquisitions, Inc.; Silverleaf Travel, Inc.;
Database Research, Inc.; and Villages Land, Inc.
(incorporated by reference to Exhibit 4.3 to
Registrant's Form 10-Q for the quarter ended March 31,
1998).
9.1 -- Voting Trust Agreement dated November 1, 1999 between
Robert E. Mead and Judith F. Mead.
10.1 -- Form of Registration Rights Agreement between Registrant
and Robert E. Mead (incorporated by reference to Exhibit
10.1 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.2.5 -- Employment Agreement with Harry J. White, Jr.
(incorporated by Reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended June 30, 1998).
10.2.6 -- Amendment to Employment Agreement with Sharon K.
Brayfield (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for quarter ended June 30, 1998).
10.2.9 -- First Amendment dated August 31, 1998, to Employment
Agreement with David T. O'Connor (incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q for
quarter ended September 30, 1998).
10.3 -- 1997 Stock Option Plan of Registrant (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.4 -- Silverleaf Club Agreement between the Silverleaf Club
and the resort clubs named therein (incorporated by
reference to Exhibit 10.4 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.5 -- Management Agreement between Registrant and the
Silverleaf Club (incorporated by reference to Exhibit
10.5 to Registrant's Registration Statement on Form S-1,
File No. 333-24273).
10.6 -- Revolving Loan and Security Agreement, dated October
1996, by CS First Boston Mortgage Capital Corp.
("CSFBMCC") and Silverleaf Vacation Club, Inc.
(incorporated by reference to Exhibit 10.6 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.7 -- Amendment No. 1 to Revolving Loan and Security
Agreement, dated November 8, 1996, between CSFBMCC and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.7 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.8 -- Loan and Security Agreement among Textron Financial
Corporation ("Textron"), Ascension Resorts, Ltd. and
Ascension Capital Corporation, dated August 15, 1995
(incorporated by reference to Exhibit 10.9 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.9 -- First Amendment to Loan and Security Agreement, dated
December 28, 1995, between Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.10 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.10 -- Second Amendment to Loan and Security Agreement, dated
October 31, 1996, executed by Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.11 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.11 -- Loan and Security Agreement, dated December 27, 1995,
executed by Ascension Resorts, Ltd. and Heller
(incorporated by reference to Exhibit 10.13 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.12 -- Amendment to Restated and Amended Loan and Security
Agreement, dated August 15, 1996, between Heller and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.14 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.13 -- Form of Indemnification Agreement (between Registrant
and all officers, directors, and proposed directors)
(incorporated by reference to Exhibit 10.18 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
</Table>
68
<Table>
10.14 -- Resort Affiliation and Owners Association Agreement
between Resort Condominiums International, Inc.,
Ascension Resorts, Ltd., and Hill Country Resort
Condoshare Club, dated July 29, 1995 (similar agreements
for all other Existing Owned Resorts) (incorporated by
reference to Exhibit 10.19 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.15 -- First Amendment to Silverleaf Club Agreement, dated
March 28, 1990, among Silverleaf Club, Ozark Mountain
Resort Club, Holiday Hills Resort Club, the Holly Lake
Club, The Villages Condoshare Association, The Villages
Club, Piney Shores Club, and Hill Country Resort
Condoshare Club (incorporated by reference to Exhibit
10.22 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.16 -- First Amendment to Management Agreement, dated January
1, 1993, between Master Endless Escape Club and
Ascension Resorts, Ltd. (incorporated by reference to
Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.18 -- Amendment to Loan Documents, dated December 27, 1996,
among Silverleaf Vacation Club, Inc., Ascension Resorts,
Ltd., and Heller Financial, Inc. (incorporated by
reference to Exhibit 10.25 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.19 -- Second Amendment to Restated and Amended Loan and
Security Agreement between Heller Financial, Inc. and
Registrant ($40 million revolving credit facility)
(incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.20 -- Silverleaf Club Agreement dated September 25, 1997,
between Registrant and Timber Creek Resort Club
(incorporated by reference to Exhibit 10.13 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.21 -- Second Amendment to Management Agreement, dated December
31, 1997, between Silverleaf Club and Registrant
(incorporated by reference to Exhibit 10.33 to
Registrant's Annual Report on Form 10-K for year Ended
December 31, 1997).
10.22 -- Silverleaf Club Agreement, dated January 5, 1998,
between Silverleaf Club and Oak N' Spruce Resort Club
(incorporated by reference to Exhibit 10.34 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.23 -- Master Club Agreement, dated November 13, 1997, between
Master Club and Fox River Resort Club (incorporated by
reference to Exhibit 10.43 to Registrant's Annual Report
on Form 10-K for year ended December 31, 1997).
10.24 -- Letter Agreement dated March 16, 1998, between the
Company and Heller Financial, Inc. (incorporated by
reference to Exhibit 10.44 to Amendment No. 1 to Form
S-1, File No. 333-47427 filed March 16, 1998).
10.25 -- Bill of Sale and Blanket Assignment dated May 28, 1998,
between the Company and Crown Resort Co., LLC
(incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended June 30, 1998).
10.31 -- Management Agreement dated October 13, 1998, by and
between the Company and Eagle Greens, Ltd. (incorporated
by reference to Exhibit 10.6 to Registrant's Form 10-Q
for quarter ended September 30, 1998).
10.36 -- First Amendment to 1997 Stock Option Plan for Silverleaf
Resorts, Inc., effective as of May 20, 1998
(incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarter ended June 30,
1998).
10.38 -- Third Amendment to Loan and Security Agreement dated as
of March 31, 1999, between the Company and Textron
Financial Corporation (incorporated by reference to
Exhibit 10.2 to Registrant's Form 10-Q for the quarter
ended March 31, 1999).
10.39 -- Amended and Restated Receivables Loan and Security
Agreement dated September 1, 1999, between the Company
and Heller Financial, Inc. (incorporated by reference to
Exhibit 10.1 to Registrant's Form 10-Q for the quarter
ended September 30, 1999).
10.40 -- Amended and Restated Inventory Loan and Security
Agreement dated September 1, 1999, between the Company
and Heller Financial, Inc. (incorporated by reference to
Exhibit 10.2 to Registrant's Form 10-Q for the quarter
ended September 30, 1999).
10.43 -- Fourth Amendment to Loan and Security Agreement dated as
of December 16, 1999 between the Company and Textron
Financial Corporation (incorporated by reference to
Exhibit 10.43 to Registrant's Form 10-K for the year
ended December 31, 1999).
10.44 -- Loan and Security Agreement dated as of December 16,
1999 between the Company and Textron Financial
Corporation (incorporated by reference to Exhibit 10.44
to Registrant's Form 10-K for the year ended December
31, 1999).
10.45 -- Loan, Security and Agency Agreement dated as of December
16, 1999 between the Company and Textron Financial
Corporation (incorporated by reference to Exhibit 10.45
to Registrant's Form 10-K for the year ended December
31, 1999).
10.46 -- Second Amendment to 1997 Stock Option Plan dated
November 19, 1999 (incorporated by reference to Exhibit
10.46 to Registrant's Form 10-K for the year ended
December 31, 1999).
10.47 -- Eighth Amendment to Management Agreement, dated March 9,
1999, between the Registrant and the Silverleaf Club
(incorporated by reference to Exhibit 10.47 to
Registrant's Form 10-K for the year ended December 31,
1999).
10.48 -- Amendment No. 1, dated August 18, 2000, to Loan and
Security Agreement, dated September 30, 1999, among the
Company, BankBoston, N.A., and Liberty Bank
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended September
30, 2000.)
10.49 -- Amendment No. 2, dated October 16, 2000, to Loan and
Security Agreement, dated September 30, 1999, among the
Company, BankBoston, N.A., and Liberty Bank
(incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended September
30, 2000.)
10.50 -- Receivables Loan and Security Agreement, dated October
30, 2000, by and among the Company, as Service,
Silverleaf Finance I, Inc., as Borrower, DG Bank
Deutsche Genossenschaftsbank, as Agent, Autobahn Funding
Company LLC, as Lender, U.S. Bank Trust N.A., as Agent's
Bank, and Wells Fargo Bank, National Association, as the
Backup Servicer (incorporated by reference to Exhibit
10.3 to Registrant's Form 10-Q for the quarter ended
September 30, 2000.)
</Table>
69
<Table>
10.51 -- Purchase and Contribution Agreement, dated October 30,
2000, between the Company, as Seller, and Silverleaf
Finance I, Inc., as Purchaser (incorporated by reference
to Exhibit 10.4 to Registrant's Form 10-Q for the
quarter ended September 30, 2000.)
*21.1 -- Subsidiaries of Silverleaf Resorts, Inc.
*99.1 -- Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*99.2 -- Certification of CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
</Table>
- ----------
* Filed herewith
(b) No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1999.
(c) The exhibits required by Item 601 of Regulation S-K have been listed in
Item 14(a) above. The exhibits listed in Item 14(a) above are either (a) filed
with this report, or (b) have previously been filed with the SEC and are
incorporated herein by reference to the particular previous filing.
(d) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the consolidated financial statements or the notes
thereto.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Dallas,
State of Texas, on November 19, 2002.
SILVERLEAF RESORTS, INC.
By: /s/ ROBERT E. MEAD
-------------------
Name: Robert E. Mead
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below on behalf of the
Registrant in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT E. MEAD Chairman of the Board and Chief Executive November 19, 2002
- ------------------------- Officer (Principal Executive Officer)
Robert E. Mead
/s/ HARRY J. WHITE, JR, Chief Financial Officer (Principal Financial November 19, 2002
- ------------------------- and Accounting Officer)
Harry J. White, Jr.
/s/ J. RICHARD BUDD Director November 19, 2002
- -------------------------
J. Richard Budd
/s/ JAMES B. FRANCIS, JR. Director November 19, 2002
- -------------------------
James B. Francis, Jr.
/s/ HERBERT B. HIRSCH Director November 19, 2002
- -------------------------
Herbert B. Hirsch
/s/ R. JANET WHITMORE Director November 19, 2002
- -------------------------
R. Janet Whitmore
</Table>
71
CERTIFICATION
I, Robert E. Mead, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Silverleaf
Resorts, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: November 19, 2002 /s/ ROBERT E. MEAD
------------------ ------------------------------------
Robert E. Mead
Chairman and Chief Executive Officer
72
CERTIFICATION
I, Harry J. White, Jr., Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Silverleaf
Resorts, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: November 19, 2002 /s/ HARRY J. WHITE, JR.
------------------ ------------------------------------
Harry J. White, Jr.
