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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 001-13003
SILVERLEAF RESORTS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2259890
(State 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 13, 2002: 36,826,906
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EXPLANATORY NOTE
On November 19, 2002, the Company simultaneously filed the following delinquent
and/or amended reports with the Securities and Exchange Commission: (i) Forms
10-Q for the quarterly periods ended June 30, 2002 and March 31, 2002; (ii)
Forms 10-K for the years ended December 31, 2001 and December 31, 2000; (iii)
Forms 10-Q for the quarterly periods ended September 30, 2001, June 30, 2001,
and March 31, 2001; and (iv) Forms 10-Q/A for the quarterly periods ended
September 30, 2000, June 30, 2000, and March 31, 2000. The disclosures contained
in this Form 10-Q for the quarter ended September 30, 2001 should be read in
conjunction with the other SEC reports described above also filed on
November 19, 2002.
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 28 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000. 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.
1
SILVERLEAF RESORTS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed Consolidated Statements of Income for the three months
and nine months ended September 30, 2001 and 2000................... 3
Condensed Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000............................................... 4
Condensed Consolidated Statement of Shareholders' Equity for the
nine months ended September 30, 2001................................ 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000............................ 6
Notes to the Condensed Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 3. Defaults Upon senior Securities..................................... 21
Item 6. Exhibits and Reports on Form 8-K.................................... 21
Signatures.......................................................... 21
2
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)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES:
Vacation Interval sales $ 31,338 $ 67,585 $ 117,470 $ 181,421
Sampler sales 950 994 2,888 2,537
------------ ------------ ------------ ------------
Total sales 32,288 68,579 120,358 183,958
Interest income 10,616 10,469 30,762 28,635
Management fee income 159 150 393 697
Other income 1,276 1,836 3,264 4,020
------------ ------------ ------------ ------------
Total revenues 44,339 81,034 154,777 217,310
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 6,549 11,282 22,964 31,385
Sales and marketing 15,955 32,577 64,675 94,960
Provision for uncollectible notes 6,816 39,597 25,551 60,128
Operating, general and administrative 8,782 8,766 26,224 25,894
Depreciation and amortization 1,607 1,925 5,132 5,624
Interest expense and lender fees 8,620 8,939 27,733 23,037
Impairment loss of long-lived assets 2,559 -- 5,443 --
------------ ------------ ------------ ------------
Total costs and operating expenses 50,888 103,086 177,722 241,028
Loss before benefit for income taxes
and extraordinary item (6,549) (22,052) (22,945) (23,718)
Benefit for income taxes 50 8,164 149 8,788
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (6,499) (13,888) (22,796) (14,930)
Extraordinary gain on extinguishment of
debt (net of income taxes of $197) -- -- -- 316
------------ ------------ ------------ ------------
NET LOSS $ (6,499) $ (13,888) $ (22,796) $ (14,614)
============ ============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Loss before extraordinary item $ (0.50) $ (1.08) $ (1.77) $ (1.16)
Extraordinary item -- -- -- 0.02
------------ ------------ ------------ ------------
Net loss $ (0.50) $ (1.08) $ (1.77) $ (1.14)
============ ============ ============ ============
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING: 12,889,417 12,889,417 12,889,417 12,889,417
============ ============ ============ ============
See notes to condensed consolidated financial statements.
3
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
ASSETS 2001 2000
----------- -----------
Cash and cash equivalents $ 4,438 $ 6,800
Restricted cash 3,836 1,660
Notes receivable, net of allowance for uncollectible notes of
$65,840 and $74,778, respectively 283,070 263,792
Accrued interest receivable 2,688 2,194
Investment in Special Purpose Entity 4,573 5,280
Amounts due from affiliates 806 671
Inventories 102,443 105,023
Land, equipment, buildings, and utilities, net 41,020 49,230
Income taxes receivable 5,005 12,511
Land held for sale 5,256 5,256
Prepaid and other assets 12,143 15,197
----------- -----------
TOTAL ASSETS $ 465,278 $ 467,614
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 8,826 $ 15,952
Accrued interest payable 8,712 3,269
Amounts due to affiliates 934 3,285
Unearned revenues 6,543 9,507
Deferred income taxes, net 19 168
Notes payable and capital lease obligations 298,204 270,597
Senior subordinated notes 66,700 66,700
----------- -----------
Total Liabilities 389,938 369,478
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 13,311,517 shares issued, and
12,889,417 shares outstanding 133 133
Additional paid-in capital 109,339 109,339
Retained deficit (29,133) (6,337)
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
----------- -----------
Total Shareholders' Equity 75,340 98,136
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 465,278 $ 467,614
=========== ===========
See notes to condensed consolidated financial statements.
