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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 of incorporation) (I.R.S. Employer
Identification No.)
1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)
214-631-1166
(Registrant's telephone number, including area code)
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]
Number of shares of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of November 22, 2002: 36,826,906
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CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION
TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, 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 THE
COMPANY'S 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 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2001. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS OF
THE DATE OF THIS REPORT ON FORM 10-Q 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.
SILVERLEAF RESORTS, INC.
INDEX
<Table>
<Caption>
Page
----
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Statements of Income for the three months
and nine months ended September 30, 2002 and 2001 ........................... 2
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 (Audited) ............................................. 3
Condensed Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 2002 ........................................ 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 .................................... 5
Notes to the Condensed Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................. 19
Item 4. Controls and Procedures ..................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................... 21
Item 2. Changes in Securities and Use of Proceeds ................................... 21
Item 3. Defaults Upon Senior Securities ............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders ......................... 22
Item 6. Exhibits and Reports on Form 8-K ............................................ 22
Signatures .................................................................. 23
</Table>
1
PART I: FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 32,179 $ 31,338 $ 91,766 $ 117,470
Sampler sales 848 950 3,046 2,888
------------ ------------ ------------ ------------
Total sales 33,027 32,288 94,812 120,358
Interest income 9,056 10,616 28,624 30,762
Management fee income 483 159 1,431 393
Other income 1,569 1,276 3,620 3,264
Gain on sale of notes receivable 897 -- 5,381 --
------------ ------------ ------------ ------------
Total revenues 45,032 44,339 133,868 154,777
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 5,828 6,549 16,832 22,964
Sales and marketing 17,288 15,955 49,837 64,675
Provision for uncollectible notes 6,436 6,816 18,352 25,551
Operating, general and administrative 7,296 8,782 24,898 26,224
Depreciation and amortization 1,248 1,607 3,797 5,132
Interest expense and lender fees 4,612 8,620 17,694 27,733
Impairment loss of long-lived assets -- 2,559 -- 5,443
------------ ------------ ------------ ------------
Total costs and operating expenses 42,708 50,888 131,410 177,722
Income (loss) before benefit for income
taxes and extraordinary item 2,324 (6,549) 2,458 (22,945)
Benefit for income taxes 1,561 50 1,519 149
------------ ------------ ------------ ------------
Income (loss) before extraordinary item 3,885 (6,499) 3,977 (22,796)
Extraordinary gain on extinguishment of debt (net
of income tax of $0) -- -- 17,885 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,885 $ (6,499) $ 21,862 $ (22,796)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.11 $ (0.50) $ 0.15 $ (1.77)
Extraordinary item -- -- 0.68 --
------------ ------------ ------------ ------------
Net income (loss) $ 0.11 $ (0.50) $ 0.84 $ (1.77)
============ ============ ============ ============
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING: 36,826,906 12,889,417 26,129,567 12,889,417
============ ============ ============ ============
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING: 36,926,568 12,889,417 26,135,186 12,899,417
============ ============ ============ ============
</Table>
See notes to condensed consolidated financial statements.
2
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
<Table>
<Caption>
September 30, December 31,
2002 2001
------------- ------------
(Audited)
ASSETS
Cash and cash equivalents $ 3,794 $ 6,204
Restricted cash 3,097 4,721
Notes receivable, net of allowance for uncollectible notes of
$35,828 and $54,744, respectively 236,222 278,592
Accrued interest receivable 2,212 2,572
Investment in Special Purpose Entity 9,204 4,793
Amounts due from affiliates 1,728 2,234
Inventories 102,582 105,275
Land, equipment, buildings, and utilities, net 34,300 37,331
Income taxes receivable -- 164
Land held for sale 4,545 5,161
Prepaid and other assets 10,599 11,053
------------ ------------
TOTAL ASSETS $ 408,283 $ 458,100
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 8,290 $ 9,203
Accrued interest payable 1,366 10,749
Amounts due to affiliates 991 565
Unearned revenues 3,737 5,500
Notes payable and capital lease obligations 246,250 294,456
Senior subordinated notes 46,961 66,700
------------ ------------
Total Liabilities 307,595 387,173
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000 shares
authorized, 37,249,006 and 13,311,517 shares issued, respectively,
and 36,826,906 and 12,889,417 shares outstanding, respectively 373 133
Additional paid-in capital 116,998 109,339
Retained deficit (11,684) (33,546)
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
------------ ------------
Total Shareholders' Equity 100,688 70,927
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 408,283 $ 458,100
============ ============
</Table>
See notes to condensed consolidated financial statements.
3
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
<Table>
<Caption>
Common Stock
-------------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained --------------------------
Issued Value Capital Deficit Shares Cost Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
January 1, 2002 13,311,517 $ 133 $ 109,339 $ (33,546) (422,100) $ (4,999) $ 70,927
Issuance of common stock 23,937,489 240 7,659 -- -- -- 7,899
Net income -- -- -- 21,862 -- -- 21,862
---------- ---------- ---------- ---------- ---------- ---------- ----------
September 30, 2002 37,249,006 $ 373 $ 116,998 $ (11,684) (422,100) $ (4,999) $ 100,688
========== ========== ========== ========== ========== ========== ==========
</Table>
See notes to condensed consolidated financial statements.