Chief Financial Officer
73
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Independent Auditors' Reports.............................................................................. F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 2001............................................. F-4
Consolidated Statements of Operations for the years ended December 31, 1999, 2000, and 2001.............. F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 2000, and 2001....
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000, and 2001.............. F-7
Notes to Consolidated Financial Statements............................................................... F-8
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Silverleaf Resorts, Inc.
We have audited the accompanying consolidated balance sheet of Silverleaf
Resorts, Inc. as of December 31, 2001 and the related consolidated statement of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Silverleaf Resorts,
Inc. at December 31, 2001, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has continued to incur losses from operations
and negative cash flow and has a retained deficit. This raises substantial doubt
about the Company's ability to continue as a going concern. While the
Restructuring Plan completed May 2, 2002 is intended to provide the Company with
a sufficient level of liquidity, there is no certainty that the Company will be
able to comply with the restructured terms of the loan agreements. Management's
plans in regard to these matters are also described in Notes 2 and 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BDO Seidman, LLP
Dallas, Texas
September 12, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Silverleaf Resorts, Inc.
We have audited the accompanying consolidated balance sheet of Silverleaf
Resorts, Inc. and subsidiaries (the "Company") as of December 31, 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express (or disclaim) an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our report.
In our opinion, the consolidated financial statements for the year ended
December 31, 1999 present fairly, in all material respects, the results of
operations and cash flows of Silverleaf Resorts, Inc. and subsidiaries for the
year ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying 2000 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in
Notes 2 and 3 to the consolidated financial statements, at December 31, 2000 the
Company was in default under the terms of its senior subordinated notes and was
not in compliance with certain covenants of its other long-term loan agreements.
The Company is attempting to negotiate a debt restructuring with the holders of
its senior subordinated notes that would involve the exchange of new notes and
shares of its common stock for the existing notes, and to modify the terms and
covenants of its other long-term debt agreements. The Company's difficulties in
meeting its loan agreement covenants and financing needs, its losses from
operations, and its negative cash flows from operating activities raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Notes 2 and 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Because of the possible material effects of the uncertainty referred to in
the preceding paragraph, we are unable to express, and we do not express, an
opinion on the consolidated financial statements for 2000.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 12, 2002
F-3
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31,
----------------------------
2000 2001
------------ ------------
ASSETS
Cash and cash equivalents $ 6,800 $ 6,204
Restricted cash 1,660 4,721
Notes receivable, net of allowance for uncollectible notes of
$74,778 and $54,744, respectively 263,792 278,592
Accrued interest receivable 2,194 2,572
Investment in Special Purpose Entity 5,280 4,793
Amounts due from affiliates 671 2,234
Inventories 105,023 105,275
Land, equipment, buildings, and utilities, net 49,230 37,331
Income taxes receivable 12,511 164
Land held for sale 5,256 5,161
Prepaid and other assets 15,197 11,053
------------ ------------
TOTAL ASSETS $ 467,614 $ 458,100
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 15,952 $ 9,203
Accrued interest payable 3,269 10,749
Amounts due to affiliates 3,285 565
Unearned revenues 9,507 5,500
Deferred income taxes, net 168 --
Notes payable and capital lease obligations 270,597 294,456
Senior subordinated notes 66,700 66,700
------------ ------------
Total Liabilities 369,478 387,173
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000 shares authorized,
13,311,517 shares issued and 12,889,417 shares
outstanding 133 133
Additional paid-in capital 109,339 109,339
Deficit (6,337) (33,546)
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
------------ ------------
Total Shareholders' Equity 98,136 70,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 467,614 $ 458,100
============ ============
</Table>
See notes to consolidated financial statements.
F-4
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 2000 2001
------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 192,767 $ 234,781 $ 139,359
Sampler sales 1,665 3,574 3,904
------------ ------------ ------------
Total sales 194,432 238,355 143,263
Interest income 28,271 37,807 41,220
Management fee income 2,811 462 2,516
Other income 4,929 4,912 4,334
Gain on sale of notes receivable -- 4,299 --
------------ ------------ ------------
Total revenues 230,443 285,835 191,333
------------ ------------ ------------
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 30,576 59,169 27,377
Sales and marketing 101,823 125,456 78,597
Provision for uncollectible notes 19,441 108,751 30,311
Operating, general and administrative 27,263 36,879 35,435
Depreciation and amortization 5,692 7,537 6,463
Interest expense and lender fees 16,847 32,750 35,016
Impairment loss of long-lived assets -- 6,320 5,442
Write-off of affiliate receivable -- 7,499 --
------------ ------------ ------------
Total costs and operating expenses 201,642 384,361 218,641
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes and extraordinary item 28,801 (98,526) (27,308)
Provision (benefit) for income taxes 11,090 (36,521) (99)
------------ ------------ ------------
Income (loss) before extraordinary item 17,711 (62,005) (27,209)
Extraordinary gain on extinguishment of debt (net of income
taxes of $1,330) -- 2,125 --
------------ ------------ ------------
NET INCOME (LOSS) $ 17,711 $ (59,880) $ (27,209)
============ ============ ============
NET INCOME (LOSS) PER SHARE -- Basic
Income (loss) before extraordinary item $ 1.37 $ (4.81) $ (2.11)
Extraordinary item -- .16 --
------------ ------------ ------------
Net income (loss) $ 1.37 $ (4.65) $ (2.11)
============ ============ ============
NET INCOME (LOSS) PER SHARE -- Diluted
Income (loss) before extraordinary item $ 1.37 $ (4.81) $ (2.11)
Extraordinary item -- .16 --
------------ ------------ ------------
Net income (loss) $ 1.37 $ (4.65) $ (2.11)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -- Basic 12,889,417 12,889,417 12,889,417
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -- Diluted 12,890,044 12,889,417 12,889,417
============ ============ ============
</Table>
See notes to consolidated financial statements.
F-5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
COMMON STOCK
-----------------------
NUMBER OF $0.01 ADDITIONAL RETAINED TREASURY STOCK
SHARES PAR PAID-IN EARNINGS -----------------------
ISSUED VALUE CAPITAL (DEFICIT) SHARES COST TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 1, 1999 13,311,517 $ 133 $ 109,339 $ 35,832 422,100 $ (4,999) $ 140,305
Net income -- -- -- 17,711 -- -- 17,711
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1999 13,311,517 133 109,339 53,543 422,100 (4,999) 158,016
Net loss -- -- -- (59,880) -- -- (59,880)
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 2000 13,311,517 133 109,339 (6,337) 422,100 (4,999) 98,136
Net loss -- -- -- (27,209) -- -- (27,209)
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 2001 13,311,517 $ 133 $ 109,339 $ (33,546) 422,100 $ (4,999) $ 70,927
========== ========== ========== ========== ========== ========== ==========
</Table>
See notes to consolidated financial statements.
F-6
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 17,711 $ (59,880) $ (27,209)
Adjustments to reconcile net income (loss) to net cash used in
Operating activities:
Provision for uncollectible notes 19,441 108,751 30,311
Gain on sale of notes receivable -- (4,299) --
Depreciation and amortization 5,692 7,537 6,463
Proceeds from sales of notes receivable -- 62,867 --
Extraordinary gain on extinguishment of debt before taxes -- (3,455) --
Gain on sale of investment -- (317) --
Impairment loss of long-lived assets -- 6,320 5,442
Write off of affiliate receivable -- 7,499 --
Deferred income taxes 5,745 (26,088) (168)
Cash effect from changes in assets and liabilities:
Restricted cash (30) (757) (3,061)
Notes receivable (131,549) (156,403) (48,376)
Accrued interest receivable (902) 61 (378)
Investment in Special Purpose Entity -- (5,280) 487
Amounts due from affiliates (2,481) 1,711 (3,190)
Inventories (41,253) 6,856 2,877
Land held for sale (97) 454 95
Prepaid and other assets 877 235 3,746
Income taxes receivable -- (12,511) 12,347
Accounts payable and accrued expenses 7,223 2,554 (6,749)
Accrued interest payable 542 648 7,480
Unearned revenues 2,061 1,509 (4,007)
Income taxes payable (3,951) (185) --
------------ ------------ ------------
Net cash used in operating activities (120,971) (62,173) (23,890)
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of land, equipment, buildings, and utilities 7,149 -- --
Purchases of land, equipment, buildings, and utilities (17,629) (3,076) (1,606)
------------ ------------ ------------
Net cash used in investing activities (10,480) (3,076) (1,606)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 219,607 193,639 100,314
Payments on borrowings to unaffiliated entities (94,697) (126,404) (75,414)
------------ ------------ ------------
Net cash provided by financing activities 124,910 67,235 24,900
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(6,541) 1,986 (596)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 11,355 4,814 6,800
------------ ------------ ------------
END OF PERIOD $ 4,814 $ 6,800 $ 6,204
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 17,724 $ 31,381 $ 22,527
Income taxes paid (refunds received) 9,297 3,630 (12,347)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Land and equipment acquired under capital leases 11,806 4,337 171
</Table>
See notes to consolidated financial statements.
F-7
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
1. NATURE OF BUSINESS
Silverleaf Resorts, Inc., a Texas Corporation (the "Company" or
"Silverleaf") is in the business of marketing and selling vacation intervals
("Vacation Intervals"). Silverleaf's principal activities, in this regard,
consist of (i) developing and acquiring timeshare resorts; (ii) marketing and
selling one-week annual and biennial Vacation Intervals to new owners; (iii)
marketing and selling upgraded Vacation Intervals to existing Silverleaf owners
("Silverleaf Owners"); (iv) providing financing for the purchase of Vacation
Intervals; and (v) operating timeshare resorts. The Company has in-house sales,
marketing, financing, and property management capabilities and coordinates all
aspects of the operation of the 19 existing owned or managed resorts (the
"Existing Owned Resorts") and the development of any new timeshare resort,
including site selection, design, and construction. Sales of Vacation Intervals
are marketed to individuals primarily through direct mail and telephone
solicitation.
Each Existing Resort has a timeshare owners' association (a "Club"). Each
Club operates through a centralized organization to manage the Existing Owned
Resorts on a collective basis. The principal such organization is Silverleaf
Club. Certain resorts, which are managed, but not owned, by the Company, are
operated through Crown Club. Crown Club is not actually a separate entity, but
consists of several individual Club management agreements (which have terms of
two to five years with a minimum of two renewal options remaining). Silverleaf
Club and Crown Club, in turn, have contracted with the Company to perform the
supervisory, management, and maintenance functions at the Existing Owned
Resorts. All costs of operating the Existing Owned Resorts, including management
fees to the Company, are to be covered by monthly dues paid by Silverleaf Owners
to their respective Clubs as well as income generated by the operation of
certain amenities at the Existing Owned Resorts. Subject to availability of
funds from the Clubs, the Company is entitled to a management fee to compensate
it for the services provided.
