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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR o
    
    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.  TEXAS
(State of incorporation)
    
    75-2259890
(I.R.S. Employer
Identification No.)
 1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code) 214-631-1166
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x     No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o     No x Number of shares of common stock outstanding of the issuers Common Stock, par
value $0.01 per share, as of May 12, 2004: 36,843,572




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Explanatory Note CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION
TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS
QUALIFIED BY THE WORDS BELIEVE, INTEND, ANTICIPATE, EXPECTS, AND WORDS
OF SIMILAR IMPORT, ARE FORWARD-LOOKING STATEMENTS AND ARE THUS PROSPECTIVE.
THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY REGARDING THE
COMPANYS FUTURE PROFITABILITY, PROSPECTS, AND RESULTS OF OPERATIONS. ALL SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE
RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS,
UNCERTAINTIES, AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING CAUTIONARY
STATEMENTS BEGINNING ON PAGE 22 OF THE COMPANYS ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003. ALL FORWARD-LOOKING STATEMENTS ARE MADE
AS OF THE DATE OF THIS REPORT ON FORM 10-Q AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS
WHY ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN THE FORWARD-LOOKING
STATEMENTS. 1




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SILVERLEAF RESORTS,
INC. INDEX PagePART I.
    
    FINANCIAL INFORMATION (Unaudited)Item 1.
    
    Consolidated Statements of Income for the three months endedMarch 31, 2004 and 2003
    
    
    3Consolidated Balance Sheets as of March 31, 2004 andDecember 31, 2003
    
    
    4Consolidated Statement of Shareholders' Equity for thethree months ended March 31, 2004
    
    
    5Consolidated Statements of Cash Flows for the threemonths ended March 31, 2004 and 2003
    
    
    6Notes to the Condensed Consolidated Financial Statements.
    
    
    7Item 2.
    
    Management's Discussion and Analysis of Financial Condition andResults of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    23Item 5.
    
    Other Information
    
    
    23PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24Signatures
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




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PART I: FINANCIAL INFORMATION (UNAUDITED) 
 Item 1. Financial Statements SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003Revenues:Vacation Interval sales
    
    $
    31,987
    
    
    $
    28,557Sampler sales
    
    
    446
    
    
    
    485Total sales
    
    
    32,433
    
    
    
    29,042Interest income
    
    
    8,926
    
    
    
    8,768Management fee income
    
    
    300
    
    
    
    471Gain on sales of notes receivable
    
    
    426
    
    
    
    1,934Other income
    
    
    1,019
    
    
    
    1,207Total revenues
    
    
    43,104
    
    
    
    41,422Costs and Operating Expenses:Cost of Vacation Interval sales
    
    
    6,035
    
    
    
    5,042Sales and marketing
    
    
    16,467
    
    
    
    16,299Provision for uncollectible notes
    
    
    6,400
    
    
    
    34,666Operating, general and administrative
    
    
    6,483
    
    
    
    6,891Depreciation and amortization
    
    
    1,096
    
    
    
    1,182Interest expense and lender fees
    
    
    4,282
    
    
    
    4,407Total costs and operating expenses
    
    
    40,763
    
    
    
    68,487Other Income:Gain on early extinguishment of debt
    
    
    
    
    
    
    1,257Total other income
    
    
    
    
    
    
    1,257Income (loss) before benefit (provision) for income taxes
    
    
    2,341
    
    
    
    (25,808
    )Benefit (provision) for income taxes
    
    
    3
    
    
    
    (13
    )Net income (loss)
    
    $
    2,344
    
    
    $
    (25,821
    )Basic income (loss) per share:
    
    $
    0.06
    
    
    $
    (0.70
    )Diluted income (loss) per share:
    
    $
    0.06
    
    
    $
    (0.70
    )Weighted average shares outstanding:Basic:
    
    
    36,841,557
    
    
    
    36,826,906Diluted:
    
    
    38,885,864
    
    
    
    36,826,906
 See notes to condensed consolidated financial statements. 3




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited) March 31,
    
    December 31,2004
    
    2003ASSETSCash and cash equivalents
    
    $
    5,000
    
    
    $
    4,093Restricted cash
    
    
    2,665
    
    
    
    1,624Notes receivable, net of allowance for uncollectible notes of
$48,565 and $48,372, respectively
    
    
    191,627
    
    
    
    193,379Accrued interest receivable
    
    
    2,098
    
    
    
    2,169Investment in Special Purpose Entity
    
    
    6,822
    
    
    
    6,053Amounts due from affiliates
    
    
    146
    
    
    
    150Inventories
    
    
    101,139
    
    
    
    101,399Land, equipment, buildings, and utilities, net
    
    
    26,899
    
    
    
    27,488Land held for sale
    
    
    2,991
    
    
    
    2,991Prepaid and other assets
    
    
    13,869
    
    
    
    12,441TOTAL ASSETS
    
    $
    353,256
    
    
    $
    351,787LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESAccounts payable and accrued expenses
    
    $
    7,643
    
    
    $
    6,705Accrued interest payable
    
    
    1,227
    
    
    
    1,087Amounts due to affiliates
    
    
    2,205
    
    
    
    656Unearned revenues
    
    
    3,904
    
    
    
    3,712Notes payable and capital lease obligations
    
    
    211,638
    
    
    
    215,337Senior subordinated notes
    
    
    36,591
    
    
    
    36,591Total Liabilities
    
    
    263,208
    
    
    
    264,088COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITYPreferred stock, 10,000,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 100,000,000 shares authorized,
37,249,006 shares issued, 36,843,572 shares outstanding at March 31,
2004, and 36,826,906 shares outstanding at December 31, 2003
    
    
    372
    
    
    
    372Additional paid-in capital
    
    
    116,806
    
    
    
    116,999Retained deficit
    
    
    (22,329
    )
    
    
    (24,673
    )Treasury stock, at cost, 405,434 shares at March 31, 2004 and 422,100
shares at December 31, 2003
    
    
    (4,801
    )
    
    
    (4,999
    )Total Shareholders Equity
    
    
    90,048
    
    
    
    87,699TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    353,256
    
    
    $
    351,787
 See notes to condensed consolidated financial statements. 4




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(in thousands, except share and per share amounts)
(Unaudited) Common StockNumber of
    
    $0.01
    
    Additional
    
    
    
    
    
    Treasury StockShares
    
    Par
    
    Paid-in
    
    RetainedIssued
    
    Value
    
    Capital
    
    Deficit
    
    Shares
    
    Cost
    
    TotalJanuary 1, 2004
    
    
    37,249,006
    
    
    $
    372
    
    
    $
    116,999
    
    
    $
    (24,673
    )
    
    
    (422,100
    )
    
    $
    (4,999
    )
    
    $
    87,699Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    16,666
    
    
    
    198
    
    
    
    5Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,344
    
    
    
    
    
    
    
    
    
    
    
    2,344March 31, 2004
    
    
    37,249,006
    
    
    $
    372
    
    
    $
    116,806
    
    
    $
    (22,329
    )
    
    
    (405,434
    )
    
    $
    (4,801
    )
    
    $
    90,048
 See notes to condensed consolidated financial statements. 5




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    2,344
    
    
    $
    (25,821
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Provision for uncollectible notes
    
    
    6,400
    
    
    
    34,666Gain on sales of notes receivable
    
    
    (426
    )
    
    
    (1,934
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    (1,257
    )Gain on sale of land held for sale
    
    
    
    
    
    
    (273
    )Proceeds from sales of notes receivable
    
    
    6,153
    
    
    
    19,532Depreciation and amortization
    
    
    1,096
    
    
    
    1,182Increase (decrease) in cash from changes in assets and liabilities:Restricted cash
    
    
    (1,041
    )
    
    
    1,834Notes receivable
    
    
    (11,520
    )
    
    
    (7,773
    )Accrued interest receivable
    
    
    71
    
    
    
    244Investment in Special Purpose Entity
    
    
    (769
    )
    