4
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<Table>
<Caption>
Nine Months Ended
September 30,
------------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 21,862 $ (22,796)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for uncollectible notes 18,352 25,551
Gain on sale of notes receivable (5,381) --
Depreciation and amortization 3,797 5,132
Proceeds from sales of notes receivable 57,168 --
Extraordinary gain on extinguishment of debt (17,885) --
Deferred income taxes -- (149)
Impairment loss of long-lived assets -- 5,443
Increase (decrease) in cash from changes in assets and liabilities:
Restricted cash 1,624 (2,176)
Notes receivable (25,591) (46,660)
Accrued interest receivable 360 (494)
Investment in Special Purpose Entity (4,411) 707
Amounts due from affiliates 932 (2,486)
Inventories 515 4,275
Land held for sale 616 --
Prepaid and other assets (1,912) 1,677
Income tax receivable 164 7,506
Accounts payable and accrued expenses (913) (7,126)
Accrued interest payable 1,273 5,443
Unearned revenues (1,763) (2,964)
------------ ------------
Net cash provided by (used in) operating activities 48,807 (29,117)
------------ ------------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (1,428) (681)
------------ ------------
Net cash used in investing activities (1,428) (681)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 66,501 82,793
Payments on borrowings to unaffiliated entities (116,290) (55,357)
------------ ------------
Net cash provided by (used in) financing activities (49,789) 27,436
------------ ------------
Net change in cash and cash equivalents (2,410) (2,362)
CASH AND CASH EQUIVALENTS:
Beginning of period 6,204 6,800
------------ ------------
End of period $ 3,794 $ 4,438
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 13,746 $ 17,882
Income tax refunds received $ (1,563) $ (7,506)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Land and equipment acquired under capital leases $ -- $ 171
Issuance of common stock $ 7,899 $ --
Issuance of senior subordinated debt $ 28,467 $ --
Retirement of senior subordinated debt $ 56,934 $ --
</Table>
See notes to consolidated condensed financial statements.
5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries ("the Company") presented herein do not include certain
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the
Company's Form 10-K for the year ended December 31, 2001 as filed with the
Securities and Exchange Commission. The accounting policies used in preparing
these condensed consolidated financial statements are the same as those
described in such Form 10-K.
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 2000 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
6
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.
NOTE 2 - 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 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 collectively
received cash payments of $1,335,545 on May 16, 2002, and a further payment of
$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 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 a positive net income. At September 30, 2002, the
Company was compliant with each of these covenants. However, continued
compliance in future periods cannot be assured. Based upon current projections,
the Company believes it will be in compliance with all financial covenants with
its senior lenders during the fourth quarter of 2002, except for the covenant
requiring it to restrict quarterly sales and marketing expenses as a percentage
of quarterly sales to below 55.0%.
7
Due to the seasonality of its sales and the fixed nature of its sales and
marketing expenses, the Company currently believes that its fourth quarter 2002
sales and marketing expenses will exceed 55.0% of fourth quarter sales. If the
Company is unable to reduce to below 55% its fourth quarter ratio of sales and
marketing expenses to sales, the Company will be noncompliant with this
financial covenant at the end of the fourth quarter. The Company has discussed
this issue with the lenders, and they are aware that in that event, it will be
necessary for the Company to negotiate a waiver or amendment of this covenant
with its senior lenders.
Compliance with these 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.
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.
8
NOTE 3 - EARNINGS PER SHARE
The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three and nine months ended
September 30, 2002 and 2001:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Weighted average shares outstanding - basic 36,826,906 12,889,417 26,129,567 12,889,417
Issuance of shares from stock options exercisable 460,000 -- 232,300 --
Repurchase of shares from stock options proceeds (360,338) -- (226,681) --
------------ ------------ ------------ ------------
Weighted average shares outstanding - diluted 36,926,568 12,889,417 26,135,186 12,889,417
============ ============ ============ ============
</Table>
For the three and nine months ended September 30, 2001, the weighted average
shares outstanding assuming dilution was non-dilutive.
NOTE 4 - 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 September 30, 2002 was approximately 14.3%.
In connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$1.8 million and $1.3 million at September 30, 2001 and 2002, respectively, and
are non-interest bearing.
