SILVERLEAF RESORTS INC - 10-Q Quarterly Report

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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 June 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 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 June 30, 2002 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.

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SILVERLEAF RESORTS, INC.

INDEX

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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)

See notes to condensed consolidated financial statements.

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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)

See notes to condensed consolidated financial statements.

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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(Unaudited)

See notes to condensed consolidated financial statements.

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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

See notes to consolidated condensed financial statements.

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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 six months
ended June 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 2001 did not
have a material impact on the Company's results of operations, financial
position, or cash flows.

SFAS No. 144 - In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 was
effective for the Company for the quarter ending March 31, 2002. The adoption of
SFAS No. 144 in 2002 did not have a material impact on the Company's results of
operations, financial position, or cash flows.

SFAS No. 145 - In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the current requirement
that gains and losses on debt extinguishment must be classified as extraordinary
items in the income statement. Instead, such gains and losses will be classified
as extraordinary items only if they are deemed to be unusual and infrequent, in
accordance with the current GAAP criteria for extraordinary classification. In
addition, SFAS No. 145 eliminates an inconsistency in lease accounting by
requiring that modifications of capital leases that result in reclassification
as operating leases be accounted for consistent with sale-leaseback accounting
rules. SFAS No. 145 also contains other non-substantive corrections to
authoritative accounting literature. The changes related to debt extinguishment

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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 June 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 third and fourth quarters 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%.

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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. In that event, it would 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.

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NOTE 3 - EARNINGS PER SHARE

The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three and six months ended June 30,
2002 and 2001:

For the six months ended June 30, 2002, and for the three and six months ended
June 30, 2001, the weighted average shares outstanding assuming dilution was
anti-dilutive. Outstanding stock options totaling approximately $1.4 million
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 six month period ended June 30, 2002.

For the six months ended June 30, 2002, and for the three and six months ended
June 30, 2001, the weighted average shares outstanding assuming dilution was
non-dilutive. Outstanding stock options totaling approximately 1.4 million
options were potentially dilutive securities that were not included in the
computation of diluted EPS because to do so would have been non-dilutive for
the six month period ended June 30, 2002.

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 June 30, 2002 was approximately 14.0%. In
connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$2.5 million and $1.4 million at June 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 June 30, 2002, $4.1 million of notes
receivable, net of accounts charged off, were considered delinquent. An
additional $63.1 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 six
months ended June 30, 2001 and 2002 (in thousands):

NOTE 5 - DEBT

Notes payable, capital lease obligations, and senior subordinated notes as of
June 30, 2002 and December 31, 2001 (in thousands):

At June 30, 2002, LIBOR rates were from 1.84% to 2.03%, 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%.

In May 2002, the Company sold $58.7 million of notes receivable to the SPE and
recognized pre-tax gains of $4.5 million. The SPE funded these purchases through
advances under a credit agreement arranged for this purpose. In

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conjunction with this sale, the Company received cash consideration of $48.4
million, which was used to pay down borrowings under its revolving loan
facilities.

NOTE 6 - SUBSIDIARY GUARANTEES

As of June 30, 2002, all subsidiaries of the Company 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.

Combined summarized operating results of the Guarantor Subsidiaries for the six
months ended June 30, 2002 and 2001, are as follows (in thousands):

Combined summarized balance sheet information as of June 30, 2002 for the
Guarantor Subsidiaries is as follows (in thousands):

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 third quarter of 2002, the Company sold $10.6 million of notes receivable
to the SPE and recognized pre-tax gains of $897,000. The SPE funded these
purchases through advances under a credit agreement arranged for this

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purpose. In conjunction with this sale, the Company received cash consideration
of $8.8 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 123,000.
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.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues

Revenues for the second quarter of 2002 were $46.8 million, representing a $1.9
million or 3.8% decrease from revenues of $48.6 million for the same period of
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

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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 26.6% to 1,825 in the second quarter of 2002 from
2,485 in the same period of 2001. The average price per interval increased 12.8%
to $11,031 in the second quarter of 2002 versus $9,780 for the same period of
2001. Total interval sales for the three months ended June 30, 2002 included 250
biennial intervals (counted as 125 Vacation Intervals) compared to 746 (373
Vacation Intervals) in the three months ended June 30, 2001. During the second
quarter of 2002, 2,045 in-house Vacation Intervals were sold at an average price
of $4,898, compared to 2,783 in-house Vacation Intervals sold at an average
price of $4,311 during the comparable 2001 period.