    
    (193
    )Amounts due to/from affiliates, net
    
    
    1,553
    
    
    
    (487
    )Inventories
    
    
    1,406
    
    
    
    (1,194
    )Prepaid and other assets
    
    
    (1,428
    )
    
    
    (552
    )Accounts payable and accrued expenses
    
    
    938
    
    
    
    290Accrued interest payable
    
    
    140
    
    
    
    (242
    )Unearned revenues
    
    
    192
    
    
    
    72Net cash provided by operating activities
    
    
    5,109
    
    
    
    18,094INVESTING ACTIVITIES:Purchases of land, equipment, buildings, and utilities
    
    
    (508
    )
    
    
    (282
    )Proceeds from sale of land held for sale
    
    
    
    
    
    
    2,880Net cash provided by (used in) investing activities
    
    
    (508
    )
    
    
    2,598FINANCING ACTIVITIES:Proceeds from borrowings from unaffiliated entities
    
    
    20,300
    
    
    
    24,132Payments on borrowings to unaffiliated entities
    
    
    (23,999
    )
    
    
    (43,198
    )Proceeds from exercise of stock options
    
    
    5
    
    
    
    Net cash used in financing activities
    
    
    (3,694
    )
    
    
    (19,066
    )Net change in cash and cash equivalents
    
    
    907
    
    
    
    1,626CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    4,093
    
    
    
    1,153End of period
    
    $
    5,000
    
    
    $
    2,779SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid, net of amounts capitalized
    
    $
    3,577
    
    
    $
    4,710
 See notes to condensed consolidated financial statements. 6




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Note 1  Background These condensed consolidated financial statements of Silverleaf Resorts, Inc.
and subsidiaries (the Company) presented herein do not include certain
information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
However, in the opinion of management, all adjustments considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in
the Companys Form 10-K for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission. The accounting policies used in preparing
these condensed consolidated financial statements are the same as those
described in such Form 10-K. Note 2  Significant Accounting Policies Summary Basis of Presentation The accompanying consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). In the opinion of the Company, the accompanying
consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations and changes in cash flows of the Company
and its subsidiaries. Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, excluding Silverleaf
Finance I, Inc., the Companys wholly-owned special purpose entity (SPE). All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements. Revenue and Expense Recognition A substantial portion of Vacation Interval
sales are made in exchange for mortgage notes receivable, which are secured by
a deed of trust on the Vacation Interval sold. The Company recognizes the sale
of a Vacation Interval under the accrual method after a binding sales contract
has been executed, the buyer has made a down payment of at least 10%, and the
statutory rescission period has expired. If all accrual method criteria are met
except that construction is not substantially complete, revenues are recognized
on the percentage-of-completion basis. Under this method, the portion of
revenue applicable to costs incurred, as compared to total estimated
construction and direct selling costs, is recognized in the period of sale. The
remaining amount is deferred and recognized as the remaining costs are
incurred. The deferral of sales and costs related to the
percentage-of-completion method is not significant. Certain Vacation Interval sales transactions are deferred until the minimum
down payment has been received. The Company accounts for these transactions
utilizing the deposit method. Under this method, the sale is not recognized, a
receivable is not recorded, and inventory is not relieved. Any cash received is
carried as a deposit until the sale can be recognized. When these types of
sales are cancelled without a refund, deposits forfeited are recognized as
income and the interest portion is recognized as interest income. In addition to sales of Vacation Intervals to new prospective owners, the
Company sells upgraded and additional Vacation Intervals to existing Silverleaf
Owners. Revenues are recognized on these upgrade Vacation Interval sales when
the criteria described above are satisfied. The revenue recognized is the net
of the incremental increase in the upgrade sales price and cost of sales is the
incremental increase in the cost of the Vacation Interval purchased. A provision for estimated customer returns is reported net against Vacation
Interval sales. Customer returns represent cancellations of sales transactions
in which the customer fails to make the first installment payment. The Company recognizes interest income as earned. Interest income is accrued on
notes receivable, net of an estimated amount that will not be collected, until
the individual notes become 90 days delinquent. Once a note 7




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becomes 90 days delinquent, the accrual of additional interest income ceases. Revenues related to one-time sampler contracts, which entitles the prospective
owner to sample a resort during certain periods, are recognized when earned.
Revenue recognition is deferred until the customer uses the stay, purchases a
Vacation Interval, or allows the contract to expire. The Company receives fees for management services provided to each timeshare
resorts owners association (a Club). These revenues are recognized on an
accrual basis in the period the services are provided if collection is deemed
probable. Utilities, services, and other income are recognized on an accrual basis in the
period service is provided. Sales and marketing costs are charged to expense in the period incurred.
Commissions, however, are recognized in the same period as the related sales. Cash and Cash Equivalents Cash and cash equivalents consist of all highly
liquid investments with an original maturity at the date of purchase of three
months or less. Cash and cash equivalents include cash, certificates of
deposit, and money market funds. Restricted Cash Restricted cash consists of certificates of deposit that
serve as collateral for construction bonds and cash restricted for repayment of
debt. Investment in Special Purpose Entity The Company is party to an $85 million
revolving credit agreement to finance Vacation Interval notes receivable
through an off-balance-sheet SPE. The Company accounts for and evaluates its
investment in the SPE in accordance with SFAS 140, EITF 99-20, and SFAS 115, as
applicable. Sales of notes receivable from the Company to its SPE that meet
certain underwriting criteria occur on a periodic basis. The SPE funds these
purchases through advances under a credit agreement arranged for this purpose.
The gain or loss on the sale is determined based on the proceeds received, the
fair value assigned to the investment in SPE, and the recorded value of notes
receivable sold. The fair value of the investment in the SPE is estimated
based on the present value of future expected cash flows back to the Company
from the notes receivable sold. The Company utilized the following key
assumptions to estimate the fair value of such cash flows: customer prepayment
rate  ranging from 2.3% to 4.3%; expected accounts paid in full as a result of
upgrades  ranging from 5.8% to 6.2%; expected credit losses  ranging from
5.6% to 8.1%; discount rate  ranging from 13.5% to 19%; base interest rate 
ranging from 3.3% to 4.4%; agent fee  ranging from 2% to 2.37%; and loan
servicing fees  1%. The Companys assumptions are based on experience with its
notes receivable portfolio, available market data, estimated prepayments, the
cost of servicing, and net transaction costs. Such assumptions are assessed
quarterly and, if necessary, adjustments are made to the carrying value of the
investment in SPE. The carrying value of the investment in SPE represents the
Companys maximum exposure to loss regarding its involvement with the SPE. Provision for Uncollectible Notes Such provision is recorded at an amount
sufficient to maintain the allowance for uncollectible notes at a level
management considers adequate to provide for anticipated losses resulting from
customers failure to fulfill their obligations under the terms of their notes.
Such allowance for uncollectible notes is adjusted based upon periodic analysis
of the notes receivable portfolio, historical credit loss experience, and
current economic factors. Credit losses take three forms. The first is the full cancellation of the note,
whereby the customer is relieved of the obligation and the Company recovers the
underlying inventory. The second form is a deemed cancellation, whereby the
Company records the cancellation of all notes that become 90 days delinquent,
net of notes that are no longer 90 days delinquent. The third form is the note
receivable reduction that occurs when a customer trades a higher value product
for a lower value product. In estimating the allowance, the Company projects
future cancellations, net of recovery of the related inventory, for each sales
year by using historical cancellations experience. The Company classifies the components of the provision for uncollectible notes
as either credit losses or customer returns (cancellations of sales whereby the
customer fails to make the first installment payment). The provision for
uncollectible notes pertaining to credit losses and customer returns are
classified in provision for uncollectible notes and Vacation Interval sales,
respectively. Inventories Inventories are stated at the lower of cost or market value. Cost
includes amounts for land, construction materials, direct labor and overhead,
taxes, and capitalized interest incurred in the construction or 8




