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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 March 31, 2003
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 [X] No [ ]
Number of shares of common stock outstanding of the issuer's Common Stock, par
value $0.01 per share, as of May 15, 2003: 36,826,906
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EXPLANATORY NOTE
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 19 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2002. 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
ended March 31, 2003 and 2002................................................ 3
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002............................................................ 4
Condensed Consolidated Statement of Shareholders' Equity for the
three months ended March 31, 2003............................................ 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002......................................... 6
Notes to the Condensed Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 21
Item 4. Controls and Procedures...................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 22
Item 6. Exhibits and Reports on Form 8-K............................................. 23
Signatures................................................................... 23
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
March 31,
-------------------------------
2003 2002
----------- -----------
REVENUES:
Vacation Interval sales $ 28,557 $ 29,439
Sampler sales 485 1,323
----------- -----------
Total sales 29,042 30,762
Interest income 8,768 10,385
Management fee income 471 166
Other income 1,207 770
----------- -----------
Total revenues 39,488 42,083
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 5,042 5,520
Sales and marketing 16,299 15,755
Provision for uncollectible notes 34,666 5,888
Operating, general and administrative 6,891 8,782
Depreciation and amortization 1,182 1,269
Interest expense and lender fees 4,407 6,968
----------- -----------
Total costs and operating expenses 68,487 44,182
OTHER INCOME:
Gain on sale of notes receivable 1,934 -
Gain on early extinguishment of debt 1,257 -
----------- -----------
Total other income 3,191 -
Loss before provision for income taxes (25,808) (2,099)
Provision for income taxes (13) (1)
----------- -----------
NET LOSS $ (25,821) $ (2,100)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE: $ (0.70) $ (0.16)
=========== ===========
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING: 36,826,906 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)
March 31, December 31,
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 2,779 $ 1,153
Restricted cash 1,790 3,624
Notes receivable, net of allowance for uncollectible notes of
$51,303 and $28,547, respectively 188,699 233,237
Accrued interest receivable 2,081 2,325
Investment in Special Purpose Entity 6,849 6,656
Amounts due from affiliates - 750
Inventories 103,746 102,505
Land, equipment, buildings, and utilities, net 32,878 33,778
Land held for sale 1,938 4,545
Prepaid and other assets 10,224 9,672
---------- ----------
TOTAL ASSETS $ 350,984 $ 398,245
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 7,684 $ 7,394
Accrued interest payable 1,027 1,269
Amounts due to affiliates 984 2,221
Unearned revenues 3,482 3,410
Notes payable and capital lease obligations 216,944 236,413
Senior subordinated notes 45,065 45,919
---------- ----------
Total Liabilities 275,186 296,626
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 37,249,006 shares issued, and
36,826,906 shares outstanding 372 372
Additional paid-in capital 116,999 116,999
Retained deficit (36,574) (10,753)
Treasury stock, at cost (422,100 shares) (4,999) (4,999)
---------- ----------
Total Shareholders' Equity 75,798 101,619
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 350,984 $ 398,245
========== ==========
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, 2003 37,249,006 $ 372 $ 116,999 $ (10,753) (422,100) $ (4,999) $ 101,619
Net loss - - - (25,821) - - (25,821)
---------- ------ ---------- --------- -------- -------- ---------
March 31, 2003 37,249,006 $ 372 $ 116,999 $ (36,574) (422,100) $ (4,999) $ 75,798
========== ====== ========== ========= ======== ========= =========
See notes to condensed consolidated financial statements.
5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------------
2003 2002
---------- --------
OPERATING ACTIVITIES:
Net loss $ (25,821) $ (2,100)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for uncollectible notes 34,666 5,888
Gain on sale of notes receivable (1,934) -
Gain on early extinguishment of debt (1,257) -
Gain on sale of land held for sale (273) -
Depreciation and amortization 1,182 1,269
Increase (decrease) in cash from changes in assets and liabilities:
Restricted cash 1,834 1,437
Notes receivable (7,773) (5,509)
Accrued interest receivable 244 101
Investment in Special Purpose Entity (193) (205)
Amounts due to/from affiliates, net (487) 1,848
Inventories (1,194) (51)
Prepaid and other assets (552) 105
Accounts payable and accrued expenses 290 823
Accrued interest payable (242) 2,018
Unearned revenues 72 (914)
---------- --------
Net cash provided by (used in) operating activities (1,438) 4,710
---------- --------
INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities (282) (593)
Proceeds from sale of land held for sale 2,880 -
---------- --------
Net cash provided by (used in) investing activities 2,598 (593)
---------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 24,132 15,133
Payments on borrowings to unaffiliated entities (43,198) (22,836)
Proceeds from sales of notes receivable 19,532 -
---------- --------
Net cash provided by (used in) financing activities 466 (7,703)
---------- --------
Net change in cash and cash equivalents 1,626 (3,586)
CASH AND CASH EQUIVALENTS:
Beginning of period 1,153 6,204
---------- --------
End of period $ 2,779 $ 2,618
========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 4,710 $ 4,013
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 months ended
March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
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, 2002 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES SUMMARY
Principles of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, excluding the
Company's special purpose entity ("SPE"). All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Revenue and Expense Recognition -- A substantial portion of Vacation Interval
sales are made in exchange for mortgage notes receivable, which are secured by a
deed of trust on the Vacation Interval sold. The Company recognizes the sale of
a Vacation Interval under the accrual method after a binding sales contract has
been executed, the buyer has made a down payment of at least 10%, and the
statutory rescission period has expired. If all accrual method criteria are met
except that construction is not substantially complete, revenues are recognized
on the percentage-of-completion basis. Under this method, the portion of revenue
applicable to costs incurred, as compared to total estimated construction and
direct selling costs, is recognized in the period of sale. The remaining amount
is deferred and recognized as the remaining costs are incurred. The deferral of
sales and costs related to the percentage-of-completion method is not
significant.
Certain Vacation Interval sales transactions are deferred until the minimum down
payment has been received. The Company accounts for these transactions utilizing
the deposit method. Under this method, the sale is not recognized, a receivable
is not recorded, and inventory is not relieved. Any cash received is carried as
a deposit until the sale can be recognized. When these types of sales are
cancelled without a refund, deposits forfeited are recognized as income and the
interest portion is recognized as interest income.
In addition to sales of Vacation Intervals to new prospective owners, the
Company sells upgraded Vacation Intervals to existing Silverleaf Owners.
Revenues are recognized on these upgrade Vacation Interval sales when the
criteria described above are satisfied. The revenue recognized is the net of the
incremental increase in the upgrade sales price and cost of sales is the
incremental increase in the cost of the Vacation Interval purchased.
A provision for estimated customer returns is reported net against Vacation
Interval sales. Customer returns represent cancellations of sales transactions
in which the customer fails to make the first installment payment.
