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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 001-13003
SILVERLEAF RESORTS, INC.
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-2259890
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1221 RIVERBEND DRIVE, SUITE 120 75247
DALLAS, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 214-631-1166
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------------- -------------------------------------------
COMMON STOCK, $.01 PAR NYSE
VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock on March 19,
1999 as reported on the New York Stock Exchange, was approximately $38,519,599.
At March 19, 1999, there were 12,889,417 shares of the Registrant's Common Stock
outstanding.
Documents Incorporated by Reference: Certain portions of the Registrant's
Definitive Proxy Statement, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the close of
the Registrant's 1998 fiscal year, are incorporated by reference in Part III of
this Form 10-K.
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FORM 10-K INDEX
PAGE
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PART I
Items 1 and 2. Business and Properties.................................................... 4
Item 3. Legal Proceedings.......................................................... 38
Item 4. Submission of Matters to a Vote of Security Holders........................ 38
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 39
Item 6. Selected Financial Data.................................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 42
Item 7a. Quantitative and Qualitative Disclosures about Market Risk................. 49
Item 8. Financial Statements and Supplementary Data................................ 49
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure................................................ 49
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 49
Item 11. Executive Compensation..................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 51
Item 13. Certain Relationships and Related Transactions............................. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 51
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES
OVERVIEW
Silverleaf Resorts, Inc. ("Silverleaf" or the "Company") is a leading
developer, marketer, and operator of "drive-to" timeshare resorts. Silverleaf
currently owns and/or operates fourteen "drive-to resorts" in Texas, Missouri,
Illinois, Alabama, North Carolina, South Carolina, Pennsylvania, and Tennessee
(the "Drive-to Resorts"). Silverleaf also owns and/or operates four "destination
resorts" in Missouri, Mississippi, and Massachusetts (the "Destination
Resorts"). The Company also owns five properties that are currently under
development, including three properties being developed as Drive-to Resorts near
Atlanta, Georgia, Kansas City, Missouri, and Philadelphia, Pennsylvania, and two
properties being developed as Destination Resorts in Las Vegas, Nevada, and
Galveston, Texas (collectively, the "New Resorts"). The Drive-to Resorts are
designed to appeal to vacationers seeking comfortable and affordable
accommodations in locations convenient to their residences and are located
proximate to major metropolitan areas. Silverleaf locates its Drive-to Resorts
near principal market areas to facilitate more frequent "short stay" getaways,
which it believes is a growing vacation trend. Silverleaf's Destination Resorts,
which are located in or near areas with national tourist appeal, offer
Silverleaf customers the opportunity to upgrade into a more upscale resort area
as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the
Destination Resorts (collectively, the "Existing Resorts") provide a quiet,
relaxing vacation environment. The New Resorts extend Silverleaf's core strategy
of drive-to getaways with opportunity to upgrade to Destination Resorts.
Silverleaf believes its resorts offer its customers an economical alternative to
commercial vacation lodging. The average price for an annual one-week Vacation
Interval for a two-bedroom unit at the Existing Resorts was $8,042 for 1998 and
$7,834 for 1997, which compares favorably to an industry average price of
$11,458 for 1997.
Owners of Silverleaf Vacation Intervals ("Silverleaf Owners") enjoy benefits
which are uncommon in the timeshare industry. These benefits include (i) use of
vacant lodging facilities at the Existing Resorts at no extra cost through
Silverleaf's "Endless Escape" program; (ii) year-round access to the Existing
Resorts' non-lodging amenities such as fishing, boating, horseback riding,
tennis, or golf on a daily basis for little or no additional charge; and (iii)
the right to exchange a week of vacation ownership ("Vacation Interval") for a
different time period or different Existing Resort through Silverleaf's internal
exchange program. These benefits are subject to availability and other
limitations. Most Silverleaf Owners may also enroll in the Vacation Interval
exchange network operated by Resort Condominiums International ("RCI").
OPERATIONS
Silverleaf is in the business of marketing and selling Vacation Intervals.
Silverleaf's principal activities in this regard include (i) acquiring and
developing timeshare resorts; (ii) marketing and selling one week annual and
biennial Vacation Intervals to prospective first-time owners; (iii) marketing
and selling upgraded Vacation Intervals to existing Silverleaf Owners; (iv)
providing financing for the purchase of Vacation Intervals; and (v) operating
timeshare resorts. The Company has substantial in-house capabilities which
enable it to coordinate all aspects of development and expansion of the Existing
Resorts and New Resorts and the development of any new resorts, including site
selection, design, and construction pursuant to standardized plans and
specifications. The Company also performs substantially all marketing and sales
functions internally and continues to make significant investments in operating
technology, including sophisticated telemarketing and computer systems and
proprietary software applications. The Company identifies potential purchasers
through internally developed marketing techniques, and sells Vacation Intervals
through on-site sales offices located at certain of its resorts which are
located in close proximity to major metropolitan areas. This practice allows the
Company an alternative to the more expensive marketing costs of subsidized
airfare and lodging which are typically associated with the timeshare industry.
The Company believes its marketing program and operating systems enable it to
market and sell Vacation Intervals at a lower cost than its competitors in the
timeshare industry.
As part of the Vacation Interval sales process, the Company offers potential
purchasers financing of up to 90% of the purchase price over a seven to ten year
period. The Company has historically financed its operations by borrowing from
third-party lending institutions at an advance rate of up to 70% of eligible
customer receivables. At December 31, 1998, the Company had a portfolio of
approximately 36,075 customer promissory notes totaling approximately $196.9
million with an average yield of 14.2% per annum, which compares favorably to
the Company's weighted average cost of borrowings of 9.6% per annum. At December
31, 1998, approximately $8.8 million in principal, or 4.5% of the Company's
loans to Silverleaf Owners, were 61 to 120 days past due, and approximately
$17.8 million in principal, or 9.0% of the Company's loans to Silverleaf Owners,
were more than 120 days past due. The Company provides for uncollectible notes
by reserving an amount which management believes is sufficient to cover
anticipated losses from customer defaults.
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Each Existing Resort has a timeshare owners' association (a "Club"). Each
Club operates through one of three centralized organizations, referred to as
Silverleaf Club, Oak N' Spruce Club, or Crown Club (collectively "Management
Clubs") to manage the Existing Resorts on a collective basis. Crown Club
consists of several individual Club agreements which have terms of two to five
years with a minimum of two renewal options remaining. The Management Clubs, in
turn, have contracted with the Company to perform the supervisory, management,
and maintenance functions at the Existing Resorts on a collective basis. All
costs of operating the Existing Resorts, including management fees to the
Company, are covered by monthly dues paid by Silverleaf Owners to their
respective Clubs as well as income generated by the operation of certain
amenities at the Existing Resorts. Effective January 1999, Oak N' Spruce Club
was merged into a Club within Silverleaf Club.
RECENT DEVELOPMENTS
o CONTINUED DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997,
Silverleaf purchased the Timber Creek Resort for $1.2 million for
development as a Drive-to Resort. Timber Creek Resort is located 50 miles
south of St. Louis, Missouri. Silverleaf intends to develop approximately
528 additional units (27,456 Vacation Intervals) at the Timber Creek
Resort. Construction of 72 units was complete as of December 31, 1998.
Sales of Vacation Intervals at Timber Creek Resort began in October 1997.
o CONTINUED DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf
purchased the Fox River Resort for $1.7 million for development as a
Drive-to Resort. Fox River Resort is located approximately 70 miles
southwest of Chicago, Illinois. Silverleaf intends to develop
approximately 740 additional units (38,480 Vacation Intervals) on this
property. Construction of 60 units was complete as of December 31, 1998.
Sales of Vacation Intervals at Fox River Resort began in November 1997.
o CONTINUED DEVELOPMENT OF OAK N' SPRUCE RESORT. In December 1997,
Silverleaf acquired the Oak N' Spruce Resort, an existing hotel/timeshare
resort, in the Berkshire Mountains of western Massachusetts for $5.1
million as a new Destination Resort (originally classified as a Drive-to
Resort) to serve Boston and the greater New York City market. The Oak N'
Spruce Resort presently has 132 existing units. Silverleaf intends to
develop approximately 568 new units (29,536 Vacation Intervals) at this
resort. Silverleaf's sales of Vacation Intervals at Oak N' Spruce Resort
began in January 1998.
o CONTINUED DEVELOPMENT OF THE VILLAGES. The Villages resort, located on
the shores of Lake Palestine, approximately 100 miles east miles east of
Dallas, Texas, has 276 existing units. Silverleaf intends to develop
approximately 424 new units (22,048 Vacation Intervals) at this resort.
o CONTINUED DEVELOPMENT OF HOLIDAY HILLS RESORT. The Holiday Hills Resort,
located two miles east of Branson, Missouri, in Taney County, has 78
existing units. Silverleaf intends to develop approximately 722 new units
(37,452 Vacation Intervals) at this resort.
o CONTINUED DEVELOPMENT OF HILL COUNTRY RESORT. The Hill Country Resort,
located near Canyon Lake in the hill country of central Texas between
Austin and San Antonio, has 189 existing units. Silverleaf intends to
develop approximately 411 new units (21,364 Vacation Intervals) at this
resort.
o DEVELOPMENT OF LAS VEGAS, NEVADA, SITE. In November 1997, Silverleaf
acquired a two acre parcel near the "strip" in Las Vegas, Nevada, for
$2.7 million. Silverleaf intends to develop this property as a new
Destination Resort which will contain approximately 157 units (8,164
Vacation Intervals).
o DEVELOPMENT OF GALVESTON, TEXAS, SITE. In December 1997 and February
1998, Silverleaf acquired two adjoining tracts of land in Galveston,
Texas, for approximately $1.7 million, to be developed as a new
beach-front Gulf Coast Destination Resort (i.e., Silverleaf's Seaside
Resort). Silverleaf intends to develop approximately 282 units (14,664
Vacation Intervals) at this resort.
o ACQUISITION OF CROWN MANAGEMENT RIGHTS. In May 1998, the Company
consummated an agreement with Crown Resort Company, LLC ("Crown") to
acquire management rights to eight timeshare resorts in Alabama,
Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, and
Texas for $4.8 million. At December 31, 1998, these eight resorts had
approximately 25,017 timeshare owners. As part of this agreement,
Silverleaf received approximately 1,800 unsold Vacation Intervals and
certain equipment at the eight resorts.
o PURCHASE OF ATLANTA, GEORGIA, SITE. The Company consummated several
transactions in the fourth quarter of 1998 whereby 275 acres of property,
including a 221 acre golf course, 72 miles north of Atlanta, Georgia,
were acquired for approximately $4.2 million. The property is being
developed as a Drive-to Resort (i.e., Apple Mountain Resort). Silverleaf
intends to develop approximately 608 units (31,616 Vacation Intervals) at
this resort.
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o PURCHASE OF KANSAS CITY, MISSOURI, SITE. In September 1998, the Company
purchased 260 acres of undeveloped land near Kansas City, Missouri, for
approximately $1.5 million. The property will be developed as a Drive-to
Resort (i.e., Lakeview Lodge). Silverleaf intends to develop
approximately 608 units (31,616 Vacation Intervals) at this resort.
o PURCHASE OF PHILADELPHIA, PENNSYLVANIA, SITE. In December 1998, the
Company purchased 1,940 acres of undeveloped land near Philadelphia,
Pennsylvania, for approximately $1.9 million. The property will be
developed as a Drive-to Resort (i.e., Beech Mountain Resort). Silverleaf
has requested initial regulatory approval of 144 units. If fully
developed, the property could accommodate approximately 608 units (31,616
Vacation Intervals) at this resort.
o INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to
the acquisitions described above, Silverleaf has also been successful in
improving internal sales growth at the Existing Resorts. During 1998,
Silverleaf sold 13,191 Vacation Intervals (excluding upgrades) compared
to 6,592 and 5,634 during 1997 and 1996, respectively. Total sales
increased to $138.4 million in 1998 from $70.1 million and $47.6 million
in 1997 and 1996, respectively.
o INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. During 1998,
Silverleaf invested approximately $3.6 million in new automated dialers,
telephone systems, computer systems, and central marketing facilities to
improve Silverleaf's operating and telemarketing systems.
o IMPROVEMENTS IN COLLECTION EFFORTS. The Company has improved its
provision for uncollectible notes from 15.3% of Vacation Interval sales
in 1997 to 12.1% of Vacation Interval sales in 1998. This is primarily
the result of improvements in the collections efforts, including
increased staffing, improved collections administrative software, and the
implementation of a program through which certain delinquent loans are
assumed by existing owners with a consistent payment history. Also, in
the fourth quarter of 1998, the Company initiated an auto-debit program
whereby new Vacation Interval buyers can elect to have their monthly dues
and installment payments charged directly to their bank accounts.
GROWTH STRATEGY
Silverleaf intends to grow through the following strategies:
INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends
to capitalize on its significant expansion capacity at the Existing Resorts and
the New Resorts by increasing marketing, sales, and development activities. At
December 31, 1998, Silverleaf owned approximately 1,500 acres of land that were
available for further development of timeshare units and amenities under
Silverleaf's master plan. Such plan projects development of 6,632 additional
units (including 126 units presently under construction), which would result in
344,584 additional Vacation Intervals. During 1998, Silverleaf has enhanced its
marketing efforts, including increased telemarketing capacity through
investments in computer and automated dialing technology, increased its sales
force, enhanced its lead generation methods, completed the construction of new
sales offices and other amenities, enhanced its collection efforts, and
commenced the development of new lodging facilities. Furthermore, Silverleaf
continues to emphasize its Endless Escape program designed to accommodate
shorter, "getaway" vacations and market secondary products such as biennial
(alternate year) intervals and short-term leasing packages ("Samplers") which
are designed to broaden Silverleaf's potential market with a wider price range
of product.
INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue
to improve operating margins by increasing sales of upgraded Vacation Intervals
to existing Silverleaf Owners since these sales have significantly lower sales
and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i)
an interval in a newly designed and constructed standard unit; (ii) an interval
in a larger or higher quality unit; (iii) an interval during a more desirable
time period; (iv) an interval at a different Drive-to Resort; or (v) an interval
at a Destination Resort. Silverleaf has designed specific marketing and sales
programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf
continues to construct higher quality, larger units for sale as upgraded
intervals, as well as developing sites at Las Vegas and Galveston as new upgrade
locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury
"Presidents View" units are offered for sale at prices ranging from $12,500 to
$20,500 per Vacation Interval. Intervals exchanged for upgraded intervals are
added back to inventory, at historical cost, for resale at the current offering
price. Sales of upgrades increased to $29.5 million in 1998, from $16.9 million
in 1997 (upgrade sales represented 21.8% of Silverleaf's Vacation Interval sales
in 1998 as compared to 24.6% for 1997). Silverleaf incurs additional sales
commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by
purchasers of upgraded intervals. Such sales absorb their proportionate share of
marketing costs to the extent they displace the sale of another interval,
although they do not directly result in incremental marketing costs.
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DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1998, Silverleaf
purchased three sites for development as Drive-to Resorts and acquired
management rights to eight existing timeshare resorts, including seven Drive-to
Resorts and one Destination Resort. Silverleaf continues to seek new properties
for Drive-to Resorts in scenic wooded areas on lakes or waterways that are near
major metropolitan areas with favorable demographic characteristics. For
Destination Resorts, Silverleaf seeks popular destination resort areas that are
easily accessible to Silverleaf Owners. Silverleaf is currently exploring a
number of other property acquisition opportunities, and intends to continue
analyzing expansion through acquiring and/or developing additional resorts.
COMPETITIVE ADVANTAGES
Silverleaf believes the following characteristics afford it certain
competitive advantages:
LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With on-site sales offices
within a one to two-hour drive of its targeted customers, Silverleaf can invite
potential customers to tour the Drive-to Resorts without offering subsidized
airline tickets and lodging, a significant marketing expense typically incurred
by competitors in the industry. Silverleaf has also reduced marketing,
operating, and administrative costs through centralization and automation of
many functions. While marketing and sales costs as a percentage of sales will
increase for recently acquired new resorts, the Company believes that these
costs will, over time, return to historical levels.
CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located
within a two-hour drive of a majority of the target customers' residences, which
accommodates the growing demand for shorter, more frequent, close-to-home
vacations. This proximity facilitates use of Silverleaf's Endless Escape
Program, allowing Silverleaf Owners to use vacant units for no additional
charge, subject to availability and certain limitations. Silverleaf believes it
is the only timeshare operator in the industry which offers its customers these
benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort
amenities year-round on a "country-club" basis. See "Features Common to Existing
Resorts" contained elsewhere herein.
SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1998, Silverleaf had
an inventory of 14,453 Vacation Intervals, and a master plan to construct new
units which will result in up to 226,908 additional Vacation Intervals at the
Existing Resorts and 117,676 Vacation Intervals at the New Resorts. Silverleaf's
master plan for construction of new units is contingent upon future sales at the
Existing Resorts and New Resorts and the availability of financing, grant of
governmental permits, and future land-planning and site-layout considerations.
IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing,
development, and property management capabilities. While Silverleaf utilizes
outside contractors to supplement internal resources, when appropriate, the
breadth of Silverleaf's internal capabilities allows greater control over all
phases of its operations and helps maintain operating standards and reduce
overall costs.
LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and
generally employs standard architectural designs and operating procedures which
it believes significantly reduce construction and operating expenses.
Standardization and integration also allow Silverleaf to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing
Resorts can normally be constructed on an "as needed" basis within 180 days.
CENTRALIZED PROPERTY MANAGEMENT. Silverleaf presently operates all of the
Existing Resorts on a centralized and collective basis, with operating and
maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes
that consolidation of resort operations benefits Silverleaf Owners by providing
them with a uniform level of service, accommodations, and amenities on a
standardized, cost-effective basis. Integration also facilitates Silverleaf's
internal exchange program, the Endless Escape Program, and the resorts'
qualification in external Vacation Interval exchange programs.
EXPERIENCED MANAGEMENT. The Company's senior management has extensive
experience in the acquisition, development, and operation of timeshare resorts.
Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than
19 years of experience in the timeshare industry and since 1995 has served as a
trustee member of American Resort Developers Association ("ARDA"), the primary
trade association for the timeshare industry. The Company's senior officers have
an average of eleven years of experience in the timeshare industry.
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RESORTS SUMMARY
The following tables set forth certain information regarding each of the
Existing Resorts and New Resorts at December 31, 1998, unless otherwise
indicated.
EXISTING RESORTS
VACATION INTERVALS
UNITS AT RESORTS AT RESORTS
----------------------- --------------------------
PRIMARY INVENTORY INVENTORY
MARKET AT PLANNED AT PLANNED
RESORT/LOCATION SERVED 12/31/98 EXPANSION(b) 12/31/98 EXPANSION
- ---------------------- ------------ -------- ------------ ---------- ------------
DRIVE-TO RESORTS
Holly Lake Dallas- 130 108 661 5,508(d)
Hawkins, TX Ft. Worth, TX
The Villages Dallas- 276 424 2,132 22,048(f)(i)
Flint, TX Ft. Worth, TX
Lake O' The Woods Dallas- 64 16 218 800(d)
Flint, TX Ft. Worth, TX
Piney Shores Houston, TX 148 452 2,102 23,488(f)(i)
Conroe, TX
Hill Country Austin-San 189(h) 411 2,482 21,364(f)(i)
Canyon Lake, TX Antonio, TX
Timber Creek St. Louis, 72 528(i) 2,528 27,456(f)(i)
DeSoto, MO MO
Fox River Chicago, IL 60 740(i) 317 38,480(f)(i)
Sheridan, IL
Treasure Lake Central PA 145 --(e) 490 --(e)
Dubois, PA
Alpine Bay Central AL 54 --(e) -- --(e)
Alpine, AL
Beech Mountain Lakes Eastern PA, 54 --(e) 118 --(e)
Drums, PA NY
Foxwood Hills Eastern SC, 114 --(e) 496 --(e)
Westminster, SC Western GA
Lake Royale Raleigh- 16 --(e) 215 --(e)
Bunn, NC Durham, NC
Tansi Resort Nashville- 124 --(e) 364 --(e)
Crossville, TN Knoxville, TN
Westwind Manor Dallas- 37 --(e) 342 --(e)
Bridgeport, TX Ft. Worth, TX
DESTINATION RESORTS
Ozark Mountain Branson, 124 400 519 20,776(f)(i)
Kimberling City, MO MO
Holiday Hills Branson, 78 722 518 37,452(f)(i)
Branson, MO MO
Oak N' Spruce Boston, MA 132 568 786 29,536(f)(i)
South Lee, MA New York, NY
Hickory Hills Gulf Coast, 80 --(e) 165 -- (e)
Gautier, MS MS
------ ------ ------ ------
Total 1,897 4,369 14,453 226,908
====== ====== ====== =======
VACATION
INTERVALS
SOLD(a)
------- AVERAGE
PRIMARY DATE IN SALES
MARKET SALES THROUGH 1998 PRICE AMENITIES/
RESORT/LOCATION SERVED COMMENCED 12/31/98 ONLY IN 1998 ACTIVITIES(c)
- ---------------------- ------------ ------------ --------- ---------- ---------- -------------
DRIVE-TO RESORTS
Holly Lake Dallas- 1982 5,839 1,070 $7,341 B,F,G,H,M,S,T
Hawkins, TX Ft. Worth, TX
The Villages Dallas- 1980 12,220 2,670 7,816 B,F,H,M,S,T
Flint, TX Ft. Worth, TX
Lake O' The Woods Dallas- 1987 2,982 605 6,873 F,M,S,T(g)
Flint, TX Ft. Worth, TX
Piney Shores Houston, TX 1988 5,594 1,700 8,534 B,F,H,M,S,T
Conroe, TX
Hill Country Austin-San 1984 6,968 1,500 8,471 M,S,T(g)
Canyon Lake, TX Antonio, TX
Timber Creek St. Louis, 1997 1,216 1,110 8,011 B,F,G,M,S,T
DeSoto, MO MO
Fox River Chicago, IL 1997 2,804 2,515 8,710 G,M,S,T
Sheridan, IL
Treasure Lake Central PA 1998 6,905 139 4,196 G,B,F,S,T,M
Dubois, PA
Alpine Bay Central AL 1998 2,754 4 4,108 G,B,F,S,T,M
Alpine, AL
Beech Mountain Lakes Eastern PA, 1998 2,636 51 4,098 B,F,S,T
Drums, PA NY
Foxwood Hills Eastern SC, 1998 5,318 5 1,786 G,T,F,S,M(g)
Westminster, SC Western GA
Lake Royale Raleigh- 1998 601 -- -- G,B,F,S,T
Bunn, NC Durham, NC
Tansi Resort Nashville- 1998 5,960 5 3,471 T,G,F,B,M
Crossville, TN Knoxville, TN
Westwind Manor Dallas- 1998 1,545 -- -- G,F,M,S,T
Bridgeport, TX Ft. Worth, TX
DESTINATION RESORTS
Ozark Mountain Branson, 1982 5,705 273 10,022 B,F,H,M,S,T
Kimberling City, MO MO
Holiday Hills Branson, 1984 3,490 377 10,755 G,M,S,T(g)
Branson, MO MO
Oak N' Spruce Boston, MA 1998 6,078 1,165 6,488 F,G,S,T
South Lee, MA New York, NY
Hickory Hills Gulf Coast, 1998 3,915 2 2,935 B,F,G,M,T,S
Gautier, MS MS
------- ------ ------
Total 82,530 13,191 $ 8,042
======= ====== =======
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NEW RESORTS
PRIMARY DATE PLANNED PLANNED EXISTING AND PLANNED
RESORT/LOCATION MARKET SERVED ACQUIRED UNITS(i) INTERVALS(i) AMENITIES/ACTIVITIES
--------------- --------------- -------- -------- ------------ --------------------
Galveston, TX... Houston, TX 1997(j) 282(l) 14,664(f)(l) B,F,M,S,T
Las Vegas, NV... Las Vegas, NV 1997 157(l) 8,164(f)(l) S
Clarkesville, GA Atlanta, GA 1998 608 31,616(f)(k) G,M,H,S,T
Smithville, MO.. Kansas City, MO 1998 608(k) 31,616(f)(k) F,M,S,T(g)
Drums, PA....... Philadelphia, PA 1998 608(k) 31,616(f)(k)(m) B,F,M,S,T
------ -------
Total... 2,263 117,676
====== =======
- ----------
(a) These totals do not reflect sales of upgraded Vacation Intervals to
Silverleaf Owners. For the year ended December 31, 1998, upgrade sales at
the Existing Resorts were as follows:
AVERAGE SALES PRICE
FOR THE YEAR
ENDED 12/31/98
UPGRADED VACATION -- NET OF
RESORT INTERVALS SOLD EXCHANGED INTERVAL
------------------ ------------------ ------------------
Holly Lake....................... 271 $ 3,376
The Villages..................... 1,041 4,267
Lake O' The Woods................ 159 3,501
Piney Shores..................... 512 3,493
Hill Country..................... 757 3,840
Timber Creek..................... 154 3,339
Fox River........................ 253 3,059
Ozark Mountain................... 534 3,976
Holiday Hills.................... 2,621 5,068
Oak N' Spruce.................... 505 4,223
Beech Mountain................... 3 6,167
Treasure Lake.................... 7 5,825
--------- --------
6,817 $ 4,327
========= ========
(b) Represents units included in the Company's master plan. This plan is subject
to change based upon various factors, including consumer demand, the
availability of financing, grant of governmental land-use permits, and
future land-planning and site layout considerations. The following chart
reflects the status of certain planned units at December 31, 1998:
LAND-USE LAND-USE LAND-USE
PROCESS PROCESS PROCESS CURRENTLY IN SHELL
NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
Holly Lake ............ 54 -- 50 -- 4 108
The Villages .......... 226 -- 180 18 -- 424
Lake O' The Woods ..... -- -- 16 -- -- 16
Piney Shores .......... 236 54 162 -- -- 452
Hill Country .......... 171 -- 220 16 4 411
Timber Creek .......... 432 -- 96 -- -- 528
Fox River ............. 626 -- 84 30 -- 740
Ozark Mountain ........ 364 -- 12 12 12 400
Holiday Hills ......... 342 180 160 26 14 722
Oak N' Spruce ......... 406 60 78 24 -- 568
------------ ------------ ------------ ------------ ------------ ------------
2,857 294 1,058 126 34 4,369
============ ============ ============ ============ ============ ============
"Land-Use Process Pending" means that the Company has commenced the
process which the Company believes is required under current law in order to
obtain the necessary land-use authorizations from the applicable local
governmental authority with jurisdiction, including submitting for approval
any architectural drawings, preliminary plats, or other attendant items as
may be required.
"Land-Use Process Complete" means either that (i) the Company believes
that it has obtained all necessary land-use authorizations under current law
from the applicable local governmental authority with jurisdiction,
including the approval and filing of any required preliminary or final plat
and the issuance of building permit(s), in each case to the extent
applicable, or (ii) upon payment of any required filing or other fees, the
Company believes that it will under current law obtain such necessary
authorizations without further process.
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The 34 "Shell Complete" units are currently devoted to such uses as a
general store, registration office, sales office, activity center,
construction office, or pro shop. The Company anticipates that these units
will continue to be used for such purposes during 1999.
(c) Principal amenities available to Silverleaf Owners at each resort are
indicated by the following symbols: B -- boating; F -- fishing; G -- golf
course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and
T -- tennis.
(d) These figures are based primarily on 50 one-week intervals per unit.
(e) The Company has management rights with respect to these resorts and
presently has no ability to expand the resorts.
(f) These figures are based primarily on 52 one-week intervals per unit.
(g) Boating is available near the resort.
(h) Includes three units which have not been finished-out for accommodations and
which are currently used for other purposes.
(i) Engineering, architectural, and construction estimates have not been
completed by the Company, and there can be no assurance that the Company
will develop these properties at the unit numbers currently projected.
(j) One portion of this tract was acquired in February 1998.
(k) The Company has not commenced the timeshare permit process. The Company has
commenced the land use permit process.
(l) The Company has commenced the timeshare permit application process, but has
not yet received a permit.
(m) The Company has requested regulatory approval to initially develop 144
units. This number reflects the approximate number of units that could be
accommodated on the property if fully developed.
FEATURES COMMON TO EXISTING RESORTS
Drive-to Resorts are primarily located in rustic areas offering Silverleaf
Owners a quiet, relaxing vacation environment. Furthermore, the resorts offer
different vacation activities, including golf, fishing, boating, swimming,
horseback riding, tennis, and archery. Destination Resorts are located in or
near areas with national tourist appeal. Features common to the Existing Resorts
include the following:
ENDLESS ESCAPE PROGRAM. The Company's Endless Escape Program offers
Silverleaf Owners a substantial benefit not typically enjoyed by many other
timeshare owners. In addition to the right to use a unit one week per year, the
Endless Escape Program allows a Silverleaf Owner to also use vacant units at any
of the Existing Resorts for no additional charge. The Endless Escape Program is
limited based on the availability of units which include unused intervals and
unsold inventory. Silverleaf Owners who have utilized the resort less frequently
are given priority to use the program and may only use an interval with an equal
or lower rating than the owned Vacation Interval. The Company believes this
program is important as many vacationers prefer shorter two to three day
vacations.
The Company changed the Endless Escape Program for customers who purchase a
Vacation Interval after July 1, 1998. Customers who purchase a Vacation Interval
at a Drive-to Resort after July 1, 1998 will not be able to use the Endless
Escape Program at the Company's Destination Resorts, including the New Resorts
in Galveston and Las Vegas. However, customers who are or become Silverleaf
Owners before such date will be able to use the Endless Escape Program at all
Destination Resorts, except the Galveston and Las Vegas resorts. Silverleaf
Owners who purchase a Vacation Interval at any Destination Resort after such
date will be able to use the Endless Escape Program at any of Silverleaf's
resorts, including the New Resorts at Galveston and Las Vegas.
YEAR-ROUND USE OF AMENITIES. Even when not using the lodging facilities,
Silverleaf Owners have unlimited year-round day usage of the amenities located
at the Existing Resorts, such as boating, fishing, miniature golf, tennis,
swimming, or hiking, for little or no additional cost. Certain amenities,
however, such as golf, horseback riding, or watercraft rentals, may require a
usage fee.
EXCHANGE PRIVILEGES. Each Silverleaf Owner has certain exchange privileges
which may be used on an annual basis to (i) exchange an interval for a different
interval (week) at the same resort so long as the different interval is of an
equal or lower rating; or
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(ii) exchange an interval for the same interval (week) at any other of the
Existing Resorts. These intra-company exchange rights are a convenience
Silverleaf provides its members as an accommodation to them, and are conditioned
upon availability of the desired interval or resort. The Company executed
approximately 1,478 intra-company exchanges in 1998. In addition, for an annual
fee of approximately $84, most Silverleaf Owners may join the exchange program
administered by RCI.
DEEDED OWNERSHIP. The Company typically sells a Vacation Interval which
entitles the owner to use a specific unit for a designated one-week interval
each year. The Vacation Interval purchaser receives a recorded deed which grants
the purchaser a percentage interest in a specific unit for a designated week.
The Company also sells a biennial (alternate year) Vacation Interval which
allows the owner to use a unit for a one-week interval every other year with
reduced dues.
MANAGEMENT CLUBS. Each of the Existing Resorts has a Club for the benefit of
the Silverleaf Owners. The Clubs operate under one of the Management Clubs to
manage the Existing Resorts on a centralized and collective basis. The
Management Clubs have contracted with the Company to perform the supervisory,
management, and maintenance functions granted by the Clubs to the Management
Clubs. Costs of these operations are covered by monthly dues paid by Silverleaf
Owners to their respective Clubs together with income generated by the operation
of certain amenities at the Existing Resorts. See "Clubs / Management Clubs"
contained elsewhere herein. Due to Nevada timeshare laws, the proposed resort in
Las Vegas will not be managed by the Management Clubs.
ON-SITE SECURITY. The Existing Resorts are patrolled by security personnel
who are either employees of the Management Clubs or personnel of independent
security service companies which have contracted with the Clubs.
DESCRIPTION OF EXISTING RESORTS OWNED AND OPERATED BY THE COMPANY
HOLLY LAKE RESORT. Holly Lake is a family-oriented golf resort located in
the Piney Woods of East Texas, approximately 105 miles east of Dallas. The
timeshare portion of Holly Lake is part of a 4,300 acre mixed-use development of
single-family lots and timeshare units with other third-party developers. The
Company owns approximately 2,740 acres within Holly Lake, of which approximately
2,667 may not be developed due to deed restrictions. At December 31, 1998,
approximately 27 acres were developed and approximately 45 remaining acres are
currently planned by the Company to be used for future development.