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through the acquisition of resort dwellings held for timeshare sale. Timeshare
unit costs are capitalized as inventory and are allocated to Vacation Intervals
based upon their relative sales values. Upon sale of a Vacation Interval, these
costs are charged to cost of sales on a specific identification basis. Vacation
Intervals reacquired are placed back into inventory at the lower of their
original historical cost basis or market value. The Company estimates the total cost to complete all amenities at each resort.
This cost includes both costs incurred to date and expected costs to be
incurred. The Company allocates the estimated total amenities cost to cost of
Vacation Interval sales based on Vacation Intervals sold in a given period as a
percentage of total Vacation Intervals expected to sell over the life of a
particular resort project. Company management periodically reviews the carrying value of its inventory on
an individual project basis to ensure that the carrying value does not exceed
market value. Land, Equipment, Buildings, and Utilities Land, equipment (including
equipment under capital lease), buildings, and utilities are stated at cost,
which includes amounts for construction materials, direct labor and overhead,
and capitalized interest. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
expense as incurred; significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, ranging from 3 to 20 years. Company
management periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Prepaid and Other Assets Prepaid and other assets consists primarily of
prepaid insurance, prepaid postage, intangibles, commitment fees, debt issuance
costs, novelty inventories, deposits, collected cash in lender lock boxes which
have not yet been applied to the loan balances by the lenders, and
miscellaneous receivables. Commitment fees and debt issuance costs are
amortized over the life of the related debt. Intangibles are amortized over
their useful lives, which do not exceed ten years. Income Taxes Deferred income taxes are recorded for temporary differences
between the bases of assets and liabilities as recognized by tax laws and their
carrying value as reported in the consolidated financial statements. A
provision is made or benefit recognized for deferred income taxes relating to
temporary differences for financial reporting purposes. To the extent a
deferred tax asset does not meet the criteria of more likely than not for
realization, a valuation allowance is recorded. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average shares outstanding. Earnings
per share assuming dilution is computed by dividing net income by the weighted
average number of shares and potentially dilutive shares outstanding. The
number of potentially dilutive shares is computed using the treasury stock
method, which assumes that the increase in the number of shares resulting from
the exercise of the stock options is reduced by the number of shares that could
have been repurchased by the Company with the proceeds from the exercise of the
stock options. Stock-Based Compensation In December 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure (SFAS 148). SFAS
148 amends the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of SFAS No. 123
or the intrinsic value method of APB Opinion No. 25, Accounting for Stock
Issued to Employee (APB No. 25). As allowed by SFAS No. 123, the Company has elected to continue to utilize the
accounting method prescribed by APB No. 25, provide the disclosure requirements
of SFAS No. 123 and, as of December 31, 2002, adopted the disclosure
requirements of SFAS No. 148. Although the Company selected an accounting
policy which requires only the excess of the market value of its common stock
over the exercise price of options granted to be recorded as compensation
expense (intrinsic method), pro forma information regarding net income (loss)
is required as if the 9




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Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. Pro forma net income (loss) applicable to the options
granted is not likely to be representative of the effects on reported net
income (loss) for future years. The fair value for these options is estimated
at the date of grant using the Black-Scholes option-pricing model. Stock
compensation determined under the intrinsic method is recognized over the
vesting period using the straight-line method. Had compensation cost for the Companys stock option grants been determined
based on the fair value at the date of grant in accordance with the provisions
of SFAS No. 123, the Companys net income (loss) and net income (loss) per
share would have been the following pro forma amounts: March 31,
    
    March 31,2004
    
    2003Net income (loss), as reported
    
    $
    2,344
    
    
    $
    (25,821
    )Stock-based compensation expense recorded
under the intrinsic value method
    
    
    
    
    
    
    Pro forma stock-based compensation expense
computed under the fair value method
    
    
    (75
    )
    
    
    (123
    )Pro forma net income (loss)
    
    $
    2,269
    
    
    $
    (25,944
    )Net income (loss) per share, basicAs reported
    
    $
    0.06
    
    
    $
    (0.70
    )Pro forma
    
    $
    0.06
    
    
    $
    (0.70
    )Net income (loss) per share, dilutedAs reported
    
    $
    0.06
    
    
    $
    (0.70
    )Pro forma
    
    $
    0.06
    
    
    $
    (0.70
    )
 There were no stock options granted during the first quarter of 2004. The fair
value of the stock options granted during the first quarter of 2003 were $0.32.
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: expected volatility ranging from 143.2% to 217.3% for all
grants, risk-free interest rates which vary for each grant and range from 4.1%
to 12.2%, expected life of 7 years for all grants, and no distribution yield
for all grants. Use of Estimates The preparation of the consolidated financial statements
requires the use of managements estimates and assumptions in determining the
carrying values of certain assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts for certain revenues and expenses during the reporting
period. Actual results could differ from those estimated. Significant
management estimates include the allowance for uncollectible notes, valuation
of SPE, and the future sales plan used to allocate certain inventories to cost
of sales. Reclassifications Certain reclassifications have been made to the 2003
consolidated financial statements to conform to the 2004 presentation. These
reclassifications had no effect on net income (loss). The reclassification
relates to the Gain on Sales of Notes Receivable as presented on the
consolidated statements of income and the consolidated statements of cash
flows. The Gain on Sales of Notes Receivable is no longer classified as Other
Income on the consolidated statements of income and is no longer classified as
a financing activity on the consolidated statements of cash flows. The
reclassification more accurately reflects the true operations of the Company. Recent Accounting Pronouncements FIN No. 46 In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No.
46). FIN No. 46 requires the primary beneficiary of a variable interest
entitys activities to consolidate the variable interest entity. FIN No. 46
defines a variable interest entity as an entity in which the equity investors
do not have substantive voting rights and there is not sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support. The primary beneficiary is the party that absorbs a majority
of the expected losses and/or receives a majority of the expected residual
returns of the variable interest entitys activities. In December 2003, the
Financial Accounting Standards Board issued FIN No. 46R (FIN No. 46R), which
supercedes and amends certain provisions of FIN No. 46. While FIN No. 46R
retains many of the concepts and provisions of FIN No. 46, it also provides
additional guidance related to the application of FIN No. 46, provides for
certain additional scope exceptions, and incorporates several Financial 10