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 September 30, 2002, $4.1 million of
notes receivable, net of accounts charged off, were considered delinquent. An
additional $58.6 million of notes would have been considered to be delinquent
had the Company not granted payment concessions to the customers. The activity
in the allowance for uncollectible notes is as follows for the three and nine
months ended September 30, 2001 and 2002 (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Balance, beginning of period ........... $ 39,504 $ 80,036 $ 54,744 $ 74,778
Provision for credit losses ............ 6,436 6,816 18,352 25,551
Receivables charged off ................ (8,246) (21,012) (25,538) (34,489)
Allowance related to notes sold ........ (1,866) -- (11,730) --
------------ ------------ ------------ ------------
Balance, end of period ................. $ 35,828 $ 65,840 $ 35,828 $ 65,840
============ ============ ============ ============
</Table>
NOTE 5 - DEBT
Notes payable, capital lease obligations, and senior subordinated notes as of
September 30, 2002 and December 31, 2001 (in thousands):
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2002 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 2,
maturity was extended to August 2003) ................................................... $ 11,259 $ 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) ........ 27,572 35,614
</Table>
9
<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 2), 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) ................................................. 9,166 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 2, 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) ............................................... 45,864 71,072
$15.1 million term loan with an interest rate of 8%, maturing in March 2007 ................ 14,854 --
$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 2, 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) ................................. 45,571 69,734
$14.9 million term loan with an interest rate of 8%, maturing in March 2007 ................ 14,648 --
$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 2, 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) ......................... 6,537 10,200
$2.1 million term loan with an interest rate of 8%, maturing in March 2007 ................. 2,104 --
$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 2, the
revolving loan agreement was amended to limit the outstanding balance to $48
million, consisting of $38 million revolver with an interest rate of Federal
Funds plus 2.75% with a 6% floor and a $10 million term loan with an interest
rate of 8%; both facilities mature March 2007) .......................................... 34,473 54,641
$11.5 million term loan with an interest rate of 8%, maturing in March 2007 ................ 9,590 --
$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 2), 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 2), interest payable monthly, at an
interest rate of LIBOR plus 3.25% (revolving under forbearance at December 31, 2001) .... 9,375 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% ........................ 2,269 3,227
------------ ------------
Total notes payable .............................................................. 243,218 289,236
Capital lease obligations .................................................................. 3,032 5,220
------------ ------------
Total notes payable and capital lease obligations ................................ 246,250 294,456
6.0% senior subordinated notes, due 2007, interest payable semiannually on April
1 and October 1, guaranteed by all of the Company's present and future
domestic restricted subsidiaries (see debt restructuring described in Note 2) ........... 28,467 --
10 1/2% senior subordinated notes, subordinate to the 6.0% senior subordinated
notes above, 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 2) .................................................................... 9,766 66,700
Interest on the 6.0% senior subordinated notes, due 2007, interest payable
semiannually on April 1 and October 1, guaranteed by all of the Company's
present and future domestic restricted subsidiaries (see debt restructuring
described in Note 2) .................................................................... 8,728 --
------------ ------------
Total senior subordinated notes .................................................. 46,961 66,700
------------ ------------
Total ............................................................................ $ 293,211 $ 361,156
============ ============
</Table>
At September 30, 2002, LIBOR rates were from 1.81% to 1.88%, and the Prime rate
was 4.75%. At December 31, 2001, LIBOR rates were from 1.86% to 1.90%, and the
Prime rate was 5.00%.
During the nine months ended September 30, 2002, the Company sold $69.3 million
of notes receivable to the SPE and recognized pre-tax gains of $5.4 million. The
SPE funded these purchases through advances under a credit
10
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.
NOTE 6 - SUBSIDIARY GUARANTEES
As of September 30, 2002, all subsidiaries of the Company (except for Silverleaf
Finance I, Inc.) have guaranteed the $47.0 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 the Company's management has determined that such information is
not material to investors. The guarantee of each Guarantor Subsidiary is full
and unconditional and joint and several. Each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company, and together comprise all direct and
indirect subsidiaries of the Company.
The Guarantor Subsidiaries had no operations for the nine months ended September
30, 2002 and 2002. Combined summarized operating results of the Guarantor
Subsidiaries for the nine months ended September 30, 2002 and 2001, are as
follows (in thousands):
<Table>
<Caption>
September 30,
-------------------------
2002 2001
---------- ----------
Revenues $ -- $ --
Expenses -- --
---------- ----------
Net loss $ -- $ --
========== ==========
</Table>
Combined summarized balance sheet information as of September 30, 2002 for the
Guarantor Subsidiaries is as follows (in thousands):
<Table>
<Caption>
September 30,
2002
-------------
Other assets $ 1
-------------
Total assets $ 1
=============
Investment by parent (includes equity
and amounts due to parent) $ 1
-------------
Total liabilities and equity $ 1
=============
</Table>
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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 an accrual for this case.
NOTE 8 - SUBSEQUENT EVENTS
In the fourth quarter of 2002, the Company sold $14.2 million of notes
receivable to a wholly-owned, unconsolidated subsidiary, Silverleaf Finance I,
Inc. (the "SPE") and recognized pre-tax gains of $1.5 million. The
11
SPE funded these purchases through advances under a credit agreement arranged
for this purpose. In conjunction with this sale, the Company received cash
consideration of $11.7 million, which was used to pay down borrowings under its
revolving loan facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are forward looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed in the Company's Form 10-K for
the year ended December 31, 2001.
The Company currently owns and/or operates 19 resorts in various stages of
development. These resorts offer a wide array of country club-like amenities,
such as golf, swimming, horseback riding, boating, and many organized activities
for children and adults. The Company represents an owner base of over 124,000.