At December 31, 1998, 130 units were completed and an additional 108 units
are planned for development. Three different types of units are offered at the
resort: (i) two bedroom, two bath, wood siding, and stucco fourplexes; (ii) one
bedroom, one bath, one sleeping loft, log construction duplexes; and (iii) two
bedroom, two bath, log construction fourplexes. Each unit has a living room with
sleeper sofa and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and vaulted ceilings. Certain units include
interior ceiling fans, imported ceramic tile, over-sized sliding glass doors,
and rattan and pine furnishings.
Amenities at the resort include an 18-hole golf course with pro shop;
19th-hole private club and restaurant; Holly Lake Restaurant; Country Store;
indoor rodeo arena and stables; six tennis courts (two lighted); four different
lakes (one with sandy swimming beach and swimming dock, one with boat launch for
water skiing); two swimming pools with bathhouses; children's pool and pavilion;
recently completed hiking/nature trail; children's playground area; two
miniature golf courses; five picnic areas; activity center with big screen
television; gameroom with arcade games and pool tables; horseback trails;
activity areas for basketball, horseshoes, volleyball, shuffleboard, and
archery; and camp sites with electrical and water hookups. Silverleaf Owners can
also rent canoes, bicycles, and water trikes. Homeowners in neighboring
subdivisions are entitled to use the amenities at Holly Lake pursuant to
easements or use agreements.
At December 31, 1998, the resort contained 6,500 Vacation Intervals, of
which 661 intervals remained available for sale. The Company plans to build an
additional 108 units, which would yield an additional 5,508 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$5,500 to $12,500 for one-week stays. During 1998, 1,070 Vacation Intervals were
sold.
THE VILLAGES AND LAKE O' THE WOODS RESORTS. The Villages and Lake O' The
Woods are sister resorts located on the shores of Lake Palestine, approximately
100 miles east of Dallas, Texas. The Villages, located approximately five miles
northwest of Lake O' The Woods, is an active sport resort popular for
water-skiing and boating. Lake O' The Woods is a quiet wooded resort where
Silverleaf Owners can enjoy the seclusion of dense pine forests less than two
hours from the Dallas-Fort Worth metroplex. The Villages is a mixed-use
development of single-family lots and timeshare units, while Lake O' The Woods
has been developed solely as a timeshare resort. The two resorts contain
approximately 615 acres, of which approximately 379 may not be developed due to
deed restrictions. At December 31, 1998, approximately 92.5 acres were developed
such that approximately 143.5 remaining acres are currently planned by the
Company to be used for future development.
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At December 31, 1998, 276 units were completed at The Villages and 64 units
were completed at Lake O' The Woods. An additional 424 units and 16 units are
planned for development at The Villages and Lake O' The Woods, respectively.
There are five different types of units at these resorts: (i) three bedroom, two
and one-half bath, wood siding exterior duplexes and fourplexes (two units);
(ii) two bedroom, two and one-half bath, wood siding exterior duplexes and
fourplexes; (iii) two bedroom, two bath, brick and siding exterior fourplexes;
(iv) two bedroom, two bath, siding exterior fourplexes, sixplexes, and
three-story twelveplexes; and (v) one bedroom, one bath with two-bed loft
sleeping area, log construction duplexes. Amenities within each unit include
full kitchen, whirlpool tub, and color television. Certain units include
interior ceiling fans, ceramic tile, and/or a fireplace. "Presidents Harbor"
units feature a larger, more spacious floor plan (1,255 square feet), front and
back verandas, washer and dryer, and a more elegant decor.
Both resorts are situated on Lake Palestine, a 27,000 acre public lake.
Recreational facilities and improvements at The Villages include a full service
marina with convenience store, boat launch, water-craft rentals, and covered and
locked rental boat stalls; two swimming pools; lighted tennis court; miniature
golf course; nature trails; camp sites; riding stables; soccer/softball field;
children's playground; RV sites; a new 9,445 square foot activity center with
movie theater, wide-screen television, reading room, tanning beds, pool table,
and small indoor gym; and competitive sports facilities which include horseshoe
pits, archery range, and shuffleboard, volleyball, and basketball courts.
Silverleaf Owners at The Villages can also rent or use bicycles, jet skis, motor
boats, paddle boats, pontoon boats, and water trikes. Neighboring homeowners are
also entitled to use these amenities pursuant to a use agreement.
Recreational facilities at Lake O' The Woods include swimming pool,
bathhouse, lighted tennis court, a recreational beach area with picnic areas, a
fishing pier on Lake Palestine, nature trails, soccer/softball field, children's
playground, RV sites, an activity center with wide-screen television and pool
table, horseshoe pits, archery range, putting green, miniature golf course,
shuffleboard, volleyball, and basketball courts. Guests can also ride horses or
rent bicycles.
At December 31, 1998, The Villages contained 14,352 total Vacation
Intervals, of which 2,132 remained available for sale. The Company plans to
build 424 additional units at The Villages, which would yield an additional
22,048 Vacation Intervals available for sale. At December 31, 1998, Lake O' The
Woods contained 3,200 total Vacation Intervals, of which 218 remained available
for sale. The Company plans to build 16 additional units at Lake O' The Woods,
which would yield 800 additional Vacation Intervals available for sale. Vacation
Intervals at The Villages and Lake O' The Woods are currently priced from $5,500
to $14,500 for one-week stays (and start at $3,800 for biennial intervals),
while one-week "Presidents Harbor" intervals are priced at $12,500 to $18,500
depending on the value rating of the interval. During 1998, 2,670 and 605
Vacation Intervals were sold at The Villages and Lake O' The Woods,
respectively.
PINEY SHORES RESORT. Piney Shores Resort is a quiet, wooded resort ideally
located for day-trips from metropolitan areas in the southeastern Gulf Coast
area of Texas. Piney Shores Resort is located on the shores of Lake Conroe,
approximately 40 miles north of Houston, Texas. At December 31, 1998, the resort
contained approximately 116 acres, of which approximately 57.5 acres are planned
by the Company for future development.
At December 31, 1998, 148 units were completed and an additional 452 units
are planned for development. All units are two bedroom, two bath units and will
comfortably accommodate up to six people. Amenities include a living room with
sleeper, full kitchen, whirlpool tub, color television, and interior ceiling
fans. Certain "lodge-style" units feature stone fireplaces, white-washed pine
wall coverings, "age-worn" paint finishes, and antique furnishings.
The primary recreational amenity at the resort is Lake Conroe, a 21,000 acre
public lake. Other recreational facilities and improvements available at the
resort include a swimming pool with spa, a new bathhouse complete with showers
and restrooms, lighted tennis court, miniature golf course, stables, horseback
riding trails, children's playground, picnic areas, boat launch, beach area for
swimming, 4,626-square foot activity center with big-screen television, 32-seat
movie theatre, covered wagon rides, and facilities for horseshoes, archery,
shuffleboard, and basketball. The resort also has a vintage moored
paddle-wheeled riverboat which is available for parties and receptions.
At December 31, 1998, the resort contained 7,696 Vacation Intervals, of
which 2,102 remained available for sale. The Company intends to build 452
additional units, which would yield an additional 23,488 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$6,500 to $14,500 for one-week stays (and start at $3,800 for biennial
intervals). During 1998, 1,700 Vacation Intervals were sold.
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HILL COUNTRY RESORT. Hill Country Resort is located near Canyon Lake in the
hill country of central Texas between Austin and San Antonio. At December 31,
1998, Hill Country Resort contained approximately 122 acres, of which
approximately 62 acres are currently planned by the Company to be used for
future development.
At December 31, 1998, 189 units were completed and an additional 411 units
are planned for development. Twenty units are single story, while all other
units are two-story structures in which the bedrooms and baths are located on
the second story. Each unit contains two bedrooms, two bathrooms, living room
with sleeper sofa, and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and interior design details such as vaulted
ceilings. Certain units include interior ceiling fans, imported ceramic tile,
over-sized sliding glass doors, rattan and pine furnishings, and/or a fireplace.
64 units feature the Company's new "lodge style". "Presidents Villas" units
feature a larger, more spacious floor plan (1,228 square feet), front and back
verandas, washer and dryer, and a more elegant decor.
Amenities at the resort include a 7,943-square foot activity center with
electronic games, pool table, and wide-screen television; miniature golf course;
a children's playground area; barbecue and picnic areas; enclosed swimming pool
and heated spa; children's wading pool; newly-constructed tennis court; archery
range; and activity areas for shuffleboard, basketball, horseshoes, and
volleyball. In November 1998 the Company began construction on the expansion of
the existing clubhouse at the resort. The Company estimates that the addition
will cost approximately $680,000 and will take six months to complete. Area
sights and activities include water-tubing on the nearby Guadalupe River and
visiting the many tourist attractions in San Antonio, such as Sea World, The
Alamo, The River Walk, and the San Antonio Zoo.
At December 31, 1998, the resort contained 9,450 Vacation Intervals, of
which 2,482 remained available for sale. The Company plans to build 411
additional units, which collectively would yield 21,364 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,500 to $14,500 for one-week stays (and start at $3,800 for
biennial intervals), while one-week "Presidents Villas" intervals are priced at
$12,500 to $18,500 depending on the value rating of the interval. During 1998,
1,500 Vacation Intervals were sold.
OZARK MOUNTAIN RESORT. Ozark Mountain Resort is a family-oriented resort
located on the shores of Table Rock Lake which features bass fishing. The resort
is located approximately 15 miles from Branson, Missouri, a family music and
entertainment center, 233 miles from Kansas City, and 276 miles from St. Louis.
Ozark Mountain Resort is a mixed-use development of timeshare and condominium
units. At December 31, 1998, the resort contained approximately 116 acres, of
which approximately 82 acres are currently planned by the Company to be used for
future development.
At December 31, 1998, 124 units were completed and an additional 400 units
are planned for development. There are two types of units: (i) two bedroom, two
bath, one-story fourplexes; and (ii) two bedroom, two bath, three-story
sixplexes. Each standard unit includes two large bedrooms, two bathrooms, living
room with sleeper sofa, and full kitchen. Other amenities within each unit
include whirlpool tub, color television, and vaulted ceilings. Certain units
contain interior ceiling fans, imported ceramic tile, over-sized sliding glass
doors, rattan or pine furnishings, or fireplace. "Presidents View" units feature
a panoramic view of Table Rock Lake, a larger, more spacious floor plan (1,255
square feet), front and back verandas, washer and dryer, and a more elegant
decor.
The primary recreational amenity available at the resort is Table Rock Lake,
a 43,100-acre public lake. Other recreational facilities and improvements at the
resort include a swimming beach with dock, an activities center with pool table,
covered boat dock and launch ramp, olympic-sized swimming pool, concession area
with dressing facilities, lighted tennis court, nature trails, horseback riding
trails, two picnic areas, two playgrounds, miniature golf course, and a
competitive sports area accommodating volleyball, basketball, tetherball,
horseshoes, shuffleboard, and archery. Guests can also rent or use canoes,
paddle boats, or rowboats. Owners of neighboring condominium units developed by
the Company in the past are also entitled to use these amenities pursuant to use
agreements with the Company. Similarly, owners of Vacation Intervals are
entitled to use certain amenities of these condominium developments, including a
wellness center featuring a jacuzzi and exercise equipment.
At December 31, 1998, the resort contained 6,224 Vacation Intervals, of
which 519 remained available for sale. The Company plans to build 400 additional
units which would yield an additional 20,776 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,500 to
$15,000 for one-week stays, while one-week "Presidents View" intervals are
priced at $12,500 to $20,500 depending on the value rating of the interval.
During 1998, 273 Vacation Intervals were sold.
HOLIDAY HILLS RESORT. Holiday Hills Resort is a resort community located in
Taney County, Missouri, two miles east of Branson, Missouri. The resort is 224
miles from Kansas City and 267 miles from St. Louis. The resort is heavily
wooded by cedar, pine, and hardwood trees, and is favored by Silverleaf Owners
seeking quality golf and nightly entertainment in nearby Branson. Holiday Hills
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Resort is a mixed-use development of single-family lots, condominiums and
timeshare units. At December 31, 1998, the resort contained approximately 338
acres, of which approximately 108 acres are currently planned by the Company to
be used for future development.
At December 31, 1998, 78 units were completed and an additional 722 units
are planned for future development. There are four types of timeshare units: (i)
two bedroom, two bath, one-story fourplexes; (ii) one bedroom, one bath, with
upstairs loft, log construction duplexes; (iii) two bedroom, two bath, two-story
fourplexes; and (iv) two bedroom, two bath, three-story sixplexes. Each unit
includes a living room with sleeper sofa, full kitchen, whirlpool tub, and color
television. Certain units will include a fireplace, ceiling fans, imported tile,
oversized sliding glass doors, vaulted ceilings, and rattan or pine furniture.
"Presidents Fairways" units feature a larger, more spacious floor plan (1,255
square feet), front and back verandas, washer and dryer, and a more elegant
decor.
Taneycomo Lake, a popular lake for trout fishing, is three miles away, and
Table Rock Lake is approximately ten miles away. Amenities at the resort include
a newly renovated 18-hole golf course; miniature golf course; tennis court;
picnic area; camp sites; archery range; basketball court; activity area which
includes shuffleboard and horseshoes; and construction of a new 5,356 square
foot clubhouse that includes a pro shop, restaurant, and meeting space is
currently being completed. The Company intends to develop a new 2,800 square
foot outdoor swimming pool with a wellness center. Lot and condominium unit
owners are also entitled to use these amenities pursuant to use agreements
between the Company and certain homeowner associations.
At December 31, 1998, the resort contained 4,008 Vacation Intervals, of
which 518 remained available for sale. The Company plans to build 722 additional
units, which would yield an additional 37,452 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,500 to
$14,500 for one-week stays, while one-week "Presidents Fairways" intervals are
priced at $12,500 to $20,500 depending on the value rating of the interval.
During 1998, 377 Vacation Intervals were sold.
TIMBER CREEK RESORT. In August 1997, the Company acquired the Timber Creek
Resort in Desoto, Missouri. The resort is located approximately 50 miles south
of St. Louis. Prior to its acquisition by the Company, the Timber Creek Resort
was operated as a campground by a nationwide campground operator. At December
31, 1998, the resort contained approximately 308 acres, of which approximately
142 acres are currently planned by the Company to be used for development.
At December 31, 1998, 72 units were completed and an additional 528 units
are planned for future development. All units are two bedroom, two bath units.
Amenities within each new unit include a living room with sleeper sofa, full
kitchen, whirlpool tub, and color television. Certain units will include a
fireplace, ceiling fans, imported ceramic tile, oversized sliding glass doors,
and rattan or pine furniture.
The primary recreational amenity available at the resort is a 35-acre
fishing lake. Other existing or planned amenities include a clubhouse; outdoor
pavilion; swimming pool; two lighted tennis courts; themed miniature golf
course; volleyball court; shuffleboard/multi-use sports court; archery;
horseback riding trail; and hook-ups for recreational vehicles. The Company
plans to construct a new par three executive golf course; clubhouse; stable and
corral; lake pavilion; indoor pool; indoor heated cedar sauna; and welcome
station as well. Other planned improvements by the Company include conversion of
the existing sales and registration buildings and renovation of the clubhouse
and clubhouse pool. The Company is obligated to maintain and provide campground
facilities for members of the previous owner's campground system.
At December 31, 1998, the resort contained 3,744 Vacation Intervals and
2,528 Vacation Intervals remained available for sale. The Company plans to build
528 additional units, which would collectively yield 27,456 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,500 to $12,500 for one-week stays (and start at $3,800 for
biennial intervals). During 1998, 1,110 Vacation Intervals were sold.
FOX RIVER RESORT. In August 1997, the Company acquired the Fox River Resort
in Sheridan, Illinois. The resort is located approximately 70 miles southwest of
Chicago. Prior to its acquisition by the Company, the Fox River Resort was
operated as a campground by a nationwide campground operator. At December 31,
1998, the resort contained approximately 308 acres, of which approximately 87
acres are currently planned by the Company to be used for future development.
At December 31, 1998, 60 units are completed and an additional 740 units are
planned for future development. All units are two bedroom, two bath units.
Amenities within each unit include a living room with sleeper sofa, full
kitchen, whirlpool tub, and color television. Certain units will include a
fireplace, ceiling fans, imported ceramic tile, oversized sliding glass doors,
and rattan or pine furniture.
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Amenities available at the resort include a new par three five-hole
executive golf course; tennis court; sports court; shuffleboard courts; outdoor
pavilion; swimming pool; miniature golf course; and hook-ups for recreational
vehicles. The Company plans to construct new sales and registration buildings;
clubhouse; covered pool; playground; children's movie theater; stable and
corral; and welcome station. The Company also plans to offer winter recreational
activities at this resort, including ice-skating, snowmobiling, and
cross-country skiing. The Company is obligated to maintain and provide
campground facilities for members of the previous owner's campground system.
At December 31, 1998, the resort contained 3,120 Vacation Intervals and 317
Vacation Intervals remained available for sale. The Company plans to build 740
additional units, which would collectively yield 38,480 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,500 to $12,500 for one-week stays (and start at $3,800 for
biennial intervals). During 1998, 2,515 Vacation Intervals were sold.
OAK N' SPRUCE RESORT. In December 1997, the Company acquired the Oak N'
Spruce Resort in the Berkshire mountains of western Massachusetts. The resort is
located approximately 134 miles west of Boston and 114 miles north of New York
City. Oak N' Spruce is a mixed-use development which includes a hotel and
timeshare units. At December 31, 1998, the resort contained approximately 240
acres, of which approximately 120 acres are currently planned by the Company to
be used for future development.
At December 31, 1998, the resort had 132 units and an additional 568 units
are planned for development. There are seven types of existing units: (i) studio
flat; (ii) one-bedroom flat; (iii) one-bedroom townhouse; (iv) two-bedroom flat;
(v) two-bedroom townhouse; (vi) two-bedroom, flex-time; and (vii) two-bedroom,
lockout. There is also a 21-room hotel at the resort which may be converted to
timeshare use. The hotel will initially be used primarily to provide
accommodations for potential timeshare customers who tour the resort. Amenities
within each new unit will include a living room with sleeper sofa, full kitchen,
whirlpool tub, and color television. Certain units will include a fireplace,
ceiling fans, imported ceramic tile, oversized sliding glass doors, and rattan
or pine furniture.
Amenities at the resort include two indoor heated swimming pools with hot
tubs; one outdoor olympic-sized, spring fed pool with bar and snack bar; sauna;
health club; nine-hole golf course; ski rentals; shuffleboard, basketball and
tennis courts; horseshoe pits; hiking and ski trails; and activity areas for
sledding and badminton. The resort is also near Beartown State Forest.
At December 31, 1998, the resort contained 6,864 Vacation Intervals, of
which 786 remained available for sale. The Company plans to build 568 additional
"lodge-style" units, which would yield an additional 29,536 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$6,600 to $12,500 for one-week stays (and start at $3,800 for biennial
intervals). During 1998, 1,165 Vacation Intervals were sold.
DESCRIPTION OF EXISTING RESORTS MANAGED BY THE COMPANY
The management rights to the following resorts were acquired via the Crown
acquisition in May 1998.
ALPINE BAY RESORT. Alpine Bay Resort is located in Talledega County,
Alabama, near Lake Logan Martin and is approximately 50 miles east of
Birmingham. The resort contains 54 units and includes a golf course, pro shop
lounge, outdoor pool, and tennis courts. At December 31, 1998, there are no
remaining unsold Vacation Intervals at this resort. During 1998, four Vacation
Intervals and Silverleaf Club Endless Escape Program memberships were sold. No
further development is planned at this resort.
HICKORY HILLS RESORT. Hickory Hills is located in Jackson County,
Mississippi, near the Pascagoula River and is approximately 20 miles east of
Biloxi. The resort contains 80 units and has a golf course, restaurant/lounge,
outdoor pool, clubhouse, fitness center, miniature golf course, tennis courts,
and playground. At December 31, 1998, there are approximately 165 unsold
Vacation Intervals at this resort. During 1998, two Vacation Intervals and
Silverleaf Club Endless Escape Program memberships were sold. No further
development is planned at this resort.
LAKE ROYALE RESORT. Lake Royale is located in Franklin County, North
Carolina, and is approximately 50 miles east of Raleigh/Durham. The resort
contains 16 units and has a golf course, pro shop lounge, outdoor pool,
clubhouse, miniature golf course, tennis courts, and playground. At December 31,
1998, there are 215 unsold Vacation Intervals at this resort. During 1998, no
Vacation Intervals or Silverleaf Club Endless Escape Program memberships were
sold. No further development is planned at this resort.
BEECH MOUNTAIN LAKES RESORT. Beech Mountain Lakes is located in Butler
Township, Luzerne County, Pennsylvania, and is approximately 30 miles south of
Wilkes Barre-Scranton. The resort contains 54 units and has a restaurant/lounge,
indoor pool/sauna, clubhouse, fitness center, tennis courts, and pontoon boat.
At December 31, 1998, there are approximately 118 unsold Vacation
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Intervals at this resort. During 1998, 51 Vacation Intervals and Silverleaf Club
Endless Escape Program memberships were sold. No further development is planned
at this resort.
TREASURE LAKE RESORT. Treasure Lake is located in Sandy Township, Clearfield
County, Pennsylvania, and is approximately 160 miles northeast of Pittsburgh.
The resort contains 145 units and has two golf courses, a restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, tennis courts, and pontoon boat. At
December 31, 1998, there are approximately 490 unsold Vacation Intervals at this
resort. During 1998, 139 Vacation Intervals and Silverleaf Club Endless Escape
Program memberships were sold. No further development is planned at this resort.
FOXWOOD HILLS RESORT. Foxwood Hills is located in Oconee County, South
Carolina, near Lake Hartwell and is approximately 100 miles northeast of
Atlanta. The resort contains 114 units and has a golf course, restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, miniature golf course, tennis
courts, pontoon boat, and playground. At December 31, 1998, there are
approximately 496 unsold Vacation Intervals at this resort. During 1998, five
Vacation Intervals and Silverleaf Club Endless Escape Program memberships were
sold. No further development is planned at this resort.
TANSI RESORT. Tansi Resort is located in Cumberland County, Tennessee, and
is approximately 75 miles west of Knoxville. The resort contains 124 units and
has a golf course, restaurant/lounge, indoor pool/sauna, outdoor pool,
clubhouse, fitness center, miniature golf course, tennis courts, and playground.
At December 31, 1998, there are approximately 364 unsold Vacation Intervals at
this resort. During 1998, five Vacation Intervals and Silverleaf Club Endless
Escape Program memberships were sold. No further development is planned at this
resort.
WESTWIND MANOR RESORT. Westwind Manor is located in Wise County, Texas, on
Lake Bridgeport and is approximately 65 miles northwest of the Dallas-Fort Worth
metroplex. The resort contains 37 units and has a golf course,
restaurant/lounge, outdoor pool, clubhouse, miniature golf course, tennis
courts, and playground. At December 31, 1998, there are approximately 342 unsold
Vacation Intervals at this resort. During 1998, no Vacation Intervals or
Silverleaf Club Endless Escape Program memberships were sold. No further
development is planned at this resort.
DESCRIPTION OF NEW RESORTS
SILVERLEAF'S LAS VEGAS RESORT. In November 1997, the Company acquired a two
acre parcel of land two blocks off the "strip" in Las Vegas, Nevada, for
development as a new Destination Resort.
The Company plans to build a five-story tower and a nine-story tower which
will include approximately 157 units, including 83 two-bedroom and 74
one-bedroom units. Construction of the units is anticipated to begin in late
1999. This resort will feature balconies, washer and dryer, whirlpool tubs,
living room with sleeper sofa, full kitchen, and color television.
Amenities at the resort will include a swimming pool, health spa with sauna,
exercise facilities, children's theatre, and video arcade. The resort will also
feature a waterfall cascading down the front of one tower.
The Company plans to build 157 units which would yield 8,164 Vacation
Intervals for sale. The Company anticipates that sales efforts will begin in
2000. The Company anticipates Vacation Intervals at the resort will be priced
from $9,500 to $13,500 for one-week stays.
SILVERLEAF'S SEASIDE RESORT. In December 1997 and February 1998, the Company
acquired over 83 acres of land, including beachfront, in Galveston, Texas. These
adjacent tracts are located approximately 50 miles south of Houston, Texas, and
were acquired for development as a new Destination Resort. Prior to its
acquisition by the Company, one tract was operated by a nationwide campground
operator.
The Company plans to build 282 new units situated in three-story 12-plex
buildings, with construction of 24 units slated to begin in April 1999. All
units will be two bedroom, two bath units. Amenities within each unit will
include two large bedrooms, two bathrooms (one with a whirlpool tub), living
room with sleeper sofa, full kitchen, color television, and vaulted ceilings.
This resort will also include the Company's upscale Presidents View units which
will overlook the Gulf of Mexico and offer 1,255 square feet of floor space,
front and back verandas, washer and dryer, and a more elegant decor.
The primary amenity at the resort is the Gulf of Mexico. This site has 635
feet of beachfront. Other currently existing amenities include a lodge with
kitchen, sports court, and swimming pool. The Company is obligated to maintain
and provide campground facilities for members of the previous owner's campground
system.
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The Company plans to build 282 units which would yield 14,664 Vacation
Intervals for sale. Construction began in January 1999. The Company anticipates
that sales efforts will begin in the summer of 1999. Vacation Intervals at the
resort will be priced from $8,000 to $14,500 for one-week stays.
APPLE MOUNTAIN RESORT. In October 1998, the Company acquired the Apple
Mountain Resort in Clarkesville, Georgia, for approximately $4.2 million. The
resort will be situated on 275 acres of beautiful open pastures and rolling
hills, with 221 acres being the golf course. The resort is approximately 125
miles north of Atlanta, Georgia, and will be developed as a Drive-to Resort.
At December 31, 1998, 608 units are planned for development. The "Lodge
Get-A-Way" will be the first units developed. Each unit will be approximately
827 square feet with all units being two bedrooms, two full baths. Amenities
within each new unit will include a living room with sleeper sofa, full kitchen,
whirlpool tub, and color television. Certain units will include a fireplace,
ceiling fans, imported ceramic tile, oversized sliding glass doors, and rattan
or pine furniture.
The administration building and activity center are also planned for
development early in 1999. The new buildings will total approximately 9,445
square feet and will feature an amenity package including wide screen
television, pool tables, arcade games, snack area, and movie theatre. Proposed
amenities will also include a tennis court, swimming pool, horseshoes,
shuffleboard, archery, miniature golf course, and volleyball and basketball
courts.
The primary recreational amenity available to the resort is an established
18-hole golf course situated on approximately 150 acres of open fairways and
rolling hills. Elevation of the course is 1,530 feet at the lowest point and
1,808 feet at the highest point. The course is designed with approximately
104,000 square feet of bent grass greens. The course's tees total approximately
4 acres, fairways total approximately 24 acres, and primary roughs total
approximately 29 acres, all covered with TIF 419 Bermuda. The balance of grass
totals approximately 95 acres and is covered with Fescue. The course has 19 sand
bunkers totaling 19,800 square feet and there are approximately seven miles of
cart paths. Lining the course are apple orchards totaling approximately four
acres, with white pine roughs along twelve of the fairways. The course has a
five-acre irrigation lake and two ponds, one approximately 3,000 square feet and
located on the fourth hole and the second approximately 1,500 square feet and
located on the fifteenth hole. The driving range covers approximately nine acres
and has 20,000 square feet of tee area covered in TIF 419 Bermuda. The pro shop
offers a full line of golfing accessories and equipment. There is also a golf
professional on site to offer lessons and to plan events for the club. This
resort is located in the Blue Ridge Mountains and offers accessibility to many
other outdoor recreational activities, including Class 5 white water rapids.
The Company plans to build 608 units which would yield 31,616 Vacation
Intervals for sale. Construction began in late 1998. Sales efforts began in
January 1999. Vacation Intervals at the resort will be priced from $6,500 to
$12,500 for one-week stays (and start at $3,800 for biennial intervals).
LAKEVIEW LODGE. In September 1998, the Company completed its purchase of 260
acres of undeveloped land near Kansas City, Missouri, for approximately $1.5
million. The property will be developed as a Drive-to Resort. At December 31,
1998, 608 units are planned for development, with all units being two bedroom,
two bath. Amenities within each unit will include a living room with sleeper
sofa, full kitchen, whirlpool tub, and color television. Certain units will
include a fireplace, ceiling fans, imported ceramic tile, oversized sliding
glass doors, and rattan or pine furniture.
The primary recreational amenity available at the resort is an adjoining
fishing lake. Other planned amenities include a clubhouse; outdoor pavilion;
swimming pool; lighted tennis courts; themed miniature golf course; volleyball
court; shuffleboard/multi-use sports court; archery; horseback riding trail;
stable and corral; lake pavilion; indoor pool; indoor heated cedar sauna;
welcome station; and hook-ups for recreational vehicles.
The Company plans to build 608 units which would yield 31,616 Vacation
Intervals for sale. The resort is in the preliminary development phase. Vacation
Intervals at the resort will be priced from $6,500 to $12,500 for one-week stays
(and start at $3,800 for biennial intervals).
BEECH MOUNTAIN RESORT. In December 1998, the Company acquired 1,998 acres of
undeveloped land near Philadelphia, Pennsylvania, for approximately $1.9
million. The property will be developed as a Drive-to Resort, to be known as
Beech Mountain Resort. At December 31, 1998, all units planned for development
will be two bedroom, two bath. Amenities within each unit will include a living
room with sleeper sofa, full kitchen, whirlpool tub, and color television.
Certain units will include a fireplace, ceiling fans, imported ceramic tile,
oversized sliding glass doors, and rattan or pine furniture.
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The primary recreational amenity available at the resort is a fishing lake.
Other planned amenities include a clubhouse; outdoor pavilion; swimming pool;
lighted tennis courts; themed miniature golf course; volleyball court;
shuffleboard/multi-use sports court; archery; horseback riding trail; stable and
corral; lake pavilion; indoor pool; indoor heated cedar sauna; welcome station;
and hook-ups for recreational vehicles.
The Company has requested initial approval of 144 units. If fully developed,
the property could accommodate approximately 608 units which would yield 31,616
Vacation Intervals for sale. The resort is in the preliminary development phase.
Vacation Intervals at the resort will be priced from $6,500 to $12,500 for
one-week stays (and start at $3,800 for biennial intervals).
MARKETING AND SALES
Marketing is the process by which the Company attracts potential customers
to visit and tour an Existing Resort or attend a sales presentation. Sales is
the process by which the Company seeks to sell a Vacation Interval to a
potential customer once he arrives for a tour at an Existing Resort or attends a
sales presentation. The Company believes it has the marketing and sales systems
necessary to sell Vacation Intervals on a low-cost basis. The Company also
believes it is strategically positioned to enter new markets and develop
marketing programs for additional resorts it may develop in the future at a
lower cost than its competitors.
MARKETING. The Company's in-house marketing staff develops prospects through
a variety of marketing programs specifically designed to attract the Company's
target customers. Databases of new prospects are principally developed through
cooperative arrangements between Database Research, Inc., a subsidiary of the
Company, and other local businesses and special event sponsors. Under these
cooperative marketing programs, basic demographic information of potential
customers is solicited on a voluntary basis from individuals who patronize these
businesses or events. After entering this demographic information into its
permanent database, the Company utilizes its systems to identify prospects who
meet the Company's marketing criteria. Using the Company's automated dialing and
bulk mailing equipment, in-house marketing specialists conduct coordinated
telemarketing and direct mail procedures which invite prospects to tour one of
the Company's resorts and receive an incentive, such as a free gift.
SALES. The Company actively sells its Vacation Intervals primarily through
on-site salespersons at certain Existing Resorts. Upon arrival at an Existing
Resort for a scheduled tour, the prospect is met by a member of the Company's
on-site salesforce who conducts the prospect on a one to two hour tour of the
resort and its related amenities. At the conclusion of the tour, the sales
representative explains the benefits and costs of becoming a Silverleaf Owner.
The presentation also includes a description of the financing alternatives
offered by the Company. Prior to the closing of any sale, a verification officer
(a salaried employee of the Company) interviews each prospect to ensure
compliance with Company sales policies and regulatory agency requirements. No
sale becomes final until a statutory waiting period (which varies from state to
state) of up to fifteen days has passed.
Sales representatives receive commissions ranging from 5% to 14% of the
sales price depending on established guidelines. Sales managers also receive
commissions of 3% to 4% and are subject to commission chargebacks in the event
the purchaser fails to make the first required payment. Sales directors also
receive commissions of 1.5% to 3%, which are also subject to chargebacks.