The Company recognizes interest income as earned. Interest income is accrued on
notes receivable, net of an estimated amount that will not be collected, until
the individual notes become 90 days delinquent. Once a note becomes 90 days
delinquent, the accrual of additional interest income ceases until collection is
deemed probable.
Revenues related to one-time sampler contracts, which entitles the prospective
owner to sample a resort during certain periods, are recognized when earned.
Revenue recognition is deferred until the customer uses the stay, purchases a
Vacation Interval, or allows the contract to expire.
7
The Company receives fees for management services provided to the Clubs. These
revenues are recognized on an accrual basis in the period the services are
provided if collection is deemed probable.
Utilities, services, and other income are recognized on an accrual basis in the
period service is provided.
Sales and marketing costs are charged to expense in the period incurred.
Commissions, however, are recognized in the same period as the related sales.
Cash and Cash Equivalents -- Cash and cash equivalents consist of all highly
liquid investments with an original maturity at the date of purchase of three
months or less. Cash and cash equivalents include cash, certificates of deposit,
and money market funds.
Restricted Cash -- Restricted cash consists of certificates of deposit that
serve as collateral for construction bonds and cash restricted for repayment of
debt.
Investment in Special Purpose Entity -- Sales of notes receivable from the
Company to its SPE that meet certain underwriting criteria occur on a periodic
basis. The gain or loss on the sale is determined based on the proceeds
received, the fair value assigned to the investment in SPE, and the recorded
value of notes receivable sold. The fair value of the investment in the SPE is
estimated based on the present value of future expected cash flows of the SPE's
residual interest in the notes receivable sold. The Company utilized the
following key assumptions to estimate the fair value of such cash flows:
customer prepayment rate - 4.3%; expected accounts paid in full as a result of
upgrades - 6.2%; expected credit losses - 8.1%; discount rate - 19%; base
interest rate - 4.4%; agent fee - 2%; and loan servicing fees - 1%. The
Company's assumptions are based on experience with its notes receivable
portfolio, available market data, estimated prepayments, the cost of servicing,
and net transaction costs. Such assumptions are assessed quarterly and, if
necessary, adjustments are made to the carrying value of the investment in SPE.
Provision for Uncollectible Notes -- Such provision is recorded at an amount
sufficient to maintain the allowance for uncollectible notes at a level
management considers adequate to provide for anticipated losses resulting from
customers' failure to fulfill their obligations under the terms of their notes.
Such allowance for uncollectible notes is adjusted based upon periodic analysis
of the notes receivable portfolio, historical credit loss experience, and
current economic factors. Credit losses take three forms. The first is the full
cancellation of the note, whereby the customer is relieved of the obligation and
the Company recovers the underlying inventory. The second form is a deemed
cancellation, whereby the Company records the cancellation of all notes that
become 90 days delinquent, net of notes that are no longer 90 days delinquent.
The third form is the note receivable reduction that occurs when a customer
trades a higher value product for a lower value product. In estimating the
allowance, the Company projects future cancellations, net of recovery of the
related inventory, for each sales year by using historical cancellations
experience.
The allowance for uncollectible notes is reduced by actual cancellations and
losses experienced, including losses related to previously sold notes receivable
which became delinquent and were reacquired pursuant to the recourse obligations
discussed herein. Actual cancellations and losses experienced represents all
notes identified by management as being probable of cancellation. Recourse to
the Company on sales of customer notes receivable is governed by the agreements
between the purchasers and the Company.
The Company classifies the components of the provision for uncollectible notes
as either credit losses or customer returns (cancellations of sales whereby the
customer fails to make the first installment payment). The provision for
uncollectible notes pertaining to credit losses and customer returns are
classified in provision for uncollectible notes and Vacation Interval sales,
respectively.
Inventories -- Inventories are stated at the lower of cost or market value. Cost
includes amounts for land, construction materials, direct labor and overhead,
taxes, and capitalized interest incurred in the construction or through the
acquisition of resort dwellings held for timeshare sale. Timeshare unit costs
are capitalized as inventory and are allocated to Vacation Intervals based upon
their relative sales values. Upon sale of a Vacation Interval, these costs are
charged to cost of sales on a specific identification basis. Vacation Intervals
reacquired are placed back into inventory at the lower of their original
historical cost basis or market value.
8
The Company estimates the total cost to complete all amenities at each resort.
This cost includes both costs incurred to date and expected costs to be
incurred. The Company allocates the estimated total amenities cost to cost of
Vacation Interval sales based on Vacation Intervals sold in a given period as a
percentage of total Vacation Intervals expected to sell over the life of a
particular resort project.
Company management periodically reviews the carrying value of its inventory on
an individual project basis to ensure that the carrying value does not exceed
market value.
Land, Equipment, Buildings, and Utilities -- Land, equipment (including
equipment under capital lease), buildings, and utilities are stated at cost,
which includes amounts for construction materials, direct labor and overhead,
and capitalized interest. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
expense as incurred; significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, ranging from 3 to 20 years. Company
management periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Prepaid and Other Assets -- Prepaid and other assets consists primarily of
prepaid insurance, prepaid postage, intangibles, commitment fees, debt issuance
costs, novelty inventories, deposits, and miscellaneous receivables. Commitment
fees and debt issuance costs are amortized over the life of the related debt.
Intangibles are amortized over their useful lives, which do not exceed ten
years.
Income Taxes -- Deferred income taxes are recorded for temporary differences
between the bases of assets and liabilities as recognized by tax laws and their
carrying value as reported in the consolidated financial statements. A provision
is made or benefit recognized for deferred income taxes relating to temporary
differences for financial reporting purposes. To the extent a deferred tax asset
does not meet the criteria of "more likely than not" for realization, a
valuation allowance is recorded.
Earnings (Loss) Per Share -- Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average shares outstanding. Earnings
per share assuming dilution is computed by dividing net income by the weighted
average number of shares and potentially dilutive shares outstanding. The number
of potentially dilutive shares is computed using the treasury stock method,
which assumes that the increase in the number of shares resulting from the
exercise of the stock options is reduced by the number of shares that could have
been repurchased by the Company with the proceeds from the exercise of the stock
options.
Use of Estimates -- The preparation of the consolidated financial statements
requires the use of management's estimates and assumptions in determining the
carrying values of certain assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts for certain revenues and expenses during the reporting
period. Actual results could differ from those estimated. Significant management
estimates include the allowance for uncollectible notes and the future sales
plan used to allocate certain inventories to cost of sales.
Recent Accounting Pronouncements--
SFAS No. 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. The adoption of
SFAS No. 146 in the first quarter of 2003 did not have any immediate effect on
the Company's results of operations, financial position, or cash flows.