The condensed consolidated financial statements of the Company include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly-owned.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
As a percentage of total revenues:
Vacation Interval sales 71.4% 70.7% 68.5% 75.9%
Sampler sales 1.9% 2.1% 2.3% 1.9%
---------- ---------- ---------- ----------
Total sales 73.3% 72.8% 70.8% 77.8%
Interest income 20.1% 23.9% 21.4% 19.9%
Management fee income 1.1% 0.4% 1.1% 0.2%
Other income 3.5% 2.9% 2.7% 2.1%
Gain on sale of notes receivable 2.0% 0.0% 4.0% 0.0%
---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 18.1% 20.9% 18.3% 19.5%
Provision for uncollectible notes 20.0% 21.7% 20.0% 21.8%
As a percentage of total sales:
Sales and marketing 52.3% 49.4% 52.6% 53.7%
As a percentage of total revenues:
Operating, general and administrative 16.2% 19.8% 18.6% 16.9%
Depreciation and amortization 2.8% 3.6% 2.8% 3.3%
As a percentage of interest income:
Interest expense and lender fees 50.9% 81.2% 61.8% 90.2%
</Table>
12
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Revenues for the third quarter of 2002 were $45.0 million, representing a
$693,000 or 1.6% increase from revenues of $44.3 million for the same period of
2001. The increase primarily resulted from an increase in Vacation Interval
sales due to an increase in in-house sales prices and a gain on the sale of
notes receivable.
The number of Vacation Intervals sold, exclusive of in-house Vacation Intervals,
decreased 3.5% to 2,172 in the third quarter of 2002 from 2,251 in the same
period of 2001. The average price per interval remained fairly constant at
$9,661 in the third quarter of 2002 versus $9,784 for the same period of 2001.
Total interval sales for the three months ended September 30, 2002 included 175
biennial intervals (counted as 88 Vacation Intervals) compared to 683 (342
Vacation Intervals) in the three months ended September 30, 2001. During the
third quarter of 2002, 1,814 in-house Vacation Intervals were sold at an average
price of $6,172, compared to 2,135 in-house Vacation Intervals sold at an
average price of $4,363 during the comparable 2001 period.
Sampler sales remained fairly constant at $848,000 for the three months ended
September 30, 2002, compared to $950,000 for the same period in 2001. 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, the decrease in sampler sales relates to
the overall decline in Company operations since 2000.
Interest income decreased 14.7% to $9.1 million for the quarter ended September
30, 2002, from $10.6 million for the same period of 2001. This decrease
primarily resulted from a decrease in notes receivable, net of allowance for
doubtful accounts, in 2002 compared to 2001.
Management fee income, which consists of management fees collected from the
resorts' management clubs, can not exceed the management clubs' net income.
Management fee income increased $324,000 to $483,000 for the third quarter of
2002, versus $159,000 for the third quarter of 2001, due to decreased operating
expenses at the management clubs in 2002 versus 2001.
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 increased $293,000 to $1.6 million for the quarter ended September
30, 2002, compared to $1.3 million for the same period of 2001. The increase
primarily relates to increased golf course and pro shop income in 2002 and a
$114,000 gain associated with the sale of land in the third quarter of 2002.
Gain on sale of notes receivable was $897,000 for the third quarter of 2002,
compared to $0 in the same period of 2001. This gain resulted from the sale of
$10.6 million of notes receivable to the SPE in the third quarter of 2002. The
SPE funded these purchases through advances under a credit agreement arranged
for this purpose.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 18.1% for
the third quarter of 2002 compared to 20.9% for the same period of 2001. The
decrease primarily resulted from an increase in sales prices in 2002 compared to
2001. The $721,000 decrease in cost of sales in the third quarter of 2002
compared to the same period of 2001 was a result of the sales mix. A higher
percentage of lower cost-basis units were sold in the third quarter of 2002
compared to 2001.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 52.3% for
the quarter ended September 30, 2002, from 49.4% for the same period of 2001. 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
these cost saving measures, sales and marketing costs as a percentage of total
sales increased due to costs incurred in the third quarter of 2002 to expand
upgrade sales offices in anticipation of future sales.
13
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.
Based upon current projections, the Company believes it will be in compliance
with all financial covenants with its senior lenders during the fourth quarter
of 2002, except for the covenant requiring it to restrict quarterly sales and
marketing expenses as a percentage of quarterly sales to below 55.0%. Due to the
seasonality of its sales and the fixed nature of its sales and marketing
expenses, the Company currently believes that its fourth quarter 2002 sales and
marketing expenses will exceed 55.0% of fourth quarter sales. If the Company is
unable to reduce its fourth quarter ratio of sales and marketing expenses to
sales to below 55.0%, the Company will be noncompliant with this financial
covenant at the end of the fourth quarter. The Company has discussed this issue
with the lenders, and they are aware that in that event, it will be necessary
for the Company to negotiate a waiver or amendment of this covenant with its
senior lenders. There can be no assurance that such a waiver or amendment can
be negotiated.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
remained fairly constant at 20.0% for the third quarter of 2002 compared to
21.7% for the same period of 2001. Due to the high level of defaults experienced
in customer receivables throughout 2001, the provision for uncollectible notes
remained relatively high during 2001 and 2002. Management believes the high
provision percentage remained necessary in 2002 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
Operating, general and administrative expenses as a percentage of total revenues
decreased to 16.2% for the third quarter of 2002, from 19.8% for the same period
of 2001. The Company substantially reduced its corporate headcount in 2001 to
align overhead with the reduced sales levels. Professional fees incurred in the
third quarter of 2001 related to the restructuring of the Company were $1.4
million. There were no professional fees related to the restructuring of the
Company in the third quarter of 2002.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
decreased to 2.8% for the three months ended September 30, 2002 versus 3.6% for
the same period of 2001. Overall, depreciation and amortization expense
decreased $359,000 for the third quarter of 2002, as compared to 2001, primarily
due to a general reduction in capital expenditures since 2000.