In addition to Vacation Interval sales revenues, interest income derived
from financing activities, and management fees received from the Management
Clubs, the Company generates additional revenue from leasing unsold intervals
(i.e., sampler sales), utility operations related to the resorts, and other
sources. All of the operations are directly related to the resort real estate
development industry.
The consolidated financial statements of the Company as of and for the
years ended December 31, 1999, 2000, and 2001 reflect the operations of the
Company and its wholly-owned subsidiaries, Villages Land, Inc. ("VLI"),
Silverleaf Travel, Inc., Database Research, Inc., Silverleaf Resort
Acquisitions, Inc., Bull's Eye Marketing, Inc., Silverleaf Berkshires, Inc., and
eStarCommunications, Inc. VLI was liquidated in 2000.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the ordinary course of business. As shown in the
accompanying financial statements, during the year ended December 31, 2000 and
2001, the Company incurred net losses of $59.9 million and $27.2 million,
respectively. It has also experienced negative cash flows from operating
activities of $121.0 million, $62.2 million, and $23.9 million during the years
ended December 31, 1999, 2000, and 2001, respectively. As discussed in Note 3,
at December 31, 2001, the Company was in monetary default on its 10 1/2% senior
subordinated notes. The Company was also in non-monetary default in connection
with its loan agreements with its three principal secured lenders, and was in
default with a fourth non-revolving secured lender due to
under-collateralization. These factors, among others, indicated that at December
31, 2001, the Company might be unable to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability of recorded asset amounts or the
amounts of liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms and covenants of its
financing agreements, to obtain additional financing or refinancing as may be
required, and ultimately to attain profitable operations.
As discussed in Note 3, the Company has finalized refinancing and
restructuring transactions related to its debt to provide liquidity to the
Company. However, the terms of the debt refinancing and restructuring require
the Company to comply with certain financial
F-8
covenants that will necessitate achievement of significant improvements in
future operating results over the operating results for 2000 and 2001.
Compliance with those covenants will require that improvements be made in
several areas of the Company's operations. The principal changes in operations
that management believes will be necessary to satisfy the financial covenants
are to reduce sales and marketing expense as a percentage of sales, to improve
profitability, and to improve customer credit quality, which the Company
believes will result in reduced credit losses.
During the second and third quarters of 2001, the Company closed three
outside sales offices, closed three telemarketing centers, and reduced headcount
in sales, marketing, and general and administrative functions. These changes
resulted in $2.7 million of asset write-offs, including $1.4 million of prepaid
booth rentals and marketing supplies and $1.3 million of fixed assets related to
the closed sales offices and closed telemarketing centers. As a result of these
actions, management believes that the necessary operating changes needed to
reduce sales and marketing expense to an appropriate level are being
implemented.
Due to the high level of defaults experienced in customer receivables
during 2000, which continued throughout 2001, the Company's provision for
uncollectible notes was relatively high as a percentage of Vacation Interval
sales during 2000 and 2001. Management believes the high level of defaults
experienced in 2000 was due to the deterioration of the economy in the United
States, which began to have a significant impact on the Company's existing
customers and on consumer confidence in general in late 2000, and a substantial
reduction by the Company in two programs that were previously used to remedy
defaulted notes receivable. Management believes the high level of defaults in
2001 was also attributable to the fact that customers concerned about the
Company's liquidity issues began defaulting on their notes after the Company's
liquidity announcement in February 2001, in addition to continuing economic
concerns.
Since the third quarter of 2001, the Company has been operating under new
sales practices whereby no sales are permitted unless the touring customer has a
minimum income level beyond that previously required and has a valid major
credit card. Further, the marketing division is employing a best practices
program, which management believes should facilitate marketing to customers who
are more likely to be a good credit risk. However, should there be further
deterioration in the economy, and if enhanced sales practices do not result in
sufficiently improved collections, the Company may not be able to realize
improvements in the overall credit quality of its notes receivable portfolio
that these actions are designed to achieve.
While the Company announced the completion of its restructuring and
refinancing transactions on May 2, 2002, the Company's ability to continue as a
going concern is dependent on other factors as well, including the achievement
of the improvements to the Company's operations described above. In addition,
the Amended Senior Credit Facilities require the Company to satisfy certain
financial covenants. Management believes that if the improvements to its
operations are successful, the Company will be able to improve its operating
results to achieve compliance with the financial covenants during the term of
the Amended Senior Credit Facilities. However, the Company's plan to utilize
certain of its assets, predominantly inventory, extends for periods of up to
fifteen years. Accordingly, the Company will need to either extend the Amended
Senior Credit Facilities or obtain new sources of financing through the issuance
of other debt, equity, or collateralized mortgage-backed securities, the
proceeds of which would be used to refinance the debt under the Amended Senior
Credit Facilities, finance mortgages receivable, or for other purposes. The
Company may not have these additional sources of financing available to it at
the times when such financings are necessary.
3. DEBT RESTRUCTURING
Since February 2001, when the Company disclosed significant liquidity
issues arising primarily from the failure to close a credit facility with its
largest secured creditor, management and its financial advisors have been
attempting to develop and implement a plan to return the Company to sound
financial condition. During this period, the Company negotiated and closed
short-term secured financing arrangements with three principal secured lenders,
which allowed it to operate at reduced sales levels as compared to original
plans and prior years. With the exception of the Company's inability to pay
interest due on the Senior Subordinated Notes, these short-term arrangements
were adequate to keep the Company's unsecured creditors current on amounts owed.
Until the May 2, 2002 closing of the Company's debt restructuring plan,
the Company remained in default under its agreements with its three principal
secured lenders, but they each agreed to forebear taking any action as a result
of the Company's defaults and to continue funding so long as the Company
complied with the terms of the short-term financing arrangements with these
lenders. These short term arrangements were due to expire on March 31, 2002, but
were extended to allow for the closing of the Company's debt restructuring plan
on May 2, 2002. Under the Exchange Offer that was closed on May 2, 2002,
$56,934,000 in principal amount of the Company's 10 1/2% senior subordinated
notes were exchanged for a combination of $28,467,000 in principal amount of the
Company's new class of 6.0% senior subordinated notes due 2007 and 23,937,489
shares of the Company's common stock, representing approximately 65% of the
common stock outstanding after the Exchange Offer. As a result of the exchange,
the Company recorded a pre-tax extraordinary gain of $17.9 million in the second
quarter of 2002. Under the terms of the Exchange Offer, tendering holders
collectively received cash payments of $1,335,545 on May 16, 2002, and a further
payment of $334,455 on
F-9
October 1, 2002. A total of $9,766,000 in principal amount of the Company's 10
1/2% notes were not tendered and remain outstanding. As a condition of the
Exchange Offer, the Company has paid all past due interest to non-tendering
holders of its 10 1/2% notes. Under the terms of the Exchange Offer, the
acceleration of the maturity date on the 10 1/2% notes which occurred in May
2001 has been rescinded, and the original maturity date in 2008 for the 10 1/2%
notes has been reinstated. Past due interest paid to non-tendering holders of
the 10 1/2% notes was $1,827,806. The indenture under which the 10 1/2% notes
were issued was also consensually amended as a part of the Exchange Offer. Prior
to the closing of its Exchange Offer on May 2, 2002, the Company had been in
monetary default with respect to the interest owed on its 10 1/2% notes since
May, 2001.
As a result of the significant discount on the Company's notes tendered in
the Exchange Offer, the Company accounted for the debt exchange in accordance
with Statement of Financial Accounting Standards No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings" ("SFAS No. 15"). Under SFAS No.
15, the Company recorded the fair value of equity issued and established a total
liability relating to the notes issued in the exchange equal to the aggregate
principal amount plus all interest payable over the term of the notes. Under
SFAS No. 15, the Company will not record interest expense in future periods for
the cash interest required to be paid to the note holders. All future cash
interest payments on the notes will reduce the $8.5 million accrued liability
referred to above.
Management has also negotiated two-year revolving, three-year term out
arrangements for $214 million with its three principal secured lenders, which
were closed at the same time as of the Exchange Offer. In addition, the Company
amended its $100 million off-balance-sheet credit facility through the Company's
SPE. Under these revised credit arrangements, two of the three creditors
converted $42.1 million of existing debt to a subordinated Tranche B. Tranche A
is secured by a first lien on currently pledged notes receivable. Tranche B is
secured by a second lien on the notes, a lien on resort assets, an assignment of
the Company's management contracts with the Clubs, a portfolio of unpledged
receivables currently ineligible for pledge under the existing facility, and a
security interest in the stock of Silverleaf Finance I, Inc., the Company's SPE.
Among other aspects of these revised arrangements, the Company will be required
to operate within certain parameters of a revised business model and satisfy the
financial covenants set forth in the Amended Senior Credit Facilities, including
maintaining a minimum tangible net worth of $100 million or greater, as defined,
sales and marketing expenses as a percentage of sales below 55.0% for the last
three quarters of 2002 and below 52.5% thereafter, notes receivable delinquency
rate below 25%, a minimum interest coverage ratio of 1.1 to 1.0 (increasing to
1.25 to 1 in 2003), and positive net income. However, such results cannot be
assured.
Assuming that the Company's financial performance in future periods
improves substantially as projected in its business model, the Company believes
it will have adequate financing to operate for the two-year revolving term of
the credit arrangements with the senior lenders. At that time management will be
required to replace or renegotiate the revolving arrangements subject to
availability.
4. SIGNIFICANT ACCOUNTING POLICIES SUMMARY
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, excluding
Silverleaf Finance I, Inc. (the Company's SPE). All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Revenue and Expense Recognition -- A substantial portion of Vacation
Interval sales are made in exchange for mortgage notes receivable, which are
secured by a deed of trust on the Vacation Interval sold. The Company recognizes
the sale of a Vacation Interval under the accrual method after a binding sales
contract has been executed, the buyer has made a down payment of at least 10%
and the statutory rescission period has expired. If all accrual method criteria
are met except that construction is not substantially complete, revenues are
recognized on the percentage-of-completion basis. Under this method, the portion
of revenue applicable to costs incurred, as compared to total estimated
construction and direct selling costs, is recognized in the period of sale. The
remaining amount is deferred and recognized as the remaining costs are incurred.
The deferral of sales and costs related to the percentage-of-completion method
is not significant.
Certain Vacation Interval sales transactions are deferred until the
minimum down payment has been received. The Company accounts for these
transactions utilizing the deposit method. Under this method, the sale is not
recognized, a receivable is not recorded, and inventory is not relieved. Any
cash received is carried as a deposit until the sale can be recognized. When
these types of sales are cancelled without a refund, deposits forfeited are
recognized as income and the interest portion is recognized as interest income.