9
FIN No. 45 - In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 requires that a guarantor recognize a liability for certain
guarantees and enhance disclosures for such guarantees. The recognition
provisions of FIN No. 45 are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements for periods ending after December
15, 2002. The adoption of FIN No. 45 did not have a material impact on the
Company's results of operations, financial position, or cash flows.
FIN No. 46 - In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires existing unconsolidated variable interest entities, as
defined, to be consolidated by their primary beneficiaries if the variable
interest entities do not effectively disperse risks among parties involved. FIN
No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. FIN No. 46 applies to financial statements
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company is still evaluating the impact the adoption of FIN No. 46 will have
on its results of operations, financial position, and cash flows.
NOTE 3 - DEBT RESTRUCTURING
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 improving the Company's
operations. 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%, notes receivable delinquency rate below 25%, a minimum interest
coverage ratio of 1.25 to 1.0, and a minimum net income. However, such results
cannot be assured.
Due to the results of the quarter ended March 31, 2003, the Company is not in
compliance with three of the financial covenants described above. First, sales
and marketing expense for the quarter ended March 31, 2003 was 56.1% of sales,
compared to a maximum threshold of 52.5%. Second, the interest coverage ratio
for the last twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a
minimum requirement of 1.25 to 1.0. And third, net loss for the quarter ended
March 31, 2003 was $25.8 million, compared to a minimum requirement of $1.00 net
income. Management has notified its secured lenders that it will not be in
compliance with the financial covenants, and has begun discussions regarding
waivers of the defaults and/or modifications to loan agreements which would
bring the Company back into compliance. As of May 14, 2003, all the secured
lenders have verbally agreed to modify the sales and marketing expense ratio
covenant. However, the secured lenders have not waived the covenant defaults
related to the interest coverage ratio or the minimum net income of $1.00. As of
May 14, 2003, none of the lenders have declared a default. Management is
attempting to negotiate waivers and or modifications of its loan agreements,
however, it cannot give any assurances that it will be successful in these
negotiations. Although the Company is hopeful that it will receive relief from
its lenders and that its lenders will continue to fund the Company's operations
until negotiations can be completed, there can be no assurance that the
Company's lenders will continue to fund its operations. A refusal by its lenders
to continue funding will have a material and adverse effect on the Company's
operations.
If the Company is able to resolve the existing covenant compliance issues,
future 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.
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.
10
NOTE 4 - EARNINGS PER SHARE
For the three months ended March 31, 2003 and 2002, the weighted average shares
outstanding assuming dilution was non-dilutive. Outstanding stock options
totaling approximately 3,377,210 and 986,000 at March 31, 2003 and 2002,
respectively, 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
three months ended March 31, 2003 and 2002, respectively.
NOTE 5 - 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 March 31, 2003 was approximately 14.5%. In
connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. Notes receivable from sampler sales were
$1.1 million and $1.4 million at March 31, 2003 and 2002, respectively, and are
non-interest bearing.
The activity in gross notes receivable is as follows for the three month periods
ended March 31, 2003 and 2002 (in thousands):
MARCH 31,
-------------------------
2003 2002
--------- ---------
Balance, beginning of period.................... $ 261,784 $ 333,336
Sales........................................... 23,261 24,913
Collections..................................... (13,237) (19,404)
Receivables charged off......................... (8,192) (13,570)
Sold notes receivable........................... (23,614) --
--------- ---------
Balance, end of period.......................... $ 240,002 $ 325,275
========= =========
The Company considers accounts over 60 days past due to be delinquent. As of
March 31, 2003, $2.9 million of notes receivable, net of accounts charged off,
were considered delinquent. An additional $51.4 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 months ended March 31, 2003 and 2002 (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
--------- ---------
Balance, beginning of period.................... $ 28,547 $ 54,744
Provision for credit losses..................... 34,666 5,888
Receivables charged off......................... (8,192) (13,570)
Allowance related to notes sold................. (3,718) --
--------- ---------
Balance, end of period.......................... $ 51,303 $ 47,062
========= =========
During the first quarter of 2003, the Company sold $23.6 million of notes
receivable and recognized pre-tax gains of $1.9 million. The SPE funded these
purchases through advances under a credit agreement arranged for this purpose.
In connection with these sales, the Company received cash consideration of $19.5
million, which was used to pay down borrowings under its revolving loan
facilities.
NOTE 6 - DEBT
Notes payable, capital lease obligations, and senior subordinated notes as of
March 31, 2003 and December 31, 2002 (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
$60 million loan agreement, which contains certain financial covenants, due
August 2003, 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)...................................................................... $ -- $ 9,836
11
$70 million loan agreement, capacity reduced by amounts outstanding under the $10
million inventory loan agreement, 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% (additional draws are no longer available under this
facility)................................................................................. 23,349 25,549
$10 million supplemental revolving loan agreement, which contains certain financial
covenants, due March 2007, 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%......................................................... 7,622 8,536
$56.9 million revolving loan agreement, which contains certain financial
covenants, due March 2007, 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% with a 6% floor......................................... 44,119 46,078
$15.1 million term loan, which contains certain financial covenants, due March
2007, principal and interest payable from the proceeds obtained on customer
notes receivable pledged as collateral for the note, at an interest rate of 8%............ 14,476 14,665
$56.1 million revolving loan agreement, which contains certain financial covenants,
due March 2007, 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% with a 6% floor................................................................... 42,855 44,288
$14.9 million term loan, which contains certain financial covenants, due March
2007, principal and interest payable from the proceeds obtained on customer
notes receivable pledged as collateral for the note, at an interest rate of 8%............ 14,275 14,461
$8.1 million revolving loan agreement, which contains certain financial covenants,
due March 2007, 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 3% with a 6% floor..................................................... 6,728 6,493
$2.1 million term loan, which contains certain financial covenants, due March
2007, principal and interest payable from the proceeds obtained on customer
notes receivable pledged as collateral for the note, at an interest rate of 8%............ 2,051 2,078
$38 million revolving loan agreement, which contains certain financial covenants,
due March 2007, principal and interest payable from the proceeds obtained on
customer notes receivable pledged as collateral for the note, at an interest
rate of Federal Funds plus 2.75% with a 6% floor.......................................... 29,952 31,128
$10 million term loan, which contains certain financial covenants, due March 2007,
principal and interest payable from the proceeds obtained on customer notes
receivable pledged as collateral for the note, at an interest rate of 8%.................. 8,350 9,465
$10 million inventory loan agreement, which contains certain financial covenants,
due March 2007, interest payable monthly, at an interest rate of LIBOR plus 3.50%......... 9,696 9,936
$10 million inventory loan agreement, which contains certain financial covenants,
due March 2007, interest payable monthly, at an interest rate of LIBOR plus 3.25%......... 9,375 9,375
Various notes, due from January 2003 through February 2009, collateralized
by various assets with interest rates ranging from 0.9% to 12.0%.......................... 1,916 2,035
---------- ----------
Total notes payable................................................................ 214,764 233,923
Capital lease obligations.................................................................... 2,180 2,490
---------- ----------
Total notes payable and capital lease obligations.................................. 216,944 236,413
6.0% senior subordinated notes, due 2007, interest payable semiannually on April
1 and October 1, guaranteed by all of the Company's present and future domestic
restricted subsidiaries................................................................... 28,467 28,467
10 1/2% senior subordinated notes, subordinate to the 6.0% senior subordinated
notes above, due 2008, interest payable semiannually on April 1 and October
1, guaranteed by all of the Company's present and future domestic restricted
subsidiaries.............................................................................. 9,766 9,766
Interest on the 6.0% senior subordinated notes, due 2007, interest payable
semiannually on April 1 and October 1, guaranteed by all of the Company's
present and future domestic restricted subsidiaries....................................... 6,832 7,686
---------- ----------
Total senior subordinated notes.................................................... 45,065 45,919
---------- ----------
Total.............................................................................. $ 262,009 $ 282,332
========== ==========
At March 31, 2003, LIBOR rates were from 1.34% to 1.41%, and the Prime rate was
4.25%. At December 31, 2002, LIBOR rates were from 1.76% to 1.82%, and the Prime
rate was 4.25%.