Impairment Loss of Long-Lived Assets
The Company recognized an impairment loss of long-lived assets of $2.6 million
in the third quarter of 2001, which primarily consisted of a $2.3 million
impairment to write-down both corporate airplanes to their estimated sales
prices and a $230,000 loss related to the re-negotiation and transfer of a
capital lease to Silverleaf Club. There was no impairment loss of long-lived
assets during the third quarter of 2002.
Interest Expense
Interest expense as a percentage of interest income decreased to 50.9% for the
three months ended September 30, 2002, from 81.2% for the same period of 2001.
This decrease is primarily the result of decreased borrowings against pledged
notes receivable, a decrease in the Company's weighted average cost of borrowing
to 6.3% in the third quarter of 2002 from 7.6% in the third quarter of 2001, and
reduced senior subordinated notes due to the restructuring completed in May
2002.
14
Income (Loss) before Benefit for Income Taxes and Extraordinary Item
Income (loss) before benefit for income taxes and extraordinary item increased
to income of $2.3 million for the third quarter of 2002, as compared to a loss
of $6.5 million for the third quarter of 2001, as a result of the above
mentioned operating results.
Benefit for Income Taxes
Benefit for income taxes as a percentage of income (loss) before benefit for
income taxes was 67.2% in the third quarter of 2002, as compared to 0.8% for the
same period of 2001. In the third quarter of 2002, the Company received a $1.6
million refund due to a tax law change that allowed the Company to recoup
additional AMT paid in previous years. The effective income tax rate for 2002
and 2001 is also the result of the 2002 and 2001 projected income tax benefits
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.
Net Income (Loss)
Net income (loss) increased to income of $3.9 million for the three months ended
September 30, 2002, as compared to a loss of $6.5 million for the same period of
2001, as a result of the above mentioned operating results.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Revenues
Revenues for the nine months ended September 30, 2002 were $133.9 million,
representing a $20.9 million or 13.5% decrease from revenues of $154.8 million
for the nine months ended September 30, 2001. 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 short-term secured
financing to sell at rates substantially reduced from 1999 and 2000 sales
levels.
As a result, the number of Vacation Intervals sold, exclusive of in-house
Vacation Intervals, decreased 28.5% to 5,901 in the first nine months of 2002
from 8,253 in the same period of 2001. The average price per interval increased
5.1% to $10,218 for the first nine months of 2002 versus $9,721 for the first
nine months of 2001. Total interval sales for the first nine months of 2002
included 937 biennial intervals (counted as 469 Vacation Intervals) compared to
2,608 (1,304 Vacation Intervals) in the first nine months of 2001. During the
first nine months of 2002, 6,045 in-house Vacation Intervals were sold at an
average price of $5,206, compared to 8,844 in-house Vacation Intervals sold at
an average price of $4,211 during the comparable 2001 period.
Sampler sales increased $158,000 to $3.0 million for the nine months ended
September 30, 2002, compared to $2.9 million for the same period in 2001.
Consistent with the overall decrease in Company operations, fewer samplers were
sold in 2002 compared to 2001. 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 the
first nine months of 2002 relate to 2000 sales.
Interest income decreased 7.0% to $28.6 million for the nine months ended
September 30, 2002, from $30.8 million for the same period of 2001. This
decrease primarily resulted from a decrease in notes receivable, net of
allowance for doubtful accounts, in 2002 compared to 2001.
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 $1.0 million to $1.4 million for the first nine
months of 2002, versus $393,000 for the first nine months of 2001, due to
decreased operating expenses at the management clubs in 2002 versus 2001.
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 increased $356,000 to $3.6 million for the first nine
15
months of 2002 compared to $3.3 million for the same period of 2001. The
increase primarily relates to increased golf course and pro shop income in 2002
and a $114,000 gain associated with the sale of land in the third quarter of
2002, partially offset by a $147,000 gain associated with the sale of land in
the first quarter of 2001.
Gain on sale of notes receivable was $5.4 million for the nine months ended
September 30, 2002, compared to $0 in the same period of 2001. This gain
resulted from the sale of $69.3 million of notes receivable to the SPE in the
first nine months of 2002. The SPE funded these purchases through advances under
a credit agreement arranged for this purpose.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 18.3% for
the first nine months of 2002 compared to 19.5% for the same period of 2001. The
decrease primarily resulted from an increase in sales prices in 2002 compared to
2001. The $6.1 million decrease in cost of sales in the first nine months of
2002 compared to the same period of 2001 was due to the decrease in Vacation
Interval sales.