In addition to sales of Vacation Intervals to new prospective owners, the
Company sells upgraded Vacation Intervals to existing Silverleaf Owners.
Revenues are recognized on these upgrade Vacation Interval sales when the
criteria described above are satisfied. The revenue recognized is the net of the
incremental increase in the upgrade sales price and cost of sales is the
incremental increase in the cost of the Vacation Interval purchased.
F-10
A provision for estimated customer returns (customer returns represent
cancellations of sales transactions in which the customer fails to make the
first installment payment) is reported net against Vacation Interval sales.
The Company recognizes interest income as earned. Interest income is
accrued on notes receivable, net of an estimated amount that will not be
collected, until the individual notes receivable become 90 days delinquent. Once
a note receivable becomes 90 days delinquent, the accrual of additional interest
income ceases until collection is deemed probable.
Revenues related to one-time sampler contracts, which entitles the
prospective owner to sample a resort for various periods, are recognized when
earned. Revenue recognition is deferred until the customer uses the stay,
purchases a Vacation Interval, or allows the contract to expire.
The Company receives fees for management services provided to the
Management Clubs. These revenues are recognized on an accrual basis in the
period the services are provided if collection is deemed probable.
Utilities, services, and other income are recognized on an accrual basis
in the period service is provided.
Sales and marketing costs are charged to expense in the period incurred.
Commissions, however, are recognized in the same period as the related sales.
Cash and Cash Equivalents -- Cash and cash equivalents consist of all
highly liquid investments with an original maturity at the date of purchase of
three months or less. Cash and cash equivalents include cash, certificates of
deposit, and money market funds.
Restricted Cash -- Restricted cash consists of certificates of deposit
that serve as collateral for construction bonds and cash restricted for
repayment of debt.
Investment in Special Purpose Entity -- Sales of notes receivable from the
Company to a wholly-owned SPE that meet certain underwriting criteria occur on a
periodic basis. The Company allocates the carrying amount between the assets
sold and retained interest based on the relative fair values at date of sale.
The gain or loss on the sale is determined based on the proceeds received and
the recorded value of notes receivable sold. The investment in the SPE is
recorded at fair value. The fair value of the investment in the SPE is estimated
based on the present value of future expected cash flows of the SPE's residual
interest in the notes receivable sold. The Company utilized the following key
assumptions to estimate the fair value of such cash flows: customer prepayment
rate - 4.3%; expected accounts paid in full as a result of upgrades - 6.2%;
expected credit losses - 8.1%; discount rate - 19%; base interest rate - 4.4%,
agent fee - 2%, and loan servicing fees - 1%. The Company's assumptions are
based on experience with its notes receivable portfolio, available market data,
estimated prepayments, the cost of servicing, and net transaction costs.
Provision for Uncollectible Notes -- Such provision is recorded in an
amount sufficient to maintain the allowance for uncollectible notes at a level
management considers adequate to provide for anticipated losses resulting from
customers' failure to fulfill their obligations under the terms of their notes.
The allowance for uncollectible notes takes into consideration both notes held
by the Company and those sold with recourse. Such allowance for uncollectible
notes is adjusted based upon periodic analysis of the notes receivable
portfolio, historical credit loss experience, and current economic factors. In
estimating the allowance, the Company projects future cancellations related to
each sales year by using historical cancellations experience.
The allowance for uncollectible notes is reduced by actual cancellations
and losses experienced, including losses related to previously sold notes
receivable which became delinquent and were reacquired pursuant to the recourse
obligations discussed herein. Actual cancellations and losses experienced
represents all notes identified by management as being probable of cancellation.
Recourse to the Company on sales of customer notes receivable is governed by the
agreements between the purchasers and the Company.
The Company classifies the components of the provision for uncollectible
notes into the following three categories based on the nature of the item:
credit losses, customer returns (cancellations of sales whereby the customer
fails to make the first installment payment), and customer releases (voluntary
cancellations of properly recorded sales transactions which in the opinion of
management is consistent with the maintenance of overall customer goodwill). The
provision for uncollectible notes pertaining to credit losses, customer returns,
and customer releases are classified in provision for uncollectible notes,
Vacation Interval sales, and operating, general and administrative expenses,
respectively. Beginning in 2001, the Company ceased allocating a portion of the
provision to operating, general and administrative expenses.
Inventories -- Inventories are stated at the lower of cost or market
value. Cost includes amounts for land, construction materials, direct labor and
overhead, taxes, and capitalized interest incurred in the construction or
through the acquisition of resort dwellings held for timeshare sale. These costs
are capitalized as inventory and are allocated to Vacation Intervals based upon
their relative sales
F-11
values. Upon sale of a Vacation Interval, these costs are charged to cost of
sales on a specific identification basis. Vacation Intervals reacquired are
placed back into inventory at the lower of their original historical cost basis
or market value. Company management periodically reviews the carrying value of
its inventory on an individual project basis to determine that the carrying
value does not exceed market value.
Land, Equipment, Buildings, and Utilities -- Land, equipment (including
equipment under capital lease), buildings, and utilities are stated at cost,
which includes amounts for construction materials, direct labor and overhead,
and capitalized interest. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
expense as incurred; significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, ranging from 3 to 20 years. Company
management periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Prepaid and Other Assets -- Prepaid and other assets consists primarily of
prepaid insurance, prepaid postage, intangibles, commitment fees, debt issuance
costs, novelty inventories, deposits, and miscellaneous receivables. Commitment
fees and debt issuance costs are amortized over the life of the related debt.
Intangibles, other than goodwill, are amortized over their useful lives, which
do not exceed ten years.
Income Taxes -- Deferred income taxes are recorded for temporary
differences between the bases of assets and liabilities as recognized by tax
laws and their carrying value as reported in the consolidated financial
statements. A provision is made or benefit recognized for deferred income taxes
relating to temporary differences in the recognition of expense and income for
financial reporting purposes. To the extent a deferred tax asset does not meet
the criteria of "more likely than not" for realization, a valuation allowance is
recorded.
Earnings (Loss) Per Share -- Basic earnings (loss) per share is computed
by dividing net income (loss) by the weighted average shares outstanding.
Earnings per share assuming dilution is computed by dividing net income by the
weighted average number of shares and potentially dilutive shares outstanding.
The number of potentially dilutive shares is computed using the treasury stock
method, which assumes that the increase in the number of shares resulting from
the exercise of the stock options is reduced by the number of shares that could
have been repurchased by the Company with the proceeds from the exercise of the
stock options.
The following table reconciles basic and diluted weighted average shares
used in the calculation of per share data for the years ended December 31, 1999,
2000, and 2001:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001
---------- ---------- ----------
Weighted average shares outstanding - basic ....................... 12,889,417 12,889,417 12,889,417
Assumed Issuance of shares from stock options exercised ........... 33,514 -- --
Assumed Repurchase of shares from stock options proceeds .......... (32,887) -- --
---------- ---------- ----------
Weighted average shares outstanding - diluted ..................... 12,890,044 12,889,417 12,889,417
========== ========== ==========
</Table>
Outstanding stock options were not dilutive because the exercise price for
such options substantially exceeded the market price for the Company's shares
for the years ended December 31, 2000 and 2001, respectively.
Use of Estimates -- The preparation of the consolidated financial
statements requires the use of management's estimates and assumptions in
determining the carrying values of certain assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts for certain revenues and expenses during the
reporting period. Actual results could differ from those estimated. Significant
management estimates include the allowance for uncollectible notes and the
future sales plan used to allocate certain inventories to cost of sales.
Recent Accounting Pronouncements --
SFAS No. 140 - In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS No. 140"), which replaces SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
revises SFAS No. 125's standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of the SFAS No. 125's provisions without
reconsideration. SFAS No. 140 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001 and for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. SFAS No. 140 is to be applied prospectively with
certain exceptions. The Company adopted the new
F-12
disclosures required under SFAS No. 140 as of December 31, 2000. The adoption of
SFAS No. 140 in 2001 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
SFAS No. 144 - In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 was
effective for the Company for the quarter ending March 31, 2002. The adoption of
SFAS No. 144 in 2002 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
SFAS No. 145 - In April 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and
Technical Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the current
requirement that gains and losses on debt extinguishment must be classified as
extraordinary items in the income statement. Instead, such gains and losses will
be classified as extraordinary items only if they are deemed to be unusual and
infrequent, in accordance with the current GAAP criteria for extraordinary
classification. In addition, SFAS No. 145 eliminates an inconsistency in lease
accounting by requiring that modifications of capital leases that result in
reclassification as operating leases be accounted for consistent with
sale-leaseback accounting rules. SFAS No. 145 also contains other
non-substantive corrections to authoritative accounting literature. The changes
related to debt extinguishment will be effective for fiscal years beginning
after May 15, 2002, and the changes related to lease accounting will be
effective for transactions occurring after May 15, 2002. The adoption of SFAS
No. 145 will require the Company to reclassify its extraordinary gains to
ordinary.
SFAS No. 146 - In June 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS
No. 146 supersedes previous accounting guidance, principally Emerging Issues
Task Force (EITF) Issue No. 94-3. SFAS No. 146 requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of a company's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amount recognized. SFAS No. 146 is
effective after fiscal years beginning after December 31, 2002. The adoption of
SFAS No. 146 will not have any immediate effect on the Company's results of
operations, financial position, or cash flows.
5. CONCENTRATIONS OF RISK
Credit Risk -- The Company is exposed to on-balance sheet credit risk
related to its notes receivable. The Company is exposed to off-balance sheet
credit risk related to notes sold under recourse provisions.
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers generally make a down payment of at least 10% of
the purchase price and deliver a promissory note to the Company for the balance.
The promissory notes generally bear interest at a fixed rate, are payable over a
seven-year to ten-year period, and are secured by a first mortgage on the
Vacation Interval. The Company bears the risk of defaults on these promissory
notes, and this risk is heightened inasmuch as the Company generally does not
verify the credit history of its customers and will provide financing if the
customer is presently employed and meets certain household income criteria.
If a buyer of a Vacation Interval defaults, the Company generally must
foreclose on the Vacation Interval and attempt to resell it; the associated
marketing, selling, and administrative costs from the original sale are not
recovered; and such costs must be incurred again to resell the Vacation
Interval. Although the Company in many cases may have recourse against a
Vacation Interval buyer for the unpaid price, certain states have laws that
limit the Company's ability to recover personal judgments against customers who
have defaulted on their loans. Accordingly, the Company has generally not
pursued this remedy.