Prospects who are interested in a lower priced product are offered biennial
(alternate year) intervals or Samplers, which entitle the prospect to sample a
resort for a specified number of nights. The prospect may apply the cost of a
Sampler against the down-payment on a Vacation Interval if purchased at a later
date. In addition, the Company actively markets upgraded Vacation Intervals to
existing Silverleaf Owners. Although most upgrades are sold by the Company's
in-house sales staff, the Company has contracted with a third party to assist in
offsite marketing of upgrades at the Destination Resorts. These upgrade programs
have been well received by Silverleaf Owners and accounted for approximately
24.6% and 21.8% of the Company's gross revenues from Vacation Interval sales for
1997 and 1998, respectively. By offering Samplers and upgraded Vacation
Intervals, the Company believes it offers an affordable product for all
prospects in its target market. Also, by offering products with a range of
prices, the Company attempts to attract younger purchasers with its lower-priced
products and gradually upgrade such purchasers over time as their earnings
increase.
Because the Company's sales representatives are a critical component of the
sales and marketing effort, the Company continually strives to attract, train
and retain a dedicated salesforce. The Company provides intensive sales
instruction and training which, coupled with the representative's valuable local
knowledge, assists the sales representatives in acquainting prospects with the
resort's benefits. Each sales representative is an employee of the Company and
receives some employment benefits. At December 31, 1998, the Company employed
more than 600 sales representatives at its Existing Resorts.
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CUSTOMER FINANCING
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers typically 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 generally
payable over a seven 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.
The Company's credit experience is such that in 1998 it allocated 12.1% of
the purchase price of Vacation Intervals to its provision for uncollectible
notes. In addition, in 1998 the Company decreased sales by $1.9 million for
customer returns (cancellations of sales transactions in which the customer
fails to make the first installment payment) and increased operating, general
and administrative expenses by $831,000 for customer releases (voluntary
cancellations of properly recorded sales transactions which in the opinion of
management is consistent with the maintenance of overall customer goodwill). 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 generally not
recovered; and sales and marketing costs must be incurred again to resell the
Vacation Interval. Although the Company, in many cases, may have recourse
against a Vacation Interval buyer for the unpaid price, certain states have laws
which limit or hinder the Company's ability to recover personal judgments
against customers who have defaulted on their loans. For example, under Texas
law, if the Company were to pursue a post-foreclosure deficiency claim against a
customer, the customer may file a court proceeding to determine the fair market
value of the property foreclosed upon. In such event, the Company may not
recover a personal judgment against the customer for the full amount of the
deficiency, but may recover only to the extent that the indebtedness owed to the
Company exceeds the fair market value of the property. Accordingly, the Company
has generally not pursued this remedy. In 1998, the Company implemented a
program through which delinquent loans are assumed by existing owners with a
consistent payment history.
Prior to 1996, the Company sold customer promissory notes and mortgages to
third parties, generally with recourse, as a means of financing its operations.
As a result, the Company may be required to repurchase customer promissory notes
previously sold which become delinquent. The Company takes these contingent
obligations into account in establishing its allowance for uncollectible notes.
At December 31, 1998, the Company had notes receivable (including notes
unrelated to Vacation Intervals) in the approximate principal amount of $197.9
million, was contingently liable with respect to approximately $3.8 million
principal amount of customer notes sold with recourse, and had an allowance for
uncollectible notes of approximately $23.9 million.
The Company recognizes interest income as earned. If interest payments on
customer notes become delinquent, the Company ceases recognition of the interest
income until collection is deemed probable. When inventory is returned to the
Company, any unpaid note receivable balances are charged against the allowance
for uncollectible notes net of the amount at which the Vacation Interval is
being restored to inventory.
The Company intends to borrow additional funds under its existing revolving
credit facilities to finance its operations. Under its existing revolving credit
facilities, the Company may borrow up to $130.0 million collateralized by
customer promissory notes and mortgages. At December 31, 1998, the Company had
borrowings under such revolving credit facilities in the approximate principal
amount of $54.7 million. These facilities permit borrowings up to 70% of the
principal amount of performing notes, and payments from Silverleaf Owners on
such notes are credited directly to the lender and applied against the Company's
loan balance. At December 31, 1998, the Company had a portfolio of approximately
36,075 Vacation Interval customer promissory notes in the approximate principal
amount of $196.9 million, of which approximately $26.6 million in principal
amount were 61 days or more past due and therefore ineligible as collateral.
At December 31, 1998, the Company's portfolio of customer notes receivable
had an average yield of 14.2%. At such date, the Company's borrowings, which
bear interest at variable rates, had a weighted average cost of 9.6%. The
Company has historically derived net interest income from its financing
activities because the interest rates it charges its customers who finance the
purchase of their Vacation Intervals exceed the interest rates the Company pays
to its lenders. Because the Company's existing indebtedness currently bears
interest at variable rates and the Company's customer notes receivable bear
interest at fixed rates, increases in interest rates would erode the spread in
interest rates that the Company has historically experienced and could cause the
interest expense on the Company's borrowings to exceed its interest income on
its portfolio of customer loans. The Company has not engaged in interest rate
hedging transactions. Therefore, any increase in interest rates, particularly if
sustained, could have a material adverse effect on the Company's results of
operations, liquidity, and financial position.
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Limitations on availability of financing would inhibit sales of Vacation
Intervals due to (i) the lack of funds to finance the initial negative cash flow
that results from sales that are financed by the Company, and (ii) reduced
demand if the Company is unable to provide financing to purchasers of Vacation
Intervals. The Company ordinarily receives only 10% of the purchase price on the
sale of a Vacation Interval but must pay in full the costs of development,
marketing, and sale of the Vacation Interval. Maximum borrowings available under
the Company's current credit agreements may not be sufficient to cover these
costs, thereby straining capital resources, liquidity, and capacity to grow. In
addition, to the extent interest rates decrease generally on loans available to
the Company's customers, the Company faces an increased risk that customers will
pre-pay their loans and reduce the Company's income from financing activities.
The Company typically provides financing to customers over a seven year
period, and customer notes had an average maturity of 6.5 years at December 31,
1998. The Company's revolving credit facilities mature between December 1999 and
October 2005. $60.0 million of such credit facilities mature in December 1999,
however, the Company has an option to extend this credit facility to December
2000. Accordingly, there could be a mismatch between the Company's cash receipts
and the Company's cash disbursement obligations in December 1999 and subsequent
periods. Although the Company has historically been able to secure financing
sufficient to fund its operations, it does not presently have agreements with
its lenders to extend the term of its existing funding commitments or to replace
such commitments upon their expiration. Failure to obtain such refinancing
facilities could require the Company to sell its portfolio of customer notes
receivable, probably at a substantial discount, or to seek other alternatives to
enable it to continue in business. While the Company has been successful in
obtaining financing to date, there is no assurance it will be able to do so in
the future.
DEVELOPMENT AND ACQUISITION PROCESS
The Company believes there is substantial opportunity to develop and acquire
resorts. As part of its current growth strategy, the Company intends to develop
and selectively acquire new resorts with characteristics similar to the Existing
Resorts and New Resorts.
In evaluating a potential site for a Drive-to Resort, the Company generally
seeks locations within 100 miles of large metropolitan areas that have favorable
demographic characteristics. For Drive-to Resorts, the Company generally seeks
wooded rustic settings with amenities such as golf courses or water frontage.
For Destination Resorts, the Company seeks popular destination resort areas that
are easily accessible to Silverleaf Owners. The Las Vegas, Nevada, site, for
example, was acquired in response to a survey in which Silverleaf Owners
expressed a strong interest in a Destination Resort in Las Vegas. The Company
also seeks locations offering an absence of competing properties near the target
location, ease of development with respect to zoning and land-use issues, and
ease of compliance with governmental regulations concerning timeshare sales and
operations.
Before committing capital to a site, the Company tests the market using
certain marketing techniques developed by the Company. The Company also explores
the zoning and land-use laws applicable to the potential site and the regulatory
issues pertaining to licenses and permits for timeshare sales and operations.
The Company will also contact various governmental entities and review
applications for necessary governmental permits and approvals. If the Company is
satisfied with its market and regulatory review, it will prepare a conceptual
layout of the resort, including building site plans and resort amenities. After
the Company applies its standard lodging unit design and amenity package, the
Company prepares a budget which estimates the cost of developing the resort,
including costs of lodging facilities, infrastructure, and amenities, as well as
projected sales, marketing, and general and administrative costs. Purchase
contracts typically provide for additional due diligence by the Company,
including obtaining an environmental report by an environmental consulting firm,
a survey of the property, and a title commitment. The Company employs legal
counsel to review such documents and to also review pertinent legal issues. If
the Company continues to be satisfied with the site after the environmental and
legal review, the Company will complete the purchase of the property.
All construction activities are managed internally by the Company. The
Company typically completes the development of a new resort's basic
infrastructure and models within one year, with additional units to be added
within 180 days based on demand, weather permitting. A normal part of the
development process is the establishment of a functional sales office at the new
resort.
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CLUBS / MANAGEMENT CLUBS
Upon purchasing a Vacation Interval at a resort, the purchaser automatically
becomes a member of a homeowner's association ("Club") for that particular
resort. At the resorts owned by the Company, the Company has the right to
appoint the directors of the Clubs. However, the Company does not have this
right at the exclusively managed resorts. The Silverleaf Owners are obligated to
pay monthly dues to their respective Clubs, which obligation is secured by a
lien on their Vacation Interval in favor of the Club. If a Silverleaf Owner
fails to pay his monthly dues, the Club may foreclose on the delinquent
Silverleaf Owner's Vacation Interval. During 1997 and 1998, approximately 228
and 201 foreclosures, respectively, resulted from Silverleaf Owners' failure to
pay monthly dues.
Each Existing Resort has a Club which has entered into a Management Club
Agreement with the Management Clubs. The Management Club Agreements authorize
the Management Clubs to manage the Existing Resorts on a centralized and
collective basis. The consolidation of resort operations through the Management
Clubs permits: (i) a centralized reservation system for all resorts; (ii)
substantial cost savings by purchasing goods and services for all resorts on a
group basis, which generally results in a lower cost of goods and services than
if such goods and services were purchased by each resort on an individual basis;
(iii) centralized management for the entire resort system; (iv) centralized
legal, accounting, and administrative services for the entire resort system; and
(v) uniform implementation of various rules and regulations governing all
resorts. All furniture, furnishings, recreational equipment, and other personal
property used in connection with the operation of the Existing Resorts are owned
by the Management Clubs, rather than the Company.
At December 31, 1998, the Management Clubs had 494 full-time employees and
is solely responsible for their salaries. The Management Clubs are also
responsible for the direct expenses of operating the Existing Resorts, while the
Company is responsible for the direct expenses of new development and all
marketing and sales activities. To the extent the Management Clubs provide
payroll, administrative, and other services that directly benefit the Company,
the Company reimburses the Management Clubs for such services.
The Management Clubs collect dues from Silverleaf Owners, plus certain other
amounts assessed against the Silverleaf Owners from time to time, together with
all income generated by the operation of certain amenities at the Existing
Resorts. Silverleaf Club dues are currently $49.98 per month ($24.99 for
biennial owners). During 1998, Oak N' Spruce Club dues were $358.82 annually.
Crown Club dues are currently $350 annually. Such amounts are placed in a common
account and are used by the Management Clubs to pay the costs of operating the
Existing Resorts and the management fees due to the Company pursuant to
Management Agreements between the Company and the Management Clubs. These
Management Agreements authorize the Company to manage and operate the resorts
and provide for a maximum management fee equal to 15% of gross revenues for
Silverleaf Club and Oak N' Spruce Club, or 10% to 15% of dues collected for
Clubs within Crown Club, but the Company's right to receive such fee on an
annual basis is limited to the amount of each Management Club's net income.
However, if the Company does not receive the maximum fee, such deficiency is
deferred for payment to succeeding year(s), subject again to the net income
limitation. Due to anticipated refurbishment of units at the Existing Resorts,
together with the operational and maintenance expenses associated with the
Company's current expansion and development plans, the Company believes its 1999
management fee will be subject to the net income limitation. For financial
reporting purposes, management fees from the Management Clubs are recognized
based on the lower of (i) the aforementioned maximum fees or (ii) each
Management Club's net income. The Silverleaf Club Management Agreement was
entered into in March 1990, has a ten year term, and will continue year-to-year
thereafter unless cancelled by either party. Oak N' Spruce Club was merged into
a Club within Silverleaf Club effective January 1999. Crown Club consists of
several individual Club agreements which have terms of two to five years with a
minimum of two renewal options remaining. At December 31, 1998, there were
approximately 46,256, 4,830, and 25,800 Silverleaf Owners who pay dues to
Silverleaf Club, Oak N' Spruce Club, and Crown Club, respectively.
As the Company develops new resorts, their respective Clubs are expected to
be added to the Silverleaf Club Management Agreement. However, the timeshare
laws of some states, including Nevada, prohibit the collective dues/expense
arrangement used by Silverleaf Club. Accordingly, the Club for the New Resort in
Las Vegas will not be managed by Silverleaf Club but will be managed directly by
Silverleaf.
OTHER OPERATIONS
OPERATION OF AMENITIES. The Company owns, operates, and receives the
revenues from the marina at The Villages and the golf course and pro shop at
Holiday Hills. Although the Company owns the golf course at Holly Lake, a
homeowners association in the development operates the golf course. In general,
the Management Clubs receive revenues from the various amenities which require a
usage fee, such as watercraft rentals, horseback rides, and restaurants.
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UNIT LEASING. The Company also recognizes revenues from sales of Samplers
which allow prospective Vacation Interval purchasers to sample a resort for a
specified number of nights. A five night Sampler package currently sells for
$595. For the years ended December 31, 1997 and 1998, the Company recognized
$1.4 million and $2.8 million, respectively, in revenues from Sampler sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein.
UTILITY SERVICES. The Company owns its own water supply facilities at Piney
Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills,
Timber Creek, and Fox River resorts. The Company also currently owns its own
waste-water treatment facilities at The Villages, Piney Shores, Ozark Mountain,
Holly Lake, Timber Creek, and Fox River resorts. The Company recently
transferred the waste-water treatment facilities at the Holiday Hills Resort to
a local public utility district. The Company is in the process of applying for
permits to build expanded water supply and waste-water facilities at the Timber
Creek and Fox River resorts. The Company has permits to supply and charge third
parties for the water supply facilities at The Villages, Holly Lake, Holiday
Hills, Ozark Mountain, Hill Country, and Piney Shores resorts, and the
waste-water facilities at the Ozark Mountain, Holly Lake, Piney Shores, Hill
Country, and The Villages resorts. The Company has applied for permits which
would allow it to charge third-parties for water supply and waste-water service
at the Timber Creek resort. The Company anticipates developing or augmenting
utility service capacity at the Timber Creek and Fox River resorts and the new
resort in Galveston.
OTHER PROPERTY. The Company owns an undeveloped five-acre tract of land in
Pass Christian, Mississippi, which has been listed with a broker for sale. The
Company had planned to develop this property as a Destination Resort. However,
in a recent survey, the Silverleaf Owners expressed a strong interest in a Texas
resort on the Gulf of Mexico. In response, the Company acquired the parcels in
Galveston, Texas, which will supplant development of the Pass Christian
property. Additionally, the Company owns approximately 45 acres in Mississippi,
and the Company is entitled to 85% of any profits from this land. An affiliate
of a director of the Company owns a 10% net profits interest in this land.
OTHER OPERATIONS. The Company provides management services for certain
condominium homeowners' associations at the Existing Resorts. The Company will
receive fees from campground members at the Timber Creek, Fox River, and
Galveston resorts.
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORKS
INTERNAL EXCHANGES. As a convenience to Silverleaf Owners, each purchaser of
a Vacation Interval from the Company has certain exchange privileges which may
be used to: (i) exchange an interval for a different interval (week) at the same
resort so long as the different interval is of an equal or lower rating; and
(ii) exchange an interval for the same interval of equal or lower rating at any
other Existing Resort. These intra-company exchange rights are conditioned upon
availability of the desired interval or resort. Owners of Vacation Intervals at
the Drive-to Resorts generally do not have exchange rights to Destination
Resorts.
RCI EXCHANGES. The Company believes that its Vacation Intervals are made
more attractive by the Company's participation in Vacation Interval exchange
networks operated by RCI. The Existing Resorts, except Oak N' Spruce, are
registered with RCI, and approximately one-third of Silverleaf Owners
participate in RCI's exchange network. The Oak N' Spruce Resort is currently
under contract with a different network exchange company, Interval
International. Membership in RCI allows participating Silverleaf Owners to
exchange their occupancy right in a unit in a particular year for an occupancy
right at the same time or a different time of the same or lower color rating in
another participating resort, based upon availability and the payment of a
variable exchange fee. A member may exchange a Vacation Interval for an
occupancy right in another participating resort by listing the Vacation Interval
as available with the exchange organization and by requesting occupancy at
another participating resort, indicating the particular resort or geographic
area to which the member desires to travel, the size of the unit desired, and
the period during which occupancy is desired.
RCI assigns a rating of "red", "white", or "blue" to each Vacation Interval
for participating resorts based upon a number of factors, including the location
and size of the unit, the quality of the resort, and the period during which the
Vacation Interval is available, and attempts to satisfy exchange requests by
providing an occupancy right in another Vacation Interval with a similar rating.
For example, an owner of a red Vacation Interval may exchange his interval for a
red, white, or blue interval. An owner of a white Vacation Interval may exchange
only for a white or blue interval, and an owner of a blue interval may exchange
only for a blue interval. If RCI is unable to meet the member's initial request,
it suggests alternative resorts based on availability.
RCI has more than 3,400 participating resort facilities and over 2.5 million
members worldwide as of December 31, 1998. During 1998, RCI processed over 1.8
million Vacation Interval exchanges. The cost of the annual membership fee in
RCI, which is at the option and expense of the owner of the Vacation Interval,
is currently $84 per year. Exchange rights require an additional fee of
approximately $118 for domestic exchanges and $155 for foreign exchanges.
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COMPETITION
The timeshare industry is highly fragmented and includes a large number of
local and regional resort developers and operators. However, some of the world's
most recognized lodging, hospitality, and entertainment companies, such as
Marriott Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"),
Hilton Hotels Corporation ("Hilton"), Hyatt Corporation ("Hyatt"), and Four
Seasons Resorts ("Four Seasons") have recently entered the industry. Other
companies in the timeshare industry, including Sunterra Corporation ("Sunterra",
formerly Signature Resorts, Inc.), Fairfield Communities, Inc. ("Fairfield"),
Vistana Inc. ("Vistana"), Ramada Vacation Suites ("Ramada"), TrendWest Resorts,
Inc. ("TrendWest"), and Bluegreen Corporation ("Bluegreen") are, or are
subsidiaries of, public companies, with the enhanced access to capital and other
resources that public ownership implies.
Fairfield and Sunterra own timeshare resorts in or near Branson, Missouri,
which compete with the Company's Holiday Hills and Ozark Mountain resorts, and
to a lesser extent with the Company's newly-acquired Timber Creek Resort.
Sunterra also owns a resort which is located near and competes with the
Company's Piney Shores Resort. Additionally, the Company believes there are a
number of public or privately-owned and operated timeshare resorts in most
states in which the Company owns resorts which will compete with the Company's
Existing Resorts and New Resorts.
The Company believes Marriott, Disney, Hilton, Hyatt, and Four Seasons
generally target consumers with higher annual incomes than the Company's target
market. The Company believes the other competitors named above target consumers
with similar, but slightly higher, income levels than the Company's target
market. The Company's competitors may possess significantly greater financial,
marketing, personnel, and other resources than the Company, and there can be no
assurance that such competitors will not significantly reduce the price of their
Vacation Intervals or offer greater convenience, services, or amenities than the
Company.
While the Company's principal competitors are developers of timeshare
resorts, the Company is also subject to competition from other entities engaged
in the commercial lodging business, including condominiums, hotels, and motels;
others engaged in the leisure business; and, to a lesser extent, from
campgrounds, recreational vehicles, tour packages, and second home sales. A
reduction in the product costs associated with any of these competitors, or an
increase in the Company's (or its customers') costs relative to such
competitors' (or their customers') costs, could have a material adverse effect
on the Company's results of operations, liquidity, and financial position.
Numerous businesses, individuals, and other entities compete with the
Company in seeking properties for acquisition and development of new resorts.
Some of these competitors are larger and have greater financial and other
resources than the Company. Such competition may result in a higher cost for
properties the Company wishes to acquire or may cause the Company to be unable
to acquire suitable properties for the development of new resorts.
GOVERNMENTAL REGULATION
GENERAL. The Company's marketing and sales of Vacation Intervals and other
operations are subject to extensive regulation by the federal government and the
states and jurisdictions in which the Existing Resorts and New Resorts are
located and in which Vacation Intervals are marketed and sold. On a federal
level, the Federal Trade Commission has taken the most active regulatory role
through the Federal Trade Commission Act, which prohibits unfair or deceptive
acts or competition in interstate commerce. Other federal legislation to which
the Company is or may be subject includes the Truth-in-Lending Act and
Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Interstate
Land Sales Full Disclosure Act, the Real Estate Settlement Procedures Act, the
Consumer Credit Protection Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act,
and the Civil Rights Acts of 1964 and 1968.
In response to certain fraudulent marketing practices in the timeshare
industry in the 1980's, various states enacted legislation aimed at curbing such
abuses. Certain states in which the Company operates have adopted specific laws
and regulations regarding the marketing and sale of Vacation Intervals. The laws
of most states require the Company to file a detailed offering statement and
supporting documents with a designated state authority, which describe the
Company, the project, and the promotion and sale of Vacation Intervals. The
offering statement must be approved by the appropriate state agency before the
Company may solicit residents of such state. The laws of certain states require
the Company to deliver an offering statement (or disclosure statement), together
with certain additional information concerning the terms of the purchase, to
prospective purchasers of Vacation Intervals who are residents of such state,
even if the resort is not located in such state. The laws of Missouri generally
only require certain disclosures in sales documents for prospective purchasers.
There are also laws in each state where the Company currently sells Vacation
Intervals which grant the purchaser of a Vacation Interval the right to cancel a
contract of purchase at any time within three to fifteen calendar days following
the date the contract was signed by the purchaser.
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The Company qualifies each resort under the laws of the state where it is
located. The Company has filed a timeshare application in Nevada with respect to
the New Resort in Las Vegas. There can be no assurance that the Company will
obtain the requisite approval to sell Vacation Intervals for this resort, and
the Company has not commenced marketing or sales activities for this resort.
The Company also markets and sells its Vacation Intervals to residents of
certain states adjacent or proximate to the states where the Company's resorts
are located. Many of these neighboring states also regulate the marketing and
sale of Vacation Intervals to their residents. The Company is currently in
various stages of obtaining permits to sell Vacation Intervals to residents of
certain states proximate to the Oak N' Spruce Resort in Massachusetts. There can
be no assurance that the Company will obtain the requisite approvals to sell
Vacation Intervals to residents of such states. The Company does not register
all of its resorts in each of the states where it registers any resorts.
Most states have additional laws which regulate the Company's activities and
protect purchasers, such as real estate licensure laws; travel sales licensure
laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize, gift
and sweepstakes laws; and other related laws.
The Company believes it is in material compliance with applicable federal
and state laws and regulations relating to the sales and marketing of Vacation
Intervals. However, the Company is normally and currently the subject of a
number of consumer complaints generally relating to marketing or sales practices
filed with relevant authorities, and there can be no assurance that all of these
complaints can be resolved without adverse regulatory actions or other
consequences. The Company expects some level of consumer complaints in the
ordinary course of its business as the Company aggressively markets and sells
Vacation Intervals to households with income of less than $50,000, which may
include individuals who are less financially sophisticated than more affluent
customers. There can be no assurance that the costs of resolving consumer
complaints or of qualifying under Vacation Interval ownership regulations in all
jurisdictions in which the Company desires to conduct sales will not be
significant, that the Company is in material compliance with applicable federal
and state laws and regulations, or that violations of law will not have adverse
implications for the Company, including negative public relations, potential
litigation, and regulatory sanctions. The expense, negative publicity, and
potential sanctions associated with the failure to comply with applicable laws
or regulations could have a material adverse effect on the Company's results of
operations, liquidity, or financial position. Further, there can be no assurance
that either the federal government or states having jurisdiction over the
Company's business will not adopt additional regulations or take other actions
which would adversely affect the Company's results of operations, liquidity, and
financial position.
During the 1980's and continuing through the present, the timeshare industry
has been and continues to be afflicted with negative publicity and prosecutorial
attention due, among other things, to marketing practices which were widely
viewed as deceptive or fraudulent. Among the many timeshare companies which have
been the subject of federal, state, and local enforcement actions and
investigations in the past were certain of the partnerships and corporations
that were merged into the Company prior to 1996 (the "Merged Companies", or
individually "Merged Company"). Some of the settlements, injunctions, and
decrees resulting from litigation and enforcement actions (the "Orders") to
which certain of the Merged Companies consented purport to bind all successors
and assigns, and accordingly bind the Company. In addition, at that time the
Company was directly a party to one such Order issued in Missouri. No past or
present officers, directors, or employees of the Company or any Merged Company
were named as subjects or respondents in any of these Orders; however, each
Order purports to bind generically unnamed "officers, directors, and employees"
of certain Merged Companies. Therefore, certain of these Orders may be
interpreted to be enforceable against the present officers, directors, and
employees of the Company even though they were not individually named as
subjects of the enforcement actions which resulted in these Orders. These Orders
require, among other things, that all parties bound by the Orders, including the
Company, refrain from engaging in deceptive sales practices in connection with
the offer and sale of Vacation Intervals. In one particular case in 1988, a
Merged Company pled guilty to deceptive uses of the mails in connection with
promotional sales literature mailed to prospective timeshare purchasers and
agreed to pay a judicially imposed fine of $1.5 million and restitution of
$100,000. The requirements of the Orders are substantially what applicable state
and federal laws and regulations mandate, but the consequence of violating the
Orders may be that sanctions (including possible financial penalties and
suspension or loss of licensure) may be imposed more summarily and may be
harsher than would be the case if the Orders did not bind the Company. In
addition, the existence of the Orders may be viewed negatively by prospective
regulators in jurisdictions where the Company does not now do business, with
attendant risks of increased costs and reduced opportunities.
In early 1997, the Company was the subject of some consumer complaints which
triggered governmental investigations into the Company's affairs. In March 1997,
the Company entered into an Assurance of Voluntary Compliance with the Texas
Attorney General, in which the Company agreed to make additional disclosure to
purchasers of Vacation Intervals regarding the limited availability of its
Endless Escape program during certain periods. The Company paid $15,200 for
investigatory costs and attorneys'
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fees of the Attorney General in connection with this matter. Also, in March
1997, the Company entered into an agreed order (the "Agreed Order") with the
Texas Real Estate Commission requiring the Company to comply with certain
aspects of the Texas Timeshare Act, Texas Real Estate License Act, and Rules of
the Texas Real Estate Commission, with which it had allegedly been in
non-compliance until mid-1995. The allegations included (i) the Company's
admitted failure to register the Missouri Destination Resorts in Texas (due to
its misunderstanding of the reach of the Texas Timeshare Act); (ii) payment of
referral fees for Vacation Interval sales, the receipt of which was improper on
the part of the recipients; and (iii) miscellaneous other actions alleged to
violate the Texas Timeshare Act, which the Company denied. While the Agreed
Order acknowledged that Silverleaf independently resolved ten consumer
complaints referenced in the Agreed Order, discontinued the practices complained
of, and registered the Destination Resorts during 1995 and 1996, the Texas Real
Estate Commission ordered Silverleaf to cease its discontinued practices and
enhance its disclosure to purchasers of Vacation Intervals. In the Agreed Order,
Silverleaf agreed to make a voluntary donation of $30,000 to the State of Texas.
The Agreed Order also directed Silverleaf to revise its training manual for
timeshare salespersons and verification officers. While the Agreed Order
resolved all of the alleged violations contained in complaints received by the
Texas Real Estate Commission through December 31, 1996, the Company has
encountered and expects to encounter some level of additional consumer
complaints in the ordinary course of its business.
The Company employs the following methods in training sales and marketing
personnel as to legal requirements. With regard to direct mailings, a designated
compliance employee of the Company reviews all mailings to determine if they
comply with applicable state legal requirements. With regard to telemarketing,
the Company's Vice President -- Marketing prepares a script for telemarketers
based upon applicable state legal requirements. All telemarketers receive
training which includes, among other things, directions to adhere strictly to
the Company approved script. Telemarketers are also monitored by their
supervisors to ensure that they do not deviate from the Company approved script.
With regard to sales functions, the Company distributes sales manuals which
summarize applicable state legal requirements. Additionally, such sales
personnel receive training as to such applicable legal requirements. The Company
has a salaried employee at each sales office who reviews the sales documents
prior to closing a sale to review compliance with legal requirements.
Additionally, a member of the corporate office staff calls each purchaser within
48 hours after the sale to verify information. Periodically, the Company is
notified by regulatory agencies to revise its disclosures to consumers and to
remedy other alleged inadequacies regarding the sales and marketing process. In
such cases, the Company revises its direct mailings, telemarketing scripts, or
sales disclosure documents, as appropriate, to comply with such requests.
ENVIRONMENTAL MATTERS. Under various federal, state, and local environmental
laws, ordinances, and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and tort
liability and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The cost of
investigation, remediation, or removal of such substances may be substantial,
and the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner or operator of a site may be subject
to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site or from environmental
regulatory violations. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such claims.
Certain federal, state, and local laws, regulations, and ordinances govern
the removal, encapsulation, or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation, or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. In 1994, the
Company conducted a limited asbestos survey at each of the Existing Resorts,
which surveys did not reveal material potential losses associated with ACMs at
certain of the Existing Resorts.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level").
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The presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to sell Vacation Intervals at such properties and the market
value of such property. The Company has not tested its properties for radon.
Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at the Company's resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify.
Electric transmission lines are located in the vicinity of some of the
Company's properties. Electric transmission lines are one of many sources of
electromagnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the Company
understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse health effects. In addition, fear of adverse health effects
from transmission lines has been a factor considered in determining property
value in obtaining financing and in condemnation and eminent domain proceedings
brought by power companies seeking to construct transmission lines. Therefore,
there is a potential for the value of a property to be adversely affected as a
result of its proximity to a transmission line and for the Company to be exposed
to damage claims by persons exposed to EMFs.
In 1994, the Company conducted Phase I environmental assessments at several
of its Existing Resorts in order to identify potential environmental concerns.
Also, the Company has obtained more recent Phase I environmental assessments for
each of the remaining Existing Resorts and New Resorts. These Phase I
assessments were carried out in accordance with accepted industry practices and
consisted of non-invasive investigations of environmental conditions at the
properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, and the
preparation and issuance of written reports. The Company's Phase I assessments
of the properties have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business, assets,
or results of operations taken as a whole; nor is the Company aware of any such
material environmental liability. Nevertheless, it is possible that the
Company's Phase I assessments do not reveal all environmental liabilities or
that there are material environmental liabilities of which the Company is
unaware. Moreover, there can be no assurance that (i) future laws, ordinances,
or regulations will not impose any material environmental liability or (ii) the
current environmental condition of the properties will not be affected by the
condition of land or operations in the vicinity of the properties (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company. The Company does not believe that compliance with applicable
environmental laws or regulations will have a material adverse effect on the
Company's results of operations, liquidity, or financial position.
The Company believes that its properties are in compliance in all material
respects with all federal, state, and local laws, ordinances, and regulations
regarding hazardous or toxic substances. The Company has not been notified by
any governmental authority or any third party, and is not otherwise aware, of
any material noncompliance, liability, or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
UTILITY REGULATION. The Company owns its own water supply and waste-water
treatment facilities at several of the Existing Resorts, which are regulated by
various governmental agencies. The Texas Natural Resource Conservation
Commission is the primary state umbrella agency regulating utilities at the
resorts in Texas; and the Missouri Department of Natural Resources and Public
Service Commission of Missouri are the primary state umbrella agencies
regulating utilities at the resorts in Missouri. The Environmental Protection
Agency, division of Water Pollution Control, and the Illinois Commerce
Commission are the primary state agencies regulating water utilities in
Illinois. These agencies regulate the rates and charges for the services
(allowing a reasonable rate of return in relation to invested capital and other
factors), the size and quality of the plants, the quality of water supplied, the
efficacy of waste-water treatment, and many other aspects of the utilities'
operations. The agencies have approval rights regarding the entity owning the
utilities (including its financial strength) and the right to approve a transfer
of the applicable permits upon any change in control of the entity holding the
permits. Other federal, state, regional, and local environmental, health, and
other agencies also regulate various aspects of the provision of water and
waste-water treatment services.
OTHER REGULATION. Under various state and federal laws governing housing and
places of public accommodation, the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities are substantially in
compliance with present requirements of such laws, the Company will incur
additional costs of compliance. Additional legislation may impose further
burdens or restrictions on owners with respect to access by disabled persons.