Sampler sales remained fairly constant at $875,000 for the three months ended
June 30, 2002, compared to $896,000 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 second quarter of 2002
relate to 2000 sales.

Interest income decreased 9.0% to $9.2 million for the quarter ended June 30,
2002, from $10.1 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 $590,000 to $783,000 for the second quarter of
2002, versus $193,000 for the second 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 $152,000 to $1.3 million for the quarter ended June 30,
2002, compared to $1.1 million for the same period of 2001. The increase
primarily relates to increased golf course and pro shop income in 2002.

Gain on sale of notes receivable was $4.5 million for the second quarter of
2002, compared to $0 in the same period of 2001. This gain resulted from the
sale of $58.7 million of notes receivable to the SPE in the second 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 18.2% for
the second quarter of 2002 compared to 19.2% for the same period of 2001. The
decrease primarily resulted from an increase in sales prices in 2002 compared to
2001. The $1.5 million decrease in cost of sales in the second quarter 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 increased to 54.1% for
the quarter ended June 30, 2002, from 53.5% 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 the substantial decrease in sales.

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.

14

Based upon current projections, the Company believes it will be in compliance
with all financial covenants with its senior lenders during the third and fourth
quarters 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 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. In that event, it would 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 second quarter of 2002 compared to
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
decreased to 18.9% for the second quarter of 2002, from 19.3% 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 second quarter of 2002 related to the restructuring of the Company were
$1.3 million compared to $1.4 million of similar charges in the same 2001
period.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues
decreased to 2.7% for the three months ended June 30, 2002 versus 3.3% for the
same period of 2001. Overall, depreciation and amortization expense decreased
$343,000 for the second 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 $98,000 in the
second quarter of 2001, which consisted of a $54,000 write-down of land held for
sale to its estimated sales price less estimated disposal costs and a $44,000
write-down of land to its estimated fair value. There was no impairment loss of
long-lived assets during the second quarter of 2002.

Interest Expense

Interest expense as a percentage of interest income decreased to 66.6% for the
three months ended June 30, 2002, from 106.2% 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
6.5% in the second quarter of 2002 from 8.4% in the second quarter of 2001, and
$2.5 million of costs related to the restructuring of the Company's debt
incurred in the second quarter of 2001.

15

Income (Loss) before (Provision) Benefit for Income Taxes and Extraordinary Item

Income (loss) before (provision) benefit for income taxes and extraordinary item
increased to income of $2.2 million for the second quarter of 2002, as compared
to a loss of $8.0 million for the second quarter of 2001, as a result of the
above mentioned operating results.

(Provision) Benefit for Income Taxes

(Provision) benefit for income taxes as a percentage of income (loss) before
(provision) benefit for income taxes was a provision of 1.8% in the second
quarter of 2002, as compared to a benefit of 0.6% for the same period of 2001.
The effective income tax rate is the result of the 2001 and 2002 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 in the second quarter of 2001.

Net Income (Loss)

Net income (loss) increased to income of $20.1 million for the three months
ended June 30, 2002, as compared to a loss of $7.9 million for the same period
of 2001, as a result of the above mentioned operating results.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Revenues

Revenues for the six months ended June 30, 2002 were $88.8 million, representing
a $21.6 million or 19.6% decrease from revenues of $110.4 million for the six
months ended June 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 37.9% to 3,729 in the first half of 2002 from
6,002 in the same period of 2001. The average price per interval increased 8.7%
to $10,542 for the first half of 2002 versus $9,697 for the first half of 2001.
Total interval sales for the first six months of 2002 included 762 biennial
intervals (counted as 381 Vacation Intervals) compared to 1,925 (963 Vacation
Intervals) in the first six months of 2001. During the first half of 2002, 4,231
in-house Vacation Intervals were sold at an average price of $4,792, compared to
6,709 in-house Vacation Intervals sold at an average price of $4,163 during the
comparable 2001 period.

Sampler sales increased $260,000 to $2.2 million for the six months ended June
30, 2002, compared to $1.9 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 six months of 2002
relate to 2000 sales.

Interest income decreased 2.9% to $19.6 million for the six months ended June
30, 2002, from $20.1 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 $714,000 to $948,000 for the first

16

half of 2002, versus $234,000 for the first half 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 $63,000 to $2.1 million for the first six months of 2002
compared to $2.0 million for the same period of 2001. The increase primarily
relates to increased golf course and pro shop income in 2002 partially offset by
a $147,000 gain associated with the sale of land recognized in the first quarter
of 2001.