12
In March 2003, the Company paid off the remaining $8.8 million balance of its
$60 million loan agreement, due August 2003, and recognized a $1.3 million gain
on early extinguishment of debt.
The Company is not in compliance with certain financial covenants due to the
results of the quarter ended March 31, 2003. See Note 3 for a description of
these covenant issues.
NOTE 7 - SUBSIDIARY GUARANTEES
As of March 31, 2003, all subsidiaries of the Company, except the SPE, have
guaranteed the $45.1 million of senior subordinated notes. Separate financial
statements and other disclosures concerning each guaranteeing subsidiary (each,
a "Guarantor Subsidiary") are not presented herein because the guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several, and each
Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together
comprise all direct and indirect subsidiaries of the Company.
The Guarantor Subsidiaries had no operations for the three months ended March
31, 2003 and 2002. Combined summarized balance sheet information as of March 31,
2003 for the Guarantor Subsidiaries is as follows (in thousands):
March 31,
2003
---------
Cash $ 1
---------
Total assets $ 1
=========
Investment by parent (includes equity
and amounts due to parent) $ 1
---------
Total liabilities and equity $ 1
=========
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The homeowners' associations of three condominium projects that a former
subsidiary of the Company constructed in Missouri filed separate actions of
unspecified amounts against the Company alleging construction defects and breach
of management agreements. This litigation has been going on for several years.
Discovery continued in the lawsuit during the period ended March 31, 2003, but
is still far from complete. Among other things, the plaintiffs have not yet
turned over the reports of their expert witnesses and the Company is unclear as
to exactly what damages are being claimed by the Plaintiffs. At this time, a
majority of the Company's legal fees and costs and expenses of litigation are
being paid by two insurance carries, subject to a reservation of rights by these
insurers. Since the Company does not know what damages are being claimed, and
cannot predict the final outcome of these claims, it cannot estimate the
additional costs it could incur, or whether its insurance carriers will continue
to cover its costs in connection with these claims.
A purported class action was filed against the Company on October 19, 2001 by
Plaintiffs who each purchased Vacation Intervals from the Company. The
Plaintiffs alleged that the Company violated the Texas Deceptive Trade Practices
Act and the Texas Timeshare Act by failing to deliver to them complete copies of
the contracts for the purchase of the Vacation Intervals as they did not receive
a complete legal description of the Hill Country Resort as attached to the
Declaration of Restrictions, Covenants, and Conditions of the Resort. The
Plaintiffs also claimed that the Company violated various provisions of the
Texas Deceptive Trade Practices Act with respect to the maintenance fees charged
by the Company to its Vacation Interval owners. In November 2002, the Court
denied the Plaintiff's request for class certification. In March 2003,
additional Plaintiffs joined the case, and a Fourth Amended Petition was filed
against the Company and Silverleaf Club alleging additional violations of the
Texas Deceptive Trade Practices Act, breach of fiduciary duty, negligent
misrepresentation, and fraud. The class allegations were also deleted from the
amended Petition. In their Fourth Amended Petition, the Plaintiffs sought
damages in the amount of $1.5 million, plus reasonable attorneys fees and court
costs. The Plaintiffs also sought rescission of their original purchase
contracts with the Company. The Company, Silverleaf Club, and the
13
Plaintiffs have agreed to a mediated settlement of Plaintiffs' claims. Under
the terms of the settlement, the Company and Silverleaf Club have agreed to pay
the Plaintiffs an aggregate sum of $130,000, and the Plaintiffs have agreed to
convey their Vacation Intervals back to the Company and have agreed to dismiss
the action against the Company and Silverleaf Club with prejudice.
A further purported class action was filed against the Company on February 26,
2002, by a couple who purchased a Vacation Interval from the Company. The
Plaintiffs allege that the Company violated the Texas Government Code by
charging a document preparation fee in regard to instruments affecting title to
real estate. Alternatively, the Plaintiffs allege that the $275 document
preparation fee constituted a partial prepayment that should have been credited
against their note and additionally seek a declaratory judgment. The petition
asserts Texas class action allegations and seeks recovery of the document
preparation fee and treble damages on behalf of both the plaintiffs and the
alleged class they purport to represent, and injunctive relief preventing the
Company from engaging in the unauthorized practice of law in connection with the
sale of its Vacation Intervals in Texas. The Company has been vigorously
contesting the Plaintiffs' claims and believes that it has meritorious defenses
to Plaintiffs' allegations. However, the Company is attempting to settle the
Plaintiffs' claims through continuing settlement negotiations. If the matter
cannot be settled in a manner acceptable to the Company, the Company will
continue to vigorously defend itself against Plaintiffs' claims.
In January 2003, a group of eight related individuals and entities who are
holders of certain of the Company's 10 1/2% senior subordinated notes due 2008
(the "10 1/2% Notes") made oral claims against the Company and a number of its
present and former officers and directors concerning the claimants' open market
purchases of 10 1/2% Notes during 2000 and 2001. The 10 1/2% Notes were
allegedly purchased for an aggregate purchase price of $3.7 million. One of the
eight claimants previously owned common stock in the Company acquired between
1998 and 2000 and also made claims against the Company with regard to
approximately $598,000 in losses allegedly suffered in connection with open
market purchases and sales of the Company's common stock. In February 2003,
these eight claimants, the Company, and certain of its former officers and
directors entered into a tolling agreement for the purposes of preserving the
claimants' rights during the term of the agreement by tolling applicable
statutes of limitations while negotiations between the claimants and the Company
take place. The 10 1/2% Notes are not in default and the Company denies all
liability with regard to the alleged claims of these eight claimants. No
litigation has been filed against the Company or any of its affiliates by these
eight claimants; however, there can be no assurance that these claims will not
ultimately result in litigation involving the Company and/or its affiliates. If
such litigation is filed, the Company intends to vigorously defend against it.