4
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)
Common Stock
-------------------------
Number of $0.01 Additional Treasury Stock
Shares Par Paid-in Retained ------------------------
Issued Value Capital Deficit Shares Cost Total
---------- ---------- ---------- ---------- -------- ---------- ----------
January 1, 2001 13,311,517 $ 133 $ 109,339 $ (6,337) (422,100) $ (4,999) $ 98,136
Net loss -- -- -- (22,796) -- -- (22,796)
---------- ---------- ---------- ---------- -------- ---------- ----------
September 30, 2001 13,311,517 $ 133 $ 109,339 $ (29,133) (422,100) $ (4,999) $ 75,340
========== ========== ========== ========== ======== ========== ==========
See notes to condensed consolidated financial statements.
5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (22,796) $ (14,614)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for uncollectible notes 25,551 60,128
Depreciation and amortization 5,132 5,624
Gain on sale of investment -- (317)
Deferred income taxes (149) (8,633)
Extraordinary gain on extinguishment of debt before taxes -- (513)
Impairment loss of long-lived assets 5,443 --
Increase (decrease) in cash from changes in assets and liabilities:
Restricted cash (2,176) (275)
Notes receivable (46,660) (125,440)
Accrued interest receivable (494) (721)
Investment in Special Purpose Entity 707 --
Amounts due from affiliates (2,486) (4,302)
Inventories 4,275 (9,359)
Land held for sale -- 456
Prepaid and other assets 1,677 (1,855)
Income tax receivable 7,506 (3,404)
Accounts payable and accrued expenses (7,126) 1,608
Accrued interest payable 5,443 2,655
Unearned revenues (2,964) 3,669
Income taxes payable -- (185)
----------- -----------
Net cash used in operating activities (29,117) (95,478)
----------- -----------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (681) (1,688)
----------- -----------
Net cash used in investing activities (681) (1,688)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 82,793 142,951
Payments on borrowings to unaffiliated entities (55,357) (43,003)
----------- -----------
Net cash provided by financing activities 27,436 99,948
----------- -----------
Net change in cash and cash equivalents (2,362) 2,782
CASH AND CASH EQUIVALENTS:
Beginning of period 6,800 4,814
----------- -----------
End of period $ 4,438 $ 7,596
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 17,882 $ 20,432
Income taxes paid (refunds received) $ (7,506) $ 3,630
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Land and equipment acquired under capital leases $ 171 $ 4,188
See notes to consolidated condensed financial statements.
6
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, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2001.
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, 2000 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 2001 did not
have a material impact on the Company's results of operations, financial
position, or cash flows.
SFAS No. 144 - In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 was
effective for the Company for the quarter ending March 31, 2002. The adoption of
SFAS No. 144 in 2002 did not have a material impact on the Company's results of
operations, financial position, or cash flows.
SFAS No. 145 - In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS No. 145 eliminates an inconsistency in lease accounting by
requiring that modifications of capital leases that result in reclassification
as operating leases be accounted for consistent with sale-leaseback accounting
rules. SFAS No. 145 also contains other non-substantive corrections to
authoritative accounting literature. The changes related to debt extinguishment
will be effective for fiscal years beginning after May 15, 2002, and the changes
related to lease accounting will be
7
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 consentually 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 minimum net income. However, such results cannot be
assured.
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
8
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 improvements to the
Company's operations described above be achieved. 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.
NOTE 3 - EARNINGS PER SHARE
For the three and nine month periods ended September 30, 2001, and September 30,
2000, the weighted average shares outstanding assuming dilution was
anti-dilutive. Outstanding stock options totaling approximately 1,249,500
options were potentially dilutive securities that were not included in the
computation of diluted EPS because to do so would have been anti-dilutive for
the three and nine month periods ended September 30, 2001.
9
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, 2001 was approximately 13.6%.
In connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$4.1 million and $1.8 million at September 30, 2000 and 2001, 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, 2001, $10.8 million of
notes receivable, net of accounts charged off, were considered delinquent. An
additional $52.9 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, 2000 and 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Balance, beginning of period ........................ $ 80,036 $ 47,646 $ 74,778 $ 32,023
Provision for credit losses ......................... 6,816 39,597 25,551 60,128
Provision for customer releases charged to operating,
general,
And administrative expenses ....................... -- 309 -- 874
Receivables charged off ............................. (21,012) (17,220) (34,489) (22,693)
-------- -------- -------- --------
Balance, end of period .............................. $ 65,840 $ 70,332 $ 65,840 $ 70,332
======== ======== ======== ========
NOTE 5 - DEBT
Notes payable, capital lease obligations, and senior subordinated notes as of
September 30, 2001 and December 31, 2000 (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
$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) ............................................ $ 17,677 $ 23,049
$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 September 30, 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
September 30, 2001; additional draws are no longer available under this
facility) ........................................................................ 38,408 41,319
$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 September 30, 2001) ............................................... 9,682 --
$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
September 30, 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) .......................... 70,300 57,133
$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 September
30, 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) ........................................ 69,573 74,101
$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 September 30, 2001;
upon completion of the debt restructuring described in Note 2, the revolving
10
loan agreement was amended to form a $8.1 million revolver with an interest
rate of Prime plus 3% with a 6% floor and a $2.1 million term loan with an
interest rate of 8%; both facilities mature March 2007)........................... 10,087 --
$45 million revolving loan agreement ($55 million as of September 30, 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 September 30, 2001) (revolving under forbearance at September 30,
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)................................... 51,854 41,817
$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 September
30, 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 September
30, 2001) ........................................................................ 9,375 8,175
Various notes, due from January 2002 through November 2009, collateralized
by various assets with interest rates ranging from 0.9% to 17.0% ............... 3,898 4,044
-------- --------
Total notes payable ....................................................... 290,790 259,574
Capital lease obligations ........................................................... 7,414 11,023
-------- --------
Total notes payable and capital lease obligations ......................... 298,204 270,597
10 1/2% senior subordinated notes, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Company's present and future
domestic restricted subsidiaries (in default at
September 30, 2001; see debt restructuring described in Note 2) .................. 66,700 66,700
-------- --------
Total ..................................................................... $364,904 $337,297
======== ========
At September 30, 2001, LIBOR rates were from 2.60% to 2.64%, and the Prime rate
was 6.00%. At December 31, 2000, LIBOR rates were from 6.40% to 6.56%, and the
Prime rate was 9.50%.
As of September 30, 2001, the Company was unable to make payments on accelerated
balances due under the senior subordinated notes. The total interest due on
these notes as of September 30, 2001, was $7.4 million.
NOTE 6 - SUBSIDIARY GUARANTEES
As of September 30, 2001, all subsidiaries of the Company have guaranteed the
$66.7 million of senior subordinated notes. The separate financial statements
and other disclosures concerning each guaranteeing subsidiary (each, a
"Guarantor Subsidiary") are not presented herein because 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.
Combined summarized operating results of the Guarantor Subsidiaries for the nine
months ended September 30, 2001 and 2000, are as follows (in thousands):
September 30,
-------------------------------------
2001 2000
--------- ---------
Revenues $ -- $ --
Expenses -- --
--------- ---------
Net loss $ -- $ --
========= =========
11
Combined summarized balance sheet information as of September 30, 2001 for the
Guarantor Subsidiaries is as follows (in thousands):
September 30,
2001
---------
Other assets $ 10
---------
Total assets $ 10
=========
Investment by parent (includes equity
and amounts due to parent) $ 10
---------
Total liabilities and equity $ 10
=========
NOTE 7 - RELATED PARTIES
In the third quarter of 2001, Silverleaf Club entered into a loan agreement for
$1.8 million, whereby the Company guaranteed such debt with certain of its
assets.
NOTE 8 - SUBSEQUENT EVENTS
In October 2001, a class action was filed against the Company by plaintiffs who
purchased Vacation Intervals from the Company. The plaintiffs allege that the
Company failed to deliver them complete copies of the contracts for the purchase
of Vacation Intervals as they did not receive a complete legal description of
the resort. The plaintiffs further claim that the Company violated various
provisions of the Texas Deceptive Trade Practices Act with respect to
maintenance fees charged by the Company to its Vacation Interval owners. The
petition alleges actual damages of $34.5 million plus consequential damages of
an unspecified amount, as well as all attorneys' fees, expenses, and costs. The
Company intends to vigorously defend against the claims and believes it has
several defenses. The Company has not yet fully assessed the claims and has not
recorded an accrual for this case.