The ultimate amount of the cost of compliance with such
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legislation is not currently ascertainable, and, while such costs are not
expected to have a material effect on the Company, such costs could be
substantial. Limitations or restrictions on the completion of certain
renovations may limit application of the Company's growth strategy in certain
instances or reduce profit margins on the Company's operations.
EMPLOYEES
At December 31, 1998, the Company employed 2,347 persons. The Company
believes employee relations are good. None of the employees are represented by a
labor union.
INSURANCE
The Company carries comprehensive liability, fire, hurricane, and storm
insurance with respect to the Company's resorts, with policy specifications,
insured limits, and deductibles customarily carried for similar properties which
the Company believes are adequate. There are, however, certain types of losses
(such as losses arising from floods and acts of war) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose its capital invested in a resort, as well as the anticipated
future revenues from such resort and would continue to be obligated on any
mortgage indebtedness or other obligations related to the property. Any such
loss could have a material adverse effect on the Company's results of operation,
liquidity, or financial position. The Company self-insures for property damage
to certain vehicles and heavy equipment.
DESCRIPTION OF CERTAIN INDEBTEDNESS
EXISTING INDEBTEDNESS. The Company has revolving credit agreements with four
lenders providing for loans up to an aggregate of $130.0 million, which the
Company uses to finance the sale of Vacation Intervals, to finance construction,
and for working capital needs. In addition, the Company has a $75.0 million
senior subordinated note due 2008, with interest payable semi-annually on April
1 and October 1, guaranteed by all of the Company's present and future domestic
restricted subsidiaries. The other foregoing loans mature between December 1999
and October 2005, and are collateralized (or cross-collateralized) by customer
notes receivable, construction in process, land, improvements, and related
equipment of certain of the Existing Resorts and New Resorts. These credit
facilities bear interest at variable rates tied to the prime rate, LIBOR, or the
corporate rate charged by certain banks. The credit facilities secured by
customer notes receivable limit advances to 70% of the unpaid balance of certain
eligible customer notes receivable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein.
The Company's credit facilities contain restrictive and financial covenants,
including covenants relating to (i) the maintenance of a minimum net worth
ranging up to $67 million, minimum liquidity, including a debt to equity ratio
of not greater than 2.5 to 1, a senior debt to equity ratio of not greater than
2.0 to 1, and a consolidated cash flow to consolidated interest expense ratio of
at least 2.0 to 1, (ii) restrictions on liens against and dispositions of
collateral, (iii) restrictions on distributions to affiliates and prepayments of
loans from affiliates, (iv) restrictions on changes in control and management of
the Company, (v) restrictions on sales of substantially all of the assets of the
Company, and (vi) restrictions on mergers, consolidations, or other
reorganizations of the Company. Under certain credit facilities, a sale of all
or substantially all of the assets of the Company, a merger, consolidation, or
reorganization of the Company, or other changes of control of the ownership of
the Company would constitute an event of default and permit the lenders to
accelerate the maturity thereof. The credit facilities also include customary
events of default, including, without limitation (i) failure to pay principal,
interest, or fees when due, (ii) untruth of any representation of warranty,
(iii) failure to perform or timely observe covenants, (iv) defaults under other
indebtedness, and (v) bankruptcy.
The following table summarizes the Company's loans, other notes payable,
capital lease obligations, and senior subordinated notes at December 31, 1998:
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AMOUNT
---------------
(IN THOUSANDS)
$60 million revolving loan due December 1999, extendable for a period of
one year, with drawings permitted until maturity, at an interest rate of
LIBOR plus 2.55%, secured by customer notes receivable........................................... $ 11,210
$40 million revolving loan due October 2005 with drawings permitted until
October 31, 2000, at a variable rate of LIBOR plus 2.5%, secured by
customer notes receivable........................................ ............................... 29,856
$15 million revolving loan due November 2002 with drawings permitted until
November 30, 1998, at an interest rate of Prime plus 2%, secured by
customer notes receivable........................................ ............................... 13,638
$15 million revolving construction loan due October 2000, with drawings
permitted until April 30, 1999, a variable rate of LIBOR plus 3.5%, secured
by land, construction in process, and customer notes receivable ................................. --
Various notes, due from December 1999 through October 2005, collateralized
by various assets with interest rates ranging from 4.2% to 14.0%. ............................... 223
---------
Total notes payable.......................................................................... 54,927
Capital lease obligations......................................................................... 3,181
---------
Total notes payable and capital lease obligations............................................ 58,108
10 1/2% senior subordinated notes, due 2008, interest payable semi-annually
on April 1 and October 1, guaranteed by all of the Company's present and
future domestic restricted subsidiaries.. ....................................................... 75,000
---------
Total........................................................................................ $ 133,108
=========
At December 31, 1998, prime rate was 7.75% and LIBOR rates were from 5.15%
to 5.28%.
The Company's future lending and development activities will likely be
financed with indebtedness under the existing revolving credit facilities or
under credit facilities to be obtained by the Company in the future. Such new
credit facilities would likely be collateralized by the Company's assets and
contain restrictive covenants. The Company does not presently have any
commitments from third-parties to extend the terms of its existing financing
arrangements or for any replacement financing arrangements upon the expiration
of such funding commitments, and there can be no assurance that alternative or
additional arrangements can be made on terms that are satisfactory to the
Company. Accordingly, future sales of Vacation Intervals may be limited by both
the availability of funds to finance customer purchases of Vacation Intervals
and by reduced demand which may result if the Company is unable to provide
financing to purchasers of Vacation Intervals. In addition, if the Company were
to incur additional indebtedness, this could increase its vulnerability to
adverse general economic and timeshare industry conditions and to increased
competitive pressures.
The foregoing summary of certain provisions of the credit facilities is
subject to and qualified in its entirety by reference to the terms of the credit
facilities, copies of which are filed as exhibits (or incorporated by reference)
to this report on Form 10-K.
THE TIMESHARE INDUSTRY
The Market. The resort component of the leisure industry is serviced
primarily by two alternatives for overnight accommodations: commercial lodging
establishments and timeshare resorts. Commercial lodging consists of (i) hotels
and motels in which a room is rented on a nightly, weekly, or monthly basis for
the duration of the visit, and (ii) rentals of privately-owned condominium units
or homes. For many vacationers, particularly those with families, a lengthy stay
at a quality commercial lodging establishment is not economical. In addition,
room rates and availability at such establishments are subject to change
periodically. Timeshare ownership presents an economical alternative to
commercial lodging for vacationers.
Worldwide Market. First introduced in Europe in the mid-1960s, ownership of
Vacation Intervals has been one of the fastest growing segments of the
hospitality industry over the past two decades. As shown below, the worldwide
timeshare industry has expanded significantly since 1980, both in Vacation
Interval sales volume (in millions) and in number of Vacation Interval owners
(in thousands). Years following 1994 are estimates.
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DOLLAR VOLUME NUMBER OF
OF VACATION VACATION
YEAR INTERVAL SALES INTERVAL OWNERS
- ---- --------------- ---------------
1980 490 155
1981 965 220
1982 1,165 335
1983 1,340 470
1984 1,735 620
1985 1,580 805
1986 1,610 970
1987 1,940 1,125
1988 2,390 1,310
1989 2,970 1,530
1990 3,240 1,800
1991 3,740 2,070
1992 4,250 2,363
1993 4,505 2,760
1994 4,760 3,144
1995 5,200 3,611
1996 5,700 4,005
1997 6,200 4,424
United States Market. In 1997, approximately 270,000 intervals in U.S.
properties were sold at an average price of $10,502 per interval, resulting in
total sales volume of $2.72 billion. By comparison, total sales volume in 1992
was $1.3 billion. A total of 2,000,000 households owned intervals in U.S.
timeshare properties at January 1, 1998.
Reasons for Growth. The following factors have contributed to increased
acceptance of the timeshare concept among the general public and the substantial
growth of the timeshare industry over the past 15 years:
o higher quality accommodations and services;
o involvement of well-recognized hotel companies in the industry;
o improved availability of financing for purchasers of Vacation Intervals;
o increased flexibility of timeshare use;
o increased regulation of the timeshare industry; and
o improved overall image of the timeshare industry.
Despite the growth in the timeshare industry, Vacation Interval ownership
had achieved only an approximate 1.95% market penetration of all U.S. households
at July 1, 1998.
The timeshare industry is highly fragmented, engaged in by a large number of
local and regional resort developers and operators. However, there is a trend
towards consolidation of timeshare properties among fewer owners. The Company
believes that one of the most significant factors contributing to the current
awareness of the timeshare industry is the entry into the market of some of the
world's major lodging, hospitality, and entertainment companies, including
Marriott, Disney, Hilton, Hyatt, and Ramada.
The Consumer. The median age of a Vacation Interval owner in 1998 in the
United States was 53 years. The following table shows the estimated household
incomes of (i) all timeshare owners in the United States, and (ii) U.S.
timeshare owners who purchased an interval during 1996 or 1997:
UNITED '96/'97
STATES BUYERS
------ ------
HOUSEHOLD INCOME BEFORE TAXES
Under $30,000............................. 5.2% 3.7%
$30,000 to $39,999........................ 9.0% 8.2%
$40,000 to $49,999........................ 12.8% 12.2%
$50,000 to $74,999........................ 31.2% 32.3%
$75,000 to $99,999........................ 20.2% 20.6%
$100,000 or more.......................... 21.5% 23.1%
Approximate Median........................ $ 68,425 $ 70,050
The U.S. Census Bureau has estimated that 29.5% of all U.S. households in
1997 had a household income between $25,000 and $50,000, which represents
approximately one-half of the Company's customer base. Based upon a sampling of
approximately 5% of the Company's customers who purchased a Vacation Interval in
1998, approximately 18% of such customers had an annual income less than
$25,000, approximately 37% of such customers had an income of $25,000 to
$50,000, and approximately 45% of such customers had an annual income greater
than $50,000.
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CAUTIONARY STATEMENTS
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Certain statements in this
report on Form 10-K that are not historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Discussions containing such forward-looking statements may be found
throughout this report on Form 10-K. In addition, when used in this report on
Form 10-K the words "believes", "anticipates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below and the matters set forth in this report on
Form 10-K generally. The forward-looking statements are made as of the date of
this report on Form 10-K and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from the projections in the forward-looking statements.
SENSITIVITY OF CUSTOMERS TO GENERAL ECONOMIC CONDITIONS. The Company targets
value-conscious customers who are generally more vulnerable to deteriorating
economic conditions than consumers in the luxury or upscale markets. Any
economic downturn could depress spending for Vacation Intervals, limit the
availability, or increase the cost of financing for the Company and its
customers, and adversely affect the collectibility of the Company's loans to
Vacation Interval buyers. During past economic slowdowns and recessions,
Affiliated Companies experienced increased delinquencies in the payment of
Vacation Interval promissory notes and monthly Club dues and consequent
increased foreclosures and loan losses. During any future economic slowdown or
recession, the Company projects that increased delinquencies, foreclosures, and
loan losses are likely to occur. Similar adverse consequences could result from
significant increases in transportation costs. Any or all of the foregoing could
have a material adverse effect on the Company's results of operations,
liquidity, and financial position.
BORROWER DEFAULTS. The Company offers financing to the buyers of Vacation
Intervals at the Company's resorts. These buyers 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 period, and are secured by a first mortgage on the
Vacation Interval. The Company bears the risk of defaults on these promissory
notes, and this risk is heightened as the Company generally does not verify the
credit history of its customers and will provide financing if the customer is
presently employed and meets certain household income criteria.
The Company's credit experience is such that in 1998 it allocated 12.1% of
the purchase price of Vacation Intervals to its provision for uncollectible
notes. In addition, in 1998 the Company decreased sales by $1.9 million for
customer returns and increased operating, general and administrative expenses by
$831,000 for customer releases. 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 generally not recovered; and such costs must be incurred again
to resell the Vacation Interval. Although the Company, in many cases, may have
recourse against a Vacation Interval buyer for the unpaid price, certain states
have laws which limit or hinder the Company's ability to recover personal
judgments against customers who have defaulted on their loans. For example,
under Texas law, if the Company were to pursue a post-foreclosure deficiency
claim against a customer, the customer may file a court proceeding to determine
the fair market value of the property foreclosed upon. In such event, the
Company may not recover a personal judgment against the customer for the full
amount of the deficiency, but may recover only to the extent that the
indebtedness owed to the Company exceeds the fair market value of the property.
Accordingly, the Company has generally not pursued this remedy. In 1998, the
Company implemented a program through which delinquent loans are assumed by
existing owners with a solid credit record.
Prior to 1996, the Company sold customer promissory notes and mortgages to
third parties, generally with recourse, as a means of financing its operations.
As a result, the Company may be required to repurchase customer promissory notes
previously sold which become delinquent. The Company takes these contingent
obligations into account in establishing its allowance for uncollectible notes.
At December 31, 1998, the Company had Vacation Interval customer notes
receivable in the approximate principal amount of $196.9 million, was
contingently liable with respect to approximately $3.8 million principal amount
of customer notes sold with recourse, and had an allowance for uncollectible
notes of approximately $23.9 million. There can be no assurance that such
allowances are adequate.
FINANCING CUSTOMER BORROWINGS. To finance its operations, the Company
borrows funds under existing or future credit arrangements and is dependent on
its ability to finance customer notes receivable through third party lenders to
conduct its business.
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BORROWING BASE. To finance Vacation Interval customer notes receivable,
the Company has entered into agreements with lenders to borrow up to
approximately $130.0 million collateralized by customer promissory notes and
mortgages. At December 31, 1998, the Company had such borrowings from
lenders in the approximate principal amount of $54.7 million. The Company's
lenders typically lend the Company 70% of the principal amount of performing
notes, and payments from Silverleaf Owners on such notes are credited
directly to the lender and applied against the Company's loan balance. At
December 31, 1998, the Company had a portfolio of approximately 36,075
Vacation Interval customer notes receivable in the approximate principal
amount of $196.9 million, of which approximately $26.6 million in principal
amount were 61 days or more past due and therefore ineligible as collateral.
NEGATIVE CASH FLOW. The Company ordinarily receives only 10% of the
purchase price on the sale of a Vacation Interval but must pay in full the
costs of development, marketing, and sale of the interval. Maximum
borrowings available under the Company's credit facilities may not be
sufficient to cover these costs, thereby straining the Company's capital
resources, liquidity, and capacity to grow.
INTEREST RATE MISMATCH. At December 31, 1998, the Company's portfolio of
customer loans had a weighted average fixed interest rate of 14.2%. At such
date, the Company's borrowings (which bear interest at variable rates)
against the portfolio had a weighted average cost of funds of 9.6%. The
Company has historically derived net interest income from its financing
activities because the interest rates it charges its customers who finance
the purchase of their Vacation Intervals exceed the interest rates the
Company pays to its lenders. Because the Company's existing indebtedness
currently bears interest at variable rates and the Company's customer notes
receivable bear interest at fixed rates, increases in interest rates would
erode the spread in interest rates that the Company has historically enjoyed
and could cause the interest expense on the Company's borrowings to exceed
its interest income on its portfolio of customer notes receivable. The
Company has not engaged in interest rate hedging transactions. Therefore,
any increase in interest rates, particularly if sustained, could have a
material adverse effect on the Company's results of operations, liquidity,
and financial position.
To the extent interest rates decrease generally on loans available to
the Company's customers, the Company faces an increased risk that customers
will pre-pay their loans and reduce the Company's income from financing
activities.
MATURITY MISMATCH. The Company typically provides financing to customers
over a seven year period, and customer notes had an average maturity of 6.5
years at December 31, 1998. The Company's related revolving credit
facilities mature between December 1999 and October 2005, with up to $60.0
million of borrowings under such credit facilities maturing in December
1999. Accordingly, there could be a mismatch between the Company's
anticipated cash receipts and cash disbursements in December 1999 and
subsequent periods. Although the Company has historically been able to
secure financing sufficient to fund its operations, it does not presently
have agreements with its lenders to extend the term of its existing funding
commitments or to replace such commitments upon their expiration. Failure to
obtain such refinancing facilities could require the Company to sell its
portfolio of customer notes receivable, probably at a substantial discount,
or to seek other alternatives to enable it to continue in business. While
the Company has been successful in obtaining financing to date, there is no
assurance it will be able to do so in the future.
IMPACT ON SALES. Limitations on the availability of financing would
inhibit sales of Vacation Intervals due to (i) the lack of funds to finance
the initial negative cash flow that results from sales that are financed by
the Company and (ii) reduced demand if the Company is unable to provide
financing to purchasers of Vacation Intervals.
REGULATION OF MARKETING AND SALES OF VACATION INTERVALS AND RELATED LAWS.
The Company's marketing and sales of Vacation Intervals and other operations are
subject to extensive regulation by the federal government and the states and
jurisdictions in which the Existing Resorts and New Resorts are located and in
which Vacation Intervals are marketed and sold. On a federal level, the Federal
Trade Commission has taken the most active regulatory role through the Federal
Trade Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-in-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer Credit
Protection Act, the Telephone Consumer Protection Act, the Telemarketing and
Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, and the Civil
Rights Acts of 1964 and 1968.
In response to certain fraudulent marketing practices in the timeshare
industry in the 1980's, various states enacted legislation aimed at curbing such
abuses. Several states in which the Company currently owns Existing Resorts or
New Resorts, as well as other states in which the Company markets its Vacation
Intervals, have adopted specific laws and regulations regarding the marketing
and sale of Vacation Intervals. The laws of several states require the Company
to file a detailed offering statement and supporting documents with a designated
state authority, which describe the Company, the project, and the promotion and
sale of Vacation
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Intervals. The offering statement must be approved by the appropriate state
agency before the Company may solicit residents of such state. The laws of
certain states require the Company to deliver an offering statement (or
disclosure statement), together with certain additional information concerning
the terms of the purchase, to prospective purchasers of Vacation Intervals who
are residents of such state, even if the resort is not located in such state.
The laws of Missouri generally only require certain disclosures in sales
documents for prospective purchasers. There are also laws in each state where
the Company currently sells Vacation Intervals which grant the purchaser of a
Vacation Interval the right to cancel a contract of purchase at any time within
three to fifteen calendar days following the date the contract was signed by the
purchaser.
The Company qualifies each resort under the timeshare laws of the state
where it is located. The Company has filed a timeshare application in Nevada
with respect to the New Resort in Las Vegas. There can be no assurance that the
Company will obtain the requisite approval to sell Vacation Intervals for this
resort, and the Company has not commenced marketing or sales activities for this
resort.
The Company also markets and sells its Vacation Intervals to residents of
certain states which are near the states where the Company's resorts are
located. Many of these neighboring states also regulate the marketing and sale
of Vacation Intervals to their residents. The Company is currently in various
stages of obtaining permits to sell Vacation Intervals to residents of certain
states proximate to the Oak 'N Spruce Resort in Massachusetts. There can be no
assurance that the Company will obtain the requisite approvals to sell Vacation
Intervals to residents of such states. The Company does not register all of its
resorts in each of the states where it registers certain resorts.
Most states have additional laws which regulate the Company's activities and
protect purchasers, such as real estate licensure laws; travel sales licensure
laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize,
gift, and sweepstakes laws; and other related laws.
The Company believes it is in material compliance with federal and state
laws and regulations to which it is currently subject relating to the sale and
marketing of Vacation Intervals. However, the Company is normally and currently
the subject of a number of consumer complaints generally relating to marketing
or sales practices filed with relevant authorities, and there can be no
assurance that all of these complaints can be resolved without adverse
regulatory actions or other consequences. The Company expects some level of
consumer complaints in the ordinary course of its business as the Company
aggressively markets and sells Vacation Intervals in the value segment of the
timeshare industry, which may include individuals who are less financially
sophisticated than more affluent customers. There can be no assurance that the
costs of resolving consumer complaints or of qualifying under Vacation Interval
ownership regulations in all jurisdictions in which the Company desires to
conduct sales will not be significant, that the Company is in material
compliance with applicable federal, state, or other laws and regulations, or
that violations of law will not have adverse implications for the Company,
including negative public relations, potential litigation, and regulatory
sanctions. The expense, negative publicity, and potential sanctions associated
with the failure to comply with applicable laws or regulations could have a
material adverse effect on the Company's results of operations, liquidity, and
financial position. Further, there can be no assurance that either the federal
government or states having jurisdiction over the Company's business will not
adopt additional regulations or take other actions which would adversely affect
the Company's results of operations, liquidity, and financial position.
During the 1980's and continuing through the present, the timeshare industry
has been and continues to be afflicted with negative publicity and prosecutorial
attention due to, among other things, marketing practices which were widely
viewed as deceptive or fraudulent. Among the many timeshare companies which have
been the subject of federal, state, and local enforcement actions and
investigations in the past were certain of the Affiliated Companies and their
affiliates. Some of the settlements, injunctions, and decrees resulting from
litigation and enforcement actions (the "Orders") to which certain of the
Affiliated Companies consented purport to bind all successors and assigns, and
accordingly bind the Company. In addition, at that time the Company was directly
a party to one such Order issued in Missouri. No past or present officers,
directors, or employees of the Company or any Affiliated Company were named as
subjects or respondents in any of these Orders; however, each Order purports to
bind generically unnamed "officers, directors, and employees" of certain
Affiliated Companies. Therefore, certain of these Orders may be interpreted to
be enforceable against the present officers, directors, and employees of the
Company even though they were not individually named as subjects of the
enforcement actions which resulted in these Orders. These Orders require, among
other things, that all parties bound by the Orders, including the Company,
refrain from engaging in deceptive sales practices in connection with the offer
and sale of Vacation Intervals. In one particular case in 1988, an Affiliated
Company pled guilty to deceptive uses of the mails in connection with
promotional sales literature mailed to prospective timeshare purchasers and
agreed to pay a judicially imposed fine of $1.5 million and restitution of
$100,000. The requirements of the Orders are substantially what applicable state
and federal laws and regulations mandate, but the consequence of violating the
Order may be that sanctions (including possible financial penalties and
suspension or loss of licensure) may be imposed more summarily and may be
harsher than would be the case if the Orders did not bind the
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Company. In addition, the existence of the Orders may be viewed negatively by
prospective regulators in jurisdictions where the Company does not now do
business, with attendant risks of increased costs and reduced opportunities.
In early 1997, the Company was the subject of some consumer complaints which
triggered governmental investigations into the Company's affairs. In March 1997,
the Company entered into an Assurance of Voluntary Compliance with the Texas
Attorney General, in which the Company agreed to make additional disclosure to
purchasers of Vacation Intervals regarding the limited availability of its
Endless Escape program during certain periods. The Company paid $15,200 for
investigatory costs and attorneys' fees of the Attorney General in connection
with this matter. Also, in March 1997, the Company entered into an agreed order
(the "Agreed Order") with the Texas Real Estate Commission requiring the Company
to comply with certain aspects of the Texas Timeshare Act, Texas Real Estate
License Act, and Rules of the Texas Real Estate Commission, with which it had
allegedly been in non-compliance until mid-1995. The allegations included (i)
the Company's admitted failure to register the Missouri Destination Resorts in
Texas (due to its misunderstanding of the reach of the Texas Timeshare Act);
(ii) payment of referral fees for Vacation Interval sales, the receipt of which
was improper on the part of the recipients; and (iii) miscellaneous other
actions alleged to violate the Texas Timeshare Act, which the Company denied.
While the Agreed Order acknowledged that Silverleaf independently resolved ten
consumer complaints referenced in the Agreed Order, discontinued the practices
complained of, and registered the Destination Resorts during 1995 and 1996, the
Texas Real Estate Commission ordered Silverleaf to cease its discontinued
practices and enhance its disclosure to purchasers of Vacation Intervals. In the
Agreed Order, Silverleaf agreed to make a voluntary donation of $30,000 to the
State of Texas. The Agreed Order also directed Silverleaf to revise its training
manual for timeshare salespersons and verification officers. While the Agreed
Order resolved all of the alleged violations contained in complaints received by
the Texas Real Estate Commission through December 31, 1996, the Company has
encountered and expects to encounter some level of additional consumer
complaints in the ordinary course of its business.
EXPANSION INTO NEW GEOGRAPHIC AREAS. Prior to August 1997, all of the
Company's operating resorts and substantially all of its customers and borrowers
were located in Texas and Missouri. Since August 1997, the Company has expanded
into several other states. The recent expansion into new geographic areas poses
new risks because the Company does not possess the same level of familiarity
with and experience in these markets as it possesses with respect to its
historical markets in Missouri and Texas, which could adversely affect the
Company's ability to develop and operate timeshare resorts and sell Vacation
Intervals in these new markets. Such expansion also requires the Company to
comply with the laws and regulations of additional jurisdictions where the
Company currently markets or will market its Vacation Intervals. Additionally,
the Company is subject to and will become subject to zoning and land use laws of
additional municipalities. There is no assurance the Company can comply with all
of these requirements economically or otherwise. The New Resorts will also
require new architectural plans and construction techniques with which the
Company is less familiar. For example, Silverleaf will utilize five-story and
nine-story, high density buildings for the proposed resort in Las Vegas, Nevada,
whereas the Company has historically utilized low-rise, lower density building
structures. The Oak N' Spruce Resort in Massachusetts and the Fox River Resort
in Illinois are subject to a longer and harsher winter climate than the resorts
in Missouri and Texas. Accordingly, construction costs at these new resorts may
be higher and the construction cycle may be longer. Expansion of the Company's
sales and marketing activities is expected to result in higher marketing
expenses to gain entrance to these new markets. Cultural differences between
customers in these new markets and the Company's historical markets may result
in additional marketing costs or lower sales. All of the above risks associated
with the Company's entrance into the new geographic areas could have a material
adverse effect on the Company's results of operations, liquidity, and financial
position.
RAPID GROWTH. The Company has experienced rapid growth which could place a
strain on the Company's management, employees, and systems. Prior to August
1997, the Company owned and operated seven resorts. Since then, the Company has
acquired three resorts and sites for five additional resorts and has acquired
management rights with respect to eight timeshare resorts. As the Company's
business develops and expands, the Company will require additional management
and employees and will need to implement enhanced operational and financial
systems. There can be no assurance that the Company will successfully hire,
retain, integrate, and utilize management and employees and implement and
maintain such operational and financial systems. Failure to hire, retain, and
integrate management and employees or implement such systems successfully could
have a material adverse effect on the Company's results of operations,
liquidity, and financial position.
CONCENTRATION IN TIMESHARE INDUSTRY. Because the Company's operations are
conducted solely within the timeshare industry, any adverse changes affecting
the timeshare industry such as an oversupply of timeshare units, a reduction in
demand for timeshare units, changes in travel and vacation patterns, a decrease
in popularity of any of the Company's resorts with consumers, changes in
governmental regulations or taxation of the timeshare industry, as well as
negative publicity about the timeshare industry, could have a material adverse
effect on the Company's results of operations, liquidity, and financial
position.
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COMPETITION. The timeshare industry is highly fragmented and includes a
large number of local and regional resort developers and operators. However,
some of the world's most recognized lodging, hospitality, and entertainment
companies, such as Marriott, Disney, Hilton, Hyatt, and Four Seasons, have
entered the industry. Other companies in the timeshare industry, including
Sunterra, Fairfield, Vacation Break, Vistana, Ramada, TrendWest, and Bluegreen
are, or are subsidiaries of, public companies with enhanced access to capital
and other resources.
Fairfield and Sunterra own timeshare resorts in or near Branson, Missouri,
which compete with the Company's Holiday Hills and Ozark Mountain resorts and to
a lesser extent with the Company's newly-acquired Timber Creek Resort. Sunterra
also owns a resort which is located near and competes with the Company's Piney
Shores Resort. Additionally, the Company believes there are a number of public
or privately-owned and operated timeshare resorts in most states in which the
Company owns resorts which will compete with the Company's Existing Resorts and
New Resorts.
The Company believes Marriott, Disney, Hilton, Hyatt, and Four Seasons
generally target consumers with higher annual incomes than the Company's target
market. The Company believes the other competitors named above target consumers
with similar, but slightly higher, income levels than the Company's target
market. The Company's competitors may possess significantly greater financial,
marketing, personnel, and other resources than the Company, and there can be no
assurance that such competitors will not significantly reduce the price of their
Vacation Intervals or offer greater convenience, services, or amenities than the
Company.
While the Company's principal competitors are developers of timeshare
resorts, the Company is also subject to competition from other entities engaged
in the commercial lodging business, including condominiums, hotels, and motels;
others engaged in the leisure business; and, to a lesser extent, from
campgrounds, recreational vehicles, tour packages, and second home sales. A
reduction in the product costs associated with any of these competitors, or an
increase in the Company's costs relative to such competitors' costs, could have
a material adverse effect on the Company's results of operations, liquidity, and
financial position.
Numerous businesses, individuals, and other entities compete with the
Company in seeking properties for development and acquisition of resorts. Some
of these competitors are larger and have greater financial and other resources
than the Company. Such competition may result in a higher cost for properties
the Company wishes to acquire or may cause the Company to be unable to acquire
suitable properties for the development of new resorts.
DEVELOPMENT, CONSTRUCTION, AND PROPERTY ACQUISITION ACTIVITIES. The Company
intends to develop and continue the expansion of the Existing Resorts, to
develop the New Resorts, and to selectively acquire and develop other resorts.
Acquiring and developing resorts places substantial demands on the Company's
liquidity and capital resources, as well as on its personnel and administrative
capabilities. Risks associated with the Company's development and construction
activities include the following: construction costs or delays at a property may
exceed original estimates, possibly making the expansion or development
uneconomical or unprofitable; sales of Vacation Intervals at a newly completed
property may not be sufficient to make the property profitable; the Company has
expanded and will continue to expand into new geographic areas in which it has
no operating history and there is no assurance the Company will be successful in
such locations; and financing may be unavailable or may not be available on
favorable terms for development of or the continued sales of Vacation Intervals
at a property. There can be no assurance the Company will develop and expand the
Existing Resorts, develop the New Resorts, or acquire and develop other resorts.
In addition, the Company's development and construction activities, as well
as its ownership and management of real estate, are subject to comprehensive
federal, state, and local laws regulating such matters as environmental and
health concerns, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction, marketing and sales,
and other matters. Such laws and difficulties in obtaining, or failing to
obtain, the requisite licenses, permits, allocations, authorizations, and other
entitlements pursuant to such laws could impact the development, completion, and
sale of the Company's projects. The enactment of "slow growth" or "no-growth"
initiatives or changes in labor or other laws in any area where the Company's
projects are located could also delay, affect the cost or feasibility of, or
preclude entirely the expansion planned at each of the Existing Resorts and New
Resorts or the development of other resorts.
Most of the Company's resorts are located in rustic areas, often requiring
the Company to provide public utility water and sanitation services in order to
proceed with development. Such activities are subject to permission and
regulation by governmental agencies, the denial or conditioning of which could
limit or preclude development. Operation of the utilities also subjects the
Company to risk of liability in connection with both the quality of fresh water
provided and the treatment and discharge of waste-water.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a large extent
upon the experience and abilities of Robert E. Mead, Sharon K. Brayfield, and
David T. O'Connor, the Company's Chief Executive Officer, President, and
Executive Vice President
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- -- Sales, respectively. The loss of the services of any one of these key
individuals could have a material adverse effect on the Company's results of
operations, liquidity, or financial position. The Company's success is also
dependent upon its ability to attract and retain qualified acquisition,
development, marketing, management, administrative, and sales personnel. The
ability to attract such personnel will become particularly important as the
Company grows and develops additional resorts, and there can be no assurance
that the Company will be successful in attracting and/or retaining such
personnel.
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO
DISABLED PERSONS. A number of state and federal laws, including the Fair Housing
Act and the Americans with Disabilities Act (the "ADA"), impose requirements
related to access and use by disabled persons of a variety of public
accommodations and facilities. The ADA requirements did not become effective
until after January 1, 1991. Although the Company believes the Existing Resorts
are substantially in compliance with laws governing the accessibility of its
facilities to disabled persons, the Company will incur additional costs of
complying with such laws. Additional federal, state, and local legislation may
impose further burdens or restrictions on the Company, the Clubs, or the
Management Clubs at the Existing Resorts, the New Resorts, or other resorts,
with respect to access by disabled persons. The ultimate cost of compliance with
such legislation is not currently ascertainable, and, while such costs are not
expected to have a material effect on the Company's results of operations,
liquidity, and financial position, such costs could be substantial.