On February 27, 2003, these eight claimants did file suit in state district
court in Dallas, Texas, against the Company's former auditors, Deloitte &
Touche, LLP alleging violation by Deloitte & Touche of the Texas Securities Act,
common law fraud, negligent misrepresentation, fraud in a stock transaction, and
accounting malpractice. The claims against Deloitte & Touche arise from the same
purchases of the Company's 10 1/2% Notes and common stock that formed the basis
for the tolling agreement. Neither the Company nor any of its affiliates is
presently a party to this litigation; however, there can be no assurance that
Deloitte & Touche will not seek to add the Company or certain of its affiliates
as parties to the litigation.
The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition.
During 2001, Silverleaf Club entered into a loan agreement for $1.8 million,
whereby the Company guaranteed such debt with certain of its aircraft or related
sales proceeds. As of December 31, 2002, Silverleaf Club's related note payable
balance was $1.3 million.
14
NOTE 9 - STOCK-BASED COMPENSATION
The Company accounts for stock options using the intrinsic value method. Had
compensation cost for the Company's stock option grants been determined based on
the fair value at the date of said grants, the Company's net loss and net loss
per share would have been the following pro-forma amounts:
MARCH 31, MARCH 31,
2003 2002
--------- ---------
Net loss, as reported $ (25,821) $ (2,100)
Stock-based compensation expense recorded
under the intrinsic value method - -
Pro forma stock-based compensation expense
Computed under the fair value method (110) (315)
--------- ---------
Pro forma net loss $ (25,931) $ (2,415)
========= =========
Net loss per share, basic and diluted
As reported $ (0.70) $ (0.16)
Pro forma $ (0.70) $ (0.19)
The fair value of the stock options granted during the first quarter of 2003
were $0.32. There were no stock options granted in the first quarter of 2002.
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility ranging from 147.4% to 217.3% for all grants,
risk-free interest rates which vary for each grant and range from 5.5% to 6.2%,
expected life of 7 years for all grants, and no distribution yield for all
grants.
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, 2002.
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 130,000.
The condensed consolidated financial statements of the Company include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly-owned.
15
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
Three Months Ended
March 31,
--------------------
2003 2002
------ ------
As a percentage of total revenues:
Vacation Interval sales 72.3% 70.0%
Sampler sales 1.2% 3.1%
----- -----
Total sales 73.5% 73.1%
Interest income 22.2% 24.7%
Management fee income 1.2% 0.4%
Other income 3.1% 1.8%
----- -----
Total revenues 100.0% 100.0%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales 17.7% 18.8%
Provision for uncollectible notes 121.4% 20.0%
As a percentage of total sales:
Sales and marketing 56.1% 51.2%
As a percentage of total revenues:
Operating, general and administrative 17.5% 20.9%
Depreciation and amortization 3.0% 3.0%
As a percentage of interest income:
Interest expense and lender fees 50.3% 67.1%
As a percentage of total revenues:
Gain on sale of notes receivable 4.9% 0.0%
Gain on early extinguishment of debt 3.2% 0.0%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Revenues
Revenues for the quarter ended March 31, 2003 were $39.5 million, representing a
$2.6 million or 6.2% decrease from revenues of $42.1 million for the quarter
ended March 31, 2002. The decrease is primarily due to reduced sales and
interest income.
Vacation Interval sales decreased $882,000 to $28.6 million during the first
quarter of 2003, down from $29.4 million in the same period of 2002. For the
quarter ended March 31, 2003, the number of Vacation Intervals sold, exclusive
of in-house Vacation Intervals, decreased 24.9% to 1,429 from 1,904 in the first
quarter of 2002. The average price per interval increased to $11,017 in the
first quarter of 2003 versus $10,074 for the first quarter of 2002. Total
interval sales for the first quarter of 2003 included 247 biennial intervals
(counted as 124 Vacation Intervals) compared to 512 (256 Vacation Intervals) in
the first quarter of 2002. During the first quarter of 2003, 1,048 upgrade
in-house Vacation Intervals, were sold at an average price of $6,082, compared
to 2,186 upgrade in-house Vacation Intervals sold at an average price of $4,693
during the comparable 2002 period. In 2003, the
16
Company's in-house sales force also sold 763 second Vacation Intervals to
existing owners at an average sales price of $8,440, which when combined with
upgrade sales was an increase of $2.6 million in in-house sales.
Sampler sales decreased $838,000 to $485,000 for the quarter ended March 31,
2003, compared to $1.3 million for the same period in 2002. 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 quarter of 2002 relate to 2000 sales, when the Company
had increased operations.
Interest income decreased 15.6% to $8.8 million for the quarter ended March 31,
2003, from $10.4 million for the same period of 2002. This decrease primarily
resulted from a decrease in notes receivable, net of allowance for doubtful
notes, in 2003 compared to 2002, primarily due to sales of notes receivable to
the SPE.
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 $305,000 to $471,000 for the first quarter of
2003, versus $166,000 for the first quarter of 2002, due to improved operating
results at the management clubs in 2003 compared to 2002.
Other income consists of water and utilities income, marina income, golf course
and pro shop income, and other miscellaneous items. Other income increased
$437,000 to $1.2 million for the first quarter of 2003 compared to $770,000 for
the same period of 2002. The increase primarily relates to a $273,000 gain
associated with the sale of land located in Las Vegas, Nevada, as well as
increased water and utilities income.
Cost of Sales
Cost of sales as a percentage of Vacation Interval sales decreased to 17.7%
during the first quarter of 2003 versus 18.8% for the same period of 2002
primarily due to increased sales prices of upgrades in 2003 compared to 2002.
Overall, the $478,000 decrease in cost of sales in the first quarter of 2003
compared to the first quarter of 2002 was primarily due to the decrease in
Vacation Interval sales.
Sales and Marketing
Sales and marketing costs as a percentage of total sales increased to 56.1% for
the quarter ended March 31, 2003, from 51.2% for the same period of 2002. The
percentage increase resulted from a $544,000 increase of sales and marketing
expense from 2002 to 2003 along with a decrease in total sales of $1.7 million
from 2002 to 2003. The $544,000 increase in sales and marketing expense is
primarily attributable to the development of new upgrade and second-week
ownership marketing programs in 2003 that did not exist in 2002. In addition, it
appears that jobs and the uncertainty about the global unrest that existed
throughout the first quarter of 2003 had a negative impact on touring families
willingness to purchase Vacation Intervals, as approximately the same number of
sales presentations were made in the first quarter of 2003 as 2002, but 475
fewer Vacation Intervals, a 24.9% reduction, were purchased.