Interest Rate Risk -- The Company has historically derived net interest
income from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Company's
indebtedness bears interest at variable rates and the Company's customer
receivables bear interest at
F-13
fixed rates, increases in interest rates will erode the spread in interest rates
that the Company has historically obtained and could cause the rate on the
Company's borrowings to exceed the rate at which the Company provides financing
to its customers. The Company has not engaged in interest rate hedging
transactions. Therefore, any increase in interest rates, particularly if
sustained, could have a material adverse effect on the Company's results of
operations, cash flows, and financial position.
Availability of Funding Sources -- The Company funds substantially all of
the notes receivable, timeshare inventories, and land inventories which it
originates or purchases with borrowings through its financing facilities, sales
of notes receivable, internally generated funds, and proceeds from public debt
and equity offerings. Borrowings are in turn repaid with the proceeds received
by the Company from repayments of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Company's results of operations, cash flows, and financial
condition.
Geographic Concentration -- The Company's notes receivable are primarily
originated in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk
inherent in such concentrations is dependent upon regional and general economic
stability, which affects property values, and the financial stability of the
borrowers. The Company's Vacation Interval inventories are concentrated in
Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in such
concentrations is in the continued popularity of the resort destinations, which
affects the marketability of the Company's products and the collection of notes
receivable.
6. NOTES RECEIVABLE
The Company provides financing to the purchasers of Vacation Intervals,
which are collateralized by their interest in such Vacation Intervals. The notes
receivable generally have initial terms of seven to ten years. The average yield
on outstanding notes receivable at December 31, 2001 was approximately 13.7%. In
connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$3.7 million and $1.4 million at December 31, 2000 and 2001, respectively, and
are non-interest bearing.
In connection with promotional sales to certain customers, the Company
entered into non-interest bearing notes receivable of $1.5 million and $443,000
for the years ended December 31, 2000 and 2001, respectively. The Company had a
remaining note discount of $940,000 and $550,000 for these notes receivable in
aggregate as of December 31, 2000 and 2001, respectively, utilizing a 10%
discount rate, which represents the lowest rate offered its existing customers.
Notes receivable are scheduled to mature as follows at December 31, 2001
(in thousands):
<Table>
2002 ....................................... $ 37,677
2003 ....................................... 43,170
2004 ....................................... 49,464
2005 ....................................... 56,674
2006 ....................................... 64,935
2007 ....................................... 74,401
Thereafter ................................. 7,565
---------
........................................... 333,886
Less discounts on notes .................... (550)
Less allowance for uncollectible notes ..... (54,744)
---------
Notes receivable, net ............ $ 278,592
=========
</Table>
There were no notes sold with recourse during the years ended December 31,
1999, 2000, and 2001. Outstanding principal maturities of notes receivable sold
with recourse as of December 31, 2000 and 2001 were $817,000 and $366,000,
respectively.
Effective October 30, 2000, the Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
an off-balance-sheet SPE, formed on October 16, 2000. The agreement presently
has a term of 5 years. During 2000, the Company sold $74 million of notes
receivable to the SPE and recognized pre-tax gains of $4.3 million. The SPE
funded these purchases through advances under a credit agreement arranged for
this purpose. In conjunction with these sales, the Company received cash
consideration of $62.9 million, which was used to pay down borrowings under its
revolving loan facilities. During 2001, the Company made no sales of notes
receivable to the SPE.
At December 31, 2001, the SPE held notes receivable totaling $50.4
million, with related borrowings of $43.6 million. Except for the repurchase of
notes that fail to meet initial eligibility requirements, the Company is not
obligated to repurchase defaulted or any other contracts sold to the SPE. It is
anticipated, however, that the Company will place bids in accordance with the
terms of the conduit agreement to repurchase some defaulted contracts in public
auctions to facilitate the re-marketing of the underlying collateral.
F-14
Management considers both pledged and sold-with-recourse notes receivable
in the Company's allowance for uncollectible notes. The Company considers
accounts over 60 days past due to be delinquent. As of December 31, 2001, $6.7
million of notes receivable, net of accounts charged off, were considered
delinquent. An additional $57.6 million of notes would have been considered to
be delinquent had the Company not granted payment concessions to the customers,
which brings a delinquent note current and extends the maturity date if two
consecutive payments are made. The activity in the allowance for uncollectible
notes is as follows for the years ended December 31, 1999, 2000, and 2001 (in
thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------
1999 2000 2001
--------- --------- ---------
Balance, beginning of period ........................ $ 23,516 $ 32,023 $ 74,778
Provision for credit losses ......................... 19,441 108,751 30,311
Provision for customer releases charged to operating,
general, and administrative expenses .............. 1,183 1,131 --
Receivables charged off ............................. (12,117) (56,475) (50,345)
Allowance related to notes sold ..................... -- (10,652) --
--------- --------- ---------
Balance, end of period .............................. $ 32,023 $ 74,778 $ 54,744
========= ========= =========
</Table>
In 2000 and 2001, the Company substantially increased its provision for
uncollectible notes to provide for the poorer performance in the Company's notes
receivable portfolio, which resulted from a general downturn in the economy and
the elimination of certain programs that had been in place to remedy defaulted
loans.
7. INVENTORIES
Inventories consist of the following at December 31, 2000 and 2001 (in
thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------------
2000 2001
-------- --------
Timeshare units ....................................... $ 41,770 $ 44,644
Unallocated amenities ................................. 37,193 36,232
Unallocated land ...................................... 8,697 8,280
Recovery of canceled and traded intervals ............. 17,254 16,061
Other ................................................. 109 58
-------- --------
Total ......................................... $105,023 $105,275
======== ========
</Table>
Due to liquidity issues experienced in 2000 and early 2001, the Company
reduced its future sales plans for most resorts and discontinued its efforts to
sell Crown intervals. As a result, the Company recorded an inventory write-down
of $15.5 million based upon a lower of cost or market assessment, and wrote-off
$3.1 million of unsold Crown inventory intervals. These write-offs are included
in Cost of Vacation Interval Sales in 2000.
Realization of inventories is dependent upon execution of management's
long-term sales plan for each resort, which extend for up to fifteen years. Such
sales plans depend upon management's ability to obtain financing to facilitate
the build-out of each resort and marketing of the Vacation Intervals over the
planned time period.
8. LAND, EQUIPMENT, BUILDINGS, AND UTILITIES
Land, equipment, buildings, and utilities consist of the following at
December 31, 2000 and 2001 (in thousands):
<Table>
<Caption>
DECEMBER 31,
------------------------------
2000 2001
---------- ----------
Land ............................................. $ 4,776 $ 4,776
Vehicles and equipment ........................... 8,370 4,887
Utility plant, buildings, and facilities ......... 11,440 12,800
Office equipment and furniture ................... 32,671 27,679
Improvements ..................................... 12,406 11,421
---------- ----------
69,663 61,563
Less accumulated depreciation .................... (20,433) (24,232)
---------- ----------
Land, equipment, buildings, and utilities, net ... $ 49,230 $ 37,331
========== ==========
</Table>
Depreciation and amortization expense for the years ended December 31,
1999, 2000, and 2001 was $5.7 million, $7.5 million, and $6.5 million,
respectively, which included amortization expense related to intangible assets
included in prepaid and other assets of $311,000, $308,000, and $0 in 1999,
2000, and 2001, respectively.
Due to liquidity concerns experienced in the fourth quarter of 2000, the
Company recorded an impairment loss of long-lived assets of $6.3 million, which
includes an impairment of $5.4 million to write-down land to estimated fair
value and land held for sale to
F-15
estimated sales price less disposal costs as a result of the Company's plan to
discontinue development of certain properties and $922,000 to write-off
intangible assets associated with the discontinuance of sales efforts related to
Crown intervals.
In 2001, the Company recorded an impairment loss of $5.4 million, which
primarily represents a $1.3 million write-off of fixed assets related to the
closure of three sales offices and three telemarketing centers, a $1.4 million
write-off of prepaid booth rentals and marketing supplies, $2.3 million related
to the write-down of two Company airplanes to their estimated sales prices less
costs to sell, and a $230,000 loss related to a lease termination.
9. INCOME TAXES
Income tax expense (benefit) consists of the following components for the
years ended December 31, 1999, 2000, and 2001 (in thousands):
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Current income tax expense (benefit) ............. $ 5,345 $ (9,103) $ 69
Deferred income tax expense (benefit) ............ 5,745 (26,088) (168)
-------- -------- --------
Total income tax expense (benefit) ..... $ 11,090 $(35,191) $ (99)
======== ======== ========
</Table>
A reconciliation of income tax expense on reported pretax income at
statutory rates to actual income tax expense for the years ended December 31,
1999, 2000, and 2001 is as follows (in thousands):
<Table>
<Caption>
1999 2000 2001
-------------------- --------------------- ---------------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
-------- -------- -------- -------- -------- --------
Income tax expense (benefit) at statutory rates .. $ 10,081 35.0% $(33,275) (35.0)% $ (9,523) (35.0)%
State income taxes, net of Federal
Income tax benefit ............................. 1,009 3.5% (2,434) (2.6)% (846) (3.1)%
Deferred tax asset reserve ....................... -- -- -- -- 16,498 60.6%
Reconciliation to 2000 tax return ................ -- -- -- -- (6,192) (22.8)%
Other, primarily permanent differences ........... -- -- 518 0.6% (36) (0.1)%
-------- -------- -------- -------- -------- --------
Total income tax expense (benefit) ..... $ 11,090 38.5% $(35,191) (37.0)% $ (99) (0.4)%
======== ======== ======== ======== ======== ========
</Table>
Deferred income tax assets and liabilities as of December 31, 2000 and
2001 are as follows (in thousands):
<Table>
<Caption>
2000 2001
--------- ---------
Deferred tax liabilities:
Depreciation .............................. $ 2,858 $ 3,469
Installment sales income .................. 95,014 95,027
--------- ---------
Total deferred tax liabilities .... 97,872 98,496
Deferred tax assets:
Net operating loss carryforward ........... 92,522 107,718
Impairment of long-lived assets ........... 3,211 5,307
Alternative minimum tax credit ............ 1,563 1,563
Other ..................................... 408 406
--------- ---------
Total deferred tax assets ......... 97,704 114,994
--------- ---------
Net deferred tax liability (asset) 168 (16,498)
========= =========
Deferred tax asset reserve ........ -- 16,498
--------- ---------
Net deferred tax liability ........ $ 168 $ --
========= =========
</Table>
The Company reports substantially all Vacation Interval sales, which it
finances, on the installment method for federal income tax purposes. Under the
installment method, the Company does not recognize income on sales of Vacation
Intervals until the down payment or installment payment on customer receivables
are received by the Company. Interest is imposed, however, on the amount of tax
attributable to the installment payments for the period beginning on the date of
sale and ending on the date the related tax is paid. If the Company is otherwise
not subject to tax in a particular year, no interest is imposed since the
interest is based on the amount of tax paid in that year. The consolidated
financial statements do not contain an accrual for any interest expense that
would be paid on the deferred taxes related to the installment method. The
amount of interest expense is not estimable as of December 31, 2001.