Sales and Marketing
Sales and marketing costs as a percentage of total sales decreased to 52.6% for
the nine months ended September 30, 2002, from 53.7% for the same period of
2001. The decrease is primarily attributable to the following cost saving
measures implemented in 2001 as a result of the aforementioned liquidity issues:
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.
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.
Based upon current projections, the Company believes it will be in compliance
with all financial covenants with its senior lenders during the fourth quarter
of 2002, except for the covenant requiring it to restrict quarterly sales and
marketing expenses as a percentage of quarterly sales to below 55.0%. Due to the
seasonality of its sales and the fixed nature of its sales and marketing
expenses, the Company currently believes that its fourth quarter 2002 sales and
marketing expenses will exceed 55.0% of fourth quarter sales. If the Company is
unable to reduce its fourth quarter ratio of sales and marketing expenses to
sales to below 55.0%, the Company will be noncompliant with this financial
covenant at the end of the fourth quarter. The Company has discussed this issue
with the lenders, and they are aware that in that event, it will be necessary
for the Company to negotiate a waiver or amendment of this covenant with its
senior lenders.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
remained fairly constant at 20.0% for the first nine months of 2002 versus 21.8%
for the same period of 2001. Due to the high level of defaults experienced in
customer receivables throughout 2001, the provision for uncollectible notes
remained relatively high during 2001 and 2002. Management believes the high
provision percentage remained necessary in 2002 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
Operating, general and administrative expenses as a percentage of total revenues
increased to 18.6% for the first nine months of 2002 from 16.9% for the same
period of 2001 due to the decrease in revenues. However, operating, general and
administrative expense decreased $1.3 million to $24.9 million during the first
nine months of 2002 compared to $26.2 million for the same period of 2001 due to
a substantial reduction in corporate headcount in
16
2001. During the first nine months of 2002, the Company incurred $2.0 million of
professional fees associated with the restructuring of the Company and $1.0
million in audit fees related to completion of the 2000 audit. In the
comparative 2001 period, the Company incurred $3.1 million in professional fees
related to the restructuring of the Company.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues was 2.8%
for the nine months ended September 30, 2002 compared to 3.3% for the same
period of 2001. Overall, depreciation and amortization expense decreased $1.3
million for the first nine months of 2002, as compared to 2001, primarily due to
the write-off of $1.3 million of fixed assets previously used in the sales and
marketing functions in the first nine months of 2001 and a general reduction in
capital expenditures since 2000.
Impairment Loss of Long-Lived Assets
The Company recognized an impairment loss of long-lived assets of $5.4 million
in the first nine months of 2001, which 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
airplanes to their estimated sales prices. There was no impairment loss of
long-lived assets during 2002.
Interest Expense
Interest expense as a percentage of interest income decreased to 61.8% for the
first nine months of 2002, from 90.2% for the same period of 2001. This decrease
is primarily the result of decreased borrowings against pledged notes
receivable, a decrease in the Company's weighted average cost of borrowing to
6.4% in the first nine months of 2002 from 8.4% in the first nine months of
2001, and reduced senior subordinated notes due to the restructuring completed
in May 2002.
Income (Loss) before Benefit for Income Taxes and Extraordinary Item
Income (loss) before benefit for income taxes and extraordinary item increased
to income of $2.5 million for the first nine months of 2002, as compared to a
loss of $22.9 million for the first nine months of 2001, as a result of the
above mentioned operating results.
Benefit for Income Taxes
Benefit for income taxes as a percentage of income (loss) before benefit for
income taxes was 61.8% in the first nine months of 2002, as compared to 0.6% for
the first nine months of 2001. In the third quarter of 2002, the Company
received a $1.6 million refund due to a tax law change that allowed the Company
to recoup additional AMT paid in previous years. The effective income tax rate
for 2002 and 2001 is also the result of the 2002 and 2001 projected income tax
benefits 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
In connection with the restructuring of the Company's debt, completed in May
2002, the Company recognized an extraordinary gain of $17.9 million related to
the early extinguishment of $56.9 million of 10 1/2% senior subordinated notes.
There were no extraordinary items during the first nine months of 2001.
Net Income (Loss)
Net income (loss) increased to income of $21.9 million for the first nine months
of 2002, as compared to a loss of $22.8 million for the first nine months of
2001, as a result of the above mentioned operating results.
17
LIQUIDITY AND CAPITAL RESOURCES
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 nine months
ended September 30, 2002, the Company's operating activities reflected cash
provided by operating activities of $48.8 million. During the same period of
2001, the Company's operating activities reflected cash used in operating
activities of $29.1 million. The increase in cash provided by operating
activities was the result of a decrease in new customer notes receivable due to
a reduction in sales in 2002 and $57.2 million in proceeds from sales of notes
receivable in 2002.