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.
During 2002, the Company sold $69.3 million of notes receivable to the SPE and
recognized pre-tax gains of $5.3 million. The SPE funded these purchases through
advances under a credit agreement arranged for this purpose. In conjunction with
these sales, the Company received cash consideration of $57.2 million, which was
used to pay down borrowings under its revolving loan facilities.
In May 2002, the Company completed the restructuring of its debt as described in
Note 2.
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, 2000.
The Company currently owns and/or manages 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 120,000.
The condensed
12
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.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
----- ----- ----- -----
As a percentage of total revenues:
Vacation Interval sales 70.7% 83.4% 75.9% 83.5%
Sampler sales 2.1% 1.2% 1.9% 1.2%
----- ----- ----- -----
Total sales 72.8% 84.6% 77.8% 84.7%
Interest income 23.9% 12.9% 19.9% 13.2%
Management fee income 0.4% 0.2% 0.2% 0.3%
Other income 2.9% 2.3% 2.1% 1.8%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 20.9% 16.7% 19.5% 17.3%
Provision for uncollectible notes 21.7% 58.6% 21.8% 33.1%
As a percentage of total sales:
Sales and marketing 49.4% 47.5% 53.7% 51.6%
As a percentage of total revenues:
Operating, general and administrative 19.8% 10.8% 16.9% 11.9%
Depreciation and amortization 3.6% 2.4% 3.3% 2.6%
As a percentage of interest income:
Interest expense and lender fees 81.2% 85.4% 90.2% 80.5%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
Revenues for the quarter ended September 30, 2001 were $44.3 million,
representing a $36.7 million or 45.3% decrease over revenues of $81.0 million
for the quarter ended September 30, 2000. In February 2001, the Company failed
to secure a new credit facility with its largest secured creditor, which created
significant liquidity concerns. In addition, the Company's three primary secured
lenders have only provided the Company sufficient 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 52.7% to 2,251 in the third quarter of 2001 from
4,764 in the same period of 2000; and the average price per interval remained
fairly constant at $9,784 versus $9,750 in the same period of 2000. Total
interval sales for the third quarter of 2001 included 683 biennial intervals
(counted as 342 Vacation Intervals) compared to 1,723 (862 Vacation Intervals)
in the third quarter of 2000. During the third quarter of 2001, 2,135 in-house
Vacation Intervals were sold at an average price of $4,363, compared to 4,406
in-house Vacation Intervals sold at an average price of $4,797 during the
comparable 2000 period.
Sampler sales decreased $44,000 to $950,000 for the quarter ended September 30,
2001, compared to $994,000 for the same period in 2000. Consistent with the
overall decrease in Company operations, fewer samplers were sold in 2001
compared to 2000. However, sampler sales are not recognized as revenue until the
Company's obligation has
13
elapsed, which often does not occur until the sampler contract expires eighteen
months after the sale is consummated. Hence, a significant portion of sampler
sales recognized in 2001 relate to 2000 sales.
Interest income increased 1.4% to $10.6 million for the quarter ended September
30, 2001, from $10.5 million for the same period of 2000. This increase
primarily resulted from an increase in notes receivable, net of allowance for
doubtful notes, as of September 30, 2001 as compared to September 30, 2000.
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 remained fairly constant at $159,000 for the third quarter
of 2001, versus $150,000 for the third quarter of 2000.
Other income consists of water and utilities income, condominium rental income,
marina income, golf course and pro shop income, and other miscellaneous items.
Other income decreased $560,000 to $1.3 million for the third quarter of 2001
compared to $1.8 million for the same period of 2000. The decrease primarily
relates to a $317,000 gain associated with the sale of land recognized in the
third quarter of 2000 and to the discontinuance of condominium rentals.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 20.9% in
the third quarter of 2001, from 16.7% for the same period of 2000. As a result
of the previously mentioned liquidity concerns, the Company was required to (i)
drastically reduce its future plan for Vacation Interval sales at its existing
resorts, (ii) abandon plans to develop two resorts already in predevelopment
status, (iii) place one resort in predevelopment status on hold, and (iv)
abandon plans to sell at the Crown resorts. These changes substantially reduced
the Company's future planned Vacation Interval sales. Due to the reduced future
sales plan, the Company allocates its resort amenities and land to cost of sales
at a higher rate in 2001 compared to 2000.