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Accounting Standards Board Staff Positions issued related to the application of
FIN No. 46. The provisions of FIN No. 46 are immediately applicable to variable interest
entities created, or interests in variable interest entities obtained, after
January 31, 2003 and the provisions of FIN No. 46R are required to be applied
to such entities, except for special purpose entities, by the end of the first
reporting period ending after March 15, 2004. For variable interest entities
created, or interests in variable interest entities obtained, on or before
January 31, 2003, FIN No. 46 or FIN No. 46R is required to be applied to
special-purpose entities by the end of the first reporting period ending after
December 15, 2003 (December 31, 2003 for calendar-year entities) and is
required to be applied to all other non-special purpose entities by the end of
the first reporting period ending after March 15, 2004 (March 31, 2004 for
calendar-year entities). FIN No. 46 and FIN No. 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is first
applied, or by restating previously issued financial statements with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN No. 46 and FIN No. 46R also require certain disclosures of an entitys
relationship with variable interest entities. The adoption of FIN No. 46 and
Fin No. 46R required the Company to consolidate its wholly-owned financing
subsidiary, Silverleaf Finance II, Inc. (SF-II), formed in December 2003. SFAS No. 149  In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS No. 149). SFAS
No. 149 amends and clarifies certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of Financial Accounting
Standards No. 133. SFAS No. 149 is effective for certain contracts entered
into or modified by the Company after June 30, 2003. The adoption of SFAS No.
149 did not impact the Companys consolidated financial position or results of
operations. SFAS No. 150  In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150,Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS No. 150). SFAS No. 150 specifies that certain financial instruments
within its scope constitute obligations of the issuer and that, therefore, the
issuer must classify them as liabilities. Such financial instruments include
mandatorily redeemable financial instruments, obligations to repurchase the
issuers equity shares by transferring assets, and certain obligations to issue
a variable number of shares. SFAS No. 150 is effective immediately for all
financial instruments entered into or modified after May 31, 2003. For all
other instruments, SFAS No. 150 is effective at the beginning of the third
quarter of 2003. The adoption of SFAS No. 150 did not impact the Companys
consolidated financial position or results of operations. Note 3  Debt Restructuring As of December 31, 2002, we were in compliance with all of our operating
covenants. However, due to the results of the quarter ended March 31, 2003, we
were not in compliance with three of our financial covenants. First, sales and
marketing expense for the quarter ended March 31, 2003 was 56.1% of sales,
compared to a maximum threshold of 52.5%. Second, the interest coverage ratio
for the twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a
minimum requirement of 1.25 to 1.0. And third, net loss for the two consecutive
quarters ended March 31, 2003 was $24.9 million, compared to a minimum
requirement of $1.00 net income. In November 2003, we entered into agreements with our three senior lenders to
amend our senior credit facilities to modify our financial covenants under
which we had been in default since the first quarter of 2003. The amended
covenants increased from 52.5% to 55% the maximum permitted ratio of sales and
marketing expenses to total sales for each quarter beginning with the quarter
ended March 31, 2003. They also exclude the $28.7 million increase in our
allowance for uncollectible notes in the quarter ended March 31, 2003 from the
calculation of our minimum required consolidated net income, and from the
calculation of our minimum required interest coverage ratio of 1.25 to 1.0. In
addition to the above amendments, we also received waivers under our senior
credit facilities of covenant defaults which occurred in the first quarter of
2003. In addition, as a result of the loss for the quarter ended March 31, 2003, our
SPE was in default of financial covenants with its lender. The lender
subsequently waived the defaults as of March 31, 2003 and modified its
agreement with the SPE. As a result of these amendments and waivers, we are in full compliance with all
of the financial covenants under our credit facilities with our senior lenders
as of December 31, 2003 and March 31, 2004. 11




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##### Table of Contents



Note 4  Earnings Per Share The following table illustrates the reconciliation between basic and diluted
weighted average shares outstanding for the three months ended March 31, 2004
and 2003: Three Months EndedMarch 31,2004
    
    2003Weighted average shares outstanding  basic
    
    
    36,841,557
    
    
    
    36,826,906Issuance of shares from stock options exercisable
    
    
    2,793,813
    
    
    
    Repurchase of shares from stock options proceeds
    
    
    (749,506
    )
    
    
    Weighted average shares outstanding  diluted
    
    
    38,885,864
    
    
    
    36,826,906
 For the three months ended March 31, 2003, the weighted average shares
outstanding assuming dilution was non-dilutive. Outstanding stock options
totaling approximately 3,377,210 at March 31, 2003 were potentially dilutive
securities that were not included in the computation of diluted EPS because to
do so would have been non-dilutive for the three months ended March 31, 2003. Note 5  Notes Receivable The Company provides financing to the purchasers of Vacation Intervals, which
are collateralized by their interest in such Vacation Intervals. The notes
receivable generally have initial terms of seven to ten years. The average
yield on outstanding notes receivable at March 31, 2004 was approximately
14.9%. In connection with the sampler program, the Company routinely enters
into notes receivable with terms of 10 months. Notes receivable from sampler
sales were $1.5 million and $1.1 million at March 31, 2004 and 2003,
respectively, and are non-interest bearing. The activity in gross notes receivable is as follows for the three month
periods ended March 31, 2004 and 2003 (in thousands): March 31,2004
    
    2003Balance, beginning of period
    
    $
    241,751
    
    
    $
    261,784Sales
    
    
    26,793
    
    
    
    23,261Collections
    
    
    (14,649
    )
    
    
    (13,237
    )Receivables charged off
    
    
    (5,503
    )
    
    
    (8,192
    )Sold notes receivable
    
    
    (8,200
    )
    
    
    (23,614
    )Balance, end of period
    
    $
    240,192
    
    
    $
    240,002
 The Company considers accounts over 60 days past due to be delinquent. As of
March 31, 2004, $2.0 million of notes receivable, net of accounts charged off,
were considered delinquent. An additional $46.4 million of notes would have
been considered to be delinquent had the Company not granted payment
concessions to the customers. The activity in the allowance for uncollectible
notes is as follows for the three months ended March 31, 2004 and 2003 (in
thousands): Three Months EndedMarch 31,2004
    
    2003Balance, beginning of period
    
    $
    48,372
    
    
    $
    28,547Provision for credit losses
    
    
    6,400
    
    
    
    34,666Receivables charged off
    
    
    (5,503
    )
    
    
    (8,192
    )Allowance related to notes sold
    
    
    (704
    )
    
    
    (3,718
    )Balance, end of period
    
    $
    48,565
    
    
    $
    51,303
 During the first quarter of 2004, the Company sold $8.2 million of notes
receivable and recognized pre-tax gains of $426,000. The SPE funded these
purchases through advances under a credit agreement arranged for this purpose.
In connection with these sales, the Company received cash consideration of $6.2
million, which was used to pay down borrowings under its revolving loan
facilities. 12




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Note 6  Debt Notes payable, capital lease obligations, and senior subordinated notes as of
March 31, 2004 and December 31, 2003 (in thousands): 2004
    
    2003$55.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.6 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.3
million term loan with an interest rate of 8%)
    
    $
    26,008
    
    
    $
    25,095$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,746
    
    
    
    10,998$55.1 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.1 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.0
million term loan with an interest rate of 8%)
    
    
    29,682
    
    
    
    28,325$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,597
    
    
    
    10,845$7.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $6.2 million revolver
with an interest rate of Prime plus 3% with a 6% floor and a $1.7
million term loan with an interest rate of 8%)
    
    
    3,762
    
    
    
    3,734$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    1,522
    
    
    
    1,558$66.4 million conduit loan, due December 2014, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of 7.035%
    
    
    62,627
    
    
    
    66,381$40.4 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $35 million revolver
with an interest rate of Federal Funds plus 2.75% with a 6% floor and a $5.4 million term loan with an interest rate of 8%)
    
    
    17,912
    
    
    
    16,897$5.4 million term loan with an interest rate of 8%, due in March 2007
    
    
    5,287
    
    
    
    5,412$70 million loan agreement, capacity reduced by amounts outstanding
under the $10 million inventory loan agreement and the $9 million
supplemental revolving loan agreement, which contains certain financial
covenants, due February 2006, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 2.65% with a 6.0% floor
(additional draws are no longer available under this facility)
    
    
    14,448
    
    
    
    17,009$9 million supplemental revolving loan agreement, which contains
certain financial covenants, due March 2007, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of LIBOR plus 2.67%
with a 6% floor
    
    
    8,370
    
    
    
    8,345$10 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest
rate of LIBOR plus 3.25%
    
    
    10,000
    
    
    
    10,000$8 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest
rate of Prime plus 3%
    
    
    8,000
    
    
    
    $10 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest
rate of LIBOR plus 3.5% with a 6% floor
    
    
    
    
    
    
    7,733Various notes, due from April 2004 through February 2009, collateralized
by various assets with interest rates ranging from 0.9% to 10.5%
    
    
    1,601
    
    
    
    1,676Totals notes payable
    
    
    210,562
    
    
    
    214,008Capital lease obligations
    
    
    1,076
    
    
    
    1,329Total notes payable and capital lease obligations
    
    
    211,638
    
    
    
    215,3376.0% senior subordinated notes, due 2007, interest payable
semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    28,467
    
    
    
    28,467101/2% senior subordinated notes, subordinate to the 6.0% senior
subordinated notes above, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Companys present and
future domestic restricted subsidiaries
    
    
    2,146
    
    
    
    2,146Interest on the 6.0% senior subordinated notes, due 2007, interest
payable semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    5,978
    
    
    