The Company has been subject to Alternative Minimum Tax ("AMT") as a
result of the deferred income, which results from the installment sales
treatment of Vacation Interval sales for regular tax purposes. The current AMT
payable balance was adjusted in 1997 to reflect the change in method of
accounting for installment sales under AMT granted by the Internal Revenue
Service, effective as of January 1, 1997. As a result, the Company's alternative
minimum taxable income for 1997 through 1999 was increased each year by
approximately $9 million, which resulted in the Company paying substantial
additional federal and state taxes in those years. The Company's AMT loss for
2000 was decreased by such amount. Subsequent to December 31, 2000, the Company
applied for and
F-16
received refunds of $8.3 million during 2001 and $1.6 million during 2002 as the
result of the carryback of its 2000 AMT loss to 1999, 1998, and 1997. The AMT
liability creates a deferred tax asset which may, subject to certain
limitations, be used to offset any future tax liability from regular federal
income tax. This deferred tax asset has an unlimited carryover period.
The net operating losses ("NOL") expire between 2007 through 2021.
Realization of the deferred tax assets arising from NOL is dependent on
generating sufficient taxable income prior to the expiration of the loss
carryforwards. Management currently does not believe that it will be able to
utilize its NOL as a result of normal operations. At present, future NOL
utilization is expected to be limited to the temporary differences creating
deferred tax liabilities. If necessary, management could implement a strategy to
accelerate income recognition for federal income tax purposes to utilize the
existing NOL. The amount of the deferred tax asset considered realizable could
be decreased if estimates of future taxable income during the carryforward
period are reduced.
Due to the Exchange Offer described in Note 3, an ownership change within
the meaning of Section 382(g) of the Internal Revenue Code ("the Code") has
occurred. As a result, a portion of the Company's NOL is subject to an annual
limitation for taxable years beginning after the date of the exchange ("change
date"), and a portion of the taxable year which includes the change date. The
annual limitation will be equal to the value of the stock of the Company
immediately before the ownership change, multiplied by the long-term tax-exempt
rate (i.e., the highest of the adjusted Federal long-term rates in effect for
any month in the three-calendar-month period ending with the calendar month in
which the change date occurs). This annual limitation may be increased for any
recognized built-in gain to the extent allowed in Section 382(h) of the Code.
The ownership change may also limit the use of the Company's minimum tax credit,
described above, as provided in Section 383 of the Code.
The following are the expiration dates and the approximate net operating
loss carryforwards at December 31, 2001 (in thousands):
<Table>
<Caption>
EXPIRATION DATES
----------------
2007 ..................................................... $ 315
2008 ..................................................... --
2009 ..................................................... 1,385
2010 ..................................................... 5,353
2011 ..................................................... 3,831
2012 ..................................................... 19,213
2018 ..................................................... 36,372
2019 ..................................................... 57,853
2020 ..................................................... 132,078
2021 ..................................................... 23,383
--------
$279,783
========
</Table>
10. DEBT
Notes payable, capital lease obligations, and senior subordinated notes as
of December 31, 2000 and 2001 are as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
-------------------------
2000 2001
-------- --------
$60 million loan agreement, which contains certain financial covenants, due
August 2002, principal and interest payable from the proceeds obtained on
customer notes receivable pledged as collateral for the note, at an interest
rate of LIBOR plus 3.55% (additional draws are no longer available under this
facility; upon the completion of the debt restructuring described in Note 3,
maturity was extended to August 2003) ...................................................... $ 23,049 $ 15,969
$70 million loan agreement, capacity reduced by amounts outstanding under the
$10 million inventory loan agreement (and the $10 million supplemental
revolving loan agreement as of December 31, 2001), which contains certain
financial covenants, due August 2004, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral for the
note, at an interest rate of LIBOR plus 2.65% (operating under forbearance at
December 31, 2001; additional draws are no longer available under this
facility) .................................................................................. 41,319 35,614
$10 million supplemental revolving loan agreement, which contains certain
financial covenants, due August 2002 (extended to March 2007 upon completion
of the debt restructuring described in Note 3), principal and interest
payable from the proceeds obtained on customer notes receivable pledged as
collateral for the note, at an interest rate of LIBOR plus 2.67% (revolving
under forbearance at December 31, 2001) .................................................... -- 9,468
$75 million revolving loan agreement, which contains certain financial
covenants, due April 2005, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the note, at
an interest rate of LIBOR plus 3.00% (revolving under forbearance at December
31, 2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to limit the outstanding balance to $72
million, consisting of $56.9 million revolver with an interest rate of LIBOR
plus 3% with a 6% floor and a $15.1 million term loan with an interest rate
of 8%; both facilities mature
March 2007) ................................................................................ 57,133 71,072
</Table>
F-17
<Table>
$75 million revolving loan agreement, which contains certain financial covenants,
due November 2005, principal and interest payable from the proceeds obtained on
customer notes receivable pledged as collateral for the note, at an interest rate of
LIBOR plus 2.67% (revolving under forbearance at December 31, 2001; upon
completion of the debt restructuring described in Note 3, the revolving loan
agreement was amended to limit the outstanding balance to $71 million,
consisting of $56.1 million revolver with an interest rate of LIBOR plus 3%
with a 6% floor and a $14.9 million term loan with an interest rate of 8%;
both facilities mature March 2007) ......................................................... 74,101 69,734
$10.2 million revolving loan agreement, which contains certain financial
covenants, due April 2006, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the note, at
an interest rate of Prime plus 2.00% (revolving under forbearance at December
31, 2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to form a $8.1 million revolver with an
interest rate of Prime plus 3% with a 6% floor and a $2.1 million term loan
with an interest rate of 8%; both facilities mature March
2007) ...................................................................................... -- 10,200
$45 million revolving loan agreement ($55 million as of December 31, 2001),
which contains certain financial covenants, due August 2005, principal and
interest payable from the proceeds obtained on customer notes receivable
pledged as collateral for the note, at an interest rate of Prime (Prime plus
2.00% as of December 31, 2001) (revolving under forbearance at December 31,
2001; upon completion of the debt restructuring described in Note 3, the
revolving loan agreement was amended to limit the outstanding balance to $48
million, consisting of $38.0 million revolver with an interest rate of
Federal Funds plus 2.75% with a 6% floor and a $10.0 million term loan with
an interest rate of 8%; both facilities mature March
2007)
41,817 54,641
$10 million inventory loan agreement, which contains certain financial
covenants, due August 2002 (extended to March 2007 upon completion of the
debt restructuring described in Note 3), interest payable monthly, at an
interest rate of LIBOR plus 3.50% (revolving under
forbearance at December 31, 2001) .......................................................... 9,936 9,936
$10 million inventory loan agreement, which contains certain financial covenants,
due March 31, 2002 (extended to March 2007 upon completion of the debt restructuring
described in Note 3), interest payable monthly, at an interest rate of LIBOR
plus 3.25% (revolving under forbearance at December 31, 2001) .............................. 8,175 9,375
Various notes, due from January 2002 through November 2009, collateralized
by various assets with interest rates ranging from 0.9% to 17.0% ......................... 4,044 3,227
-------- --------
Total notes payable ................................................................. 259,574 289,236
Capital lease obligations ..................................................................... 11,023 5,220
-------- --------
Total notes payable and capital lease obligations ................................... 270,597 294,456
10 1/2% senior subordinated notes, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Company's present and future
domestic restricted subsidiaries (in default at December 31, 2001; see debt
restructuring described in Note 3) ......................................................... 66,700 66,700
-------- --------
Total ............................................................................... $337,297 $361,156
======== ========
</Table>
At December 31, 2001, LIBOR rates were from 1.86% to 1.90%, and the Prime
rate was 5.0%.
Certain of the above debt agreements include restrictions on the Company's
ability to pay dividends based on minimum levels of net income and cash flow.
The debt agreements contain covenants including requirements that the Company
(i) preserve and maintain the collateral securing the loans; (ii) pay all taxes
and other obligations relating to the collateral; and (iii) refrain from selling
or transferring the collateral or permitting any encumbrances on the collateral.
The debt agreements also contain restrictive covenants which include (i)
restrictions on liens against and dispositions of collateral, (ii) restrictions
on distributions to affiliates and prepayments of loans from affiliates, (iii)
restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and (v)
restrictions on mergers, consolidations, or other reorganizations of the
Company. Under certain credit facilities, a sale of all or substantially all of
the assets of the Company, a merger, consolidation, or reorganization of the
Company, or other changes of control of the ownership of the Company, would
constitute an event of default and permit the lenders to accelerate the maturity
thereof.
Such credit facilities also contain operating covenants requiring the
Company to (i) maintain an aggregate minimum tangible net worth ranging from
$17.5 million to $110 million, minimum liquidity, including a debt to equity
ratio of not greater than 2.5 to 1 and a liquidity ratio of not less than 5%, an
interest coverage ratio of at least 2.0 to 1, a marketing expense ratio of no
more than 0.55 to 1, a consolidated cash flow to consolidated interest expense
ratio of at least 2.0 to 1, and total tangible capital funds greater than $200
million plus 75% of net income beginning October 1999; (ii) maintain its legal
existence and be in good standing in any jurisdiction where it conducts
business; (iii) remain in the active management of the Resorts; and (iv) refrain
from modifying or terminating certain timeshare documents. The credit facilities
also include customary events of default, including, without limitation (i)
failure to
F-18
pay principal, interest, or fees when due, (ii) untruth of any representation of
warranty, (iii) failure to perform or timely observe covenants, (iv) defaults
under other indebtedness, and (v) bankruptcy.
Upon completion of the debt restructuring described in Note 3, the
operating covenants described at (i) above were replaced by new operating
covenants that require that the Company maintain a minimum tangible net worth of
$100 million or greater, as defined, sales and marketing expenses as a
percentage of sales below 55.0% for the last three quarters of 2002 and below
52.5% thereafter, notes receivable delinquency rate below 25%, a minimum
interest coverage ratio of 1.1 to 1.0 (increasing to 1.25 to 1 in 2003), and
positive net income. As of September 30, 2002, the Company was in compliance
with these operating covenants. However, such future results cannot be assured.