Gain on sale of notes receivable was $4.5 million for the six months ended June
30, 2002, compared to $0 in the same period of 2001. This gain resulted from the
sale of $58.7 million of notes receivable to the SPE in the second 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 18.5% for
the first six months of 2002 compared to 19.1% for the same period of 2001. The
decrease primarily resulted from an increase in sales prices in 2002 compared to
2001. The $5.4 million decrease in cost of sales in the first six 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 52.7% for
the six months ended June 30, 2002, from 55.3% 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 third and fourth
quarters 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 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. In that event, it would 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 half 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.

17

Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues
increased to 19.8% for the first six months of 2002, from 15.8% for the same
period of 2001. Although the Company substantially reduced its corporate
headcount in 2001 to align overhead with the reduced sales levels, operating,
general and administrative expense remained fairly constant at $17.6 million
during the first half of 2002 compared to $17.4 million for the same period of
2001. This was primarily due to $2.0 million of professional fees incurred in
the first half of 2002 associated with the restructuring of the Company compared
to $1.7 million of such costs incurred in the comparable 2001 period. In
addition, the Company incurred $1.0 million in audit fees in the first quarter
of 2002 related to the completion of the 2000 audit.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues was 2.9%
for the six months ended June 30, 2002 compared to 3.2% for the same period of
2001. Overall, depreciation and amortization expense decreased $978,000 for the
first half 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 quarter 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 $2.9 million
in the first half 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 and a $1.4 million write-off of prepaid marketing costs
related to the discontinuance of certain lead generation programs. There was no
impairment loss of long-lived assets during the first half of 2002.

Interest Expense

Interest expense as a percentage of interest income decreased to 66.9% for the
first six months of 2002, from 94.9% for the same period of 2001. 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 6.5% in the first half of 2002 compared
to 8.9% in the first half of 2001.

Income (Loss) before (Provision) Benefit for Income Taxes and Extraordinary Item

Income (loss) before (provision) benefit for income taxes and extraordinary item
increased to income of $133,000 for the first six months of 2002, as compared to
a loss of $16.4 million for the first six months of 2001, as a result of the
above mentioned operating results.

(Provision) Benefit for Income Taxes

(Provision) benefit for income taxes as a percentage of income (loss) before
(provision) benefit for income taxes was a provision of 30.8% in the first half
of 2002, as compared to a benefit of 0.6% for the first half of 2001. The
effective income tax rate is the result of the 2001 and 2002 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 six months of 2001.

18

Net Income (Loss)

Net income (loss) increased to income of $18.0 million for the first half of
2002, as compared to a loss of $16.3 million for the first half of 2001, as a
result of the above mentioned 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 six months
ended June 30, 2002, the Company's operating activities reflected cash provided
by operating activities of $42.3 million. During the same period of 2001, the
Company's operating activities reflected cash used in operating activities of
$27.6 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 $48.4 million in proceeds from sales of notes receivable in
2002.

USES OF CASH. Investing activities reflect a net use of cash due to capital
additions. Net cash used in investing activities for the six months ended June
30, 2002 and 2001 was $832,000 and $715,000, 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 six months ended June 30, 2002, net cash used in financing activities
was $45.1 million compared to net cash provided by financing activities of $27.3
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 June 30, 2002, the Company's revolving credit facilities provided for loans
of up to $274.1 million of which approximately $245.6 million of principal and
interest related to advances under the credit facilities was outstanding. For
the six months ended June 30, 2002, the weighted average cost of funds for all
borrowings, including the senior subordinated debt, was 6.5%. 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. In May 2002, the Company sold $58.7 million of notes receivable to the
SPE and recognized pre-tax gains of $4.5 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 $48.4
million, which was used to pay down borrowings under its revolving loan
facilities.

At June 30, 2002, the SPE held notes receivable totaling $93.7 million, with
related borrowings of $86.3 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 third quarter of 2002, the Company sold $10.6 million of notes receivable
to the SPE and recognized pre-tax gains of $897,000. 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 $8.8
million, which was used to pay down borrowings under its revolving loan
facilities.

19

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 six months ended June 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 totaled $245 million at June 30, 2002, is variable. The impact
of a one-point interest rate change on the outstanding balance of variable-rate
financial instruments at June 30, 2002, on the Company's results of operations
for the first six months

20

of 2002 would be approximately $1.2 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.

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 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
7.

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 June 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 June 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.