    5,978Total senior subordinated notes
    
    
    36,591
    
    
    
    36,591Total
    
    $
    248,229
    
    
    $
    251,928
 At March 31, 2004, LIBOR rates were from 1.12% to 1.15%, and the Prime rate was
4.00%. At December 31, 2003, LIBOR rates were from 1.15% to 1.18%, and the
Prime rate was 4.00%. 13




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##### Table of Contents



Note 7  Subsidiary Guarantees As of March 31, 2004, all subsidiaries of the Company, except the SPE and
SF-II, have guaranteed the $36.6 million of senior subordinated notes. Separate
financial statements and other disclosures concerning each guaranteeing
subsidiary (each, a Guarantor Subsidiary) are not presented herein because
the guarantee of each Guarantor Subsidiary is full and unconditional and joint
and several, and each Guarantor Subsidiary is a wholly-owned subsidiary of the
Company, and together comprise all direct and indirect subsidiaries of the
Company. The Guarantor Subsidiaries had no operations for the three months ended March
31, 2004 and 2003. Combined summarized balance sheet information as of March
31, 2004 for the Guarantor Subsidiaries is as follows (in thousands): March 31,2004Other assets
    
    $
    1Total assets
    
    $
    1Investment by parent (includes equity
and amounts due to parent)
    
    $
    1Total liabilities and equity
    
    $
    1
 Note 8  Commitments and Contingencies Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.
et al, Circuit Court of Christian County, Missouri. The homeowners
associations of five condominium projects that a former subsidiary of the
Company constructed in Missouri filed two separate actions against the Company
in 1999 and 2000, respectively, alleging breach of warranty, construction
defects and breach of management agreements. These two cases have been
consolidated, but no trial date has been set. The plaintiffs have filed an
amended petition alleging actual damages in excess of $25,000 and punitive
damages. A special master has been appointed by agreement of all the parties
in this case. The special master will decide discovery disputes and make
recommendations on substantive motions. Discovery continued in the lawsuit
during the quarter ended March 31, 2004, but is not yet complete. The Company
has filed a counterclaim seeking contractual indemnification under the terms of
management agreements with each of the plaintiffs. At this time, the Companys
legal fees and costs of litigation are being paid by its insurance carriers,
subject to a reservation of rights by these insurers. The Company cannot
predict the final outcome of these claims, nor can it estimate the additional
costs it could incur, or whether its insurance carriers will continue to cover
its costs in connection with these claims. Ozark Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,
Circuit Court of Stone County, Missouri. The homeowners associations of three
condominium projects that a former subsidiary of the Company constructed in
Missouri filed an action against the Company in 2000 alleging construction
defects, misrepresentation, breach of fiduciary duty, negligence, and breach of
management agreements and seeking damages and certain other equitable relief.
The plaintiffs seek actual and punitive damages in excess of $500,000,
attorneys fees and costs. The Company has filed a counterclaim seeking
contractual indemnification under the terms of management agreements with the
plaintiffs. At this time, a majority of the Companys legal fees and costs of
litigation are being paid by its insurance carriers, subject to a reservation
of rights by these insurers. Discovery in the case is ongoing. The case is
scheduled for trial in November 2004. The Company cannot predict the final
outcome of these claims, nor can it estimate the additional costs it could
incur, or whether its insurance carriers will continue to cover its costs in
connection with these claims. The Company intends to vigorously defend this
litigation. The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition. During 2001, Silverleaf Club entered into a loan agreement for $1.8 million,
whereby the Company guaranteed such debt with certain of its aircraft or
related sales proceeds. As of March 31, 2004, Silverleaf Clubs related note
payable balance was $894,000. Note 9  Subsequent Events Exchange Offer.In connection with the Companys need to improve its ability
to access new capital markets to finance its future operations and to refinance
certain of its senior credit facilities, the Company commenced an offer (the
Exchange Offer) on May 4, 2004 to exchange for each $500 principal amount of
its 6% Senior Subordinated Notes due 2007 (the Old Notes) (i) $500 principal
amount of its 8% Senior Subordinated Notes due 2010 (the Exchange Notes) and
(ii) an additional payment of interest (the Additional Interest Payment) in
an amount equal to the amount of interest accrued on each Old Note held by each
exchanging noteholder from April 1, 2004 through the day before the Exchange
Date. Currently, the outstanding principal balance of the Old Notes is $28.5
million. 14




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##### Table of Contents



The Company will accept for exchange any and all validly tendered Old Notes not
withdrawn prior to 5:00 p.m., New York City time, on June 2, 2004, unless the
Exchange Offer is extended to a later date by the Company in its sole
discretion (the Expiration Date). At a time and date as soon as practicable
following the Expiration Date, the Exchange Offer will be fully consummated
(the Exchange Date). The Exchange Offer is conditioned upon holders of a
minimum of 80% in principal amount of the Old Notes agreeing to (i) exchange
their Old Notes for the Exchange Notes and the Additional Interest Payment, and
(ii) approve the terms and conditions of the Exchange Notes and the New
Indenture. If the minimum of 80% in principal amount of the Old Notes is
exchanged, the Company will be required to pay approximately $455,000 in
additional interest payments each year. The Exchange Notes will be issued
pursuant to an indenture dated as of the Exchange Date by and among the
Company, certain of its subsidiaries, as guarantors, and Wells Fargo Bank,
National Association, as Trustee. 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Certain matters discussed throughout this Form 10-Q filing are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed in the Companys Form 10-K for
the year ended December 31, 2003. The Company currently owns and operates 12 resorts in various stages of
development. These resorts offer a wide array of country club-like amenities,
such as golf, swimming, horseback riding, boating, and many organized
activities for children and adults. The Company represents a Vacation Interval
ownership base of over 82,000. The condensed consolidated financial statements
of the Company include the accounts of Silverleaf Resorts, Inc. and its
subsidiaries, all of which are wholly-owned. Results of Operations The following table sets forth certain operating information for the Company. Three Months EndedMarch 31,2004
    
    2003As a percentage of total revenues:Vacation Interval sales
    
    
    74.2
    %
    
    
    68.9
    %Sampler sales
    
    
    1.0
    %
    
    
    1.2
    %Total sales
    
    
    75.2
    %
    
    
    70.1
    %Interest income
    
    
    20.7
    %
    
    
    21.2
    %Management fee income
    
    
    0.7
    %
    
    
    1.1
    %Gain on sale of notes receivable
    
    
    1.0
    %
    
    
    4.7
    %Other income
    
    
    2.4
    %
    
    
    2.9
    %Total revenues
    
    
    100.0
    %
    
    
    100.0
    %As a percentage of Vacation Interval sales:Cost of Vacation Interval sales
    
    
    18.9
    %
    
    
    17.7
    %Provision for uncollectible notes
    
    
    20.0
    %
    
    
    121.4
    %As a percentage of total sales:Sales and marketing
    
    
    50.8
    %
    
    
    56.1
    %As a percentage of total revenues:Operating, general and administrative
    
    
    15.0
    %
    
    
    16.6
    %Depreciation and amortization
    
    
    2.5
    %
    
    
    2.9
    %As a percentage of interest income:Interest expense and lender fees
    
    
    48.0
    %
    
    
    50.3
    %
 16




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##### Table of Contents



Results of Operations for the Three Months Ended March 31, 2004 and 2003 Revenues Revenues for the quarter ended March 31, 2004 were $43.1 million, representing
a $1.7 million or 4.1% increase from revenues of $41.4 million for the quarter
ended March 31, 2003. The increase is primarily due to increased sales,
partially offset by a smaller gain on sales of notes receivable in the first
quarter of 2004 versus the same period of 2003. The following table summarizes our Vacation Interval sales (dollars in
thousands). 2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    Average$ Sales
    
    Units
    
    Price
    
    $ Sales
    
    Units
    
    PriceOutside Sales
    
    $
    14,905
    
    
    
    1,270
    
    
    $
    11,736
    
    
    $
    15,743
    
    
    
    1,429
    
    
    $
    11,017In-house Upgrade Sales
    
    
    9,676
    
    
    
    1,328
    
    
    
    7,286
    
    
    
    6,374
    
    
    
    1,048
    
    
    
    6,082In-house Reload Sales.
    