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
financing with the senior lenders. At that time, management will be required to
replace or renegotiate the revolving arrangements subject to availability.
USES OF CASH. Investing activities reflect a net use of cash due to capital
additions. Net cash used in investing activities for the nine months ended
September 30, 2002 and 2001 was $1.4 million and $681,000, respectively. The
increase in net cash used in investing activities relates to an increase in
equipment purchases in 2002. The Company evaluates sites for additional new
resorts or acquisitions on an ongoing basis. Certain debt agreements include
restrictions on the Company's ability to pay dividends based on minimum levels
of net income and cash flow.
During the nine months ended September 30, 2002, net cash used in financing
activities was $49.8 million compared to net cash provided by financing
activities of $27.4 million in the same 2001 period. The decrease in cash
provided by financing activities was the result of reduced borrowings against
pledged notes receivable and increased payments on borrowings against pledged
notes receivable in 2002. At September 30, 2002, the Company's revolving credit
facilities provided for loans of up to $270.1 million of which approximately
$241.9 million of principal and interest related to advances under the credit
facilities was outstanding. For the nine months ended September 30, 2002, the
weighted average cost of funds for all borrowings, including the senior
subordinated debt, was 6.4%. 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. During 2001, the Company made no sales of notes receivable to
the SPE. During 2002, the Company sold $69.3 million of notes receivable to the
SPE and recognized pre-tax gains of $5.4 million. The SPE funded these purchases
through advances under a credit agreement arranged for this purpose. In
conjunction with this sale, the Company received cash consideration of $57.2
million, which was used to pay down borrowings under its revolving loan
facilities.
At September 30, 2002, the SPE held notes receivable totaling $96.7 million,
with related borrowings of $83.9 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.
In the fourth quarter of 2002, the Company sold $14.2 million of notes
receivable to the SPE and recognized pre-tax gains of $1.5 million. The SPE
funded these purchases through advances under a credit agreement arranged for
this
18
purpose. In conjunction with this sale, the Company received cash consideration
of $11.7 million, which was used to pay down borrowings under its revolving loan
facilities.
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 Note 2 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of and for the nine months ended September 30, 2002, 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
19
totaled $240.9 million at September 30, 2002, is variable. The impact of a
one-point interest rate change on the outstanding balance of variable-rate
financial instruments at September 30, 2002, on the Company's results of
operations for the first nine months of 2002 would be approximately $1.8
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.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of internal controls and disclosure controls and
procedures designed to provide reasonable assurance as to the reliability of its
published financial statements and other public disclosures, including the
disclosures contained in this report. The Company's board of directors,
operating through its audit committee, which is composed entirely of independent
outside directors, provides oversight to the financial reporting process.
Within the 90-day period prior to the filing of this report, an evaluation was
carried out by management of the Company, under the supervision and with the
participation of its chief executive officer and chief financial officer, of the
effectiveness of the Company's disclosure controls and procedures as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act").
Based upon that evaluation, the chief executive officer and the chief financial
officer of the Company concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in its reports filed under the Exchange Act is accumulated and
communicated to the Company's management, including its chief executive officer
and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date of management's evaluation.
The Company has previously devoted considerable attention and resources to
remediating identified weaknesses in its internal controls. In connection with
its report on the Company's financial statements for the year ended December 31,
2000, the Company's former independent auditor, Deloitte & Touche LLP,
identified to management and the audit committee of the board of directors
certain conditions in the design and operation of the Company's internal
accounting controls. Deloitte & Touche LLP concluded that such conditions,
considered collectively, constituted a material weakness in the Company's
internal controls. Such conditions included: deficiencies in the implementation
and monitoring of internal control procedures, deficiencies and processing
errors in the accounting process for notes payable, inadequate testing of
borrowing bases for compliance with loan covenants, deficiencies in the
accounting process for sales and notes receivable and in the methodology for
estimating the allowance for doubtful accounts, errors in some instances in
recordation of prepaid assets and fixed assets, and weaknesses in the design,
documentation and supervision of certain aspects of the Company's security
administration policies and procedures concerning its management information
systems. Both prior to and following the completion of the Company's debt
restructuring plan discussed in note 2 of Item 1 of this report, management of
the Company worked to remediate the conditions identified by Deloitte & Touche
LLP. Additionally, the new audit committee of the Company, which is comprised
entirely of independent directors appointed in May 2002, retained a third party
consulting firm which is a member of the SEC Practice Section of the American
Institute of Certified Public Accountants in June 2002, to fully and
independently assess the Company's internal controls, as well as the
remediation efforts of management. In August 2002, the consulting firm was
retained by the audit committee to perform on an outsourced basis the internal
audit function for the Company. In this capacity the consulting firm has
periodically provided the audit committee and management with reports
concerning the Company's remediation of conditions identified by Deloitte &
Touche LLP and the effectiveness of internal controls. During the consulting
firm's most recent evaluation of the Company's internal controls in November
2002, the consulting firm reported that no significant deficiencies came to its
attention in the design or operation of internal controls which, in its
judgment, could adversely affect the Company's ability to record, process,
summarize and report in a timely manner accurate financial data and disclosure
information, and the firm noted no material weaknesses in the design or
operation of the Company's internal controls. The Company continues to evaluate
the effectiveness of its remedial actions to address the conditions identified
by Deloitte & Touche LLP as well as the Company's overall disclosure controls
and procedures.