Provision for Uncollectible Notes
The provision for uncollectible notes as a percentage of Vacation Interval sales
increased substantially in the first quarter of 2003 to 121.4% compared to 20.0%
for the first quarter of 2002. Management observed that cancellations in the
three months ended March 31, 2003 significantly exceeded the amount that would
have been expected under its estimate for the December 31, 2002 allowance for
uncollectible notes. Accordingly, the estimate was revised in the quarter ended
March 31, 2003 as follows:
- - the basis of the estimate of future cancellations was changed from Vacation
Interval sales to incremental amounts financed, resulting in an increase of
$1.6 million,
- - certain historical cancellations from 2000 and 2001 that were previously
excluded from predictive cancellations, as such cancellations were assumed
to be uncharacteristically large as a result of the Company's class action
notices to all customers and announcements about its liquidity and possible
bankruptcy issues in the first half of 2001, were included in predictive
cancellations, resulting in an increase of $5.6 million,
- - the estimate of cancellations in 7, 8, and 9 years after a sale were
increased, resulting in an increase of $1.6 million,
- - the estimate of inventory recoveries resulting from cancellations was
revised, resulting in an increase of $300,000,
17
- - the ratio of the excess of cancellations in the first quarter over the
estimated cancellations for the same period based on the weighted average
rate of cancellations divided by the incremental amounts financed for the
period 1997 through 2002, was applied to all future estimated
cancellations, resulting in an increase of $15.0 million, and
- - an estimate was added for current notes with customers who received payment
or term concessions that would have been deemed cancellations were it not
for the concessions, resulting in an increase of $4.7 million.
The result of these revisions to the estimate was a $28.7 million increase from
the original estimate for the provision for uncollectible notes in the quarter
ended March 31, 2003. 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 17.5% for the first quarter of 2003, from 20.9% for the same period
of 2002. Overall, operating, general and administrative expense decreased by
$1.9 million for the first quarter of 2003, as compared to the same period of
2002. This was partially due to $676,000 of professional fees that were incurred
in the first quarter of 2002 associated with the restructuring of the Company.
In addition, the Company incurred $1.0 million of audit fees in the first
quarter of 2002 related to the completion of the 2000 audit. No such fees were
incurred in the first quarter of 2003.
Depreciation and Amortization
Depreciation and amortization expense as a percentage of total revenues remained
constant at 3.0% for the quarter ended March 31, 2003 versus 3.0% for the same
quarter of 2002. Overall, depreciation and amortization expense decreased
$87,000 for the first quarter of 2003, as compared to 2002, primarily due to a
general reduction in capital expenditures since 2000.
Interest Expense and Lender Fees
Interest expense and lender fees as a percentage of interest income decreased to
50.3% for the first quarter of 2003, from 67.1% for the same period of 2002.
This decrease is primarily the result of decreased borrowings against pledged
notes receivable, decreased senior subordinated notes due to the debt
restructuring completed in May 2002, and decreased interest income as described
above. Also, the Company's weighted average cost of borrowing decreased to 6.1%
in the first quarter of 2003 compared to 6.6% in the first quarter of 2002.
Gain on Sale of Notes Receivable
Gain on sale of notes receivable was $1.9 million for the first quarter of 2003,
compared to $0 in the same period of 2002. This gain resulted from the sale of
$23.6 million of notes receivable to the SPE in the first quarter of 2003. There
were no such sales in the first quarter of 2002.
Gain on Early Extinguishment of Debt
Gain on early extinguishment of debt was $1.3 million for the quarter ended
March 31, 2003, compared to $0 in the same period of 2002. The gain in 2003
resulted from the early extinguishment of the $8.8 million remaining balance of
the Company's $60 million loan agreement, due August 2003. There were no such
early extinguishments of debt in the first quarter of 2002.
Loss before Provision for Income Taxes
Loss before provision for income taxes increased to $25.8 million for the
quarter ended March 31, 2003, as compared to $2.1 million for the quarter ended
March 31, 2002, as a result of the above mentioned operating results.
18
Provision for Income Taxes
Provision for income taxes as a percentage of loss before provision for income
taxes was 0.1% in the first quarter of 2003, as compared to 0.0% for the first
quarter of 2002. The effective income tax rate is the result of the 2002 and
2003 projected income tax benefits being reduced by the effect of a valuation
allowance, which reduces the projected net deferred tax assets to zero due to
the unpredictability of recovery.
Net Loss
Net loss increased to $25.8 million for the quarter ended March 31, 2003, as
compared to $2.1 million for the quarter ended March 31, 2002, as a result of
the above mentioned operating results.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL COVENANTS. Due to the results of the quarter ended March 31, 2003, the
Company is not in compliance with three of the financial covenants described
above. First, sales and marketing expense for the quarter ended March 31, 2003
was 56.1% of sales, compared to a maximum threshold of 52.5%. Second, the
interest coverage ratio for the last twelve months ended March 31, 2003 was 1.02
to 1.0, compared to a minimum requirement of 1.25 to 1.0. And third, net loss
for the quarter ended March 31, 2003 was $25.8 million, compared to a minimum
requirement of $1.00 net income. Management has notified its secured lenders
that it will not be in compliance with the financial covenants, and has begun
discussions regarding waivers of the defaults and/or modifications to loan
agreements which would bring the Company back into compliance. As of May 14,
2003, all the secured lenders have verbally agreed to modify the sales and
marketing expense ratio covenant. However, the secured lenders have not waived
the covenant defaults related to the interest coverage ratio or the minimum net
income of $1.00. As of May 14, 2003, none of the lenders have declared a
default. Management is attempting to negotiate waivers and or modifications of
its loan agreements, however, it cannot give any assurances that it will be
successful in these negotiations. Although the Company is hopeful that it will
receive relief from its lenders and that its lenders will continue to fund the
Company's operations until negotiations can be completed, there can be no
assurance that the Company's lenders will continue to fund its operations. A
refusal by its lenders to continue funding will have a material and adverse
effect on the Company's operations.
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, the sale of notes receivable to the SPE, 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 customer notes receivable by (i) borrowing at an advance
rate of up to 75% of eligible customer notes receivable, (ii) selling notes
receivable, and (iii) 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 three months ended March 31, 2003, the
Company's operating activities reflected cash used in operating activities of
$1.4 million. During the same period of 2002, the Company's operating activities
reflected cash provided by operating activities of $4.7 million. In 2003, the
decrease in cash provided by operating activities was primarily the result of
increased construction of inventory, decreased payments on notes receivable, and
the March 31, 2003 payment of $1.4 million of accrued interest due April 1,
2003.