    
    7,406
    
    
    
    880
    
    
    
    8,416
    
    
    
    6,440
    
    
    
    763
    
    
    
    8,440Total
    
    $
    31,987
    
    
    
    
    
    
    
    
    
    
    $
    28,557
 Overall, Vacation Interval sales increased $3.4 million during the first
quarter of 2004 versus the first quarter of 2003, primarily due to higher
in-house upgrade sales at higher average prices in 2004 versus 2003. The number
of outside sales (sales to new customers) decreased 11.1% but the number of
in-house upgrade sales increased 26.7%, and the number of in-house reload sales
(sales of second Vacation Intervals to existing customers) increased 15.3%
during the first quarter of 2004 versus the same period of 2003. Total interval
sales for the first quarter of 2004 included 264 biennial intervals (counted as
132 Vacation Intervals) compared to 247 biennial intervals (counted as 124
Vacation Intervals) in the first quarter of 2003. Sampler sales decreased $39,000 to $446,000 for the quarter ended March 31,
2004, compared to $485,000 for the same period in 2003. Sampler sales are not
recognized as revenue until the Companys obligation has elapsed, which often
does not occur until the sampler contract expires eighteen months after the
sale is consummated. Hence, a significant portion of sampler sales recognized
in the first quarter of 2004 relate to 2002 sales activity. Interest income remained fairly consistent at $8.9 million during the first
quarter of 2004 versus $8.8 million during the same period of 2003. Management fee income, which consists of management fees collected from the
resorts management clubs, can not exceed the management clubs net income.
Management fee income decreased $171,000 to $300,000 for the first quarter of
2004, versus $471,000 for the first quarter of 2003 due primarily to the
discontinuation of management fees from seven resorts the Company had managed
since 1998, which were sold during the third quarter of 2003. Gain on sales of notes receivable was $426,000 for the first quarter of 2004,
resulting from the sale of $8.2 million of notes receivable to the SPE. The
$1.9 million gain in the first quarter of 2003 resulted from the sale of $23.6
million of notes receivable to the SPE. Fewer sales of notes receivable took
place in the first quarter of 2004 versus the same period of 2003 due primarily
to reduced availability during the first quarter of 2004 compared to the same
period of 2003. Other income consists of water and utilities income, marina income, golf course
and pro shop income, and other miscellaneous items. Other income decreased
$188,000 to $1.0 million for the first quarter of 2004 compared to $1.2 million
for the same period of 2003. The decrease primarily relates to a $273,000 gain
recorded in the first quarter of 2003 associated with the sale of land located
in Las Vegas, Nevada, partially offset by increased water and utilities income
in 2004 versus 2003. Cost of Sales Cost of sales as a percentage of Vacation Interval sales increased to 18.9%
during the first quarter of 2004 versus 17.7% for the same period of 2003
primarily due to the Company selling a much larger percentage of its lower
cost inventory in the first quarter of 2003 versus selling primarily its higher
cost inventory during the same period of 2004. Overall, the $993,000 increase
in cost of sales in the first quarter of 2004 compared to the first quarter of
2003 was primarily due to the increase in Vacation Interval sales. 17




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Sales and Marketing Sales and marketing expenses as a percentage of total sales decreased to 50.8%
for the quarter ended March 31, 2004, from 56.1% for the same period of 2003.
This reduction is the result of our marketing strategy to improve the sales mix
and increase the proportion of inside sales over outside sales, with inside
sales requiring less sales and marketing expenses. For the quarter ended March
31, 2004, inside sales increased to 53.4% of Vacation Interval sales, up from
44.9% for the same period a year ago. Provision for Uncollectible Notes The provision for uncollectible notes as a percentage of Vacation Interval
sales was 20.0% in the first quarter of 2004 compared to 121.4% for the first
quarter of 2003. For the quarter ended March 31, 2004, management estimates
that the 20% provision resulted in an adequate allowance for uncollectible
notes for all future credit losses net of inventory recovery. For the quarter
ended March 31, 2003 management observed that cancellations in the three
months then ended had significantly exceeded the amount that would have been
expected under its estimate for the December 31, 2002 allowance for
uncollectible notes. Accordingly, the estimate was revised in the quarter ended
March 31, 2003 as follows:  
    
    the basis of the estimate of future cancellations was changed from
Vacation Interval sales to incremental amounts financed, resulting in
an increase of $1.6 million,
    
    certain historical cancellations from 2000 and 2001 that were
previously excluded from predictive cancellations, as such
cancellations were assumed to be uncharacteristically large as a
result of the Companys class action notices to all customers and
announcements about its liquidity and possible bankruptcy issues in
the first half of 2001, were included in predictive cancellations,
resulting in an increase of $5.6 million,
    
    the estimate of cancellations in 7, 8, and 9 years after a sale were
increased, resulting in an increase of $1.6 million,
    
    the estimate of inventory recoveries resulting from cancellations was
revised, resulting in an increase of $300,000,
    
    the ratio of the excess of cancellations in the first quarter over the
estimated cancellations for the same period based on the weighted
average rate of cancellations divided by the incremental amounts
financed for the period 1997 through 2002, was applied to all future
estimated cancellations, resulting in an increase of $15.0 million,
and
    
    an estimate was added for current notes with customers who received
payment or term concessions that would have been deemed cancellations
were it not for the concessions, resulting in an increase of $4.6
million. The result of these revisions to the estimate was a $28.7 million increase from
the original estimate for the provision for uncollectible notes in the quarter
ended March 31, 2003. Management will continue its current collection programs
and seek new programs to reduce note defaults and improve the credit quality of
our customers. However, there can be no assurance that these efforts will be
successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total
revenues decreased to 15.0% for the first quarter of 2004, from 16.6% for the
same period of 2003. Overall, operating, general and administrative expense
decreased by $408,000 for the first quarter of 2004, as compared to the same
period of 2003. This was primarily due to lower workers compensation insurance
and reductions in legal expenses and professional fees. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues
decreased to 2.5% for the quarter ended March 31, 2004 versus 2.9% for the same
quarter of 2003. Overall, depreciation and amortization expense decreased
$86,000 for the first quarter of 2004, as compared to 2003, primarily due to a
general reduction in capital expenditures since 2000. Interest Expense and Lender Fees Interest expense and lender fees as a percentage of interest income decreased
to 48.0% for the first quarter of 2004, from 50.3% for the same period of 2003.
This decrease is primarily the result of decreased borrowings against 18