Also, as the Company continues to deplete its inventory of low-cost Vacation
Intervals, acquired primarily in 1995 and 1996, the Company's sales mix has
shifted to more recently constructed units, which were built at a higher average
cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation
Interval sales has increased compared to 2000.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 49.4% for
the quarter ended September 30, 2001, from 47.5% for the same period of 2000. As
a result of the aforementioned liquidity issues, the Company made several
changes during 2001, including the closure of three outside sales offices,
closing three telemarketing centers, discontinuing certain lead generation
programs, and reducing headcount in both sales and marketing functions. Despite
these cost saving measures, sales and marketing costs as a percentage of total
sales increased due to the substantial decrease in sales and $249,000 of
nonrecurring transition costs associated with these changes.
Since the third quarter of 2001, the Company has been operating under new sales
practices whereby no sales are permitted unless the touring customer has a
minimum income level beyond that previously required and has a valid major
credit card. Further, the marketing division is employing a best practices
program, which should facilitate marketing to customers who management believes
are more likely to be a good credit risk.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
decreased to 21.7% for the third quarter of 2001, compared to 58.6% for the
third quarter of 2000. This decrease is primarily attributable to the
deterioration of the economy that came to public awareness in late 2000 and the
Company's decision to substantially reduce two programs in 2000 that had
previously been used to remedy defaulted notes receivable. The assumptions
program, which had been used by the Company since December 1997 to allow
delinquent loans to be assumed by other customers, was virtually eliminated due
to its high cost of operation. The downgrade program, which was implemented in
April 2000 to supplement the assumptions program, allows delinquent customers to
downgrade to a more affordable product. In late 2000, the downgrade program was
reduced as it became apparent that this program
14
did not significantly reduce delinquencies. As a result of these changes, the
Company recognized additional reserves in 2000.
Due to the high level of defaults experienced in customer receivables throughout
2001, the provision for uncollectible notes remained relatively high during
2001. Management believes the high provision percentage remained necessary in
2001 because of continuing economic concerns and customers concerned about the
Company's liquidity issues began defaulting on their notes after the Company's
liquidity announcement in February 2001. Management will continue its current
collection programs and seek new programs to reduce note defaults. However,
there can be no assurance that these efforts will be successful.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
increased to 19.8% for the third quarter of 2001, from 10.8% for the same period
of 2000. Although the Company substantially reduced its corporate headcount in
2001 to align overhead with the reduced sales levels, operating, general and
administrative expense remained constant at $8.8 million for the third quarter
of 2001, as compared to 2000, primarily due to $1.4 million of professional fees
incurred in 2001 associated with the restructuring of the Company.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 3.6% for the quarter ended September 30, 2001, compared to 2.4% for
the quarter ended September 30, 2000. Overall, depreciation and amortization
expense decreased $318,000 for the third quarter of 2001, as compared to 2000,
primarily due to the write-off of $1.3 million of fixed assets previously used
in the sales and marketing functions in the first quarter of 2001 and a general
reduction in capital expenditures in 2001.
Impairment Loss of Long-Lived Assets
The Company recognized an impairment loss of long-lived assets of $2.6 million
in the third quarter of 2001, which primarily consisted of a $2.3 million
impairment to write-down both corporate planes to their estimated sales prices
and a $230,000 loss related to the re-negotiation and transfer of a capital
lease to Silverleaf Club.
Interest Expense
Interest expense as a percentage of interest income decreased to 81.2% for the
third quarter of 2001, from 85.4% for the same period of 2000. This decrease is
primarily the result of decreased interest expense related to decreased
borrowings against pledged notes receivable. Also, the Company's weighted
average cost of borrowing decreased to 7.6% in the third quarter of 2001
compared to 9.7% in the third quarter of 2000.
Loss before Benefit for Income Taxes and Extraordinary Item
Loss before benefit for income taxes and extraordinary item decreased to $6.5
million for the quarter ended September 30, 2001, as compared to $22.1 million
for the quarter ended September 30, 2000, as a result of the above mentioned
operating results.
Benefit for Income Taxes
Benefit for income taxes as a percentage of loss before benefit for income taxes
and extraordinary item was 0.8% in the third quarter of 2001, as compared to
37.0% for the third quarter of 2000. The decrease in the effective income tax
rate is the result of the 2001 projected income tax benefit being reduced by the
effect of a valuation allowance, which reduces the projected net deferred tax
assets to zero due to the unpredictability of recovery.