During the three months ended March 31, 2003, net cash provided by financing
activities was $466,000 compared to net cash used in financing activities of
$7.7 million in the comparable 2002 period. The increase in cash provided by
financing activities was the result of proceeds from sales of notes receivable
of $19.5 million in 2003, partially offset by increased payments on borrowings
against pledged notes receivable. At March 31, 2003, the Company's revolving
credit facilities provided for loans of up to $254.5 million of which
approximately $213.9 million of principal and interest related to advances under
the credit facilities was outstanding. For the three months ended March 31,
2003, the weighted average cost of funds for all borrowings, including the
senior subordinated debt, was 6.1%. Customer defaults have a significant impact
on cash available to the Company from financing customer notes receivable in
that notes more than 60 days past due are not eligible as collateral. As a
result, the Company must repay borrowings against such delinquent notes.
Effective October 30, 2000, the Company entered into a $100 million revolving
credit agreement to finance Vacation Interval notes receivable through an
off-balance-sheet SPE, formed on October 16, 2000. The agreement presently has a
term of 5 years. However, on April 30, 2004, the second anniversary date of the
amended facility, the
19
SPE's lender under the credit agreement has the right to put, transfer, and
assign to the SPE all of its rights, title, and interest in and to all of the
assets securing the facility at a price equal to the then outstanding principal
balance under the facility. At March 31, 2003, the SPE held notes receivable
totaling $123.5 million, with related borrowings of $97.9 million. Except for
the repurchase of notes that fail to meet initial eligibility requirements, the
Company is not obligated to repurchase defaulted or any other contracts sold to
the SPE. It is anticipated, however, that the Company will place bids in
accordance with the terms of the conduit agreement to repurchase some defaulted
contracts in public auctions to facilitate the re-marketing of the underlying
collateral.
During the first quarter of 2003, the Company sold $23.6 million of notes
receivable and recognized pre-tax gains of $1.9 million. The SPE funded these
purchases through advances under a credit agreement arranged for this purpose.
In connection with these sales, the Company received cash consideration of $19.5
million, which was used to pay down borrowings under its revolving loan
facilities.
For regular federal income tax purposes, the Company reports substantially all
of the Vacation Interval sales it finances under the installment method. Under
this method, income on sales of Vacation Intervals is not recognized until cash
is received, either in the form of a down payment or as installment payments on
customer notes receivable. The deferral of income tax liability conserves cash
resources on a current basis. Interest is imposed, however, on the amount of tax
attributable to the installment payments for the period beginning on the date of
sale and ending on the date the payment is received. 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, although due to existing AMT loss
carryforwards, it is anticipated that no such current AMT liability exists.
Payment of AMT creates a deferred tax asset in the form of a minimum tax credit,
which, unless otherwise limited, reduces the future regular tax liability
attributable to Vacation Interval sales. 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. Subsequent to
December 31, 2000, the Company applied for and received refunds of $8.3 million
and $1.6 million during 2001 and 2002, respectively, as the result of the
carryback of its 2000 AMT loss to 1999, 1998, and 1997. Accordingly, no minimum
tax credit exists currently.
The net operating losses ("NOLs") expire between 2012 through 2021. Realization
of the deferred tax assets arising from NOLs 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 restructuring completed in May 2002, an ownership change within the
meaning of Section 382(g) of the Internal Revenue Code ("the Code") 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, as described above, the use of the Company's minimum tax
credit, if any, 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.
20
Due to the uncertainties mentioned above, the independent auditors report on the
Company's financial statements for the period ended December 31, 2002 contains
an explanatory paragraph concerning the Company's ability to continue as a going
concern.
USES OF CASH. Investing activities typically reflect a net use of cash due to
capital additions. However, net cash provided by investing activities for the
three months ended March 31, 2003 was $2.6 million compared to net cash used in
investing activities of $593,000 during the same period of 2002. The increase in
net cash provided by investing activities relates to proceeds from the sale of
land held for sale of $2.9 million in 2003, partially offset by a reduction in
equipment purchases in 2003. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of and for the three months ended March 31, 2003, 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 $212.8 million at March 31, 2003, is
variable. The impact of a one-point interest rate change on the outstanding
balance of variable-rate financial instruments at March 31, 2003, on the
Company's quarterly results of operations would be approximately $532,000 or
approximately $0.01 per share.
At March 31, 2003, the carrying value of the Company's notes receivable
portfolio approximates fair value because the weighted average interest rate on
the portfolio approximates current interest rates received on similar notes. If
interest rates on the Company's notes receivable are increased or perceived to
be above market rates, 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. The impact of a one-point interest rate change on the portfolio could
result in a fair value impact of $5.5 million or approximately $0.15 per share.
Credit Risk -- The Company is exposed to on-balance sheet credit risk related to
its notes receivable. The Company is exposed to off-balance sheet credit risk
related to notes sold.
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers generally make a down payment of at least 10% of
the purchase price and deliver a promissory note to the Company for the balance.
The promissory notes generally bear interest at a fixed rate, are payable over a
seven-year to ten-year period, and are secured by a first mortgage on the
Vacation Interval. The Company bears the risk of defaults on these promissory
notes, and this risk is heightened inasmuch as the Company generally does not
verify the credit history of its customers and will provide financing if the
customer is presently employed and meets certain household income criteria.
If a buyer of a Vacation Interval defaults, the Company generally must foreclose
on the Vacation Interval and attempt to resell it; the associated marketing,
selling, and administrative costs from the original sale are not recovered; and
such costs must be incurred again to resell the Vacation Interval. Although the
Company in many cases may have recourse against a Vacation Interval buyer for
the unpaid price, certain states have laws that limit the Company's ability to
recover personal judgments against customers who have defaulted on their loans.
Accordingly, the Company has generally not pursued this remedy.
21
Interest Rate Risk -- The Company has historically derived net interest income
from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Company's
indebtedness bears interest at variable rates and the Company's customer
receivables bear interest at fixed rates, increases in interest rates will erode
the spread in interest rates that the Company has historically obtained and
could cause the rate on the Company's borrowings to exceed the rate at which the
Company provides financing to its customers. The Company has not engaged in
interest rate hedging transactions. Therefore, any increase in interest rates,
particularly if sustained, could have a material adverse effect on the Company's
results of operations, cash flows, and financial position.
Availability of Funding Sources -- The Company funds substantially all of the
notes receivable, timeshare inventories, and land inventories which it
originates or purchases with borrowings through its financing facilities, sales
of notes receivable, internally generated funds, and proceeds from public debt
and equity offerings. Borrowings are in turn repaid with the proceeds received
by the Company from repayments of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Company's results of operations, cash flows, and financial
condition.