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pledged notes receivable and decreased senior subordinated notes due to the
early retirement of $7.6 million of 101/2% senior subordinated notes during
the third quarter of 2003. If the Exchange Offer discussed in Note 9. Subsequent Events is consummated in
June 2004, interest expense is expected to increase between $455,000 to
$570,000 annually, due to the increase in interest rates from 6% to 8% on the
Companys senior subordinated notes currently due in 2007. Under the terms of
the Exchange Offer, the new maturity date is scheduled for 2010. Gain on Early Extinguishment of Debt Gain on early extinguishment of debt was $0 for the quarter ended March 31,
2004, compared to $1.3 million for the quarter ended March 31, 2003. The gain
in 2003 resulted from the early extinguishment of the $8.8 million remaining
balance of the Companys $60 million loan agreement, due August 2003. Income (Loss) before Benefit (Provision) for Income Taxes Income (loss) before benefit (provision) for income taxes increased to income
of $2.3 million for the quarter ended March 31, 2004, as compared to a loss of
$25.8 million for the quarter ended March 31, 2003, as a result of the above
mentioned operating results. Benefit (Provision) for Income Taxes Benefit (provision) for income taxes was a benefit of $3,000 for the first
quarter of 2004 compared to a provision of $13,000 for the same period of 2003.
Benefit (provision) for income taxes as a percentage of income (loss) before
benefit (provision) for income taxes was 0.1% for each of the first quarters of
2004 and 2003. The effective income tax rate is the result of the 2003 and 2004
projected income tax benefits being reduced by the effect of a valuation
allowance, which reduces the projected net deferred tax assets to zero due to
the unpredictability of recovery. Net Income (Loss) Net income (loss) increased to income of $2.3 million for the quarter ended
March 31, 2004, as compared to a loss of $25.8 million for the quarter ended
March 31, 2003, as a result of the above mentioned operating results. Liquidity and Capital Resources Financial Covenants.As of December 31, 2002, we were in compliance with all of
our operating covenants. However, due to the results of the quarter ended March
31, 2003, we were not in compliance with three of our financial covenants.
First, sales and marketing expense for the quarter ended March 31, 2003 was
56.1% of sales, compared to a maximum threshold of 52.5%. Second, the interest
coverage ratio for the twelve months ended March 31, 2003 was 1.02 to 1.0,
compared to a minimum requirement of 1.25 to 1.0. And third, net loss for the
two consecutive quarters ended March 31, 2003 was $24.9 million, compared to a
minimum requirement of $1.00 net income. In November 2003, we entered into agreements with our three senior lenders to
amend our senior credit facilities to modify our financial covenants under
which we had been in default since the first quarter of 2003. The amended
covenants increased from 52.5% to 55% the maximum permitted ratio of sales and
marketing expenses to total sales for each quarter beginning with the quarter
ended March 31, 2003. They also exclude the $28.7 million increase in our
allowance for uncollectible notes in the quarter ended March 31, 2003 from the
calculation of our minimum required consolidated net income, and from the
calculation of our minimum required interest coverage ratio of 1.25 to 1.0. In
addition to the above amendments, we also received waivers under our senior
credit facilities of covenant defaults which occurred in the first quarter of
2003. In addition, as a result of the loss for the quarter ended March 31, 2003, our
SPE was in default of financial covenants with its lender. The lender
subsequently waived the defaults as of March 31, 2003 and modified its
agreement with the SPE. As a result of these amendments and waivers, we are in full compliance with all
of the financial covenants under our credit facilities with our senior lenders
as of December 31, 2003 and March 31, 2004. 19




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Sources of Cash.The Company generates cash primarily from the cash received on
the sale of Vacation Intervals, the financing of customer notes receivable from
Silverleaf Owners, the sale of notes receivable to the SPE, management fees,
sampler sales, and resort and utility operations. The Company typically
receives a 10% down payment on sales of Vacation Intervals and finances the
remainder by receipt of a seven-year to ten-year customer promissory note. The
Company generates cash from customer notes receivable by (i) borrowing at an
advance rate of up to 75% of eligible customer notes receivable, (ii) selling
notes receivable, and (iii) from the spread between interest received on
customer notes receivable and interest paid on related borrowings. Because the
Company uses significant amounts of cash in the development and marketing of
Vacation Intervals, but collects cash on customer notes receivable over a
seven-year to ten-year period, borrowing against receivables has historically
been a necessary part of normal operations. During the three months ended March
31, 2004, the Companys operating activities reflected cash provided by
operating activities of $5.1 million versus $18.1 million during the same
period of 2003. The decrease in cash provided by operating activities was
primarily the result of $13.4 million lower proceeds from sales of notes
receivable. Although it appears the Company has adequate liquidity to meet its needs in
2004 and 2005, it is continuing to identify additional financing arrangements
into 2006 and beyond. To finance the Companys growth, development, and any
future expansion plans, the Company may at some time be required to consider
the issuance of other debt, equity, or collateralized mortgage-backed
securities, the proceeds of which would be used to finance future acquisitions,
refinance debt, finance mortgage receivables, or for other purposes. Any debt
incurred or issued by the Company may be secured or unsecured, have fixed or
variable rate interest, and may be subject to such terms as management deems
prudent. Uses of Cash.Investing activities typically reflect a net use of cash due to
capital additions and property acquisitions. During the first quarter of 2004,
net cash used in investing activities was $508,000 due to equipment purchases.
However in the first quarter of 2003, net cash provided by investing activities
was $2.6 million due to proceeds from the sale of land held for sale of $2.9
million, partially offset by $282,000 of equipment purchases. The Company
evaluates sites for additional new resorts or acquisitions on an ongoing basis. During the three months ended March 31, 2004, net cash used in financing
activities was $3.7 million compared to $19.1 million in the comparable 2003
period. The decrease in cash used in financing activities was the result of
decreased payments on borrowings against pledged notes receivable due to lower
sales of notes receivable, the proceeds of which are used to pay down
borrowings, partially offset by decreased borrowings against pledged notes
receivable. At March 31, 2004, the Companys senior credit facilities provided for loans of
up to $263.4 million of which approximately $209.0 million of principal related
to advances under the credit facilities was outstanding. For the three months
ended March 31, 2004, the weighted average cost of funds for all borrowings,
including the senior subordinated debt, was 6.7%. Customer defaults have a
significant impact on cash available to the Company from financing customer
notes receivable in that notes more than 60 days past due are not eligible as
collateral. As a result, the Company must repay borrowings against such
delinquent notes. Certain debt agreements include restrictions on the Companys ability to pay
dividends based on minimum levels of net income and cash flow. The Companys
ability to pay dividends might also be restricted by the Texas Business
Corporation Act. Off-Balance-Sheet Arrangements.The Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable
through an off-balance-sheet SPE during 2000. Due to the results of operations
during the first quarter of 2003, the SPE was in default of financial covenants
with its lender. The lender subsequently waived the defaults and modified its
agreement with the SPE in June 2003. The Company also obtained an extension of
the SPEs existing revolving credit facility through March 2006. In connection
with the two-year extension of this facility, however, the Company agreed to
reduce the principal amount of the facility from $100 million to $85 million.
The SPE allows the Company to realize the benefit of an additional $85 million
of revolving credit in addition to the on-balance-sheet credit arrangements it
has with its senior lenders. Credit facilities are necessary for the Company to
have the liquidity necessary to fund its costs and expenses. Therefore it is
vitally important to the Companys liquidity plan to have financing available
in order to finance future sales, since it finances the majority of its
timeshare sales over seven to ten years. During the first quarter of 2004, the Company sold $8.2 million of notes
receivable to the SPE and recognized pre-tax gains of $426,000. In conjunction
with these sales, the Company received cash consideration of $6.2 million,
which 20