20
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently subject to 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 judgement 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.
In October 2001, an action was filed against the Company in state district court
in Texas by plaintiffs who purported to represent a class of individuals who
purchased Vacation Intervals from the Company. The plaintiffs alleged 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 claimed 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 alleged actual class damages of $34.5 million plus consequential
damages of an unspecified amount, as well as all attorneys' fees, expenses, and
costs. Subsequent to the initial filing, the alleged claims and theories of
recovery were amended on various occasions by the plaintiffs. After a class
certification hearing before the court concluded on November 14, 2002, the court
denied the plaintiffs' motion for class certification. The Company intends to
vigorously defend against any appeal of the court's denial of class
certification, and the remaining claims of the individual plaintiffs and
believes it has several defenses. The Company has not recorded an accrual for
this case.
In February 2002, a class action was filed against the Company in state district
court in Texas 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 an accrual for this case.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 2, 2002, the Indenture (the "Old Indenture") for the Company's 10 1/2%
Senior Subordinated Notes due 2008 (the "Old Notes") was amended and restated
with the consent of the holders of approximately 85.36% of the outstanding
principal balance of the Old Notes. These consensual amendments to the Old
Indenture eliminated substantially all of the restrictive covenants and modified
certain other provisions of the Old Indenture, including an amendment to permit
the Exchange Notes to rank senior in right of payment to the Old Notes. The
holders of the Old Notes also (i) consented to a rescission of the notice of
acceleration of the maturity date of the Old Notes that occurred on May 22, 2001
and (ii) waived all events of default that had occurred under the Old Indenture
prior to May 2, 2002.
On May 2, 2002, the Company issued $28,467,000 of its 6% Senior Subordinated
Notes due 2007 ("Exchange Notes") and 23,937,489 shares of its common stock
("Exchange Shares") to holders of the Old Notes who tendered their Old Notes
pursuant to the Exchange Offer dated March 15, 2002. The Exchange Notes and the
Exchange Shares were issued by the Company in a transaction exclusively with
existing security holders in accordance with the terms of the exemption from
registration afforded by Section 3(a)(9) of the Securities Act of 1933, as
amended. The Exchange Notes are senior in right of payment to the Old Notes.
For additional information about the effect of the Exchange Offer on the rights
of holders of the Old Notes, see Part I, Item 1--Notes to Consolidated Condensed
Financial Statements (Unaudited) at Note 2--Debt Restructuring beginning on page
6.
21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 1, 2001, the Company was unable to make the regularly scheduled
interest payment on its 10 1/2% Senior Subordinated Notes due 2008 (the "Old
Notes"). The Company's payment default on the Old Notes was a direct result of
covenant 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 trustee for the Old Notes (the "Old Indenture
Trustee") advising that the payment due April 1, 2001 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, 2001 interest payment default
within 30 days. 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.
On May 2, 2002, the Company completed an exchange offer (the "Exchange Offer")
commenced on March 15, 2002 regarding the Old Notes. A total of $56,934,000 in
principal amount of the Company's Old Notes (representing 85.36% of all Old
Notes outstanding) 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 a
further 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 remained
outstanding at September 30, 2002.
As a condition of the Exchange Offer, the Company paid all past due interest to
non-tendering holders of its Old Notes on May 2, 2002. 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 effective as of May 2, 2002. 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 effective as of May 2, 2002 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. At September 30, 2002, there were 36,826,906 shares
of common stock outstanding.
As a condition 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 one of its unconsolidated subsidiaries.
Finalization of the Exchange Offer and the amendment of its principal credit
facilities effective as of May 2, 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 holders of the Company's Old Notes
consented to a waiver by the Old Indenture Trustee of all events of default that
existed under the Old Notes or the Old Indenture on or before May 2, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 -- Ninth Amendment to Management Agreement
dated September 27, 2002, between the
Company and Silverleaf Club.
*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.
- ----------
* Filed herewith
22
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 10-Q
for the quarter ending September 30, 2002: None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 25, 2002 By: /s/ ROBERT E. MEAD
----------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: November 25, 2002 By: /s/ HARRY J. WHITE, JR.
----------------------
Harry J. White, Jr.
Chief Financial Officer
23
CERTIFICATION
I, Robert E. Mead, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Silverleaf
Resorts, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report are conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 25, 2002 /s/ ROBERT E. MEAD
------------------------------------
Robert E. Mead
Chairman and Chief Executive Officer
24
CERTIFICATION
I, Harry J. White, Jr., Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Silverleaf
Resorts, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report are conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 25, 2002 /s/ HARRY J. WHITE, JR.
-----------------------------------
Harry J. White, Jr.
Chief Financial Officer
25
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Ninth Amendment to Management Agreement dated September 27,
2002 between the Company and Silverleaf Club.
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>