VULNERABILITY TO REGIONAL CONDITIONS. Prior to August 1997, all of the
Company's operating resorts and substantially all of the Company's customers and
borrowers were located in Texas and Missouri. Since August 1997, the Company has
expanded into several other states. The Company's performance and the value of
its properties is affected by regional factors, including local economic
conditions (which may be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics, and other factors) and the local
regulatory climate. Even with the recent acquisitions, the Company's current
geographic concentration could make the Company more susceptible to adverse
events or conditions which affect these areas in particular.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state, and local
laws, ordinances, and regulations, as well as common law, the owner or operator
of real property generally is liable for the costs of removal or remediation of
certain hazardous or toxic substances located on, in, or emanating from, such
property, as well as related costs of investigation and property damage. Such
laws often impose liability without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The presence
of such substances, or the failure to properly remediate such substances, may
adversely affect the owner's ability to sell or lease a property or to borrow
money using such real property as collateral. Other federal and state laws
require the removal or encapsulation of asbestos-containing material when such
material is in poor condition or in the event of construction, demolition,
remodeling, or renovation. Other statutes may require the removal of underground
storage tanks. Noncompliance with these and other environmental, health, or
safety requirements may result in the need to cease or alter operations at a
property. Further, the owner or operator of a site may be subject to common law
claims by third parties based on damages and costs resulting from violations of
environmental regulations or from contamination associated with the site. Phase
I environmental reports (which typically involve inspection without soil
sampling or ground water analysis) were prepared in 1994 by independent
environmental consultants for several of the Existing Resorts, and more recent
Phase I environmental reports have been obtained for each of the remaining
resorts. The reports did not reveal, nor is the Company aware of, any
environmental liability that would have a material adverse effect on the
Company's results of operations, liquidity, or financial position. No assurance,
however, can be given that these reports reveal all environmental liabilities or
that no prior owner created any material environmental condition not known to
the Company.
Certain environmental laws impose liability on a previous owner of property
to the extent hazardous or toxic substances were present during the prior
ownership period. A transfer of the property may not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by it or by its predecessors.
The Company believes that it is in compliance in all material respects with
all federal, state, and local ordinances and regulations regarding hazardous or
toxic substances. The Company has not been notified by any governmental
authority or third party of any non-compliance, liability, or other claim in
connection with any of its present or former properties.
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; POSSIBLE INABILITY TO
QUALIFY RESORTS. The attractiveness of Vacation Interval ownership is enhanced
by the availability of exchange networks that allow Silverleaf Owners to
exchange in a particular year the occupancy right in their Vacation Interval for
an occupancy right in another participating network resort. According to ARDA,
the ability to exchange Vacation Intervals was cited by many buyers as an
important reason for purchasing a Vacation Interval. Several companies,
including RCI, provide broad-based Vacation Interval exchange services, and the
Existing Resorts, except Oak N' Spruce Resort, are currently qualified for
participation in the RCI exchange network. Oak N' Spruce Resort is currently
under contract with another exchange network provider, Interval International.
However, no assurance can be given that the Company will continue to be able to
qualify such resorts or any other future resorts for participation in these
networks or any other exchange network. If such
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exchange networks cease to function effectively, or if the Company's resorts are
not accepted as exchanges for other desirable resorts, the Company's sales of
Vacation Intervals could be materially adversely affected.
RESALE MARKET FOR VACATION INTERVALS. Based on its experience at the
Existing Resorts, the Company believes the market for resale of Vacation
Intervals by the owners of such intervals is very limited and that resale prices
are substantially below their original purchase price. This may make ownership
of Vacation Intervals less attractive to prospective buyers. Also, attempts by
buyers to resell their Vacation Intervals compete with sales of Vacation
Intervals by the Company. While Vacation Interval resale clearing houses or
brokers do not currently have a material impact, if the secondary market for
Vacation Intervals were to become more organized and liquid, the availability of
resale intervals at lower prices could materially adversely affect the prices
and number of sales of new Vacation Intervals by the Company.
SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS. Sales of Vacation
Intervals have generally been lower in the months of November and December. Cash
flow and earnings may be impacted by the timing of development, the completion
of future resorts, and the potential impact of weather or other conditions in
the regions where the Company operates. The above may cause significant
variations in quarterly operating results.
NATURAL DISASTERS; UNINSURED LOSS. There are certain types of losses (such
as losses arising from floods and acts of war) that are not generally insured
because they are either uninsurable or not economically insurable and for which
neither the Company, the Clubs, nor the Management Clubs has insurance coverage.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could be required to repair damage at its expense or lose its capital
invested in a resort, as well as the anticipated future revenues from such
resort. Moreover, the Company would continue to be obligated on any mortgage
indebtedness or other obligations related to the property. Any such loss could
have a material adverse effect on the Company's results of operations,
liquidity, and financial position.
ACCELERATION OF DEFERRED TAXES. While the Company reports sales of Vacation
Intervals as income currently for financial reporting purposes, for regular
federal income tax purposes the Company reports substantially all Vacation
Interval sales on the installment method. Under the installment method, the
Company recognizes income for tax on the sale of the Vacation Interval when cash
is received in the form of a down payment and as payments on customer loans are
received. The Company's December 31, 1998 liability for deferred taxes (i.e.,
taxes owed to taxing authorities in the future in consequence of income
previously reported in the financial statements) was $59.0 million, primarily
attributable to this method of reporting Vacation Interval sales, before
utilization of any available deferred tax benefits (up to $37.5 million at
December 31, 1998), including net operating loss carryforwards. This amount does
not include accrued interest on such deferred taxes which also will be payable
when the taxes are due, the amount of which is not now reasonably ascertainable.
If the Company should sell the installment notes or be required to factor them
or if the notes were foreclosed on by a lender of the Company or otherwise
disposed of, the deferred gain would be reportable for tax and the deferred
taxes, including interest on the taxes for the period the taxes were deferred,
as computed under Section 453 of the Internal Revenue Code of 1986, as amended
(the "Code"), would become due. There can be no assurance that the Company would
have sufficient cash resources to pay those taxes and interest. Furthermore, if
the Company's sales of Vacation Intervals should decrease in the future, the
Company's diminished operations may not generate either sufficient tax losses to
offset taxable income or funds to pay the deferred tax liability from prior
periods.
ALTERNATIVE MINIMUM TAXES. Prior to 1997, the Company used the installment
method for the calculation of adjusted current earnings for federal alternative
minimum tax purposes, although the accrual method is required under the Code.
During 1997, the Company submitted a request to the Internal Revenue Service for
permission to change to the accrual method for this computation. In 1998, the
Company received a ruling from the Internal Revenue Service granting the request
effective January 1, 1997. As a result, the Company's alternative minimum
taxable income for 1997 through 2000 was or will be increased each year by
approximately $9 million per year, which will result in the Company paying
substantial additional federal and state taxes in those years. As a result of
this change, the Company paid $668,000 of federal alternative minimum tax in
1998 for 1997 and estimates total federal alternative minimum tax of $4.8
million for 1998.
LIMITATIONS ON USE OF CARRYOVERS FROM OWNERSHIP CHANGE. The Company
estimates that it had net operating loss carryforwards of approximately $85.6
million at December 31, 1998, for regular federal income tax purposes related
primarily to the deferral of installment sale gains. In addition to the general
limitations on the carryback and carryforward of net operating losses under
Section 172 of the Code, Section 382 of the Code imposes additional limitations
on the utilization of a net operating loss by a corporation following various
types of ownership changes which result in more than a 50 percentage point
change in ownership of a corporation within a three year period. Mr. Mead owned
100% of the stock of the Company until December 29, 1995, at which time his
ownership decreased to approximately 99% and Ms. Brayfield acquired 1%. As a
result of the Company's initial public offering in June 1997, Mr. Mead's
ownership of the Company further decreased to approximately 67%. After the
closing of the secondary
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37
offering in April 1998 and taking into account shares owned by his family, Mr.
Mead owns 50.7% of the outstanding shares of Common Stock of the Company. In the
future, Mr. Mead, his family, or Ms. Brayfield could transfer their shares
and/or the Company could issue additional shares, including shares which it is
required to issue under its 1997 Stock Option Plan, which could result in more
than a 50 percentage point change in ownership of the Company. If such a change
occurs within a three year period, the limitations of Section 382 would apply.
Although the Company does not believe that those limitations would currently
adversely affect the Company, there can be no assurance that the limitations
will not limit or deny the future utilization of the net operating loss by the
Company, resulting in the Company paying substantial additional federal and
state taxes and interest for any periods following such change in ownership.
When such a change in ownership occurs, Section 383 of the Code also limits or
denies the future utilization of certain carryover excess credits, including any
unused minimum tax credit attributable to payment of alternative minimum taxes.
Although the Company does not believe that these additional limitations would
currently adversely affect the Company, there can be no assurance that these
additional limitations will not limit or deny the future utilization of any
excess tax credits of the Company, resulting in the Company paying substantial
additional federal and state taxes and interest for any periods following such
change in ownership.
TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX
LIABILITY. Although all on-site sales personnel are treated as employees of the
Company for payroll tax purposes, the Company does have independent contractor
agreements with certain sales and marketing persons or entities. The Company has
not treated these independent contractors as employees; accordingly, the Company
does not withhold payroll taxes from the amounts paid to such persons or
entities. In the event the Internal Revenue Service or any state or local taxing
authority were to successfully classify such persons or entities as employees of
the Company, rather than as independent contractors, and hold the Company liable
for back payroll taxes, such action may have a material adverse effect on the
Company's results of operations, liquidity, and financial position.
YEAR 2000 COMPLIANCE. Many of the world's computer systems record years in a
two-digit format. Such computer systems will be unable to properly interpret
dates beyond the year 1999, which could potentially lead to disruptions in the
Company's operations. The Company has conducted a review of its information
technology ("IT") systems currently utilized and is in the process of
identifying and assessing non-IT systems in order to determine its potential
year 2000 deficiencies. This study included reviewing all applicable reports,
files, inquiry screens, maintenance screens, batch programs, software, hardware,
and other interactive applications. Non-IT systems are generally more difficult
to assess because they often contain embedded technology that may be subject to
year 2000 problems. In completing its assessment, the Company has identified
several primary computer systems that are currently not year 2000 compliant.
Each of these computer systems and its year 2000 compliance status are discussed
below:
Marketing system - The current Marketing system requires modifications in
order to be year 2000 compliant. These modifications are anticipated to be
completed during the second quarter of 1999.
Sales and Credit system - The Sales and Credit system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the Sales
and Credit system is scheduled to be completed by June 1999.
Accounts Receivable system - The Accounts Receivable system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the
Accounts Receivable system is scheduled to be completed by June 1999.
Inventory system - The Inventory system is currently being redeveloped to be
year 2000 compliant, among other enhancements. The redevelopment of the
Inventory system is scheduled to be completed by June 1999.
Finance Administration system - The Finance Administration system will need
to be redeveloped in order to be year 2000 compliant. The redevelopment of the
Finance Administration system is scheduled to be completed by June 1999.
Sales Commissions system - The Sales Commissions system is currently being
redeveloped to be year 2000 compliant, among other enhancements. The
redevelopment of the Sales Commissions system is scheduled to be completed by
June 1999.
Predictive dialer software - The Company's predictive dialer software is
scheduled to be year 2000 compliant with an upgrade scheduled for the second
quarter of 1999.
Full implementation of all programs is anticipated to be completed by June
1999.
In the redevelopment phase of each module, the system being modified will be
tested by the appropriate programmers to ensure proper handling of dates. Test
procedures have already been developed as well as a complete test environment.
The necessary
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personnel and processing resources have been determined and assigned to the
appropriate projects. All major redeveloped systems will be run parallel with
the existing systems to ensure completeness and accuracy. All redeveloped
systems will be verified and accepted by the appropriate users prior to
eliminating the existing systems. Any other primary computer programs currently
utilized by the Company, that are not mentioned above, are already year 2000
compliant.
In addition to the major computer systems described above, the Company
primarily utilizes standardized and upgraded Microsoft Office products that are
year 2000 compliant. All personal computer ("PC") applications that are not in
Microsoft Office are written in Visual Basic and programmed to handle year 2000
issues. All operating systems utilized by the Company, which include Novell,
Intranetware, OS/400, Windows 95, and Windows NT, are year 2000 compliant. The
Company's AS400 hardware and related Network servers are year 2000 compliant as
well. The Company has evaluated all data communications equipment, including
PCs. The Company has located a minimal number of PCs requiring replacement and
no significant deficiencies of data communications equipment have been found.
The Company has identified non-IT systems that may be year 2000 sensitive,
including primarily access gates, alarms, irrigation systems, thermostats, and
utility meters and switches at its resorts. Although these systems vary by
resort, most of these systems are already year 2000 compliant or are not reliant
on a time-chip that would be affected by year 2000. The Company anticipates that
all these systems will be year 2000 compliant by the end of the second quarter
of 1999.
The Company has made inquiries of its major vendors, consisting primarily of
financial institutions, regarding their year 2000 compliance status and its
potential impact to the Company's business. Based on these discussions, the
Company does not anticipate year 2000 difficulties associated with its major
vendors. The Company, however, would change vendors if year 2000 problems at its
existing vendors create interruptions to its business.
Company management believes that the total cost of the aforementioned year
2000 computer system and equipment enhancements will be less than $430,000,
including an estimate of internal payroll committed to the projects, of which
approximately $220,000 has already been incurred. The Company will utilize both
internal and external resources to achieve year 2000 compliance. The Company
estimates that its identification and assessment activities are approximately
95% complete and that its remediation is approximately 70% complete.
The failure to correct a material year 2000 internal problem could result in
an interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of year 2000 readiness of third party vendors, the Company is unable
to determine at this time whether the consequences of year 2000 failures of
third party vendors will have a material impact on the Company's results of
operations, liquidity, or financial condition. The Company believes, however,
that its year 2000 compliance plan and time line provide adequate staffing,
resources, and time to mitigate and proactively respond to any unforeseen year
2000 problems in a timely and preemptive manner. The cost of year 2000
compliance and the estimated date of completion of necessary modifications,
however, are based on the Company's best estimates, which were derived from
various assumptions of future events. There can be no assurance that these
estimates will be achieved and actual results could differ materially from those
anticipated.
In the event of a complete failure of the Company's information technology
systems, the Company would be able to continue the affected functions either
manually or through the use of non-year 2000 compliant systems. The primary
costs associated with such a necessity would be (1) increased time delays
associated with posting of information and (2) increased personnel to manually
process the information. The Company does not believe the increased costs
associated with such personnel would be significant. The Company currently does
not have a contingency plan in place. The Company will evaluate the need for a
plan in 1999 as the Company progresses through the year 2000 conversion.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently subject to litigation and claims respecting tort,
contract, and consumer disputes, among others. In the judgment of management,
none of such lawsuits or claims against the Company, either individually or in
the aggregate, is likely to have a material adverse effect on the Company or its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's initial public offering of common stock was consummated in
June 1997 (the "Initial Public Offering"), at an initial public offering price
of $16.00 per share. The Company's common stock is quoted on the New York Stock
Exchange ("NYSE") under the symbol "SVR." The following table sets forth, for
the periods indicated, the high and low sale prices for the Common Stock, as
quoted on the NYSE:
HIGH LOW
-------- --------
Year Ended December 31, 1997:
Second Quarter (Commencing June 6, 1997)... $ 19 $ 14 5/8
Third Quarter.............................. 24 3/16 15
Fourth Quarter............................. 26 1/4 20 3/4
Year Ended December 31, 1998:
First Quarter.............................. $ 29 1/8 $ 24 3/8
Second Quarter ............................ 25 5/8 15 7/8
Third Quarter.............................. 15 1/8 7 9/16
Fourth Quarter............................. 14 6 13/16
Year Ended December 31, 1999:
First Quarter (through March 19, 1999)..... $ 10 5/8 $ 6 3/16
On March 19, 1999, there were approximately 25 holders of record of the
Company's Common Stock and the estimated number of beneficial stockholders was
1,900.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock. The
Company currently intends to retain future earnings to finance its operations
and fund the growth of its business. Any payment of future dividends will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions in respect of the
payment of dividends, and other factors that the Company's Board of Directors
deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING INFORMATION
The Selected Consolidated Historical Financial and Operating Information
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this report on Form 10-K.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Vacation Interval sales ................... $ 24,551 $ 34,091 $ 45,907 $ 68,682 $ 135,582
Sampler sales ............................. 1,137 1,310 1,717 1,415 2,768
------------ ------------ ------------ ------------ ------------
Total sales ............................. 25,688 35,401 47,624 70,097 138,350
Interest income ........................... 1,633 3,968 6,297 9,149 16,823
Interest income from affiliates ........... 252 393 377 247 62
Management fee income ..................... 2,394 2,478 2,187 2,331 2,540
Other income .............................. 1,932 1,832 1,440 3,234 2,980
------------ ------------ ------------ ------------ ------------
Total revenues .......................... 31,899 44,072 57,925 85,058 160,755
------------ ------------ ------------ ------------ ------------
Costs and Operating Expenses:
Cost of Vacation Interval sales ........... 2,648 3,280 2,805 6,600 19,877
Sales and marketing ....................... 12,929 17,850 21,839 30,559 67,030
Provision for uncollectible notes ......... 4,205 6,632 8,733 10,524 16,372
Operating, general and administrative ..... 5,853 8,780 10,116 12,230 17,184
Depreciation and amortization ............. 590 863 1,264 1,497 3,332
Interest expense .......................... 1,642 3,609 4,759 4,664 7,150
------------ ------------ ------------ ------------ ------------
Total costs and operating expenses ...... 27,867 41,014 49,516 66,074 130,945
------------ ------------ ------------ ------------ ------------
Income from continuing operations before
income taxes .............................. 4,032 3,058 8,409 18,984 29,810
Income tax expense .......................... 1,677 1,512 3,140 7,024 11,432
------------ ------------ ------------ ------------ ------------
Income from continuing operations ........... 2,355 1,546 5,269 11,960 18,378
Income (loss) on discontinued operations .... 568 (1,484) (295) -- --
------------ ------------ ------------ ------------ ------------
Net income .................................. $ 2,923 $ 62 $ 4,974 $ 11,960 $ 18,378
============ ============ ============ ============ ============
Income per share from continuing
operations--Basic and Diluted(a) .......... $ 0.31 $ 0.20 $ 0.68 $ 1.22 $ 1.45
============ ============ ============ ============ ============
Net income per share--Basic and Diluted(a) .. $ 0.39 $ 0.01 $ 0.64 $ 1.22 $ 1.45
============ ============ ============ ============ ============
Weighted average number of shares
outstanding--Basic ........................ 7,588,952 7,590,295 7,711,517 9,767,407 12,633,751
============ ============ ============ ============ ============
Weighted average number of shares
outstanding--Diluted ...................... 7,588,952 7,590,295 7,711,517 9,816,819 12,682,982
============ ============ ============ ============ ============
DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(b) ........................................... $ 6,264 $ 7,530 $ 14,432 $ 25,145 $ 40,292
OTHER OPERATING DATA:
Number of Existing Resorts at period end ............ 7 7 7 10 18
Number of Vacation Intervals sold (excluding
upgrades)(c) ...................................... 3,423 4,464 5,634 6,592 13,191
Number of upgraded Vacation Intervals sold .......... 1,290 1,921 1,914 3,908 6,817
Number of Vacation Intervals in inventory ........... 5,943 6,580 6,746 10,931 14,453
Average price of Vacation Intervals sold (excluding
upgrades)(c)(d) ................................... $ 5,821 $ 5,965 $ 6,751 $ 7,854 $ 8,042
Average price of upgraded Vacation Intervals sold
(net of exchanged interval) ....................... $ 3,585 $ 3,885 $ 4,113 $ 4,326 $ 4,327
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DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 929 $ 3,712 $ 973 $ 4,970 $ 11,355
Amounts due from affiliates................... 4,559 4,342 6,237 1,389 4,115
Total assets.................................. 39,463 62,687 90,852 156,401 312,920
Amounts due to affiliates..................... 14,613 14,263 14,765 -- --
Notes payable and capital lease obligations... 6,061 23,363 41,986 48,871 58,108
Senior subordinated notes..................... -- -- -- -- 75,000
Total liabilities............................. 29,347 46,999 70,190 72,636 170,994
Shareholders' equity.......................... 10,116 15,688 20,662 83,765 141,926
- ----------
(a) Earnings per share amounts are based on the weighted average number of
shares outstanding.
(b) EBITDA represents income from continuing operations before interest expense,
income taxes, and depreciation and amortization. EBITDA is presented because
it is a widely accepted indicator of a company's financial performance.
However, EBITDA should not be construed as an alternative to net income as a
measure of the Company's operating results or to cash flows from operating
activities (determined in accordance with generally accepted accounting
principles) as a measure of liquidity. Since revenues from Vacation Interval
sales include promissory notes received by the Company, EBITDA does not
reflect cash flow available to the Company. Additionally, due to varying
methods of reporting EBITDA within the timeshare industry, the computation
of EBITDA for the Company may not be comparable to other companies in the
timeshare industry which compute EBITDA in a different manner. The Company's
management interprets trends in EBITDA to be an indicator of the Company's
financial performance, in addition to net income and cash flows from
operating activities (determined in accordance with generally accepted
accounting principles). The following table reconciles EBITDA to net income
from continuing operations:
YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Income from continuing operations.......... $ 2,355 $ 1,546 $ 5,269 $11,960 $18,378
Interest expense........................... 1,642 3,609 4,759 4,664 7,150
Income tax expense......................... 1,677 1,512 3,140 7,024 11,432
Depreciation and amortization.............. 590 863 1,264 1,497 3,332
------- ------- ------- ------- -------
EBITDA from continuing operations.......... $ 6,264 $ 7,530 $14,432 $25,145 $40,292
======= ======= ======= ======= =======
(c) The Vacation Intervals sold during the years ended December 31, 1997 and
December 31, 1998 include 1,517 biennial intervals (counted as 759 annual
Vacation Intervals) and 3,860 biennial intervals (counted as 1,930 annual
Vacation Intervals), respectively. The Company did not begin selling
biennial intervals until January 1997.
(d) Includes annual and biennial Vacation Interval sales for one and two bedroom
units.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Item 6 "Selected Financial Data" and the Company's Financial Statements and the
notes thereto and other financial data included elsewhere in this Form 10-K. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in Items 1 and 2 "Business and Properties"
included elsewhere herein.
OVERVIEW
The Company generates revenues primarily from the sale and financing of
Vacation Intervals, including upgraded intervals. Additional revenues are
generated from management fees from the Management Clubs, lease income from
Sampler sales, and utility operations. The Company recognizes management fee
income as the lesser of 15% of revenue or 100% of net income of the Management
Clubs; however, if the Company does not receive 15% of each Management Club's
gross revenues, such deficiency is deferred for payment in succeeding years,
subject again to the net income limitation.
The Company recognizes Vacation Interval sales revenues on the accrual
basis. A sale is recognized 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 criteria are met except that construction is not
substantially complete, revenues are recognized on the percentage-of-completion
basis. Under this method, the portion of revenue applicable to costs incurred,
as compared to total estimated construction and direct selling costs, is
recognized in the period of sale. The remaining amount is deferred and
recognized as Vacation Interval sales in future periods as the remaining costs
are incurred. At December 31, 1998, $1.3 million of Vacation Interval sales
transactions were deferred as the minimum down payment had not 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 liability until the
sale can be recognized. When these types of sales are cancelled without a
refund, deposits forfeited are recognized as income. When deposits are
ultimately recognized as sales, the interest portion is recognized as interest
income.
The Company accounts for uncollectible notes by recording a provision to its
allowance for uncollectible notes at the time revenue is recognized. The Company
classifies the components of the provision for uncollectible notes into the
following three categories based on the nature of the item -- credit losses,
customer returns, and customer releases (customer releases represent voluntary
cancellations of properly recorded sales transactions which in the opinion of
management are consistent with the maintenance of overall customer goodwill).
The provision for uncollectible notes pertaining to credit losses, customer
returns, and customer releases is classified in the Consolidated Statement of
Income in provision for uncollectible notes, Vacation Interval sales, and
operating, general and administrative expenses, respectively. The Company sets
the provision for uncollectible notes at an amount sufficient to maintain the
allowance at a level which management considers adequate to provide for
anticipated losses from customers' failure to fulfill their obligations under
the notes. When inventory is returned to the Company, any unpaid notes
receivable balances are charged against the previously established bad debt
reserves net of the amount at which the Vacation Interval is restored to
inventory, which is the lower of the historical cost basis or market value of
the Vacation Interval.
Costs associated with the acquisition and development of resorts (including
land, construction costs, furniture, interest, and taxes) are capitalized and
included in inventory. Vacation Interval inventory is segregated into three
ratings based on customer demand, with greater costs apportioned to higher value
ratings. As Vacation Intervals are sold, these costs are deducted from inventory
on a specific identification basis.
Vacation Intervals may be reacquired as a result of (i) foreclosure (or deed
in lieu of foreclosure); (ii) trade-in associated with the purchase of an
upgraded Vacation Interval; or (iii) the Company's ongoing program to reacquire
Vacation Intervals owned but not actively used by Silverleaf Owners. Vacation
Intervals reacquired are recorded in inventory at the lower of their original
cost or market value. Vacation Intervals which have been reacquired are relieved
from inventory on a specific identification basis when resold. Inventory
acquired prior to 1996 through the Company's program to reacquire Vacation
Intervals owned but not actively used by Silverleaf Owners has a significantly
lower average cost basis than recently constructed inventory, contributing
significantly to historical operating margins. New inventory added through the
Company's construction and acquisition programs has a higher average cost than
the Company's pre-1996 inventory. Accordingly, cost of sales has increased and
will continue to increase as sales of new inventory increases relative to
overall sales.
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The Company recognizes interest income as earned. To the extent interest
payments become delinquent, the Company ceases recognition of the interest
income until collection is probable.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company.
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
As a percentage of Total Revenues:
Vacation Interval sales ............................ 79.3% 80.7% 84.3%
Sampler sales ...................................... 3.0 1.7 1.7
------ ------ ------
Total Sales ..................................... 82.3 82.4 86.0
Interest income .................................... 11.5 11.1 10.5
Management fee income .............................. 3.8 2.7 1.6
Other income ....................................... 2.4 3.8 1.9
------ ------ ------
Total Revenues ............................. 100.0% 100.0% 100.0%
As a percentage of gross Vacation Interval sales:
Cost of Vacation Interval sales .................... 6.1% 9.6% 14.7%
Sales and marketing ................................ 47.6 44.5 49.4
Provision for uncollectible notes .................. 19.0 15.3 12.1
As a percentage of Interest Income:
Interest expense ................................... 71.3% 49.6% 42.3%
As a percentage of Total Revenues:
Operating, general and administrative .............. 17.5% 14.4% 10.7%
Depreciation and amortization ...................... 2.2 1.8 2.1
Total costs and operating expenses ................. 85.5 77.7 81.5
1998 VERSUS 1997. Revenues in 1998 were $160.8 million, representing a $75.7
million or 89.0% increase over revenues of $85.1 million for the year ended
December 31, 1997. The increase was primarily due to a $66.9 million increase in
sales of Vacation Intervals and a $7.5 million increase in interest income. The
strong increase in Vacation Interval revenues primarily resulted from increased
sales at existing resorts and sales at three new resorts, Timber Creek near St.
Louis, Missouri, and Fox River near Chicago, Illinois, each of which opened
sales offices in the fourth quarter of 1997, and Oak N' Spruce near Boston,
Massachusetts, which opened a sales office in the second quarter of 1998. In
1998 and 1997, sales were reduced by $1.9 million and $2.8 million,
respectively, for cancellations related to customer returns (i.e., customers
that failed to make their first installment payment).
In 1998, the number of Vacation Intervals sold, exclusive of upgraded
Vacation Intervals, increased 100.1% to 13,191 from 6,592 in 1997; the average
price per interval increased 2.4% to $8,042 from $7,854. Total interval sales
for 1998 included 3,860 biennial intervals (counted as 1,930 Vacation Intervals)
compared to 1,517 biennial intervals (counted as 759 Vacation Intervals) in
1997. The Company also experienced increased sales of upgraded intervals at the
Existing Resorts through the continued implementation of marketing and sales
programs focused on selling upgraded intervals to the Company's existing
Vacation Interval owners. In 1998, the number of upgraded Vacation Intervals
sold was 6,817 at an average price of $4,327 compared to 3,908 upgraded Vacation
Intervals sold in 1997 at an average price of $4,326. In addition, Vacation
Interval sales at existing resorts increased as a result of enhanced
telemarketing capacity, arising from investments in computer and automated
dialing technology.
Sampler sales increased to $2.8 million in 1998 compared to $1.4 million in
1997. The increase resulted from increased sales of overnight samplers offered
at new resorts, offset by an increase in biennial interval sales which are an
alternative to the sampler program.
Interest income increased 79.7% to $16.9 million for the year ended December
31, 1998 from $9.4 million for 1997. This increase resulted from an $81.9
million increase in notes receivable, net of allowance for uncollectible notes,
due to increased sales, as well as interest income generated from the proceeds
of the debt and equity offerings completed on April 3, 1998. Interest income
from short-term investments, primarily from the proceeds from public offerings
prior to their utilization, increased from $354,000 in 1997 to $959,000 in 1998.
Management fee income increased 9.0% to $2.5 million in 1998 from $2.3
million in 1997. The increase in management fee income was primarily the result
of greater net income from the Management Clubs due to higher dues income
resulting from an increased membership base, partially offset by an increase in
operating expenses.
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Other income consists of water and utilities income, condominium rental
income, and miscellaneous items. Other income decreased 7.8% to $3.0 million for
the year ended December 31, 1998 from $3.2 million for the year ended December
31, 1997. This decrease is primarily the result of a $219,000 claims settlement
included in other income in 1997.
Cost of sales as a percentage of gross Vacation Interval sales increased to
14.7% in 1998 from 9.6% in 1997. As the Company continues to deplete its
inventory of low cost Vacation Intervals acquired primarily in 1995 and 1996,
the Company's sales mix has shifted to more recently constructed units, which
were built at a higher average cost per Vacation Interval. Hence, the cost of
sales as a percentage of Vacation Interval sales has increased compared to 1997.
Sales and marketing costs as a percentage of gross Vacation Interval sales
increased to 49.4% for the year ended December 31, 1998 from 44.5% for 1997.
This increase is due primarily to the implementation of new marketing programs,
start up costs in recently opened markets or markets yet to open where sales
have not yet reached mature levels to offset costs, and the deferred sales
recognition associated with sales at resorts under construction whereby only the
direct sales commissions costs related to such sales have been similarly
deferred.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 12.1% in 1998 from 15.3% in 1997. This is the result of
improvements in the Company's collection efforts, including increased staffing,
improved collections software, the implementation of a program through which
delinquent loans are assumed by existing owners with a consistent payment
history, and an increase in receivables related to upgrade sales, which
typically represent better performing accounts, resulting in fewer
delinquencies. The Company anticipates that it will decrease the provision for
uncollectible notes to 10.0% in 1999.
Operating, general and administrative expenses as a percentage of total
revenues declined to 10.7% in 1998 from 14.4% in 1997. The decrease is the
result of the Company's ability to increase sales without proportionate
increases in overhead. Overall, operating, general and administrative expenses
increased $5.0 million in 1998 as compared to the prior year, primarily due to
an increase in corporate salaries and additional costs resulting from growth and
the Company's publicly traded status effective June 1997.
In 1998, depreciation and amortization expense as a percentage of total
revenues increased to 2.1% from 1.8% in 1997. Overall, depreciation and
amortization expense increased $1.8 million from 1997, primarily due to
investments in a new automated dialer, telephone system, and central marketing
facility.
Interest expense as a percentage of interest income decreased to 42.3% for
the year ended December 31, 1998 from 49.6% in 1997. While interest expense
increased $2.5 million, or 53.3%, overall compared to 1997, this increase was
not proportionate with the increase in interest income previously discussed.
This was due primarily to the payment of indebtedness with proceeds from the
Company's equity and debt offerings in the second quarter of 1998, which
resulted in lower effective interest rates and lower average balances on
outstanding notes payable and capital lease obligations, offset by the interest
expense generated by the 10.5% senior subordinated notes.
Income from continuing operations before income taxes increased 57.0% to
$29.8 million for the year ended December 31, 1998, from $19.0 million for the
year ended December 31, 1997 as a result of the above mentioned operating
results.
Income tax expense as a percentage of income from continuing operations
before income taxes increased to 38.4% in 1998 versus 37.0% in 1997. This
increase resulted from an increase in state income taxes, primarily due to
additional operations commencing in Illinois, Missouri, and Massachusetts.
Net income increased $6.4 million, or 53.7%, to $18.4 million for the year
ended December 31, 1998, from $12.0 million for the year ended December 31, 1997
as a result of the above mentioned operating results.
1997 VERSUS 1996. Revenues in 1997 were $85.1 million, representing a $27.1
million or 46.8% increase over revenues of $57.9 million in 1996. The increase
was primarily due to a $22.8 million increase in sales of Vacation Intervals and
a $2.7 million increase in interest income. In 1997 and 1996, sales were reduced
by $2.8 million and $2.2 million, respectively, for customer returns (i.e.,
customers that failed to make their first installment payment).