15
Net Loss
Net loss decreased to $6.5 million for the quarter ended September 30, 2001, as
compared to $13.9 million for the quarter ended September 30, 2000, as a result
of the above mentioned operating results.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
Revenues for the nine months ended September 30, 2001 were $154.8 million,
representing a $62.5 million or 28.8% decrease from revenues of $217.3 million
for the nine months ended September 30, 2000. In February 2001, the Company
failed to secure a new credit facility with its largest secured creditor, which
created significant liquidity concerns. In addition, the Company's three primary
secured lenders have only provided the Company sufficient short-term secured
financing to sell at rates substantially reduced from 1999 and 2000 sales
levels.
As a result, Vacation Interval sales decreased $64.0 million to $117.5 million,
down from $181.4 million in 2000. In the first nine months of 2001, the number
of Vacation Intervals sold, exclusive of in-house Vacation Intervals, decreased
34.4% to 8,253 from 12,588 in the same period of 2000; and the average price per
interval remained fairly unchanged at $9,721 versus $9,799 in the same period of
2000. Total interval sales for the nine months ended September 30, 2001 included
2,608 biennial intervals (counted as 1,304 Vacation Intervals) compared to 5,157
(2,579 Vacation Intervals) in the nine months ended September 30, 2000. During
the first nine months of 2001, 8,844 in-house Vacation Intervals were sold at an
average price of $4,211, compared to 12,112 in-house Vacation Intervals sold at
an average price of $4,794 during the comparable 2000 period.
Sampler sales increased to $2.9 million for the nine months ended September 30,
2001, compared to $2.5 million for the same period in 2000. Consistent with the
overall decrease in Company operations, fewer samplers were sold in 2001
compared to 2000. However, sampler sales are not recognized as revenue until the
Company's obligation has elapsed, which often does not occur until the sampler
contract expires eighteen months after the sale is consummated. Hence, a
significant portion of sampler sales recognized in 2001 relate to 2000 sales.
Interest income increased 7.4% to $30.8 million for the nine months ended
September 30, 2001, from $28.6 million for the same period of 2000. This
increase primarily resulted from an increase in notes receivable, net of
allowance for doubtful notes, during the nine months ended September 30, 2001 as
compared to the nine months ended September 30, 2000.
Management fee income, which consists of management fees collected from the
resorts' management clubs, cannot exceed the management clubs' net income.
Management fee income decreased $304,000 for the nine months ended September 30,
2001, as compared to the same period of 2000, due to increased operating
expenses at the management clubs.
Other income consists of water and utilities income, condominium rental income,
marina income, golf course and pro shop income, and other miscellaneous items.
Other income decreased $756,000 to $3.3 million for the nine months ended
September 30, 2001, compared to $4.0 million for the same period of 2000. The
decrease relates to a $317,000 gain associated with the sale of land recognized
in the third quarter of 2000 and to the discontinuance of condominium rentals.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales increased to 19.5% in
the nine months ended September 30, 2001, versus 17.3% for the same period of
2000. As a result of the previously mentioned liquidity concerns, the Company
was required to (i) drastically reduce its future plan for Vacation Interval
sales at its existing resorts, (ii) abandon plans to develop two resorts already
in predevelopment status, (iii) place one resort in predevelopment status on
hold, and (iv) abandon plans to sell at the Crown resorts. These changes
substantially reduced the Company's future planned Vacation Interval sales. Due
to the reduced future sales plan, the Company allocates its resort amenities and
land to cost of sales at a higher rate in 2001 compared to 2000.
16
Also, as the Company continues to deplete its inventory of low-cost Vacation
Intervals, acquired primarily in 1995 and 1996, the Company's sales mix has
shifted to more recently constructed units, which were built at a higher average
cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation
Interval sales has increased compared to 2000.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 53.7% for
the nine months ended September 30, 2001, from 51.6% for the same period of
2000. As a result of the aforementioned liquidity issues, the Company made
several changes during 2001, including the closure of three outside sales
offices, closing three telemarketing centers, discontinuing certain lead
generation programs, and reducing headcount in both sales and marketing
functions. Despite these cost saving measures, sales and marketing costs as a
percentage of total sales increased due to the substantial decrease in sales and
$1.8 million of nonrecurring transition costs associated with these changes.