Notes payable secured by customer notes receivable require that
collections from customers be remitted to the lenders upon receipt. In addition,
the Company is required to calculate the appropriate "Borrowing Base" for each
note payable monthly. Such Borrowing Base determines whether the loans are
collateralized in accordance with the applicable loan agreements and whether
additional amounts can be borrowed. In preparing the monthly Borrowing Base
reports for the lenders, the Company has classified certain notes as eligible
for Borrowing Base that might be considered ineligible in accordance with the
loan agreements. A significant portion of the potentially ineligible notes
relates to cancelled notes from customers who have upgraded to a higher value
product and notes that have been subject to payment concessions.
The Company has developed programs under which customers may be granted
payment concessions in order to encourage delinquent customers to make
additional payments. The effect of these concessions is to extend the term of
the customer notes. Upon granting a concession, the Company considers the
customer account to be current. Under the Company's notes payable agreements,
customer notes that are less than 60 days past due are considered eligible as
Borrowing Base. As of December 31, 2000 and 2001, a total of $30.5 million and
$53.3 million of customer notes, respectively, have been considered eligible for
Borrowing Base purposes which would have been considered ineligible had payment
concessions and the related reclassification as current not been granted. In
addition, as of December 31, 2000 and 2001, approximately $20.6 million and
$247,000, respectively, of cancelled notes from customers who have upgraded to a
different product have been treated as eligible for Borrowing Base purposes.
Principal maturities of notes payable, capital lease obligations, and
senior subordinated notes, including acceleration of loans in default, are as
follows at December 31, 2001 (in thousands):
<Table>
<Caption>
2002...................................................... $ 356,075
2003...................................................... 1,620
2004...................................................... 1,493
2005...................................................... 635
2006...................................................... 436
Thereafter................................................ 897
-----------
Total........................................... $ 361,156
===========
</Table>
Considering the debt restructuring described in Note 3, principal
maturities of notes payable, capital lease obligations, and senior subordinated
notes are as follows at December 31, 2001 (in thousands):
<Table>
2002................................................. $ 123,063
2003................................................. 64,545
2004................................................. 56,280
2005................................................. 48,834
2006................................................. 48,060
Thereafter........................................... 20,374
-----------
Total...................................... $ 361,156
===========
</Table>
Total interest expense for the years ended December 31, 1999, 2000, and
2001 was $16.8 million, $32.8 million, and $35.0 million, respectively. Interest
of $2.7 million, $2.0 million, and $1.2 million was capitalized during the years
ended December 31, 1999, 2000, and 2001, respectively.
As of December 31, 2001, eligible customer notes receivable with a face
amount of $319.0 million and interval inventory of $19.3 million were pledged as
collateral.
11. COMMITMENTS AND CONTINGENCIES
In 2000, operating, general and administrative expense includes $3.5
million related to lawsuit settlements.
The homeowners associations of three condominium projects that a former
subsidiary of the Company constructed in Missouri filed separate actions of
unspecified amounts against the Company alleging construction defects and breach
of management
F-19
agreements. During 2000, the Company incurred $1.3 million to correct a portion
of the problems alleged by the plaintiffs and has not accrued any additional
costs. At this time, the Company cannot predict the final outcome of these
claims and cannot estimate the additional costs it could incur.
In October 2001, a class action was filed against the Company by
plaintiffs who purchased Vacation Intervals from the Company. The plaintiffs
allege that the Company failed to deliver them complete copies of the contracts
for the purchase of Vacation Intervals as they did not receive a complete legal
description of the resort. The plaintiffs further claim that the Company
violated various provisions of the Texas Deceptive Trade Practices Act with
respect to maintenance fees charged by the Company to its Vacation Interval
owners. The petition alleges actual damages of $34.5 million plus consequential
damages of an unspecified amount, as well as all attorneys' fees, expenses, and
costs. The Company intends to vigorously defend against the claims and believes
it has several defenses. The Company has not yet fully assessed the claims, and
accordingly has not recorded an accrual for this case.
The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition.
The Company has entered into noncancelable operating leases covering
office and storage facilities and equipment, which will expire at various dates
through 2009. The total rental expense incurred during the years ended December
31, 1999, 2000, and 2001 was $8.0 million, $10.2 million, and $3.6 million,
respectively. The Company has also acquired equipment by entering into capital
leases. The future minimum annual commitments for the noncancelable lease
agreements are as follows at December 31, 2001 (in thousands):
<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES
------ ------
2002 .......................................... $ 3,172 $ 2,083
2003 .......................................... 1,399 1,889
2004 .......................................... 1,201 1,542
2005 .......................................... 238 1,443
2006 .......................................... 3 1,409
Thereafter .................................... -- 3,300
------- -------
Total minimum future lease payments ........... 6,013 $11,666
=======
Less amounts representing interest ............ (793)
-------
Present value of future minimum lease payments $ 5,220
=======
</Table>
Equipment acquired under capital leases consists of the following at
December 31, 2000 and 2001 (in thousands):
<Table>
<Caption>
2000 2001
-------- --------
Amount of equipment under capital leases ........ $ 19,260 $ 15,463
Less accumulated depreciation ................... (6,623) (8,261)
-------- --------
$ 12,637 $ 7,202
======== ========
</Table>
During 2001, Silverleaf Club entered into a loan agreement for $1.8
million, whereby the Company guaranteed such debt with certain of its assets. As
of December 31, 2001, Silverleaf Club's related note payable balance was $1.7
million.
Periodically, the Company enters into employment agreements with certain
executive officers, which provide for minimum annual base salaries and other
fringe benefits as determined by the Board of Directors of the Company. Certain
of these agreements provide for bonuses based on the Company's operating
results. The agreements are for varying terms of up to three years and typically
can be terminated by either party upon 30 days notice, subject to severance
provisions.
Certain employment agreements provide that such person will not directly
or indirectly compete with the Company in any county in which it conducts its
business or markets its products for a period of two years following the
termination of the agreement. These agreements also provide that such persons
will not influence any employee or independent contractor to terminate its
relationship with the Company or disclose any confidential information of the
Company.
As of December 31, 2001, the Company had construction commitments of
approximately $7.8 million.
F-20
12. EQUITY
The Company's stock option plan provides for the award of nonqualified
stock options to directors, officers, and key employees, and the grant of
incentive stock options to salaried key employees. Nonqualified stock options
provide for the right to purchase common stock at a specified price which may be
less than or equal to fair market value on the date of grant (but not less than
par value). Nonqualified stock options may be granted for any term and upon such
conditions determined by the Board of Directors of the Company. The Company has
reserved 1,600,000 shares of common stock for issuance pursuant to its stock
option plan.
Outstanding options have a graded vesting schedule, with equal
installments of shares vesting up through four years from the original grant
date. These options are exercisable at prices ranging from $3.59 to $25.50 per
share and expire 10 years from the date of grant.
Stock option transactions during 1999, 2000, and 2001 are summarized as
follows:
<Table>
<Caption>
1999 2000 2001
------------------------------ ----------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE PER SHARE OF SHARES PRICE PER SHARE OF SHARES PRICE PER SHARE
---------- --------------- ---------- --------------- ---------- ---------------
Options outstanding, beginning of year 1,280,000 $ 17.63 1,477,000 $ 15.64 1,551,000 $ 14.45
Granted .............................. 295,500 $ 7.58 137,000 $ 3.70 -- $ --
Exercised ............................ -- -- -- -- -- --
Forfeited ............................ (98,500) $ 17.65 (63,000) $ 18.97 (472,500) $ 15.29
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding, end of year ..... 1,477,000 $ 15.64 1,551,000 $ 14.45 1,078,500 $ 14.08
========== ========== ========== ========== ========== ==========
Exercisable, end of year ............. 471,125 $ 17.46 807,125 $ 16.54 807,875 $ 15.33
========== ========== ========== ========== ========== ==========
</Table>
For stock options outstanding at December 31, 2001:
<Table>
<Caption>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER FAIR VALUE EXERCISE PRICE PER REMAINING
RANGE OF EXERCISE PRICES OF SHARES PER OPTION SHARE LIFE IN YEARS
- --------------------------------- ------------ -------------- ------------------ -------------
$3.59 - $25.50 ................. 1,078,500 $12.40 $14.08 7.0
</Table>
The Company has adopted the disclosure-only provisions of Statement of
Financial Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS
No. 123"). The Company applies the accounting methods of Accounting Principles
Board Opinion No. 25 ("APB No. 25") and related Interpretations in accounting
for its stock options. Accordingly, no compensation costs have been recognized
for stock options. Had compensation costs for the options been determined based
on the fair value at the grant date for the awards in 1999, 2000, and 2001
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would approximate the pro forma amounts
indicated below (in thousands, except per share amounts):
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
----------------- ----------------- -----------
Net income (loss) -- as reported........................................... $ 17,711 $ (59,880) $ (27,209)
Net income (loss) -- pro forma............................................. 15,877 (62,076) (27,900)
Net income (loss) per share -- as reported: Basic.......................... 1.37 (4.65) (2.11)
Net income (loss) per share -- as reported: Diluted........................ 1.37 (4.65) (2.11)
Net income (loss) per share -- pro forma: Basic............................ 1.23 (4.82) (2.16)
Net income (loss) per share -- pro forma: Diluted.......................... 1.23 (4.82) (2.16)
</Table>
The weighted average fair value per common stock option granted during
1999 and 2000 were $6.82 and $3.42, respectively. There were no stock options
granted in 2001. The fair value of the stock options granted are estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility ranging from 120.8%
to 146.0% for all grants, risk-free interest rates which vary for each grant and
range from 5.5% to 6.5%, expected life of 7 years for all grants, and no
distribution yield for all grants.
13. RELATED PARTY TRANSACTIONS
Each timeshare owners association has entered into a management agreement,
which authorizes the Management Clubs to manage the resorts. The Management
Clubs, in turn, have entered into management agreements with the Company,
whereby the Company manages the operations of the resorts. Pursuant to the
management agreements, the Company receives a management fee equal to the
F-21
lesser of 15% of gross revenues for Silverleaf Club and 10% to 15% of dues
collected for owners associations within Crown Club or the net income of each
Management Club. However, if the Company does not receive the aforementioned
maximum fee, such deficiency is deferred for payment in the succeeding year(s),
subject again to the net income limitation. The Silverleaf Club Management
Agreement is effective through March 2010, and will continue year-to-year
thereafter unless cancelled by either party. Crown Club consists of several
individual Club agreements that have terms of two to five years with a minimum
of two renewal options remaining. During the years ended December 31, 1999,
2000, and 2001, the Company recorded management fees of $2.8 million, $462,000,
and $2.5 million, respectively, in management fee income.