Geographic Concentration -- The Company's notes receivable are primarily
originated in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk
inherent in such concentrations is dependent upon regional and general economic
stability, which affects property values and the financial stability of the
borrowers. The Company's Vacation Interval inventories are concentrated in
Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in such
concentrations is in the continued popularity of the resort destinations, which
affects the marketability of the Company's products and the collection of notes
receivable.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Company's disclosure controls and procedures.
Based on, and as of the date of, that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures were effective, in all material respects, to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act is recorded, processed, summarized, and reported as and when
required.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation referred to above.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The homeowners' associations of three condominium projects that a former
subsidiary of the Company constructed in Missouri filed separate actions of
unspecified amounts against the Company alleging construction defects and breach
of management agreements. This litigation has been going on for several years.
Discovery continued in the lawsuit during the period ended March 31, 2003, but
is still far from complete. Among other things, the plaintiffs have not yet
turned over the reports of their expert witnesses and the Company is unclear as
to exactly what damages are being claimed by the Plaintiffs. At this time, a
majority of the Company's legal fees and costs and expenses of litigation are
being paid by two insurance carries, subject to a reservation of rights by these
insurers. Since the Company does not know what damages are being claimed, and
cannot predict the final outcome of these claims, it cannot estimate the
additional costs it could incur, or whether its insurance carriers will continue
to cover its costs in connection with these claims.
A purported class action was filed against the Company on October 19, 2001 by
Plaintiffs who each purchased Vacation Intervals from the Company. The
Plaintiffs alleged that the Company violated the Texas Deceptive Trade Practices
Act and the Texas Timeshare Act by failing to deliver to them complete copies of
the contracts for the purchase of the Vacation Intervals as they did not receive
a complete legal description of the Hill Country Resort as attached to the
Declaration of Restrictions, Covenants, and Conditions of the Resort. The
Plaintiffs also claimed that the Company violated various provisions of the
Texas Deceptive Trade Practices Act with respect to the maintenance fees charged
by the Company to its Vacation Interval owners. In November 2002, the Court
denied the Plaintiff's request for class certification. In March 2003,
additional Plaintiffs joined the case, and a Fourth Amended Petition was filed
against the Company and Silverleaf Club alleging additional violations of the
Texas Deceptive Trade Practices Act, breach of fiduciary duty, negligent
misrepresentation, and fraud. The class allegations were also deleted from the
amended Petition. In their Fourth Amended Petition, the Plaintiffs sought
damages in the amount of $1.5 million, plus reasonable attorneys fees and court
costs. The Plaintiffs also sought rescission of their original purchase
contracts with the Company. The Company, Silverleaf Club, and the Plaintiffs
have agreed to a mediated settlement of Plaintiffs' claims. Under the terms of
the settlement, the Company and Silverleaf Club have agreed to pay the
Plaintiffs an aggregate sum of $130,000, and the Plaintiffs have agreed to
convey their Vacation Intervals back to the Company and have agreed to dismiss
the action against the Company and Silverleaf Club with prejudice.
A further purported class action was filed against the Company on February 26,
2002, by a couple who purchased a Vacation Interval from the Company. The
Plaintiffs allege that the Company violated the Texas Government Code by
charging a document preparation fee in regard to instruments affecting title to
real estate. Alternatively, the Plaintiffs allege that the $275 document
preparation fee constituted a partial prepayment that should have been credited
against their note and additionally seek a declaratory judgment. The petition
asserts Texas class action allegations and seeks recovery of the document
preparation fee and treble damages on behalf of both the plaintiffs and the
alleged class they purport to represent, and injunctive relief preventing the
Company from engaging in the unauthorized practice of law in connection with the
sale of its Vacation Intervals in Texas. The Company has been vigorously
contesting the Plaintiffs' claims and believes that it has meritorious defenses
to Plaintiffs' allegations. However, the Company is attempting to settle the
Plaintiffs' claims through continuing settlement negotiations. If the matter
cannot be settled in a manner acceptable to the Company, the Company will
continue to vigorously defend itself against Plaintiffs' claims.
In January 2003, a group of eight related individuals and entities who are
holders of certain of the Company's 10 1/2% senior subordinated notes due 2008
(the "10 1/2% Notes") made oral claims against the Company and a number of its
present and former officers and directors concerning the claimants' open market
purchases of 10 1/2% Notes during 2000 and 2001. The 10 1/2% Notes were
allegedly purchased for an aggregate purchase price of $3.7 million. One of the
eight claimants previously owned common stock in the Company acquired between
1998 and 2000 and also made claims against the Company with regard to
approximately $598,000 in losses allegedly suffered in connection with open
market purchases and sales of the Company's common stock. In February 2003,
these eight claimants, the Company, and certain of its former officers and
directors entered into a tolling agreement for the purposes of preserving the
claimants' rights during the term of the agreement by tolling applicable
statutes of limitations while negotiations between the claimants and the Company
take place. The 10 1/2% Notes are not in default and the Company denies all
liability with regard to the alleged claims of these eight claimants. No
litigation has been filed against the Company or any of its affiliates by these
eight claimants; however, there can be no assurance that these claims will not
ultimately result in litigation involving the Company and/or its affiliates. If
such litigation is filed, the Company intends to vigorously defend against it.
On February 27, 2003, these eight claimants did file suit in state district
court in Dallas, Texas, against the Company's former auditors, Deloitte &
Touche, LLP alleging violation by Deloitte & Touche of the Texas Securities Act,
common law fraud, negligent misrepresentation, fraud in a stock transaction, and
accounting malpractice. The claims against Deloitte & Touche arise from the same
purchases of the Company's 10 1/2% Notes and common stock that formed the basis
for the tolling agreement. Neither the Company nor any of its affiliates is
presently a party to this litigation; however, there can be no assurance that
Deloitte & Touche will not seek to add the Company or certain of its affiliates
as parties to the litigation.
22
The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition.
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 during the quarter ended March 31, 2003:
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: May 15, 2003 By: /s/ ROBERT E. MEAD
------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: May 15, 2003 By: /s/ HARRY J. WHITE, JR.
-----------------------
Harry J. White, Jr.
Chief Financial Officer
23
CERTIFICATION
I, Robert E. Mead, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Silverleaf Resorts, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report are conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ ROBERT E. MEAD
-----------------------------------------
Robert E. Mead
Chairman and Chief Executive Officer
24
CERTIFICATION
I, Harry J. White, Jr., Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Silverleaf Resorts, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
(d) presented in this quarterly report are conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ HARRY J. WHITE, JR.
----------------------------------
Harry J. White, Jr.
Chief Financial Officer
25
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