Since the third quarter of 2001, the Company has been operating under new sales
practices whereby no sales are permitted unless the touring customer has a
minimum income level beyond that previously required and has a valid major
credit card. Further, the marketing division is employing a best practices
program, which should facilitate marketing to customers who management believes
are more likely to be a good credit risk.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
decreased to 21.8% for the nine months ended September 30, 2001, compared to
33.1% for the same period of 2000. This decrease is primarily attributable to
the deterioration of the economy that came to public awareness in late 2000 and
the Company's decision to substantially reduce two programs in 2000 that had
previously been used to remedy defaulted notes receivable. The assumptions
program, which had been used by the Company since December 1997 to allow
delinquent loans to be assumed by other customers, was virtually eliminated due
to its high cost of operation. The downgrade program, which was implemented in
April 2000 to supplement the assumptions program, allows delinquent customers to
downgrade to a more affordable product. In late 2000, the downgrade program was
reduced as it became apparent that this program did not significantly reduce
delinquencies. As a result of these changes, the Company recognized additional
reserves in 2000.
Due to the high level of defaults experienced in customer receivables throughout
2001, the provision for uncollectible notes remained relatively high during
2001. Management believes the high provision percentage remained necessary in
2001 because of continuing economic concerns and customers concerned about the
Company's liquidity issues began defaulting on their notes after the Company's
liquidity announcement in February 2001. Management will continue its current
collection programs and seek new programs to reduce note defaults. However,
there can be no assurance that these efforts will be successful.
Operating, General and Administrative
Operating, general and administrative expenses as a percentage of total revenues
increased to 16.9% for the nine months ended September 30, 2001, from 11.9%
during the nine months ended September 30, 2000. Although the Company
substantially reduced its corporate headcount in 2001 to align overhead with the
reduced sales levels, operating, general and administrative expense increased
$330,000 for the first nine months of 2001, as compared to 2000, primarily due
to $3.1 million of professional fees incurred in 2001 associated with the
restructuring of the Company.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues
increased to 3.3% for the nine months ended September 30, 2001, compared to 2.6%
for the nine months ended September 30, 2000, due to the decrease in revenues.
Overall, depreciation and amortization expense decreased $492,000 for the nine
months ended September 30, 2001, as compared to 2000, primarily due to the
write-off of $1.3 million of fixed assets previously used in the sales and
marketing functions in the first quarter of 2001 and a general reduction in
capital expenditures in 2001.
17
Impairment Loss of Long-Lived Assets
The Company recognized an impairment loss of long-lived assets of $5.4 million
in 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 planes to their estimated sales
prices.
Interest Expense
Interest expense as a percentage of interest income increased to 90.2% for the
nine months ended September 30, 2001, from 80.5% for the same period of 2000.
This increase is primarily the result of $3.1 million of costs incurred in 2001
related to restructuring the Company's debt, partially offset by a decrease in
the Company's weighted average cost of borrowing to 8.4% in the first nine
months of 2001 compared to 9.6% in the first nine months of 2000.
Loss before Benefit for Income Taxes and Extraordinary Item
Loss before benefit for income taxes and extraordinary item was a loss of $22.9
million for the nine months ended September 30, 2001, as compared to a loss of
$23.7 million for the nine months ended September 30, 2000, as a result of the
aforementioned operating results.
Benefit for Income Taxes
Benefit for income taxes as a percentage of loss before benefit for income taxes
and extraordinary item was 0.6% for the first nine months of 2001, as compared
to 37.1% for the same period of 2000. The decrease in the effective income tax
rate is the result of the 2001 projected income tax benefit being reduced by the
effect of a valuation allowance, which reduces the projected net deferred tax
assets to zero due to the unpredictability of recovery.
Extraordinary Item
There were no extraordinary items during the first nine months of 2001. The
Company recognized an extraordinary gain of $316,000, net of income taxes of
$198,000, related to the early extinguishment of $1.0 million of 10 1/2% senior
subordinated notes in the first nine months of 2000.
Net Loss
Net loss was $22.8 million for the nine months ended September 30, 2001, as
compared to $14.6 million for the nine months ended September 30, 2000, as a
result of the aforementioned operating results.
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, 2001 and September 30, 2000, the Company's operating
activities reflected cash used in operating activities of $29.1 million and
$95.5 million, respectively. The decrease in cash used in operating activities
was the result of a decrease in new customer notes receivable due to a reduction
in sales in 2001, a decrease in construction of inventory in 2001, and income
tax refunds of $7.5 million in 2001.