The direct expenses of operating the resorts are paid by the Management
Clubs. To the extent the Management Clubs provide payroll, administrative, and
other services that directly benefit the Company, a separate allocation charge
is generated and paid by the Company to the Management Clubs. During the years
ended December 31, 1999, 2000, and 2001, the Company incurred $10.3 million,
$155,000, and $147,000, respectively, of expenses under these agreements. As of
January 1, 2000, certain employees were transferred from the Management Clubs to
the Company. Hence, the allocation of overhead from the Management Clubs to the
Company was substantially reduced in 2000. As a result of the payroll changes
implemented January 1, 2000, the Company allocated overhead to the Management
Clubs of $1.7 million and $1.7 million during the years ended December 31, 2000
and 2001, respectively.
The following schedule represents amounts due from (to) affiliates at
December 31, 2000 and 2001 (in thousands):
<Table>
<Caption>
DECEMBER 31,
2000 2001
--------- ---------
Timeshare owners associations and other, net.......................................... $ 216 $ 102
Amount due from Silverleaf Club....................................................... -- 1,555
Amount due from Crown Club............................................................ 455 577
--------- ---------
Total amounts due from affiliates........................................... $ 671 $ 2,234
========= =========
Amount due to Silverleaf Club......................................................... 689 261
Amount due to SPE..................................................................... 2,596 304
--------- ---------
Total amounts due to affiliates............................................. $ 3,285 $ 565
========= =========
</Table>
In December 2000, the Company wrote-off its receivable from Silverleaf
Club and incurred a charge of $7.5 million. At December 31, 2000, due to
liquidity concerns and the planned reduction in future sales, the Company
anticipated that future membership dues would not be sufficient to pay down the
receivable. Hence, the Company's Board of Directors approved the write-off of
this amount.
During 2001, Silverleaf Club entered into a loan agreement for $1.8
million, whereby the Company guaranteed such debt with certain of its assets. As
of December 31, 2001, Silverleaf Club's related note payable balance was $1.7
million.
At December 31, 2000, the amount due to SPE primarily relates to upgrades
of sold notes receivable, which was subsequently paid. Upgrades represent sold
notes that are replaced by new notes when holders of said notes upgrade to a
more valuable Vacation Interval.
An affiliate of a director of the Company is entitled to a 10% net profits
interest from sales of certain land in Mississippi. During 2000, the affiliate
of the director was paid $49,637 under this agreement. During 2001, the Company
sold additional parcels of this land and accrued a liability of $17,286 to the
affiliate. As of December 31, 2001, the Company owns approximately 11 acres of
land that is subject to this net profits interest.
In 1997, the Company entered into a ten-year lease agreement with a
principal shareholder who is the CEO of the Company for personal use of flood
plain land adjacent to one of the Company's resorts in exchange for an annual
payment equal to the property taxes attributable to the land. These property
taxes were approximately $7,500 for the year ended December 31, 2001. The lease
has four renewal options of ten years at the option of the lessee.
In August 1997, subject to an employment agreement with an officer, the
Company purchased a house for $531,000 and leased the house, with an option to
purchase, to the officer for 13 months at a rental rate equal to the Company's
expense for interest, insurance, and taxes, which was approximately $3,000 per
month. In September 1998, the officer exercised his option to purchase the house
at the end of the lease for $531,000. In March 2001, the Company forgave the
remaining $48,000 balance on a note due from the officer.
In June 1998, the Company entered an employment agreement, whereby the
Company paid $108,000 for an employee's condominium in Branson, Missouri, upon
his relocation to Dallas, Texas, and paid $500,000 over a three-year period as
compensation
F-22
for and in consideration of the exclusivity of his services. Prior to becoming
an employee in June 1998, the Company paid this employee's former architectural
firm $246,000 during 1998 for architectural services rendered to the Company.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, other receivables,
amounts due from or to affiliates, and accounts payable and accrued expenses
approximates fair value due to the relatively short-term nature of the financial
instruments. The carrying value of the notes receivable approximates fair value
because the weighted average interest rate on the portfolio of notes receivable
approximates current interest rates to be received on similar current notes
receivable. The carrying value of notes payable and capital lease obligations
approximates their fair value because the interest rates on these instruments
are adjustable or approximate current interest rates charged on similar current
borrowings.
The estimated fair value of the Company's $66.7 million senior
subordinated notes at December 31, 2001 was approximately $41.8 million, based
on the market value of notes exchanged in the Exchange Offer described in Note
3. However, these notes were not traded on a regular basis and were therefore
subject to large variances in offer prices. Accordingly, the estimated fair
value may not be indicative of the amount at which a transaction could be
completed. As described in Note 3, the majority of the $66.7 million senior
subordinated notes were converted to common stock and a new class of senior
subordinated notes on May 2, 2002.
Considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
15. ACQUISITIONS
In 1999, the Company acquired undeveloped land near The Villages Resort in
Tyler, Texas, for approximately $1.5 million, undeveloped land near Holiday
Hills Resort in Branson, Missouri, for approximately $500,000, and undeveloped
land near Fox River Resort in Sheridan, Illinois, for approximately $805,000.
16. SUBSIDIARY GUARANTEES
All subsidiaries of the Company, except SF1, have guaranteed the $66.7
million of senior subordinated notes. The separate financial statements and
other disclosures concerning each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented herein because management determined that such
information is not material to investors. The guarantee of each Guarantor
Subsidiary is full and unconditional and joint and several, and each Guarantor
Subsidiary is a wholly-owned subsidiary of the Company, and together comprise
all direct and indirect subsidiaries of the Company. During 2000, the Company
liquidated several subsidiaries with nominal operations.
Combined summarized operating results of the Guarantor Subsidiaries for
the years ended December 31, 1999, 2000, and 2001, are as follows (in
thousands):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
----------- ----------- -----------
Revenues ........................................... $ 56 $ -- $ --
Expenses ........................................... (89) -- --
----------- ----------- -----------
Loss from continuing operations, before income taxes $ (33) $ -- $ --
Income taxes ....................................... 13 -- --
----------- ----------- -----------
Net loss ........................................... $ (20) $ -- $ --
=========== =========== ===========
</Table>
Combined summarized balance sheet information of the Guarantor
Subsidiaries as of December 31, 2000 and 2001, is as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
--------------------
2000 2001
------ ------
Other assets ............................................. $ 1 $ 1
------ ------
Total assets ................................... $ 1 $ 1
====== ======
Investment by parent (includes equity and amounts due to
parent) ................................................ $ 1 $ 1
------ ------
Total liabilities and equity ................... $ 1 $ 1
====== ======
</Table>
F-23
17. 401(k) PLAN
Effective January 1, 1999, the Company established the Silverleaf Resorts,
Inc. 401(k) plan (the "Plan"), a qualified defined contribution retirement plan,
covering employees 21 years of age or older who have completed six months of
service. The Plan allows eligible employees to defer receipt of up to 15% of
their compensation and contribute such amounts to various investment funds. The
employee contributions vest immediately. The Company is not required by the Plan
to match employee contributions, however, it may do so on a discretionary basis.
The Company incurred nominal administrative costs related to maintaining the
Plan and made no contributions to the Plan during the years ended December 31,
1999, 2000, and 2001.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2000 and 2001 is set forth below in
thousands, except per share amounts.
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
============ =========== =========== =========
Total revenues
2001 ...................................................... $ 61,828 $ 48,611 $ 44,339 $ 36,555
============ =========== =========== =========
2000 ...................................................... $ 65,393 $ 70,882 $ 81,034 $ 68,526
============ =========== =========== =========
Total costs and operating expenses
2001 ...................................................... $ 70,244 $ 56,591 $ 50,888 $ 40,918
============ =========== =========== =========
2000 ...................................................... $ 62,909 $ 75,033 $ 103,086 $ 143,333
============ =========== =========== =========
Income (loss) before extraordinary item
2001 ...................................................... $ (8,367) $ (7,930) $ (6,499) $ ( 4,413)
============ =========== =========== =========
2000 ...................................................... $ 1,564 $ (2,607) $ (13,888) $ (47,074)
============ =========== =========== =========
Net income (loss)
2001 ...................................................... $ (8,367) $ (7,930) $ (6,499) $ ( 4,413)
============ =========== =========== =========
2000 ...................................................... $ 1,564 $ (2,291) $ (13,888) $ (45,265)
============ =========== =========== =========
Income (loss) before extraordinary item per common share:
basic and diluted
2001 ...................................................... $ (0.65) $ (0.62) $ (.50) $ (.34)
============ =========== =========== =========
2000 ...................................................... $ 0.12 $ (0.20) $ (1.08) $ (3.65)
============ =========== =========== =========
Net income (loss) per common share: basic and diluted
2001 ...................................................... $ (0.65) $ (0.62) $ (.50) $ (.34)
============ =========== =========== =========
2000 ...................................................... $ 0.12 $ (0.18) $ (1.08) $ (3.51)
============ =========== =========== =========
</Table>
Significant adjustments in the fourth quarter of 2000 -
Due to liquidity concerns experienced in the fourth quarter of 2000, the
Company reduced its sales plan for future years, discontinued plans to develop
certain properties, and discontinued its efforts to sell Crown intervals and to
upgrade existing Crown Club members to Silverleaf Club. As a result, the Company
incurred one-time charges of $15.5 million to write-down inventories based on a
lower of cost or market assessment, $5.4 million to record the impairment of
land and land held for sale, $3.1 million to write-off unsold Crown inventory
intervals, and $922,000 to write-off Crown intangible assets established in
connection with the acquisition of Crown in May 1998. The Company recorded an
additional provision for uncollectible notes in the fourth quarter of
approximately $46 million. In the fourth quarter of 2000, the Company also
wrote-off its receivable from Silverleaf Club and incurred a charge of $7.5
million.
19. SUBSEQUENT EVENTS
In February 2002, a class action was filed against the Company by a couple
who purchased a Vacation Interval from the Company. The plaintiffs allege that
the Company violated the Texas Government Code by charging a document
preparation fee in regard to instruments affecting title to real estate, and
that such fee constituted a partial prepayment that should have been credited
against their note. The petition seeks recovery of the $275 document preparation
fee, $825 of treble damages, and injunctions preventing the Company from
engaging in such practices. The Company has not yet fully assessed the claims
and has not recorded a an accrual for this case.
In May 2002, the Company completed the restructuring of its debt as
described in Note 3.
During 2002, the Company sold $69.3 million of notes receivable to the SPE
and recognized pre-tax gains of $5.3 million. The SPE funded these purchases
through advances under a credit agreement arranged for this purpose. In
connection with these sales, the Company received cash consideration of $57.2
million, which was used to pay down borrowings under its revolving loan
facilities.
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTIONS
- ------- ------------
*99.1 -- Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*99.2 -- Certification of CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
</Table>