In 1997, the number of Vacation Intervals sold, exclusive of sales of
upgraded Vacation Intervals, increased 17.0% to 6,592 from 5,634 in 1996 and the
average price per unit increased 16.3% to $7,854 from $6,751. The increase in
Vacation Interval sales resulted from the Company's modernized electronic
telemarketing programs, increased sales force, and enhanced lead generation
methods. The increase in average price per interval resulted from the Company's
increased sales of higher value rated intervals. In addition to
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increases in sales of Vacation Intervals, the Company increased revenues
generated from sales of upgraded intervals at its Existing Resorts through the
continued implementation of marketing and sales programs focused on selling such
intervals to Silverleaf Owners.
In 1997, sampler sales decreased to $1.4 million compared to $1.7 million in
1996. The decrease resulted from the Company's marketing of biennial intervals
as an alternative to the sampler program.
Interest income increased 40.8% to $9.4 million in 1997 from $6.7 million in
1996. This increase resulted from a $36.2 million increase in notes receivable,
net of allowance for uncollectible notes, due to increased sales.
Management fee income increased 6.6% to $2.3 million in 1997 from $2.2
million in 1996. This increase was primarily the result of greater Silverleaf
Club net income due to higher dues income from an increased membership base.
Other income increased to $3.2 million in 1997 from $1.4 million in 1996.
This increase was primarily due to usage fees from the Company's newly remodeled
golf course at Holiday Hills and higher water and sewer income due to the
addition of two new utility operations. Additionally, the Company recovered
$219,000 from a lawsuit in 1997.
Cost of sales as a percentage of gross Vacation Interval sales increased to
9.6% in 1997 from 6.1% in 1996. Cost of sales for 1996 was lower primarily as a
result of the sale of low cost inventory acquired by the Company in 1995 and
1996 through its program to reacquire Vacation Intervals owned but not actively
used by Silverleaf Owners. The number of intervals acquired from Silverleaf
Owners in 1997 was 559 as compared to approximately 1,700 in 1996. Additionally,
the Company continues to deplete its inventory of low cost intervals. As a
result of these factors and the Company's construction program to build new
inventory, the cost of sales percentage increased in 1997.
Sales and marketing costs as a percentage of gross Vacation Interval sales
declined to 44.5% in 1997 from 47.6% in 1996. This decline is due primarily to
the efficiencies resulting from the Company's telemarketing and sales force
areas and economies of scale.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 15.3% for 1997 from 19.0% in 1996, reflecting an increased
focus on collection efforts for notes receivable. The improvement can also be
attributed to an increase in receivables relating to upgrade sales which
typically represent better performing accounts, resulting in fewer
delinquencies.
Operating, general and administrative expenses as a percentage of total
revenues declined to 14.4% in 1997 from 17.5% in 1996 due to efficiencies
realized from higher sales volume. Overall, operating, general and
administrative expenses increased $2.1 million in 1997 as compared to 1996,
primarily due to an increase in corporate salaries and additional costs incurred
as a result of the Company's publicly traded status effective June 1997.
Depreciation and amortization expense as a percentage of total revenue
declined to 1.8% in 1997 from 2.2% in 1996. Overall, depreciation and
amortization expense increased $233,000 from 1996, primarily due to investments
in a new automated dialer, telephone system, and central marketing facility.
Interest expense as a percentage of interest income declined to 49.6% in
1997 from 71.3% in 1996. This decrease was due to lower borrowing cost during
the second half of 1997, mostly as a result of payment of indebtedness with
proceeds of the Company's initial public offering in June 1997.
Income from continuing operations before income taxes increased 125.8% to
$19.0 million in 1997 from $8.4 million in 1996 as a result of the above
mentioned operating results.
Income tax expense as a percentage of income from continuing operations
before income taxes remained relatively unchanged at 37.0% in 1997 versus 37.3%
in 1996.
Net income increased $7.0 million, or 140%, to $12.0 million for the year
ended December 31, 1997, compared to $5.0 million for the year ended December
31, 1996, as a result of the above mentioned operating results and losses from
discontinued operations of $295,000 in 1996.
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
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customer notes receivables from Silverleaf Owners, management fees, sampler
sales, and resort and utility operations. During the year ended December 31,
1996, net cash provided by operating activities was $6.4 million. During the
years ended December 31, 1997 and 1998, the Company's operating activities
reflected a use of cash of $3.4 million and $17.6 million, respectively. The
Company typically receives a 10% down payment on sales of Vacation Intervals and
finances the remainder by receipt of a seven 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 70% 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 to ten year period,
borrowing against receivables has historically been a necessary part of normal
operations.
Net cash provided by financing activities for the years ended December 31,
1996, 1997, and 1998 was $14.9 million, $46.9 million, and $118.5 million,
respectively. During 1998, the $118.5 million in cash flows provided by
financing activities was primarily due to the issuance of $75 million of senior
subordinated notes, bearing an interest rate of 10.5%, due 2008 and $44.8
million of proceeds from the issuance of common stock, net of debt issuance
costs of $3.5 million in April 1998. The Company's revolving credit facilities
provide for loans of up to $130.0 million. At December 31, 1998, approximately
$54.7 million of principal and interest related to advances under the credit
facilities was outstanding. Of this amount, $11.2 million, $13.6 million, and
$29.9 million matures in 1999, 2002, and 2005, respectively. For the year ended
December 31, 1998, the weighted average cost of funds for all borrowings,
including the senior subordinated debt, was 9.6%. Customer defaults have
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 in effect must repay borrowings against
such notes.
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 will be 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 which 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 which 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 2000 was or will be increased each year by approximately
$9.0 million per year for the pre-1997 adjustment, which will result in the
Company paying substantial additional federal and state taxes in those years.
The Company's net operating loss carryforwards, which also may be used to offset
installment sales income, expire beginning in 2007 through 2018. Realization of
the deferred tax asset arising from net operating losses is dependent on
generating sufficient taxable income prior to the expiration of the loss
carryforwards and other factors.
USES OF CASH. Investing activities typically reflect a net use of cash
because of loans to customers in connection with the Company's Vacation Interval
sales, capital additions, and property acquisitions. Net cash used in investing
activities for the years ended December 31, 1996, 1997, and 1998 was $24.0
million, $39.5 million, and $94.5 million, respectively. Cash used in investing
activities increased significantly in each period primarily due to significant
increases in customer notes receivable and the acquisition of the Fox River,
Timber Creek, and Oak N' Spruce resorts and the Las Vegas and Galveston sites in
1997, and the acquisition of the Crown resorts, the Atlanta, Kansas City, and
Philadelphia sites, and a second parcel of land in Galveston in 1998. The
Company acquired the Fox River and Timber Creek resorts in August 1997 for $2.9
million, the site in Las Vegas, Nevada, in November 1997 for $2.7 million, one
tract of the Galveston property in December 1997 for $485,000, and the Oak N'
Spruce Resort in Massachusetts in December 1997 for $5.1 million. The Company
acquired a second tract of the Galveston property in February 1998 for $1.2
million, the Crown resorts in May 1998 for $4.8 million, the Kansas City site in
September 1998 for $1.5 million, the Philadelphia site in December 1998 for $1.9
million, and various tracts of the Atlanta property throughout the fourth
quarter of 1998 for $4.2 million. Also, in the third and fourth quarter of 1998,
the Company reacquired 422,100 shares of its common stock for approximately $5.0
million. Operating and investing activities also use cash because the Company
requires funds to construct infrastructure, amenities, and additional units at
the Existing Resorts and New Resorts, to acquire property for future resort
development, and to support current operations. The Company evaluates sites for
additional new resorts or acquisitions on an ongoing basis. As of December 31,
1998, the Company had construction commitments of approximately $22.7 million.
Certain debt agreements include restrictions on the Company's ability to pay
dividends based on minimum levels of net income and cash flow.
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The Company believes that with respect to its current operations and
capital commitments, its borrowing capacity under certain existing or
renegotiated third-party lending agreements, together with cash generated from
operations and future borrowings, will be sufficient to meet the Company's
working capital and capital expenditure needs for the year ended December 31,
1999. However, depending upon conditions in capital and other financial markets,
and other factors including the Company's growth, development, and expansion
plans, the Company may from time to time 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.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income, and net income during any of the Company's
three most recent fiscal years. However, to the extent inflationary trends
affect short-term interest rates, a portion of the Company's debt service costs
may be affected as well as the rates the Company charges on its customer notes
receivable.
NEW ACCOUNTING STANDARDS
SFAS No. 130 -- The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting on Comprehensive Income", effective January 1,
1998. The Company had no items classified as other comprehensive income in the
periods presented.
SFAS No. 131 -- The Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. It establishes standards for
reporting and displaying information about operating segments in annual
financial statements and requires that enterprises report selected information
about operating segments in interim reports. Management has reviewed the
requirements and definitions contained within SFAS No. 131 and believe the
Company operates in only one segment.
SFAS No. 133 -- In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999 and will be adopted for
the period ended December 31, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction. The
impact of SFAS No. 133 on the Company's results of operations, financial
position, or cash flows will be dependent on the level and types of derivative
instruments the Company will have entered into at the time the standard is
implemented. The Company currently has no derivative instruments.
SOP No. 98-5 -- On April 3, 1998, the Accounting Standards Executive
Committee issued Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities" ("SOP No. 98-5"), effective for fiscal years beginning after
December 15, 1998. SOP No. 98-5 requires that costs for start-up activities,
including organization costs, be charged to expense as incurred. The Company
currently follows the practice of charging start-up costs to expense as
incurred. The Company elected to early adopt SOP No. 98-5. At the time of its
adoption, the Company had no start-up costs capitalized and, therefore, the
adoption had no effect on results of operations or financial position of the
Company.
YEAR 2000 COMPLIANCE
Many of the world's computer systems record years in a two-digit format.
Such computer systems will be unable to properly interpret dates beyond the year
1999, which could potentially lead to disruptions in the Company's operations.
The Company has conducted a review of its information technology ("IT") systems
currently utilized and is in the process of identifying and assessing non-IT
systems in order to determine its potential year 2000 deficiencies. This study
included reviewing all applicable reports, files, inquiry screens, maintenance
screens, batch programs, software, hardware, and other interactive applications.
Non-IT systems are generally more difficult to assess because they often contain
embedded technology that may be subject to year 2000 problems. In completing its
assessment, the Company has identified several primary computer systems that are
currently not year 2000 compliant. Each of these computer systems and its year
2000 compliance status are discussed below:
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Marketing system - The current Marketing system requires modifications in
order to be year 2000 compliant. These modifications are anticipated to be
completed during the second quarter of 1999.
Sales and Credit system - The Sales and Credit system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the Sales
and Credit system is scheduled to be completed by June 1999.
Accounts Receivable system - The Accounts Receivable system will need to be
redeveloped in order to be year 2000 compliant. The redevelopment of the
Accounts Receivable system is scheduled to be completed by June 1999.
Inventory system - The Inventory system is currently being redeveloped to be
year 2000 compliant, among other enhancements. The redevelopment of the
Inventory system is scheduled to be completed by June 1999.
Finance Administration system - The Finance Administration system will need
to be redeveloped in order to be year 2000 compliant. The redevelopment of the
Finance Administration system is scheduled to be completed by June 1999.
Sales Commissions system - The Sales Commissions system is currently being
redeveloped to be year 2000 compliant, among other enhancements. The
redevelopment of the Sales Commissions system is scheduled to be completed by
June 1999.
Predictive dialer software - The Company's predictive dialer software is
scheduled to be year 2000 compliant with an upgrade scheduled for the second
quarter of 1999.
Full implementation of all programs is anticipated to be completed by June
1999.
In the redevelopment phase of each module, the system being modified will be
tested by the appropriate programmers to ensure proper handling of dates. Test
procedures have already been developed as well as a complete test environment.
The necessary personnel and processing resources have been determined and
assigned to the appropriate projects. All major redeveloped systems will be run
parallel with the existing systems to ensure completeness and accuracy. All
redeveloped systems will be verified and accepted by the appropriate users prior
to eliminating the existing systems. Any other primary computer programs
currently utilized by the Company, that are not mentioned above, are already
year 2000 compliant.
In addition to the major computer systems described above, the Company
primarily utilizes standardized and upgraded Microsoft Office products that are
year 2000 compliant. All personal computer ("PC") applications that are not in
Microsoft Office are written in Visual Basic and programmed to handle year 2000
issues. All operating systems utilized by the Company, which include Novell,
Intranetware, OS/400, Windows 95, and Windows NT, are year 2000 compliant. The
Company's AS400 hardware and related Network servers are year 2000 compliant as
well. The Company has evaluated all data communications equipment, including
PCs. The Company has located a minimal number of PCs requiring replacement and
no significant deficiencies of data communications equipment have been found.
The Company has identified non-IT systems that may be year 2000 sensitive,
including primarily access gates, alarms, irrigation systems, thermostats, and
utility meters and switches at its resorts. Although these systems vary by
resort, most of these systems are already year 2000 compliant or are not reliant
on a time-chip that would be affected by year 2000. The Company anticipates that
all these systems will be year 2000 compliant by the end of the second quarter
of 1999.
The Company has made inquiries of its major vendors, consisting primarily of
financial institutions, regarding their year 2000 compliance status and its
potential impact to the Company's business. Based on these discussions, the
Company does not anticipate year 2000 difficulties associated with its major
vendors. The Company, however, would change vendors if year 2000 problems at its
existing vendors create interruptions to its business.
Company management believes that the total cost of the aforementioned year
2000 computer system and equipment enhancements will be less than $430,000,
including an estimate of internal payroll committed to the projects, of which
approximately $220,000 has already been incurred. The Company will utilize both
internal and external resources to achieve year 2000 compliance. The Company
estimates that its identification and assessment activities are approximately
95% complete and that its remediation is approximately 70% complete.
The failure to correct a material year 2000 internal problem could result in
an interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and
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financial condition. Due to the general uncertainty inherent in the year 2000
problem, resulting in part from the uncertainty of year 2000 readiness of third
party vendors, the Company is unable to determine at this time whether the
consequences of year 2000 failures of third party vendors will have a material
impact on the Company's results of operations, liquidity, or financial
condition. The Company believes, however, that its year 2000 compliance plan and
time line provide adequate staffing, resources, and time to mitigate and
proactively respond to any unforeseen year 2000 problems in a timely and
preemptive manner. The cost of year 2000 compliance and the estimated date of
completion of necessary modifications, however, are based on the Company's best
estimates, which were derived from various assumptions of future events. There
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
In the event of a complete failure of the Company's information technology
systems, the Company would be able to continue the affected functions either
manually or through the use of non-year 2000 compliant systems. The primary
costs associated with such a necessity would be (1) increased time delays
associated with posting of information and (2) increased personnel to manually
process the information. The Company does not believe the increased costs
associated with such personnel would be significant. The Company currently does
not have a contingency plan in place. The Company will evaluate the need for a
plan in 1999 as the Company progresses through the year 2000 conversion.
SUBSEQUENT EVENTS
Effective January 1, 1999, the Company established the Silverleaf Resorts,
Inc. 401(k) plan (the "Plan"), a qualified defined contribution retirement plan
covering employees 21 years of age or older who have completed one year of
service. The Plan allows eligible employees to defer receipt of up to 15% of
their compensation and contribute such amounts to various investment funds. The
employee contributions vest immediately. The Company is not required by the Plan
to match employee contributions, however, may do so on a discretionary basis.
The Company, however, will incur the administrative costs of maintaining the
Plan.
In January 1999, the Company acquired undeveloped land near The Villages
Resort in Tyler, Texas, for approximately $970,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of and for the year ended December 31, 1998, the Company had no
derivative financial instruments or foreign operations. Interest on the
Company's notes receivable and senior subordinated notes is fixed rate. See
notes 3 and 11 to consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Consolidated Financial Statements
appearing on page 57 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth under "Directors and
Executive Officers" and "Proxy Statement -- Compliance with Section 16(a) under
the Securities Exchange Act of 1934" in the Company's Definitive Proxy Statement
and reference is expressly made thereto for the specific information
incorporated herein by the aforesaid reference.
The following is a listing of the executive officers of the Company, none of
whom has a family relationship with directors or other executive officers:
ROBERT E. MEAD, age 52, founded the Company, has served as its Chairman of
the Board since its inception, and has served as its Chief Executive Officer
since May 1990. Mr. Mead began his career in hotel and motel management and also
operated his own construction company. Mr. Mead currently serves as a trustee
member of ARDA and has over 19 years of experience in the timeshare industry,
with special expertise in the areas of consumer finance, hospitality management,
and real estate development.
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SHARON K. BRAYFIELD, age 38, has served as the President of the Company
since 1992 and manages all of the Company's day to day activities. Ms. Brayfield
began her career with an affiliated company in 1982 as the Public Relations
Director of Ozark Mountain Resort. In 1989, she was promoted to Executive Vice
President of Resort Operations for an affiliated company and in 1991 was named
Chief Operations Officer of the Company. For the past five years and through
April 1997, Ms. Brayfield was also the President of Silverleaf Club.
DAVID T. O'CONNOR, age 57, has over 21 years of experience in real estate
and timeshare sales and has worked periodically with Mr. Mead over the past 15
years. Mr. O'Connor has served as the Company's Executive Vice President --
Sales for the past three years and as Vice President -- Sales since 1991. In
such capacities he directed all field sales, including the design and
preparation of all training materials, incentive programs, and follow-up sales
procedures. For the five year period ended May 12, 1997, Mr. O'Connor was an
employee of Recreational Consultants, Inc., which was an independent contractor
of the Company.
THOMAS C. FRANKS, age 45, joined the Company in August 1997 as President of
a newly-formed, wholly-owned subsidiary of the Company, Silverleaf Resort
Acquisitions, Inc. In February 1998, Mr. Franks was named as Vice President --
Investor Relations and Governmental Affairs for the Company, and in October 1998
Mr. Franks was named Executive Vice President -- Corporate Affairs. Mr. Franks
has more than 16 years of experience in the timeshare industry and is
responsible for acquisitions and industry and governmental relations. Mr. Franks
served as the President of ARDA from February 1991 through July 1997.
HARRY J. WHITE, JR., age 44, joined the Company in June 1998 as Chief
Financial Officer and has responsibility for all accounting, financial
reporting, and taxation issues. Prior to joining the Company, Mr. White was
Chief Financial Officer of Thousand Trails, Inc. and a senior manager with
Deloitte & Touche LLP.
LARRY H. FRITZ, age 46, has been employed by the Company (or an affiliated
company) periodically over the past ten years and has served in various
marketing management positions. Since 1991, Mr. Fritz has served as the
Company's chief marketing officer, with responsibility for daily marketing
operations, and currently serves as the Company's Vice President -- Marketing.
IOANNIS N. (JOHN) GIOLDASIS, age 48, has been with the Company since May
1993 and currently serves as Vice President -- Promotions. Mr. Gioldasis is
responsible for the design and implementation of marketing strategies and
promotional concepts for lead generation in Texas and other markets. Prior to
joining the Company, Mr. Gioldasis was a national field director for Resort
Property Consultants, Inc.
ALLEN L. HUDSON, age 52, joined the Company on June 1, 1998 as Vice
President -- Architecture and Engineering. Mr. Hudson was President and Chief
Operating Officer of an architectural firm which provided consultant design and
project management services to Silverleaf from 1995 until joining the Company.
CARLA R. KIENAST, age 46, joined the Company as Vice President -- Investor
Relations in October 1998. With over fifteen total years of corporate
communications experience, and ten specifically focused on investor relations,
Ms. Kienast had her own consulting practice prior to joining the Company.
Silverleaf had been a client of her consulting practice since its initial public
offering. Before starting her own firm, Ms. Kienast served as Manager of
Investor Relations for Haggar Clothing Co. for four years following its initial
public offering, and also held various investor relations and corporate
communications positions at Amtech Corporation.
EDWARD L. LAHART, age 34, has served as Vice President -- Corporate
Operations since June 1998. Prior to June 1998, Mr. Lahart served in various
capacities in the Credit and Collections department.
ROBERT G. LEVY, age 50, was appointed Vice President -- Resort Operations in
March 1997 and administers the Company's Management Agreement with the
Silverleaf Club. Since 1990, Mr. Levy has held a variety of managerial positions
with the Silverleaf Club including Project Manager, General Manager, Texas
Regional Manager, and Director of Operations. Prior thereto, Mr. Levy spent 18
years in hotel, motel, and resort management, and was associated with the
Sheraton, Ramada Inn, and Holiday Inn hotel chains.
JAMES J. OESTREICH, age 58, joined the Company in February 1998 as Vice
President -- Marketing Development. From January 1991 to August 1995, Mr.
Oestreich served as Vice President of Sales and Marketing for Casablanca
Express, Inc. From August 1995 until joining the Company, Mr. Oestreich served
as President of Bull's Eye Marketing, Inc., a provider of marketing services to
the resort and direct sales industries.
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SANDRA G. CEARLEY, age 37, has served as Secretary of the Company since its
inception. Ms. Cearley maintains corporate minute books, oversees regulatory
filings, and coordinates legal matters with the Company's attorneys.
COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities
("Insiders"), to file with the Commission initial reports of ownership and
reports of changes in ownership of common stock. Insiders are required by the
Commission's regulations to furnish to the Company copies of all Section 16(a)
reports filed by such persons.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations from the Insiders,
two Insiders did not timely report grants of options under the Company's 1997
Stock Option Plan (the "Plan"). Allen L. Hudson, Vice President - Architecture
and Engineering Services, inadvertently omitted on the Initial Statement of
Beneficial Ownership of Securities filed on May 26, 1998 on Form 3 an option to
purchase 10,000 shares of the Company's common stock which was granted to him
prior to his election as an officer of the Company. James Oestreich, Vice
President - Marketing Development, did not timely report the grant of an option
to purchase 25,000 shares granted under the Plan to him in May 1998. In February
1999, Messrs. Hudson and Oestreich each filed a Form 5 for 1998 to report these
options. Each Form 5 was filed on a timely basis. All other Insiders complied
with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth under "Executive
Compensation" in the Company's Proxy Statement and reference is expressly made
thereto for the specific information incorporated herein by the aforesaid
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement and reference is expressly made thereto for the specific information
incorporated herein by the aforesaid reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement and
reference is expressly made thereto for the specific information incorporated
herein by the aforesaid reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Charter of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
3.2 -- Bylaws of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.2 to Registrant's Form 10-K for
year ended December 31, 1997).
4.1 -- Form of Stock Certificate of Registrant (incorporated
by reference to Exhibit 4.1 to Amendment No. 1 dated
May 16, 1997 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
4.2 -- Indenture dated April 1, 1998, between the Company and
Norwest Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.3 -- Certificate No. 001 of 10 1/2% Senior Subordinated
Notes due 2008 in the amount of $75,000,000
(incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.4 -- Subsidiary Guarantee dated April 8, 1998 by Silverleaf
Berkshires, Inc.; Bull's Eye Marketing, Inc.;
Silverleaf Resort Acquisitions, Inc.; Silverleaf
Travel, Inc.; Database Research, Inc.; and Villages
Land, Inc.
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52
(incorporated by reference to Exhibit 4.3 to
Registrant's Form 10-Q for the quarter ended March 31,
1998).
10.1 -- Form of Registration Rights Agreement between
Registrant and Robert E. Mead (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.2.1 -- Employment Agreement between Registrant and Robert E.
Mead (incorporated by reference to Exhibit 10.2.1 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.2.2 -- Employment Agreement between Registrant and David T.
O'Connor (incorporated by reference to Exhibit 10.2.2
to Amendment No. 1 dated May 16, 1997 to Registrant's
Registration Statement on Form S-1, File No.
333-24273).
10.2.3 -- Employment Agreement between Registrant and Sharon K.
Brayfield (incorporated by reference to Exhibit 10.2.3
to Registrant's Registration Statement on Form S-1,
File No. 333-24273).
10.2.4 -- Employment Agreement between Registrant and Thomas
Franks (incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.2.5 -- Memorandum Agreement, dated August 21, 1997, between
Registrant and Thomas C. Franks (incorporated by
reference to Exhibit 10.7 to Registrant's Form 10-Q for
quarter ended September 30, 1997).
10.2.6 -- Employment Agreement, dated January 16, 1998, between
Registrant and Allen L. Hudson (incorporated by
reference to Exhibit 10.2.6 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.2.7 -- Employment Agreement, dated January 20, 1998, between
Registrant and Jim Oestreich (incorporated by reference
to Exhibit 10.2.7 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.2.8 -- Employment Agreement with Harry J. White, Jr.
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.2.9 -- Amendment to Employment Agreement with Sharon K.
Brayfield (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.2.10 -- First Amendment dated June 12, 1998, to Employment
Agreement with Jim Oestreich (incorporated by reference
to Exhibit 10.7 to Registrant's Form 10-Q for quarter
ended September 30, 1998).
10.2.11 -- Second Amendment dated September 29, 1998, to
Employment Agreement with Jim Oestreich (incorporated
by reference to Exhibit 10.8 to Registrant's Form 10-Q
for quarter ended September 30, 1998).
10.2.12 -- First Amendment dated August 31, 1998, to Employment
Agreement with David T. O'Connor (incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q
for quarter ended September 30, 1998).
10.3 -- 1997 Stock Option Plan of Registrant (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.3.1 -- Nonqualified Stock Option Agreement (David T. O'Connor)
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended June 30,
1997).
10.3.2 -- Incentive Stock Option Agreement (Larry H. Fritz)
(incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended June 30,
1997).
10.3.3 -- Non-Qualified Stock Option Agreement (Thomas Franks)
(incorporated by reference to Exhibit 10.8 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.4 -- Non-Qualified Stock Option Agreement (Stuart M. Bloch)
(incorporated by reference to Exhibit 10.9 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.5 -- Non-Qualified Stock Option Agreement (James B. Francis,
Jr.) (incorporated by reference to Exhibit 10.10 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.6 -- Non-Qualified Stock Option Agreement (Michael A.
Jenkins) (incorporated by reference to Exhibit 10.11 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.7 -- Non-Qualified Stock Option Agreement, dated January 20,
1998, between Registrant and Jim Oestreich
(incorporated by reference to Exhibit 10.3.9 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.3.8 -- Non-Qualified Stock Option Agreement dated June 25,
1998, with Thomas C. Franks (incorporated by reference
to Exhibit 10.3 to Registrant's Form 10-Q for quarter
ended June 30, 1998).
10.3.9 -- Incentive and Non-Qualified Stock Option Agreement
dated June 25, 1998, with Sharon K. Brayfield
(incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
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53
10.3.10 -- Non-Qualified Stock Option Agreement dated June 29,
1998, with Harry J. White, Jr. (incorporated by
reference to Exhibit 10.5 to Registrant's Form 10-Q for
quarter ended June 30, 1998).
10.3.11 -- Non-Qualified Stock Option Agreement dated August 31,
1998, with David T. O'Connor (incorporated by reference
to Exhibit 10.11 to Registrant's Form 10-Q for quarter
ended September 30, 1998).
10.4 -- Silverleaf Club Agreement between the Silverleaf Club
and the resort clubs named therein (incorporated by
reference to Exhibit 10.4 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.5 -- Management Agreement between Registrant and the
Silverleaf Club (incorporated by reference to Exhibit
10.5 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.6 -- Revolving Loan and Security Agreement, dated October
1996, by CS First Boston Mortgage Capital Corp.
("CSFBMCC") and Silverleaf Vacation Club, Inc.
(incorporated by reference to Exhibit 10.6 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.7 -- Amendment No. 1 to Revolving Loan and Security
Agreement, dated November 8, 1996, between CSFBMCC and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.7 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.8 -- Loan and Security Agreement among Textron Financial
Corporation ("Textron"), Ascension Resorts, Ltd. and
Ascension Capital Corporation, dated August 15, 1995
(incorporated by reference to Exhibit 10.9 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.9 -- First Amendment to Loan and Security Agreement, dated
December 28, 1995, between Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.10 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.10 -- Second Amendment to Loan and Security Agreement, dated
October 31, 1996, executed by Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.11 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.11 -- Restated and Amended Loan and Security Agreement, dated
December 27, 1995, between Heller Financial, Inc.
("Heller") and Ascension Resorts, Ltd. (incorporated by
reference to Exhibit 10.12 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.12 -- Loan and Security Agreement, dated December 27, 1995,
executed by Ascension Resorts, Ltd. and Heller
(incorporated by reference to Exhibit 10.13 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.13 -- Amendment to Restated and Amended Loan and Security
Agreement, dated August 15, 1996, between Heller and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.14 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.14 -- Form of Indemnification Agreement (between Registrant
and all officers, directors, and proposed directors)
(incorporated by reference to Exhibit 10.18 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.15 -- Resort Affiliation and Owners Association Agreement
between Resort Condominiums International, Inc.,
Ascension Resorts, Ltd., and Hill Country Resort
Condoshare Club, dated July 29, 1995 (similar
agreements for all other Existing Resorts)
(incorporated by reference to Exhibit 10.19 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.16 -- First Amendment to Silverleaf Club Agreement, dated
March 28, 1990, among Silverleaf Club, Ozark Mountain
Resort Club, Holiday Hills Resort Club, the Holly Lake
Club, The Villages Condoshare Association, The Villages
Club, Piney Shores Club, and Hill Country Resort
Condoshare Club (incorporated by reference to Exhibit
10.22 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.17 -- First Amendment to Management Agreement, dated January
1, 1993, between Master Endless Escape Club and
Ascension Resorts, Ltd. (incorporated by reference to
Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.18 -- Contract of Sale, dated May 2, 1997, between Registrant
and third-party (incorporated by reference to Exhibit
10.24 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
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54
10.19 -- Amendment to Loan Documents, dated December 27, 1996,
among Silverleaf Vacation Club, Inc., Ascension
Resorts, Ltd., and Heller Financial, Inc. (incorporated
by reference to Exhibit 10.25 to Amendment No. 1 dated
May 16, 1997 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.20 -- Contract of Sale between Thousand Trails, Inc. and
Registrant (approximately 98.475 acres, Galveston
County, Texas) (incorporated by reference to Exhibit
10.1 to Registrant's Form 10-Q for quarter ended
September 30, 1997).
10.21 -- Contract of Sale between R.J. Novelli, Sr., et al and
Registrant (approximately 21.5 acres, Galveston County,
Texas) (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.22 -- Contract of Sale between Harmon/Koval Limited Liability
Company and Registrant (2.1 acres, Clark County,
Nevada) (incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.23 -- Second Amendment to Restated and Amended Loan and
Security Agreement between Heller Financial, Inc. and
Registrant ($40 million revolving credit facility)
(incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.24 -- Construction Loan Agreement between Heller Financial
Inc. and Registrant ($10 million revolving construction
loan facility) (incorporated by reference to Exhibit
10.5 to Registrant's Form 10-Q for quarter ended
September 30, 1997).
10.25 -- Real Estate Contract of Sale dated September 30, 1997,
between Registrant and Robert E. Mead (incorporated by
reference to Exhibit 10.12 to Registrant's Form 10-Q
for quarter ended September 30, 1997).
10.26 -- Silverleaf Club Agreement dated September 25, 1997,
between Registrant and Timber Creek Resort Club
(incorporated by reference to Exhibit 10.13 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.27 -- Loan Agreement, dated December 19, 1997, between Credit
Suisse First Boston Mortgage Capital, L.L.C. and
Registrant (incorporated by reference to Exhibit 10.31
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.28 -- Amendment to Loan Documents, dated December 22, 1997,
between Registrant and Credit Suisse First Boston
Mortgage Capital, L.L.C. (incorporated by reference to
Exhibit 10.32 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.29 -- Second Amendment to Management Agreement, dated
December 31, 1997, between Silverleaf Club and
Registrant (incorporated by reference to Exhibit 10.33
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.30 -- Silverleaf Club Agreement, dated January 5, 1998,
between Silverleaf Club and Oak N' Spruce Resort Club
(incorporated by reference to Exhibit 10.34 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.31 -- Contract of Sale, dated November 13, 1997, between Oak
N' Spruce Management, Inc., Beartown Development, Inc.,
Bruce Hagedorn and Doug Richie, and Registrant
(incorporated by reference to Exhibit 10.35 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.32 -- Contract of Sale, dated January 12, 1998, between Crown
Resort Co. L.L.C., Richard W. Dickson and Robert G.