18
During the nine months ended September 30, 2001 and September 30, 2000, net cash
provided by financing activities was $27.4 million and $99.9 million,
respectively. The decrease in cash provided by financing activities was
primarily the result of reduced borrowings against pledged notes receivable in
2001. At September 30, 2001, the Company's revolving credit facilities provided
for loans of up to $294.3 million of which approximately $288.3 million of
principal and interest related to advances under the credit facilities was
outstanding. For the nine months ended September 30, 2001, the weighted average
cost of funds for all borrowings, including the senior subordinated debt, was
8.4%. 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 2000, the Company sold $74 million of notes receivable
to the SPE and recognized pre-tax gains of $4.3 million. The SPE funded these
purchases through advances under a credit agreement arranged for this purpose.
In conjunction with these sales, the Company received cash consideration of
$62.9 million, which was used to pay down borrowings under its revolving loan
facilities. During 2001, the Company made no sales of notes receivable to the
SPE.
At September 30, 2001, the SPE held notes receivable totaling $55.4 million,
with related borrowings of $47.7 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.
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
19
(i.e., the highest of the adjusted Federal long-term rates in effect for any
month in the three-calendar-month period ending with the calendar month in which
the change date occurs). This annual limitation may be increased for any
recognized built-in gain to the extent allowed in Section 382(h) of the Code.
The ownership change may also limit the use of the Company's minimum tax credit,
described above, as provided in Section 383 of the Code.
Given its current economic condition, the Company's access to capital and other
financial markets is anticipated to be limited. However, to finance the
Company's growth, development, and any future expansion plans, the Company may
at some time be required to consider the issuance of other debt, equity, or
collateralized mortgage-backed securities, the proceeds of which would be used
to finance future acquisitions, refinance debt, finance mortgage receivables, or
for other purposes. Any debt incurred or issued by the Company may be secured or
unsecured, have fixed or variable rate interest, and may be subject to such
terms as management deems prudent.
USES OF CASH. Investing activities reflect a net use of cash due to capital
additions. Net cash used in investing activities for the nine months ended
September 30, 2000 and September 30, 2001 was $1.7 million and $681,000,
respectively. The decrease in net cash used in investing activities relates to a
reduction in equipment purchases in 2001. 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.
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, 2001, the Company had no
significant derivative financial instruments or foreign operations. Interest on
the Company's notes receivable portfolio, senior subordinated debt, capital
leases, and miscellaneous notes is fixed, whereas interest on the Company's
primary loan agreements, which totaled $287 million at September 30, 2001, is
variable. The impact of a one-point interest rate change on the outstanding
balance of variable-rate financial instruments at September 30, 2001, on the
Company's results of operations for the nine months ended September 30, 2001
would be approximately $2.2 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.
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, a class action was filed against the Company by plaintiffs who
purchased Vacation Intervals from the Company. The plaintiffs allege that the
Company failed to deliver them complete copies of the contracts for the purchase
of Vacation Intervals as they did not receive a complete legal description of
the resort. The plaintiffs further claim that the Company violated various
provisions of the Texas Deceptive Trade Practices Act with respect to
maintenance fees charged by the Company to its Vacation Interval owners. The
petition alleges actual damages of $34.5 million plus consequential damages of
an unspecified amount, as well as all attorneys' fees, expenses, and costs. The
Company intends to vigorously defend against the claims and believes it has
several defenses. The Company has not yet fully assessed the claims and has not
recorded an accrual for this case.
20
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.
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. At September 30,
2001, the Company was still unable to make any payments on the accelerated
balances due under the Old Notes due to the payment blockage notice. The total
interest arrearage on the $66.7 million in outstanding principal amount of the
Old Notes was approximately $7.4 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
99.1 Certification of CEO pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
99.2 Certification of CFO pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K with the
SEC for the quarter ended September 30, 2001:
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 19, 2002 By: /s/ ROBERT E. MEAD
------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: November 19, 2002 By: /s/ HARRY J. WHITE, JR.
-----------------------
Harry J. White, Jr
Chief Financial Officer
21
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.
Date: November 19, 2002 /S/ ROBERT E. MEAD
------------------------------------
Robert E. Mead
Chairman and Chief Executive Officer
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.
Date: November 19, 2002 /S/ HARRY J. WHITE, JR.
-----------------------
Harry J. White, Jr.
Chief Financial Officer
22
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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