On May 2, 2002, the Company consummated an exchange offer ("Exchange Offer")
with the holders of its 10 1/2% senior subordinated notes due 2008 ("Old
Notes"). In connection with the Exchange Offer, the Company solicited consents
from the holders of the Old Notes concerning, among other things, proposed
amendments to the indenture dated April 1, 1998 under which the Old Notes were
issued. The information required by this Item 4 regarding the consents sought by
the Company from the holders of the Old Notes is incorporated by reference to
the information concerning the Exchange Offer provided in Part II, Items 2 and 3
of this quarterly report on Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

*4.1 -- Amended and Restated Indenture dated May 2, 2002, between the
Company, Wells Fargo Bank Minnesota, National Association, as
Trustee, and the Subsidiary Guarantors for the Company's 10 1/2%
Senior Subordinated Notes due 2008.

*4.2 -- Indenture dated May 2, 2002, between the Company, Wells Fargo Bank
Minnesota, National Association, as Trustee, and the Subsidiary
Guarantors for the Company's 6 % Senior Subordinated Notes due 2007.

22

*4.3 -- Certificate No. 001 of 6% Senior Subordinated Notes due 2007 in the
amount of $28,467,000.

*4.4 -- Subsidiary Guarantee dated May 2, 2002 by Awards Verification
Center, Inc., Silverleaf Travel, Inc., Silverleaf Resort
Acquisitions, Inc., Bull's Eye Marketing, Inc., Silverleaf
Berkshires, Inc., and eStarCommunications, Inc.

*10.1 -- Second Amendment to Amended and Restated Receivables Loan and
Security Agreement dated April 30, 20002 between the Company and
Heller Financial, Inc.

*10.2 -- Fourth Amendment to Second Amended and Restated Inventory Loan and
Security Agreement dated April 30, 2002. and Heller Financial, Inc.

*10.3 -- Amended and Restated Revolving Credit Agreement dated as of April
30, 2002 between the Company and Sovereign Bank, as Agent, and
Liberty Bank.

*10.4 -- Amended And Restated Loan, Security And Agency Agreement (Tranche
A), dated as of April 30, 2002, by and among the Company, Textron
Financial Corporation, as a Lender and as facility agent and
collateral agent.

*10.5 -- Amended And Restated Loan, Security And Agency Agreement (Tranche
B), dated as of April 30, 2002, by and among the Company, Textron
Financial Corporation and Bank of Scotland, as Lenders and Textron
Financial Corporation, as and collateral agent ("Agent").

*10.6 -- First Amendment To Loan And Security Agreement (Tranche C), dated as
of April 30, 2002, entered into by and between the Company and
Textron Financial Corporation

*10.7 -- This Second Amendment To Loan And Security Agreement dated as of
April 30, 2002 by and between the Company and Textron Financial
Corporation.

*10.8 -- Amended And Restated Receivables Loan and Security Agreement Dated
as of April 30, 2002 among Silverleaf Finance I, Inc., as the
Borrower, the Company, as the Servicer, Autobahn Funding Company
LLC, as a Lender, DZ Bank AG Deutsche Zentral-Genossenschaftsbank,
Frankfurt AM Main, as the Agent, U.S. Bank Trust National
Association, as the Agent's Bank, and Wells Fargo Bank Minnesota,
National Association, as the Backup Servicer.

*10.9 -- Amendment Agreement No. 1, dated as of April 30, 2002 Purchase And
Contribution Agreement dated as of October 30, 2000 between the
Company and Silverleaf Finance I, Inc.

*10.10 -- Employment Agreement dated April 18, 2002 between the Company and
Sharon K. Brayfield

16.1 -- Letter from Deloitte & Touche, LLP to the Securities and Exchange
Commission dated June 25, 2002 (incorporated by reference to Exhibit
16.1 of the Registrant's Form 8-K filed on June 26, 2002).

*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

- ---------

(b) Reports on Form 8-K

The Company filed the following Current Reports on Form 10-Q for the
quarter ending June 30, 2002:

Current Report on Form 8-K filed with the SEC on May 3, 2002 announcing
the consumption of the Company's debt restructuring plan, including its exchange
offer with the holders of its 10 1/2% senior subordinated notes.

Current Report on Form 8-K filed with the SEC on June 26, 2002
announcing a change in auditors.

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

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.

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: Novemmber 19, 2002 /s/ HARRY J. WHITE, JR.
------------------------------------
Harry J. White, Jr.
Chief Financial Officer

24

INDEX TO EXHIBITS