Garner, and Registrant (incorporated by reference to
Exhibit 10.36 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.33 -- Contract of Sale, dated February 18, 1998, between
Registrant and Michael J. McDermott (incorporated by
reference to Exhibit 10.37 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.34 -- Contract of Sale, dated February 19, 1998, between
Registrant and Lee R. Roper (incorporated by reference
to Exhibit 10.38 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.35 -- Contract of Sale, dated February 19, 1998, between
Registrant and J. Phillip Ballard, Jr., and Eagle
Greens Ltd. (incorporated by reference to Exhibit 10.39
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.36 -- Stock Purchase Agreement, dated January 15, 1998,
between Silverleaf Resorts, Inc. and Jim Oestreich
(incorporated by reference to Exhibit 10.40 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.37 -- Contract of Sale, dated May 2, 1997, between Registrant
and Thousand Trails, Inc. (incorporated by reference to
Exhibit 10.41 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
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55
10.38 -- First Amendment to Contract of Sale, dated July 25,
1997, between Registrant and Thousand Trails, Inc.
(incorporated by reference to Exhibit 10.42 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.39 -- Master Club Agreement, dated November 13, 1997, between
Master Club and Fox River Resort Club (incorporated by
reference to Exhibit 10.43 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.40 -- Letter Agreement dated March 16, 1998, between the
Company and Heller Financial, Inc. (incorporated by
reference to Exhibit 10.44 to Amendment No. 1 to Form
S-1, File No. 333-47427 filed March 16, 1998).
10.41 -- Bill of Sale and Blanket Assignment dated May 28, 1998,
between the Company and Crown Resort Co., LLC
(incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.42 -- Contract of Sale by and between Terry Adair and George
R. Bedell, as Trustee, dated March 27, 1998
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.43 -- Contract of Sale by and between Great Atlanta's
Properties Corp. and George R. Bedell, as Trustee,
dated August 12, 1998 (incorporated by reference to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.44 -- Contract of Sale, dated February 25, 1998 (as amended
in October 1998), by and between the Company and J.
Phillip Ballard, Jr. and Eagle Greens Ltd., f/k/a
Northeast Georgia Recreational Development Co., Inc.
(incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.45 -- Amendment to Contract of Sale, dated October 14, 1998,
by and between the Company and J. Phillip Ballard, Jr.
and Eagle Greens, Ltd., f/k/a Northeast Georgia
Recreational Development Co., Inc. (incorporated by
reference to Exhibit 10.4 to Registrant's Form 10-Q for
quarter ended September 30, 1998).
10.46 -- Second Amendment to Contract of Sale, dated October 14,
1998, by and between the Company and J. Phillip
Ballard, Jr. and Eagle Greens Ltd., f/k/a Northeast
Georgia Recreational Development Co., Inc.
(incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.47 -- Management Agreement dated October 13, 1998, by and
between the Company and Eagle Greens, Ltd.
(incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.48 -- One to Four Family Residential Contract (Resale)
between the Company and Thomas C. Franks, dated July
30, 1998 (incorporated by reference to Exhibit 10.12 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
*10.49 -- Contract of Sale dated April 28, 1998, by and between
Beech Mountain Lakes Corp. and the Company.
*10.50 -- Amendment to Contract of Sale dated November 24, 1998,
by and between Beech Mountain Lakes Corp. and the
Company.
*10.51 -- Contract of Sale dated September 30, 1998, by and
between National American Corp. and the Company.
*12.1 -- Statement concerning computation of ratios of earnings
to fixed charges
*21.1 -- Subsidiaries of Silverleaf Resorts, Inc.
*27.1 -- Financial Data Schedule.
------------
* Filed herewith
(b) No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1998.
(c) The exhibits required by Item 601 of Regulation S-K have been listed
above.
(d) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the consolidated financial statements or the notes
thereto.
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56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized in the City of Dallas,
State of Texas, on March 26, 1999.
SILVERLEAF RESORTS, INC.
By: /s/ ROBERT E. MEAD
-----------------------------------
Name: Robert E. Mead
Title: Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT E. MEAD Chairman of the Board and Chief March 26, 1999
--------------------------------- Executive Officer (Principal
Robert E. Mead Executive Officer)
/s/ SHARON K. BRAYFIELD Director and President March 26, 1999
---------------------------------
Sharon K. Brayfield
/s/ HARRY J. WHITE, JR. Chief Financial Officer and March 26, 1999
--------------------------------- Treasurer (Principal
Harry J. White, Jr. Financial and Accounting
Officer)
/s/ STUART MARSHALL BLOCH Director March 26, 1999
---------------------------------
Stuart Marshall Bloch
/s/ JAMES B. FRANCIS, JR. Director March 26, 1999
---------------------------------
James B. Francis, Jr.
/s/ MICHAEL A. JENKINS Director March 26, 1999
---------------------------------
Michael A. Jenkins
56
57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................................ 58
Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. 59
Consolidated Statements of Income for the years ended December 31, 1996,
1997, and 1998.......................................................... 60
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997, and 1998....................................... 61
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997, and 1998.................................................... 62
Notes to Consolidated Financial Statements................................ 63
57
58
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Silverleaf Resorts, Inc.
We have audited the accompanying consolidated balance sheets of Silverleaf
Resorts, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1998
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Silverleaf Resorts, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 1, 1999
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59
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
---------------------
ASSETS 1997 1998
--------- --------
Cash and cash equivalents...................................... $ 4,970 $ 11,355
Restricted cash................................................ 200 873
Notes receivable, net of allowance for uncollectible notes of
$12,621 and $23,947, respectively........................... 92,036 173,959
Amounts due from affiliates.................................... 1,389 4,115
Inventories.................................................... 27,432 71,694
Land, equipment, buildings, and utilities, net................. 22,611 34,025
Prepaid and other assets....................................... 7,763 16,899
--------- ---------
TOTAL ASSETS......................................... $156,401 $312,920
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses........................ $ 5,106 $ 8,144
Unearned revenues............................................ 3,122 4,082
Income taxes payable......................................... 1,500 4,136
Deferred income taxes, net................................... 14,037 21,524
Notes payable and capital lease obligations.................. 48,871 58,108
Senior subordinated notes.................................... -- 75,000
-------- --------
Total Liabilities.................................... 72,636 170,994
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000 shares
authorized, 13,311,517 shares issued and 12,889,417 shares
outstanding at December 31, 1998 and 11,311,517 shares
issued and outstanding at December 31, 1997............... 113 133
Additional paid-in capital................................... 64,577 109,339
Retained earnings............................................ 19,075 37,453
Treasury stock, at cost (422,100 shares at December 31,
1998)..................................................... -- (4,999)
-------- --------
Total Shareholders' Equity........................... 83,765 141,926
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $156,401 $312,920
======== ========
See notes to consolidated financial statements.
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60
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ----------- -----------
REVENUES:
Vacation Interval sales .......................................... $ 45,907 $ 68,682 $ 135,582
Sampler sales .................................................... 1,717 1,415 2,768
----------- ----------- -----------
Total sales .................................................... 47,624 70,097 138,350
Interest income .................................................. 6,297 9,149 16,823
Interest income from affiliates .................................. 377 247 62
Management fee income ............................................ 2,187 2,331 2,540
Other income ..................................................... 1,440 3,234 2,980
----------- ----------- -----------
Total revenues ........................................... 57,925 85,058 160,755
----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales .................................. 2,805 6,600 19,877
Sales and marketing .............................................. 21,839 30,559 67,030
Provision for uncollectible notes ................................ 8,733 10,524 16,372
Operating, general and administrative ............................ 10,116 12,230 17,184
Depreciation and amortization .................................... 1,264 1,497 3,332
Interest expense to affiliates ................................... 880 422 --
Interest expense to unaffiliated entities ........................ 3,879 4,242 7,150
----------- ----------- -----------
Total costs and operating expenses ....................... 49,516 66,074 130,945
----------- ----------- -----------
Income from continuing operations before income taxes .... 8,409 18,984 29,810
Income tax expense ....................................... 3,140 7,024 11,432
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS .................................. 5,269 11,960 18,378
DISCONTINUED OPERATIONS:
Loss from operations (less applicable income
tax benefit of $99 in 1996) ................................... (168) -- --
Loss on disposal including provision for operating
losses during the phase out period (plus applicable
income tax benefit of $74 in 1996) ............................ (127) -- --
----------- ----------- -----------
Total loss from discontinued operations .................. (295) -- --
----------- ----------- -----------
NET INCOME ......................................................... $ 4,974 $ 11,960 $ 18,378
=========== =========== ===========
INCOME PER SHARE FROM CONTINUING OPERATIONS --
Basic and Diluted ............................................... $ 0.68 $ 1.22 $ 1.45
=========== =========== ===========
NET INCOME PER SHARE-- Basic and Diluted ........................... $ 0.64 $ 1.22 $ 1.45
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-- Basic .............................................. 7,711,517 9,767,407 12,633,751
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-- Diluted ............................................ 7,711,517 9,816,819 12,682,982
=========== =========== ===========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK
-----------------------
NUMBER OF $0.01 ADDITIONAL TREASURY STOCK
SHARES PAR PAID-IN RETAINED ------------------------
ISSUED VALUE CAPITAL EARNINGS SHARES COST TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
JANUARY 1, 1996 ................ 7,711,517 $ 77 $ 13,470 $ 2,141 -- $ -- $ 15,688
Net income ................... -- -- -- 4,974 -- -- 4,974
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1996 .............. 7,711,517 77 13,470 7,115 -- -- 20,662
Issuance of common stock ..... 3,600,000 36 51,107 -- -- -- 51,143
Net income ................... -- -- -- 11,960 -- -- 11,960
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1997 .............. 11,311,517 113 64,577 19,075 -- -- 83,765
Issuance of common stock ..... 2,000,000 20 44,762 -- -- -- 44,782
Treasury stock -- -- -- -- (422,100) (4,999) (4,999)
Net income ................... -- -- -- 18,378 -- -- 18,378
---------- ---------- ---------- ---------- ---------- ---------- ----------
DECEMBER 31, 1998 .............. 13,311,517 $ 133 $ 109,339 $ 37,453 $ (422,100) $ (4,999) $ 141,926
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
OPERATING ACTIVITIES:
Net income ................................................ $ 4,974 $ 11,960 $ 18,378
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 1,264 1,497 3,332
Discontinued operations ................................ 3,794 1,589 --
(Gain) loss on disposal of equipment, buildings, and
utilities ............................................. 64 (34) --
Deferred income taxes .................................. 1,975 9,194 7,487
Increase (decrease) in cash from changes in assets and
liabilities (exclusive of amounts contributed):
Restricted cash ...................................... -- (200) (673)
Amounts due from affiliates .......................... (1,734) 551 (2,726)
Inventories .......................................... (5,846) (18,010) (44,262)
Prepaid and other assets ............................. (1,559) (4,541) (5,803)
Accounts payable and accrued expenses ................ 394 1,950 3,038
Amounts due to affiliates ............................ 114 (286) --
Interest payable to affiliates ....................... 1,238 (6,244) --
Unearned revenues .................................... 701 1,332 960
Income taxes payable ................................. 996 (2,150) 2,636
--------- --------- ---------
Net cash provided by (used in) operating
activities ....................................... 6,375 (3,392) (17,633)
--------- --------- ---------
INVESTING ACTIVITIES:
Issuance of notes receivable from affiliates .............. (208) -- --
Collections of notes receivable from affiliates ........... -- 4,297 --
Proceeds from sales of land, equipment, buildings,
and utilities ............................................ -- 1,176 --
Proceeds from sales of land held for sale ................. 600 -- --
Purchases of land, equipment, buildings, and utilities .... (4,162) (8,692) (12,552)
Notes receivable, net ..................................... (20,226) (36,242) (81,923)
--------- --------- ---------
Net cash used in investing activities ............. (23,996) (39,461) (94,475)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities ....... 26,648 54,069 166,658
Payments on borrowings to unaffiliated entities ........... (8,939) (50,127) (84,436)
Payments of debt issuance costs ........................... -- -- (3,512)
Proceeds from borrowings from affiliates .................. 619 68 --
Payments on borrowings to affiliates ...................... (1,112) (8,303) --
Net proceeds from initial public offering ................. -- 51,143 --
Net proceeds from issuance of common stock ................ -- -- 44,782
Purchase of treasury stock ................................ -- -- (4,999)
Discontinued operations ................................... (2,334) -- --
--------- --------- ---------
Net cash provided by financing activities ......... 14,882 46,850 118,493
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ............................. (2,739) 3,997 6,385
CASH AND EQUIVALENTS:
BEGINNING OF PERIOD ....................................... 3,712 973 4,970
--------- --------- ---------
END OF PERIOD ............................................. $ 973 $ 4,970 $ 11,355
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid ............................................. $ 3,003 $ 10,007 $ 6,608
Income taxes paid ......................................... -- -- 1,308
Land and equipment acquired under capital leases .......... 814 2,943 2,015
Costs incurred in connection with initial public offering.. -- 6,457 --
Costs incurred in connection with secondary public
offering ............................................... -- -- 3,968
See notes to consolidated financial statements.
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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
1. NATURE OF BUSINESS
Silverleaf Resorts, Inc., a Texas Corporation (the "Company" or
"Silverleaf") is in the business of marketing and selling vacation intervals
("Vacation Intervals"). Silverleaf's principal activities, in this regard,
consist of (i) developing and acquiring timeshare resorts; (ii) marketing and
selling one-week annual and biennial Vacation Intervals to new prospective
owners; (iii) marketing and selling upgraded Vacation Intervals to existing
Silverleaf owners ("Silverleaf Owners"); (iv) providing financing for the
purchase of Vacation Intervals; and (v) operating timeshare resorts. The Company
has in-house sales, marketing, financing, and property management capabilities
and coordinates all aspects of expansion of the eighteen existing owned or
managed resorts (the "Existing Resorts") and the development of any new
timeshare resort, including site selection, design, and construction. The
Company operates the Existing Resorts through three centralized organizations,
Silverleaf Club, Oak N' Spruce Club, and Crown Club (collectively, the
"Management Clubs"), which bear the costs of operating, maintaining, and
refurbishing the resorts from monthly dues paid by the Vacation Interval owners.
Crown Club consists of several individual Club agreements which have terms of
two to five years with a minimum of two renewal options remaining. The Company
receives a management fee from the Management Clubs to compensate it for the
services provided. In addition to Vacation Interval sales revenues, interest
income derived from its financing activities, and the management fee received
from the Management Clubs, the Company generates additional revenue from leasing
of unsold intervals (i.e., sampler sales), utility operations related to the
resorts, and other sources. All of the operations are directly related to the
resort real estate development industry. Sales of Vacation Intervals are
marketed to individuals primarily through direct mail and telephone
solicitation.
The consolidated financial statements of the Company as of and for the years
ended December 31, 1996, 1997, and 1998, reflect the operations of the Company
and its wholly owned subsidiaries, Condominium Builders, Inc. ("CBI"), Villages
Land, Inc. ("VLI"), Silverleaf Travel, Inc. ("STI"), Database Research, Inc.
("DRI"), Silverleaf Resort Acquisitions, Inc. ("SAI"), Bull's Eye Marketing,
Inc. ("BEM"), and Silverleaf Berkshires, Inc. ("SBI"). CBI was liquidated in
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. 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. Revenues are
recognized after a binding sales contract has been executed, a 10% minimum down
payment has been received, and the statutory rescission period has expired. If
all 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. At December 31, 1998, $1.3 million of Vacation Interval
sales transactions were deferred as the minimum down payment had not 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
liability until the sale can be recognized. When these types of sales are
cancelled without a refund, deposits forfeited are recognized as income. When
deposits are ultimately recognized as sales, 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 (customer returns represent cancellations of
sales transactions in which the customer fails to make the first installment
payment) is reported net against Vacation Interval sales.
The Company recognizes interest income as earned. To the extent interest
payments become delinquent the Company ceases recognition of the interest income
until collection is probable. When inventory is returned to the Company, any
unpaid note receivable
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balances, net of the lower of historical cost or market value of the related
Vacation Interval (which is the amount at which the Vacation Interval is being
restored to inventory), are charged against the previously established allowance
for uncollectible notes.
Revenues related to one-time sampler contracts, which entitles the
prospective owner to sample a resort for various periods, are recorded as
earned.
The Company receives fees for management services provided to the Management
Clubs. These revenues are recognized on an accrual basis in the period the
services are provided.
Utilities, services, and other income is recognized on an accrual basis in
the period service is provided.
Sales and marketing costs are charged to expense in the period the
corresponding revenue is recognized.
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 consist of cash, certificates of
deposit, and money market funds.
Restricted Cash -- Restricted cash consists of certificates of deposit which
serve as collateral for construction bonds.
Provision for Uncollectible Notes -- The Company records a provision for
uncollectible notes at the time revenue is recognized. Such provision is
recorded in an amount sufficient to maintain the allowance for uncollectible
notes at a level considered adequate to provide for anticipated losses resulting
from customers' failure to fulfill their obligations under the terms of their
notes. The allowance for uncollectible notes takes into consideration both notes
held by the Company and those sold with recourse. Such allowance for
uncollectible notes is adjusted based upon periodic analysis of the notes
receivable portfolio, historical credit loss experience, and current economic
factors. 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. Recourse to the Company on sales of
customer notes receivable is governed by the agreements between the purchasers
and the Company. The Company classifies the components of the provision for
uncollectible notes into the following three categories based on the nature of
the item: credit losses, customer returns (cancellations of sales whereby the
customer fails to make their first installment payment), and customer releases
(voluntary cancellations of properly recorded sales transactions which in the
opinion of management is consistent with the maintenance of overall customer
goodwill). The provision for uncollectible notes pertaining to credit losses,
customer returns, and customer releases are classified in provision for
uncollectible notes, Vacation Interval sales, and operating, general and
administrative expenses, respectively.
Inventories -- Inventories are stated at the lower of cost or market value.
Cost includes amounts for land, construction materials, direct labor and
overhead, taxes, and capitalized interest incurred in the construction or
through the acquisition of resort dwellings held for timeshare sale. These costs
are capitalized as inventory and are allocated to Vacation Intervals based upon
their relative sales values. Upon sale of a Vacation Interval, these costs are
charged to cost of sales on a specific identification basis. Vacation Intervals
reacquired are placed back into inventory at the lower of their original
historical cost basis or market value. Company management routinely reviews the
carrying value of its inventory on an individual project basis to determine that
the carrying value does not exceed market value.
Land, Equipment, Buildings, and Utilities -- Land, equipment (including
equipment under capital lease), buildings, and utilities are stated at cost,
which includes amounts for construction materials, direct labor and overhead,
and capitalized interest. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
expense as incurred; significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, ranging from 3 to 20 years. Company
management routinely 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 booth rental, prepaid insurance, prepaid promotional items, prepaid
postage, intangibles, commitment fees, debt issuance costs, supplies
inventories, deposits, and miscellaneous receivables. 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
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recognized for deferred income taxes relating to temporary differences in the
recognition of expense and income for financial reporting purposes. To the
extent a deferred tax asset does not meet the criteria of "more likely than not"
for realization, a valuation allowance is recorded.
Earnings Per Share -- Basic earnings per share is computed by dividing net
income 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 equivalent shares outstanding. The number of equivalent 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 described in
Note 9 is reduced by the number of shares which could have been repurchased by
the Company with the proceeds from the exercise of the stock options.
The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the years ended December 31, 1997 and
1998:
YEARS ENDED
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
Weighted average shares outstanding - basic ......... 9,767,407 12,633,751
Issuance of shares from stock options exercised ..... 321,949 791,392
Repurchase of shares from stock options proceeds .... (272,537) (742,161)
----------- -----------
Weighted average shares outstanding - diluted ....... 9,816,819 12,682,982
=========== ===========
No stock options were granted or outstanding prior to 1997.
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.
Environmental Remediation Costs -- The Company accrues for losses associated
with environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances change. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable.
Company management is not aware of any environmental remediation obligations
which would materially affect the operations, financial position, or cash flows
of the Company.
Reclassifications -- Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements to conform to the 1998 presentation.
These reclassifications had no effect on net income.
SFAS No. 130 -- The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting on Comprehensive Income", effective January 1,
1998. The Company had no items classified as other comprehensive income in the
periods presented.
SFAS No. 131 -- The Company has adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 redefines how operating segments are
determined and requires disclosures of certain financial and descriptive
information about a company's operating segments. It establishes standards for
reporting and displaying information about operating segments in annual
financial statements and requires that enterprises report selected information
about operating segments in interim reports. Management has reviewed the
requirements and definitions contained within SFAS No. 131 and believe the
Company operates in only one segment.
SFAS No. 133 -- In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999 and will be adopted for
the period ended December 31, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of the derivatives are recorded each period in current earnings or
other comprehensive income depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction. The
impact of SFAS No. 133 on the Company's results of operations, financial
position, or cash flows will be dependent on the level and types of derivative
instruments the Company will have entered into at the time the standard is
implemented. The Company currently has no derivative instruments.
SOP No. 98-5 -- On April 3, 1998, the Accounting Standards Executive
Committee issued Statement of Position 98-5, "Reporting
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on Costs of Start-Up Activities" ("SOP No. 98-5"), effective for fiscal years
beginning after December 15, 1998. SOP No. 98-5 requires that costs for start-up
activities, including organization costs, be charged to expense as incurred. The
Company elected to early adopt SOP No. 98-5. At the time of its adoption, the
Company had no start-up costs capitalized and, therefore, the adoption had no
effect on results of operations or financial position of the Company.
3. CONCENTRATIONS OF RISK
Credit Risk -- The Company is exposed to on-balance sheet credit risk
related to its notes receivable. The Company is exposed to off-balance sheet
credit risk related to notes sold under recourse provisions.
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers 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 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 which
limit the Company's ability to recover personal judgments against customers who
have defaulted on their loans. Accordingly, the Company has generally not
pursued this remedy.
Interest Rate Risk -- The Company has historically derived net interest
income from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Company's
indebtedness bears interest at variable rates and the Company's customer
receivables bear interest at 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,
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, and Illinois. 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,
Massachusetts, and Illinois, with construction occurring in Georgia, and
pre-development in Pennsylvania and Nevada. 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.
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 December 31, 1998, was approximately 14.2%.
In connection with the sampler program, the Company routinely enters into notes
receivable with terms of 10 months. These notes receivable totaled $1.5 million
and $2.4 million at December 31, 1997 and 1998, respectively, and are typically
non-interest bearing.
In connection with promotional sales to certain customers, the Company
entered into $3.5 million of non-interest bearing notes receivable. The Company
calculated a discount of $1.2 million on these notes receivable utilizing a 10%
discount rate, which represents the lowest rate offered its existing customers.
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Notes receivable are scheduled to mature as follows at December 31, 1998 (in
thousands):
1999........................................... $ 2,843
2000........................................... 4,094
2001........................................... 2,900
2002........................................... 8,269
2003........................................... 23,882
Thereafter..................................... 155,918
---------
197,906
Less allowance for uncollectible notes......... 23,947
---------
Notes receivable, net................ $ 173,959
=========
There were no notes sold with recourse during the years ended December 31,
1996, 1997, and 1998. The following schedule summarizes outstanding principal
maturities of notes receivable sold with recourse as of December 31, 1997 and
1998 (in thousands):
DECEMBER 31,
------------------
1997 1998
------- -------
Unaffiliated third parties................................. $ 6,550 $ 3,799
Affiliates................................................. 841 --
------- -------
Total outstanding notes receivable sold with recourse.. $ 7,391 $ 3,799
======= =======
Management considers both pledged and sold-with-recourse notes receivable in
the Company's allowance for uncollectible notes. The activity in the allowance
for uncollectible notes is as follows for the years ended December 31, 1996,
1997, and 1998 (in thousands):
DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- --------
Balance, beginning of period................................... $ 8,067 $ 9,698 $ 12,621
Provision for credit losses.................................... 8,733 10,524 16,372
Provision for customer releases charged to operating, general,
and administrative expenses.................................. 1,146 1,215 831
Receivables charged off........................................ (8,248) (8,816) (5,877)
-------- -------- --------
Balance, end of period......................................... $ 9,698 $ 12,621 $ 23,947
======== ======== ========
5. LAND, EQUIPMENT, BUILDINGS, AND UTILITIES
The Company's land, equipment, buildings, and utilities consist of the
following at December 31, 1997 and 1998 (in thousands):
DECEMBER 31,
-------------------
1997 1998
------- -------
Land................................................. $ 5,708 $ 6,689
Vehicles and equipment............................... 1,808 3,703
Utility plant, buildings, and facilities............. 4,140 4,497
Office equipment and furniture....................... 8,066 17,349
Improvements......................................... 7,796 9,827
------- -------
27,518 42,065
Less accumulated depreciation........................ (4,907) (8,040)
------- -------
Land, equipment, buildings, and utilities, net....... $22,611 $34,025
======= =======
Depreciation and amortization expense for the years ended December 31, 1996,
1997, and 1998, was $1.3 million, $1.5 million, and $3.3 million, respectively,
which included amortization expense related to intangible assets included in
prepaid and other assets of $179,000 in 1998.
6. INCOME TAXES
Income tax expense consists of the following components for the years ended
December 31, 1996, 1997, and 1998 (in thousands):
1996 1997 1998
------- ------- ------
Current:
Federal............................................. $ 992 $ 1,500 $ 3,945
State............................................... -- -- --
------- ------- -------
Total current income tax expense............ 992 1,500 3,945
Deferred income tax expense........................... 1,975 5,524 7,487
------- ------- -------
Total income tax expense.................... $ 2,967 $ 7,024 $11,432
======= ======= =======
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A reconciliation of income tax expense on reported pretax income at
statutory rates to actual income tax expense for the years ended December 31,
1996, 1997, and 1998, is as follows (in thousands):
1996 1997 1998
------------- -------------- -------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
------- ---- ------- ---- ------- ----
Income tax expense at statutory rates.... $ 2,700 34% $ 6,454 34% $10,434 35.0%
State income taxes, net of Federal
income tax benefit...................... 238 3% 570 3% 998 3.4%
Other.................................... 29 1% -- -- -- --
------- --- ------- ---- ------- ----
Total income tax expense......... $ 2,967 38% $ 7,024 37% $11,432 38.4%
======= === ======= ==== ======= =====
Income tax expense attributable to:
Continuing operations................... $ 3,140 $ 7,024 $11,432
Discontinued operations................. (173) -- --
------- ------- -------
Total income tax expense......... $ 2,967 $ 7,024 $11,432
======= ======= =======
Deferred income tax assets and liabilities as of December 31, 1997 and 1998,
are as follows (in thousands):
1997 1998
-------- -------
Deferred tax liabilities:
Installment sales income....................... $ 30,207 $58,993
Deferred tax assets:
Other.......................................... 162 (110)
Alternative minimum tax credit................. 1,500 5,417
Net operating loss carryforward................ 14,508 32,162
-------- -------
Total deferred tax assets.............. 16,170 37,469
-------- -------
Net deferred tax liability............. $ 14,037 $21,524
======== =======
The Company reports substantially all Vacation Interval sales which it
finances on the installment method for federal income tax purposes. Under the
installment method, the Company does not recognize income on sales of Vacation
Intervals until the installment payments on customer receivables are received by
the Company. Interest will be 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 which
would be paid on the deferred taxes related to the installment method. The
amount of interest expense is not estimable as of December 31, 1998.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of the
deferred income which results from the installment sales treatment of Vacation
Interval sales for regular tax purposes. The current AMT payable balance was
adjusted in 1997 to reflect the change in method of accounting for installment
sales under AMT granted by the Internal Revenue Service, effective as of January
1, 1997. As a result, the Company's alternative minimum taxable income for 1997
through 2000 was or will be increased each year by approximately $9 million per
year, which will result in the Company paying substantial additional federal and
state taxes in these years. The AMT liability creates a deferred tax asset which
can be used to offset any future tax liability from regular federal income tax.
This deferred tax asset has an unlimited carryover period.
The net operating losses ("NOL") expire between 2007 through 2018.
Realization of the deferred tax assets arising from net operating losses is
dependent on generating sufficient taxable income prior to the expiration of the
loss carryforwards. Management believes that it will be able to utilize its net
operating losses from normal operations or in the event an ownership change
should occur which could limit the utilization of the NOL; and the Company 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.
The following are the expiration dates and the approximate net operating
loss carryforwards at December 31, 1998 (in thousands):
EXPIRATION DATES
----------------
2007...................................... $ 315
2008...................................... --
2009...................................... 1,385
2010...................................... 5,353
2011...................................... 4,239
2012...................................... 19,514
2018...................................... 54,821
-------
$85,627
=======
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7. DEBT
Loans, notes payable, capital lease obligations, and senior subordinated
notes as of December 31, 1997 and 1998 (in thousands):
1997 1998
------- --------
$60 million revolving loan agreement, which contains certain financial
covenants, due December 1999, 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 2.55%............. $ 1,529 $ 11,210
$40 million revolving loan agreement, which contains certain financial
covenants, due October 2005, principal and interest payable from the
proceeds obtained from customer notes receivable which are pledged as
collateral for the note, at an interest rate of LIBOR plus 2.5%.............. 22,137 29,856
$15 million revolving loan agreement which contains certain financial
covenants, due November 2002, principal and interest payable from the
proceeds obtained from customer notes receivable which are pledged as
collateral for the note, at an interest rate of Prime plus 2%................ 12,596 13,638
$15 million revolving construction loan due October 2000, with drawings
permitted until April 1999, a variable rate of LIBOR plus 3.5% secured by
land, construction in process, and customer notes receivable................. -- --
$12 million revolving loan agreement which contains certain financial
covenants, due May 2003, principal and interest payable from the proceeds
obtained from customer notes receivable which are pledged as collateral for
the note, at an interest rate of Base plus 2.75%............................. 4,122 --
$10 million line of credit due January 2000, with drawings permitted until
December 1998, at a variable rate of LIBOR plus 3%, secured by land,
improvements, and equipment of various Existing Resorts and New
Resorts...................................................................... 4,070 --
Various notes, due from December 1999 through October 2005,
collateralized by various assets with interest rates ranging from 4.2% to
14.0%....................................................................... 1,785 223
------- --------
Total notes payable.................................................. 46,239 54,927
Capital lease obligations...................................................... 2,632 3,181
------- --------
Total notes payable and capital lease obligations.................... 48,871 58,108
10 1/2% senior subordinated notes, due 2008, interest payable semi-
annually on April 1 and October 1, guaranteed by all of the
Company's present and future domestic restricted subsidiaries............. -- 75,000
------- --------
Total................................................................ $48,871 $133,108
======= ========
At December 31, 1998, prime rate was 7.75% and LIBOR rates were from 5.15% to
5.28%.
Certain of the above debt agreements include restrictions on the Company's
ability to pay dividends based on minimum levels of net income and cash flow.
The debt agreements contain additional covenants including requirements that the
Company (i) preserve and maintain the collateral securing the loans; (ii) pay
all taxes and other obligations relating to the collateral; and (iii) refrain
from selling or transferring the collateral or permitting any encumbrances on
the collateral. Such credit facilities also contain operating covenants
requiring the Company to (i) maintain an aggregate minimum tangible net worth
ranging from $12 million to $67 million, minimum liquidity, including a debt to
equity ratio of not greater than 2.5 to 1, a senior debt to equity ratio of not
greater than 2.0 to 1, and a consolidated cash flow to consolidated interest
expense ratio of at least 2.0 to 1; (ii) maintain its legal existence and be in
good standing in any jurisdiction where it conducts business; (iii) remain in
the active management of the Resorts; and (iv) refrain from modifying or
terminating certain timeshare documents.
Principal maturities of loans, notes payable, capital lease obligations, and
senior subordinated notes are as follows at December 31, 1998 (in thousands):
1999......................... $ 18,965
2000......................... 8,275
2001......................... 8,390
2002......................... 8,216
2003......................... 4,690
Thereafter................... 84,572
--------
Total.............. $133,108
========
Total interest expense for the years ended December 31, 1996, 1997, and 1998
was $4.8 million, $4.7 million, and $7.1 million, respectively. Interest of
$711,000, $823,000, and $2.7 million was capitalized during the years ended
1996, 1997, and 1998, respectively.
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70
As of December 31, 1998, approximately $89 million of assets of the Company
were pledged as collateral.
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has been named a defendant in
certain lawsuits. It is the opinion of the Company's management that the outcome
of the suits now pending will not have a material adverse effect on the
operations, cash flows, or the financial condition of the Company.
Prior to 1996, the Company sold certain of its notes receivable with
recourse to third parties and affiliated parties. The Company has a contingent
liability for the notes receivable sold with recourse. The total amount of the
contingent liability was equal to the uncollected balance of the notes as of
December 31, 1998. The Company's management considers both pledged and sold with
recourse notes receivable in the Company's allowance for uncollectible notes.
The Company has entered into noncancelable operating leases covering office
and storage facilities and small equipment which will expire at various dates
through 2003. The total rental expense incurred during the years ended December
31, 1996, 1997, and 1998, was $1.7 million, $2.0 million, and $4.8 million,
respectively. The Company has also acquired equipment by entering into capital
leases. The future minimum annual commitments for the noncancelable lease
agreements are as follows at December 31, 1998 (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
1999............................................... $ 1,446 $ 2,014
2000............................................... 1,285 1,836
2001............................................... 797 1,518
2002............................................... 203 962
2003............................................... -- 130
------- ---------
Total minimum future lease payments................ 3,731 $ 6,460
=========
Less amounts representing interest................. (550)
-------
Present value of future minimum lease payments..... $ 3,181
=======
Equipment acquired under capital leases consists of the following at
December 31, 1997 and 1998 (in thousands):
1997 1998
------- -------
Amount of equipment under capital leases......................... $ 4,743 $ 3,627
Less accumulated depreciation.................................... (861) (862)
------- -------
$ 3,882 $ 2,765
======= =======
Periodically, the Company enters into employment agreements with certain
executive officers which provide for minimum annual base salaries and other
fringe benefits as determined by the Board of Directors of the Company. Certain
of these agreements provide for bonuses based on the Company's operating
results. The agreements are for varying terms of up to three years and typically
can be terminated by either party upon 30 days notice to the other.
Certain employment agreements provide that such person will not directly or
indirectly compete with the Company in any county in which it conducts its
business or markets its products for a period of two years following the
termination of the agreement. These agreements also provide that such persons
will not influence any employee or independent contractor to terminate its
relationship with the Company or disclose any confidential information of the
Company.
As of December 31, 1998, the Company had construction commitments of
approximately $22.7 million.
9. EQUITY
The Company completed its initial public offering in June 1997 of 3,600,000
shares of common stock at $16.00 per share (the "IPO"). Costs incurred in
connection with the IPO were approximately $6.5 million. Net proceeds were used
primarily for the repayment of amounts owed to affiliates and notes payable to
third parties.
Effective April 3, 1998, the Company completed the sale of 2,000,000
shares of Company common stock at a price of $24.375 per share. On the same
date, the majority shareholder of the Company sold 875,000 additional shares of
Company common stock to the public.
70
71
Also effective April 3, 1998, the placement of $75 million aggregate
principal amount of 10 1/2% senior subordinated notes due 2008 ("Senior
Subordinated Notes") was completed by the Company. The Senior Subordinated Notes
are general unsecured obligations of the Company, ranking subordinate in right
of payment to all senior indebtedness of the Company, including indebtedness
under the Company's revolving credit facilities. The Company received proceeds
from these two offerings in an aggregate net amount of $118.9 million. Costs
incurred in connection with the offerings were approximately $4.4 million. The
Company has utilized the proceeds primarily for the repayment of notes payable
and capital lease obligations, and its construction and acquisition programs.
The following unaudited condensed pro forma financial information for the
years ended December 31, 1997 and 1998 was prepared from the consolidated
financial statements of the Company by adjusting for the effect of all public
offerings in 1997 and 1998, which includes the Company's initial public offering
completed in June 1997 and the equity and debt offerings completed in April
1998, including debt repaid from proceeds of such offerings, as if all of these
transactions had occurred on January 1, 1997. The pro forma information is for
informational purposes only and not necessarily indicative of the financial
position or results of operations that would have resulted had these offerings
actually occurred on January 1, 1997, nor does it purport to represent future
financial position or results of operations of the Company (in thousands, except
per share amounts):
PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS
OF
INCOME (UNAUDITED)
------------------
YEARS ENDED DECEMBER 31,
1997 1998
----------- -----------
Revenues ....................................... $ 84,811 $ 160,693
Expenses ....................................... 69,136 131,393
----------- -----------
Income before provision for income taxes .... 15,675 29,300
Provision for income taxes ..................... (5,800) (11,236)
----------- -----------
Net income .................................. $ 9,875 $ 18,064
=========== ===========
Net income per share:
Basic ....................................... $ 0.81 $ 1.37
=========== ===========
Diluted ..................................... $ 0.81 $ 1.37
=========== ===========
Weighted average shares outstanding:
Basic ....................................... 12,117,170 13,144,563
Diluted ..................................... 12,166,582 13,193,794
During 1997, the Company established a stock option plan (the "1997 Stock
Option Plan"). The 1997 Stock Option Plan provides for the award of nonqualified
stock options to directors, officers, and key employees, and the grant of
incentive stock options to salaried key employees. Nonqualified stock options
provide for the right to purchase common stock at a specified price which may be
less than or equal to fair market value on the date of grant (but not less than
par value). Nonqualified stock options may be granted for any term and upon such
conditions determined by the board of directors of the Company. The Company has
reserved 1,600,000 shares of common stock for issuance pursuant to the Company's
1997 Stock Option Plan.
Outstanding options have a graded vesting schedule, with equal installments
of shares vesting up through four years from the original grant date. These
options are exercisable at prices ranging from $16.00 to $25.50 per share and
expire 10 years from the date of grant.
Stock option transactions during 1997 and 1998 are summarized as follows:
1997 1998
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE PER SHARE OF SHARES PRICE PER SHARE
--------- --------------- --------- ---------------
Options outstanding, beginning of year... -- -- 863,000 $ 17.93
Granted.................................. 877,000 $ 17.90 685,000 $ 19.19
Exercised................................ -- -- -- --
Forfeited................................ (14,000) $ 16.00 (268,000) $ 22.58
-------- -------- --------- --------
Options outstanding, end of year......... 863,000 $ 17.93 1,280,000 $ 17.63
======== ======== ========= ========
Exercisable, end of year................. -- -- 215,750 $ 17.93
======== ======== ========= ========
For stock options outstanding at December 31, 1998:
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WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER FAIR VALUE AVERAGE REMAINING
RANGE OF EXERCISE PRICES OF SHARES OF OPTIONS EXERCISE PRICE LIFE IN YEARS
------------------------ --------- ---------- -------------- -------------
$16.00 - $25.50 ........ 1,280,000 $ 12.06 $ 17.63 9
The Company has adopted the disclosure-only provisions of Statement of
Financial Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"). The Company applies the accounting methods of Accounting Principles
Board Opinion No. 25 ("APB No. 25") and related Interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
the stock options. Had compensation costs for the options been determined based
on the fair value at the grant date for the awards in 1997 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net income and net income per
share would have been the pro forma amounts indicated below (in thousands,
except per share amounts):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
Net income-- as reported............................... $11,960 $18,378
Net income-- pro forma................................. 11,404 16,374
Net income per share-- as reported:
Basic and diluted.................................... 1.22 1.45
Net income per share-- pro forma:
Basic................................................ 1.17 1.30
Diluted.............................................. 1.16 1.29
The fair value of the stock options granted are estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 56.5% and 69.6% for 1997 and 1998,
respectively, risk-free interest rate of 6.625% and 6.5% for 1997 and 1998,
respectively, expected life of 7 years for both 1997 and 1998, and no
distribution yield for both 1997 and 1998.
10. RELATED PARTY TRANSACTIONS
Each timeshare owners association has entered into a management agreement,
which authorizes the Management Clubs to manage the resorts on a centralized and
collective basis. The Management Clubs, in turn, have entered into management
agreements with the Company, whereby the Company manages the operations of the
resorts. Pursuant to the management agreements, the Company receives a
management fee equal to the lesser of 15% of gross revenues for Silverleaf Club
and Oak N' Spruce Club and 10% to 15% of dues collected for owners associations
within Crown Club or the net income of each Management Club; however, if the
Company does not receive the aforementioned maximum fee, such deficiency is
deferred for payment in succeeding year(s), subject again to the net income
limitation. The Silverleaf Club Management Agreement was entered into in March
1990, has a ten year term, and will continue year-to-year thereafter unless
cancelled by either party. Oak N' Spruce Club was legally merged into a Club
within Silverleaf Club effective January 1999. Crown Club consists of several
individual Club agreements which have terms of two to five years with a minimum
of two renewal options remaining. During the years ending December 31, 1996,
1997, and 1998, the Company recorded management fees of $2.2 million, $2.3
million, and $2.5 million, respectively, in management fee income.
The direct expenses of operating the resorts are paid by the Management
Clubs. To the extent the Management Clubs provide payroll, administrative, and
other services that directly benefit the Company, a separate allocation charge
is generated and paid by the Company to the Management Clubs. During the years
ended December 31, 1996, 1997, and 1998, the Company incurred $2.1 million, $2.6
million, and $5.8 million, respectively, of expenses under these agreements. At
December 31, 1997 and 1998, the net receivable from the Management Clubs totaled
$1.3 million and $4.1 million, respectively. The amounts are included in amounts
due from affiliates.
The Company incurred and made payments to Recreational Consultants, Inc., an
entity of which an officer of the Company is the principal. Amounts paid under
this agreement totaled $539,000, $302,000, and $736,000 during the years ended
December 31, 1996, 1997, and 1998, respectively.
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The following schedule represents amounts due from affiliates at December
31, 1997 and 1998 (in thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Timeshare owners associations and other, net .... $ 107 $ (33)
Amount due from Silverleaf Club ................. 1,282 2,895
Amount due from Oak N' Spruce Club .............. -- 889
Amount due from Crown Club ...................... -- 364
------- -------
Total amounts due from affiliates ..... $ 1,389 $ 4,115
======= =======
During 1997, the Company paid off affiliate debt and accrued interest
totaling approximately $15.0 million and received payments of approximately $5.0
million of affiliate notes receivable and accrued interest. The payment to
affiliates was made with funds from the initial public offering in June 1997. On
the consolidated balance sheets dated December 31, 1997 and 1998, the remaining
due from affiliates relates to the Silverleaf Club, Oak N' Spruce Club, Crown
Club, and the various homeowners' associations.
The Company agreed to sell to the principal shareholder the Company's
interest in a condominium and a residential dwelling at a price in excess of the
Company's carrying value. As of December 31, 1996, the carrying value of these
assets totaled approximately $450,000. In September 1997, the principal
shareholder paid the Company $508,000 for these assets.
The Company has entered into a ten year lease agreement with the principal
shareholder for personal use of flood plain land adjacent to one of the
Company's resorts in exchange for an annual payment equal to the property taxes
attributable to the land.
In August 1997, subject to an employment agreement with an officer, the
Company purchased a house for $531,000 and leased the house, with an option to
purchase, to the officer for 13 months at a rental rate equal to the Company's
expense for interest, insurance, and taxes, which was approximately $3,000 per
month. In September 1998, the officer exercised his option to purchase the house
at the end of the lease for $531,000. The Company holds a second lien on the
house for $128,000, which is still owed to the Company by the officer at 8% per
annum.
In February 1998, the Company paid $250,000 for all of the outstanding stock
of a marketing company, the President and sole shareholder of which
simultaneously became an employee of the Company.
In June 1998, the Company entered an employment agreement, whereby the
Company paid $108,000 for an employee's condominium in Branson, Missouri, upon
his relocation to Dallas, Texas, and will pay $500,000 over a three-year period
as compensation for and in consideration of the exclusivity of his services.
Prior to becoming an employee in June 1998, the Company paid this employee's
former architectural firm $421,000, $401,000, and $246,000, during 1996, 1997,
and 1998, respectively, for architectural services rendered to the Company.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, other receivables, amounts
due from or to affiliates, and accounts payable and accrued expenses
approximates fair value due to the relatively short term nature of the financial
instruments. The carrying value of the notes receivable approximates fair value
because the weighted average interest rate on the portfolio of notes receivable
approximates current interest rates to be received on similar current notes
receivable. The carrying value of loans, notes payable, Senior Subordinated
Notes, and capital lease obligations approximates their fair value because the
interest rates on these instruments are adjustable or approximate current
interest rates charged on similar current borrowings. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
12. DISCONTINUED OPERATIONS
The Company adopted a plan on December 31, 1996, to discontinue its
development and sale of condominiums by CBI. All anticipated future costs of
carrying and selling the remaining inventory of CBI were accrued as of December
31, 1996. Based on the formal plan adopted by the Company, substantially all
assets were sold and liabilities repaid by December 31, 1997, and no accrual for
losses was required.
73
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13. ACQUISITIONS
In August 1997, the Company acquired certain land and amenities located near
St. Louis, Missouri, and Chicago, Illinois, for $2.9 million. The Company has
developed these properties as Drive-to Resorts.
In November 1997, the Company acquired a parcel of land near the "strip" in
Las Vegas, Nevada, for $2.7 million. This property is intended for development
as a new Destination Resort.
In December 1997, the Company acquired the Oak N' Spruce resort in the
Berkshire Mountains of western Massachusetts for $5.1 million as a new
Destination Resort (originally intended to be a Drive-to Resort) to serve the
greater New York City market. The Company plans additional development at the
Oak N' Spruce resort.
In December 1997, the Company acquired a tract of land in Galveston, Texas,
for approximately $485,000; and in February 1998, the Company acquired another
tract of land in Galveston for approximately $1.2 million. The Company intends
to develop both of these tracts of land as a new beach-front Gulf Coast
Destination Resort.
In May 1998, the Company consummated an agreement with Crown Resort Co., LLC
("Crown") acquiring timeshare management rights and unsold Vacation Intervals at
eight resorts in Alabama, Mississippi, North Carolina, Pennsylvania, South
Carolina, Tennessee, and Texas for $4.8 million. The acquisition was accounted
for under the purchase method of accounting.
The Company acquired a golf course and undeveloped land near Atlanta,
Georgia, for approximately $4.2 million. The undeveloped land was acquired in
three parcels between September 1998 and December 1998 for $804,000 and the golf
course was acquired in October 1998 for $3.4 million. The Company also acquired
undeveloped land near Kansas City, Missouri, for approximately $1.5 million in
September 1998 and acquired a tract of land in Philadelphia, Pennsylvania, for
approximately $1.9 million in December 1998. The Company will develop all three
properties as Drive-to Resorts. These acquisitions are accounted for under the
purchase method of accounting based on preliminary information, and are subject
to final allocation of purchase price.
14. SUBSIDIARY GUARANTEES
All subsidiaries of the Company have guaranteed the $75.0 million of Senior
Subordinated Notes (see Note 9). The separate financial statements and other
disclosures concerning each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented herein because management had determined that
such information is not material to investors. The guarantee of each Guarantor
Subsidiary is full and unconditional and joint and several, and each Guarantor
Subsidiary is a wholly-owned subsidiary of the Company, and together comprise
all direct and indirect subsidiaries of the Company. During the second quarter
of 1998, the Company liquidated several subsidiaries with nominal operations.
Combined summarized operating results of the Guarantor Subsidiaries for the
years ended December 31, 1996, 1997, and 1998 are as follows (in thousands):
1996 1997 1998
-------- ------- ------
Revenues................................................ $ 761 $ 407 $ 135
======== ====== ======
Loss from continuing operations, before income taxes.... $ (346) $ (140) $ (353)
======== ====== ======
Net loss from discontinued operations, net of a
benefit of $257 in 1996............................... $ (438) $ -- $ --
======== ====== ======
Net loss................................................ $ (656) $ (88) $ (217)
======== ====== ======
Combined summarized balance sheet information of the Guarantor Subsidiaries
as of December 31, 1997 and 1998 is as follows (in thousands):
1997 1998
------- -------
Land, equipment, inventories, and utilities, net.. $ 1,985 $ 8
Other assets...................................... 825 34
------- -------
Total assets............................ $ 2,810 $ 42
======= =======
Investment by parent (includes equity and amounts
due to parent).................................. $ 2,810 $ 40
Other liabilities................................. -- 2
------- -------
Total liabilities and equity............ $ 2,810 $ 42
======= =======
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15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations for 1998 and 1997 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Total revenues
1998....................................................... $ 31,029 $ 43,161 $ 45,219 $ 41,346
======== ======== ======== ========
1997....................................................... $ 17,926 $ 23,042 $ 22,903 $ 21,187
======== ======== ======== ========
Total costs and operating expenses
1998....................................................... $ 25,257 $ 34,275 $ 36,364 $ 35,049
======== ======== ======== ========
1997....................................................... $ 13,713 $ 17,796 $ 16,993 $ 17,572
======== ======== ======== ========
Income before income taxes
1998....................................................... $ 5,772 $ 8,887 $ 8,854 $ 6,297
======== ======== ======== ========
1997....................................................... $ 4,213 $ 5,246 $ 5,909 $ 3,616
======== ======== ======== ========
Net income
1998....................................................... $ 3,574 $ 5,500 $ 5,420 $ 3,884
======== ======== ======== ========
1997....................................................... $ 2,654 $ 3,304 $ 3,723 $ 2,279
======== ======== ======== ========
Earnings per common share (basic)
1998....................................................... $ 0.32 $ 0.42 $ 0.42 $ 0.30
======== ======== ======== ========
1997....................................................... $ 0.34 $ 0.38 $ 0.33 $ 0.20
======== ======== ======== ========
Earnings per common share (diluted)
1998....................................................... $ 0.31 $ 0.41 $ 0.42 $ 0.30
======== ======== ======== ========
1997....................................................... $ 0.34 $ 0.38 $ 0.33 $ 0.20
======== ======== ======== ========
16. SUBSEQUENT EVENTS
Effective January 1, 1999, the Company established the Silverleaf Resorts,
Inc. 401(k) plan (the "Plan"), a qualified defined contribution retirement plan
covering employees 21 years of age or older who have completed one year of
service. The Plan allows eligible employees to defer receipt of up to 15% of
their compensation and contribute such amounts to various investment funds. The
employee contributions vest immediately. The Company is not required by the Plan
to match employee contributions, however, may do so on a discretionary basis.
The Company, however, will incur the administrative costs of maintaining the
Plan.
In January 1999, the Company acquired undeveloped land near The Villages
resort in Tyler, Texas, for approximately $970,000.
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Charter of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
3.2 -- Bylaws of Silverleaf Resorts, Inc. (incorporated by
reference to Exhibit 3.2 to Registrant's Form 10-K for
year ended December 31, 1997).
4.1 -- Form of Stock Certificate of Registrant (incorporated
by reference to Exhibit 4.1 to Amendment No. 1 dated
May 16, 1997 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
4.2 -- Indenture dated April 1, 1998, between the Company and
Norwest Bank Minnesota, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.3 -- Certificate No. 001 of 10 1/2% Senior Subordinated
Notes due 2008 in the amount of $75,000,000
(incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for quarter ended March 31,
1998).
4.4 -- Subsidiary Guarantee dated April 8, 1998 by Silverleaf
Berkshires, Inc.; Bull's Eye Marketing, Inc.;
Silverleaf Resort Acquisitions, Inc.; Silverleaf
Travel, Inc.; Database Research, Inc.; and Villages
Land, Inc. (incorporated by reference to Exhibit 4.3 to
Registrant's Form 10-Q for the quarter ended March 31,
1998).
10.1 -- Form of Registration Rights Agreement between
Registrant and Robert E. Mead (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.2.1 -- Employment Agreement between Registrant and Robert E.
Mead (incorporated by reference to Exhibit 10.2.1 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.2.2 -- Employment Agreement between Registrant and David T.
O'Connor (incorporated by reference to Exhibit 10.2.2
to Amendment No. 1 dated May 16, 1997 to Registrant's
Registration Statement on Form S-1, File No.
333-24273).
10.2.3 -- Employment Agreement between Registrant and Sharon K.
Brayfield (incorporated by reference to Exhibit 10.2.3
to Registrant's Registration Statement on Form S-1,
File No. 333-24273).
10.2.4 -- Employment Agreement between Registrant and Thomas
Franks (incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.2.5 -- Memorandum Agreement, dated August 21, 1997, between
Registrant and Thomas C. Franks (incorporated by
reference to Exhibit 10.7 to Registrant's Form 10-Q for
quarter ended September 30, 1997).
10.2.6 -- Employment Agreement, dated January 16, 1998, between
Registrant and Allen L. Hudson (incorporated by
reference to Exhibit 10.2.6 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.2.7 -- Employment Agreement, dated January 20, 1998, between
Registrant and Jim Oestreich (incorporated by reference
to Exhibit 10.2.7 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.2.8 -- Employment Agreement with Harry J. White, Jr.
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.2.9 -- Amendment to Employment Agreement with Sharon K.
Brayfield (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.2.10 -- First Amendment dated June 12, 1998, to Employment
Agreement with Jim Oestreich (incorporated by reference
to Exhibit 10.7 to Registrant's Form 10-Q for quarter
ended September 30, 1998).
10.2.11 -- Second Amendment dated September 29, 1998, to
Employment Agreement with Jim Oestreich (incorporated
by reference to Exhibit 10.8 to Registrant's Form 10-Q
for quarter ended September 30, 1998).
10.2.12 -- First Amendment dated August 31, 1998, to Employment
Agreement with David T. O'Connor (incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q
for quarter ended September 30, 1998).
10.3 -- 1997 Stock Option Plan of Registrant (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 dated May
16, 1997 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.3.1 -- Nonqualified Stock Option Agreement (David T. O'Connor)
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended June 30,
1997).
10.3.2 -- Incentive Stock Option Agreement (Larry H. Fritz)
(incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended June 30,
1997).
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77
10.3.3 -- Non-Qualified Stock Option Agreement (Thomas Franks)
(incorporated by reference to Exhibit 10.8 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.4 -- Non-Qualified Stock Option Agreement (Stuart M. Bloch)
(incorporated by reference to Exhibit 10.9 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.5 -- Non-Qualified Stock Option Agreement (James B. Francis,
Jr.) (incorporated by reference to Exhibit 10.10 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.6 -- Non-Qualified Stock Option Agreement (Michael A.
Jenkins) (incorporated by reference to Exhibit 10.11 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.3.7 -- Non-Qualified Stock Option Agreement, dated January 20,
1998, between Registrant and Jim Oestreich
(incorporated by reference to Exhibit 10.3.9 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.3.8 -- Non-Qualified Stock Option Agreement dated June 25,
1998, with Thomas C. Franks (incorporated by reference
to Exhibit 10.3 to Registrant's Form 10-Q for quarter
ended June 30, 1998).
10.3.9 -- Incentive and Non-Qualified Stock Option Agreement
dated June 25, 1998, with Sharon K. Brayfield
(incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.3.10 -- Non-Qualified Stock Option Agreement dated June 29,
1998, with Harry J. White, Jr. (incorporated by
reference to Exhibit 10.5 to Registrant's Form 10-Q for
quarter ended June 30, 1998).
10.3.11 -- Non-Qualified Stock Option Agreement dated August 31,
1998, with David T. O'Connor (incorporated by reference
to Exhibit 10.11 to Registrant's Form 10-Q for quarter
ended September 30, 1998).
10.4 -- Silverleaf Club Agreement between the Silverleaf Club
and the resort clubs named therein (incorporated by
reference to Exhibit 10.4 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.5 -- Management Agreement between Registrant and the
Silverleaf Club (incorporated by reference to Exhibit
10.5 to Registrant's Registration Statement on Form
S-1, File No. 333-24273).
10.6 -- Revolving Loan and Security Agreement, dated October
1996, by CS First Boston Mortgage Capital Corp.
("CSFBMCC") and Silverleaf Vacation Club, Inc.
(incorporated by reference to Exhibit 10.6 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.7 -- Amendment No. 1 to Revolving Loan and Security
Agreement, dated November 8, 1996, between CSFBMCC and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.7 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.8 -- Loan and Security Agreement among Textron Financial
Corporation ("Textron"), Ascension Resorts, Ltd. and
Ascension Capital Corporation, dated August 15, 1995
(incorporated by reference to Exhibit 10.9 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.9 -- First Amendment to Loan and Security Agreement, dated
December 28, 1995, between Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.10 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.10 -- Second Amendment to Loan and Security Agreement, dated
October 31, 1996, executed by Textron and Silverleaf
Vacation Club, Inc. (incorporated by reference to
Exhibit 10.11 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.11 -- Restated and Amended Loan and Security Agreement, dated
December 27, 1995, between Heller Financial, Inc.
("Heller") and Ascension Resorts, Ltd. (incorporated by
reference to Exhibit 10.12 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.12 -- Loan and Security Agreement, dated December 27, 1995,
executed by Ascension Resorts, Ltd. and Heller
(incorporated by reference to Exhibit 10.13 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.13 -- Amendment to Restated and Amended Loan and Security
Agreement, dated August 15, 1996, between Heller and
Silverleaf Vacation Club, Inc. (incorporated by
reference to Exhibit 10.14 to Registrant's Registration
Statement on Form S-1, File No. 333-24273).
10.14 -- Form of Indemnification Agreement (between Registrant
and all officers, directors, and proposed directors)
(incorporated by reference to Exhibit 10.18 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
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78
10.15 -- Resort Affiliation and Owners Association Agreement
between Resort Condominiums International, Inc.,
Ascension Resorts, Ltd., and Hill Country Resort
Condoshare Club, dated July 29, 1995 (similar
agreements for all other Existing Resorts)
(incorporated by reference to Exhibit 10.19 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.16 -- First Amendment to Silverleaf Club Agreement, dated
March 28, 1990, among Silverleaf Club, Ozark Mountain
Resort Club, Holiday Hills Resort Club, the Holly Lake
Club, The Villages Condoshare Association, The Villages
Club, Piney Shores Club, and Hill Country Resort
Condoshare Club (incorporated by reference to Exhibit
10.22 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.17 -- First Amendment to Management Agreement, dated January
1, 1993, between Master Endless Escape Club and
Ascension Resorts, Ltd. (incorporated by reference to
Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.18 -- Contract of Sale, dated May 2, 1997, between Registrant
and third-party (incorporated by reference to Exhibit
10.24 to Amendment No. 1 dated May 16, 1997 to
Registrant's Registration Statement on Form S-1, File
No. 333-24273).
10.19 -- Amendment to Loan Documents, dated December 27, 1996,
among Silverleaf Vacation Club, Inc., Ascension
Resorts, Ltd., and Heller Financial, Inc. (incorporated
by reference to Exhibit 10.25 to Amendment No. 1 dated
May 16, 1997 to Registrant's Registration Statement on
Form S-1, File No. 333-24273).
10.20 -- Contract of Sale between Thousand Trails, Inc. and
Registrant (approximately 98.475 acres, Galveston
County, Texas) (incorporated by reference to Exhibit
10.1 to Registrant's Form 10-Q for quarter ended
September 30, 1997).
10.21 -- Contract of Sale between R.J. Novelli, Sr., et al and
Registrant (approximately 21.5 acres, Galveston County,
Texas) (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.22 -- Contract of Sale between Harmon/Koval Limited Liability
Company and Registrant (2.1 acres, Clark County,
Nevada) (incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.23 -- Second Amendment to Restated and Amended Loan and
Security Agreement between Heller Financial, Inc. and
Registrant ($40 million revolving credit facility)
(incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.24 -- Construction Loan Agreement between Heller Financial
Inc. and Registrant ($10 million revolving construction
loan facility) (incorporated by reference to Exhibit
10.5 to Registrant's Form 10-Q for quarter ended
September 30, 1997).
10.25 -- Real Estate Contract of Sale dated September 30, 1997,
between Registrant and Robert E. Mead (incorporated by
reference to Exhibit 10.12 to Registrant's Form 10-Q
for quarter ended September 30, 1997).
10.26 -- Silverleaf Club Agreement dated September 25, 1997,
between Registrant and Timber Creek Resort Club
(incorporated by reference to Exhibit 10.13 to
Registrant's Form 10-Q for quarter ended September 30,
1997).
10.27 -- Loan Agreement, dated December 19, 1997, between Credit
Suisse First Boston Mortgage Capital, L.L.C. and
Registrant (incorporated by reference to Exhibit 10.31
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.28 -- Amendment to Loan Documents, dated December 22, 1997,
between Registrant and Credit Suisse First Boston
Mortgage Capital, L.L.C. (incorporated by reference to
Exhibit 10.32 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.29 -- Second Amendment to Management Agreement, dated
December 31, 1997, between Silverleaf Club and
Registrant (incorporated by reference to Exhibit 10.33
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.30 -- Silverleaf Club Agreement, dated January 5, 1998,
between Silverleaf Club and Oak N' Spruce Resort Club
(incorporated by reference to Exhibit 10.34 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.31 -- Contract of Sale, dated November 13, 1997, between Oak
N' Spruce Management, Inc., Beartown Development, Inc.,
Bruce Hagedorn and Doug Richie, and Registrant
(incorporated by reference to Exhibit 10.35 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
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10.32 -- Contract of Sale, dated January 12, 1998, between Crown
Resort Co. L.L.C., Richard W. Dickson and Robert G.
Garner, and Registrant (incorporated by reference to
Exhibit 10.36 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.33 -- Contract of Sale, dated February 18, 1998, between
Registrant and Michael J. McDermott (incorporated by
reference to Exhibit 10.37 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.34 -- Contract of Sale, dated February 19, 1998, between
Registrant and Lee R. Roper (incorporated by reference
to Exhibit 10.38 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.35 -- Contract of Sale, dated February 19, 1998, between
Registrant and J. Phillip Ballard, Jr., and Eagle
Greens Ltd. (incorporated by reference to Exhibit 10.39
to Registrant's Annual Report on Form 10-K for year
ended December 31, 1997).
10.36 -- Stock Purchase Agreement, dated January 15, 1998,
between Silverleaf Resorts, Inc. and Jim Oestreich
(incorporated by reference to Exhibit 10.40 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.37 -- Contract of Sale, dated May 2, 1997, between Registrant
and Thousand Trails, Inc. (incorporated by reference to
Exhibit 10.41 to Registrant's Annual Report on Form
10-K for year ended December 31, 1997).
10.38 -- First Amendment to Contract of Sale, dated July 25,
1997, between Registrant and Thousand Trails, Inc.
(incorporated by reference to Exhibit 10.42 to
Registrant's Annual Report on Form 10-K for year ended
December 31, 1997).
10.39 -- Master Club Agreement, dated November 13, 1997, between
Master Club and Fox River Resort Club (incorporated by
reference to Exhibit 10.43 to Registrant's Annual
Report on Form 10-K for year ended December 31, 1997).
10.40 -- Letter Agreement dated March 16, 1998, between the
Company and Heller Financial, Inc. (incorporated by
reference to Exhibit 10.44 to Amendment No. 1 to Form
S-1, File No. 333-47427 filed March 16, 1998).
10.41 -- Bill of Sale and Blanket Assignment dated May 28, 1998,
between the Company and Crown Resort Co., LLC
(incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended June 30,
1998).
10.42 -- Contract of Sale by and between Terry Adair and George
R. Bedell, as Trustee, dated March 27, 1998
(incorporated by reference to Exhibit 10.1 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.43 -- Contract of Sale by and between Great Atlanta's
Properties Corp. and George R. Bedell, as Trustee,
dated August 12, 1998 (incorporated by reference to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.44 -- Contract of Sale, dated February 25, 1998 (as amended
in October 1998), by and between the Company and J.
Phillip Ballard, Jr. and Eagle Greens Ltd., f/k/a
Northeast Georgia Recreational Development Co., Inc.
(incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.45 -- Amendment to Contract of Sale, dated October 14, 1998,
by and between the Company and J. Phillip Ballard, Jr.
and Eagle Greens, Ltd., f/k/a Northeast Georgia
Recreational Development Co., Inc. (incorporated by
reference to Exhibit 10.4 to Registrant's Form 10-Q for
quarter ended September 30, 1998).
10.46 -- Second Amendment to Contract of Sale, dated October 14,
1998, by and between the Company and J. Phillip
Ballard, Jr. and Eagle Greens Ltd., f/k/a Northeast
Georgia Recreational Development Co., Inc.
(incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.47 -- Management Agreement dated October 13, 1998, by and
between the Company and Eagle Greens, Ltd.
(incorporated by reference to Exhibit 10.6 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
10.48 -- One to Four Family Residential Contract (Resale)
between the Company and Thomas C. Franks, dated July
30, 1998 (incorporated by reference to Exhibit 10.12 to
Registrant's Form 10-Q for quarter ended September 30,
1998).
*10.49 -- Contract of Sale dated April 28, 1998, by and between
Beech Mountain Lakes Corp. and the Company.
*10.50 -- Amendment to Contract of Sale dated November 24, 1998,
by and between Beech Mountain Lakes Corp. and the
Company.
*10.51 -- Contract of Sale dated September 30, 1998, by and
between National American Corp. and the Company.
*12.1 -- Statement concerning computation of ratios of earnings
to fixed charges
79
80
*21.1 -- Subsidiaries of Silverleaf Resorts, Inc.
*27.1 -- Financial Data Schedule.
- ------------
* Filed herewith
(b) No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1998.
(c) The exhibits required by Item 601 of Regulation S-K have been listed
above.
(d) Financial Statement Schedules
None. Schedules are omitted because of the absence of the conditions under
which they are required or because the information required by such omitted
schedules is set forth in the consolidated financial statements or the notes
thereto.
80