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was used to pay down borrowings under its revolving loan facilities. During the
first quarter of 2003, the Company sold $23.6 million of notes receivable to
the SPE and recognized pre-tax gains of $1.9 million. In conjunction with these
sales, the Company received cash consideration of $19.5 million, which was
primarily used to pay down borrowings under its revolving loan facilities. The
SPE funded these purchases through advances under a credit agreement arranged
for this purpose. The Company receives fees for servicing sold notes,
calculated based on 1% of eligible notes held by the facility. Such fees were
$187,000 and $229,000 for the quarters ended March 31, 2004 and 2003,
respectively. Such fees received approximate the Companys internal cost of
servicing such notes. As a result, the related servicing asset or liability was
estimated to be insignificant. At March 31, 2004, the SPE held notes receivable
totaling $98.3 million, with related borrowings of $78.1 million. Except for
the repurchase of notes that fail to meet initial eligibility requirements, the
Company is not obligated to repurchase defaulted or any other contracts sold to
the SPE. It is anticipated, however, that it will place bids in accordance with
the terms of the conduit agreement to repurchase some defaulted contracts in
public auctions to facilitate the re-marketing of the underlying collateral.
The investment in the SPE was valued at $6.8 million at March 31, 2004. Taxes.For regular federal income tax purposes, the Company reports
substantially all of the Vacation Interval sales it finances under the
installment method. Under this method, income on sales of Vacation Intervals is
not recognized until cash is received, either in the form of a down payment or
as installment payments on customer notes receivable. The deferral of income
tax liability conserves cash resources on a current basis. Interest is imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the payment is
received. If the Company is otherwise not subject to tax in a particular year,
no interest is imposed since the interest is based on the amount of tax paid in
that year. The consolidated financial statements do not contain an accrual for
any interest expense that would be paid on the deferred taxes related to the
installment method as the interest expense is not estimable. In addition, the
Company is subject to current alternative minimum tax (AMT) as a result of
the deferred income that results from the installment sales treatment, although
due to existing AMT loss carryforwards, it is anticipated that minimal current
AMT liability exists. Payment of AMT creates a deferred tax asset in the form
of a minimum tax credit, which, unless otherwise limited, reduces the future
regular tax liability attributable to Vacation Interval sales. In 1998, the
Internal Revenue Service approved a change in the method of accounting for
installment sales effective as of January 1, 1997. As a result, the Companys
alternative minimum taxable income for 1997 through 1999 was increased each
year by approximately $9.0 million for the pre-1997 adjustment, which resulted
in the Company paying substantial additional federal and state taxes in those
years. Subsequent to December 31, 2000, the Company applied for and received
refunds of $8.3 million and $1.6 million during 2001 and 2002, respectively, as
the result of the carryback of its 2000 AMT loss to 1999, 1998, and 1997.
Accordingly, no minimum tax credit exists currently. The net operating losses (NOLs) expire between 2012 through 2021. Realization
of the deferred tax assets arising from NOLs is dependent on generating
sufficient taxable income prior to the expiration of the loss carryforwards.
Management currently does not believe that it will be able to utilize its NOL
from normal operations. At present, future NOL utilization is expected to be
limited to the temporary differences creating deferred tax liabilities. If
necessary, management could implement a strategy to accelerate income
recognition for federal income tax purposes to utilize the existing NOL. The
amount of the deferred tax asset considered realizable could be decreased if
estimates of future taxable income during the carryforward period are reduced. Due to the restructuring completed in May 2002, an ownership change within the
meaning of Section 382(g) of the Internal Revenue Code (the Code) occurred.
As a result, a portion of the Companys NOL is subject to an annual limitation
for taxable years beginning after the date of the exchange (change date), and
a portion of the taxable year which includes the change date. The annual
limitation will be equal to the value of the stock of the Company immediately
before the ownership change, multiplied by the long-term tax-exempt rate (i.e.,
the highest of the adjusted Federal long-term rates in effect for any month in
the three-calendar-month period ending with the calendar month in which the
change date occurs). This annual limitation may be increased for any recognized
built-in gain to the extent allowed in Section 382(h) of the Code. The
ownership change may also limit, as described above, the use of the Companys
minimum tax credit, if any, as provided in Section 383 of the Code. Exchange Offer.In connection with the Companys need to improve its ability
to access new capital markets to finance its future operations and to refinance
certain of its senior credit facilities, the Company commenced an offer (the
Exchange Offer) on May 4, 2004 to exchange for each $500 principal amount of
its 6% Senior Subordinated Notes due 2007 (the Old Notes) (i) $500 principal
amount of its 8% Senior Subordinated Notes due 2010 (the Exchange Notes) and
(ii) an additional payment of interest (the Additional Interest Payment) in
an amount equal to the amount of interest accrued on each Old Note held by each
exchanging noteholder from April 1, 2004 through the day before the Exchange
Date. Currently, the outstanding principal balance of the Old Notes is $28.5
million. 21




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The Company will accept for exchange any and all validly tendered Old Notes not
withdrawn prior to 5:00 p.m., New York City time, on June 2, 2004, unless the
Exchange Offer is extended to a later date by the Company in its sole
discretion (the Expiration Date). At a time and date as soon as practicable
following the Expiration Date, the Exchange Offer will be fully consummated
(the Exchange Date). The Exchange Offer is conditioned upon holders of a
minimum of 80% in principal amount of the Old Notes agreeing to (i) exchange
their Old Notes for the Exchange Notes and the Additional Interest Payment, and
(ii) approve the terms and conditions of the Exchange Notes and the New
Indenture. If the minimum of 80% in principal amount of the Old Notes is
exchanged, the Company will be required to pay approximately $455,000 in
additional interest payments each year. The Exchange Notes will be issued
pursuant to an indenture dated as of the Exchange Date by and among the
Company, certain of its subsidiaries, as guarantors, and Wells Fargo Bank,
National Association, as Trustee. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk As of and for the three months ended March 31, 2004, the Company had no
significant derivative financial instruments or foreign operations. Interest on
the Companys notes receivable portfolio, senior subordinated debt, capital
leases, and miscellaneous notes is fixed, whereas interest on the Companys
primary loan agreements, which totaled $209.0 million at March 31, 2004, is
variable. The impact of a one-point interest rate change on the outstanding
balance of variable-rate financial instruments at March 31, 2004, on the
Companys quarterly results of operations would be approximately $523,000 or
approximately $0.01 per share. At March 31, 2004, the carrying value of the Companys notes receivable
portfolio approximates fair value because the weighted average interest rate on
the portfolio approximates current interest rates received on similar notes. If
interest rates on the Companys notes receivable are increased or perceived to
be above market rates, the fair market value of the Companys fixed-rate notes
will decline, which may negatively impact the Companys ability to sell new
notes. The impact of a one-point interest rate change on the portfolio could
result in a fair value impact of $5.6 million or approximately $0.15 per share. Credit Risk The Company is exposed to on-balance sheet credit risk related to
its notes receivable. The Company is exposed to off-balance sheet credit risk
related to notes receivable sold. The Company offers financing to the buyers of Vacation Intervals at the
Companys resorts. These buyers generally make a down payment of at least 10%
of the purchase price and deliver a promissory note to the Company for the
balance. The promissory notes generally bear interest at a fixed rate, are
payable over a seven-year to ten-year period, and are secured by a first
mortgage on the Vacation Interval. The Company bears the risk of defaults on
these promissory notes. If a buyer of a Vacation Interval defaults, the Company generally must
foreclose on the Vacation Interval and attempt to resell it; the associated
marketing, selling, and administrative costs from the original sale are not
recovered; and such costs must be incurred again to resell the Vacation
Interval. Although the Company in many cases may have recourse against a
Vacation Interval buyer for the unpaid price, certain states have laws that
limit the Companys ability to recover personal judgments against customers who
have defaulted on their loans. Accordingly, the Company has generally not
pursued this remedy. Interest Rate Risk The Company has historically derived net interest income
from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Companys
indebtedness bears interest at variable rates and the Companys customer
receivables bear interest at fixed rates, increases in interest rates will
erode the spread in interest rates that the Company has historically obtained
and could cause the rate on the Companys borrowings to exceed the rate at
which the Company provides financing to its customers. The Company has not
engaged in interest rate hedging transactions. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect
on the Companys results of operations, cash flows, and financial position. Availability of Funding Sources The Company funds substantially all of the
notes receivable, timeshare inventories, and land inventories which it
originates or purchases with borrowings through its financing facilities, sales
of notes receivable, internally generated funds, and proceeds from public debt
and equity offerings. Borrowings are in turn repaid with the proceeds received
by the Company from repayments of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Companys results of 22




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operations, cash flows, and financial condition. Geographic Concentration The Companys notes receivable are primarily
originated in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk
inherent in such concentrations is dependent upon regional and general economic
stability, which affects property values and the financial stability of the
borrowers. The Companys Vacation Interval inventories are concentrated in
Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in
such concentrations is in the continued popularity of the resort destinations,
which affects the marketability of the Companys products and the collection of
notes receivable. 
 Item 4. Controls and Procedures An evaluation as of the end of the period covered by this report was carried
out under the supervision and with the participation of management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness and design and operation of the Companys disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
adequate to ensure that information required to be disclosed in the reports the
Company files and submits under the Exchange Act is recorded, processed,
summarized, and reported as and when required. There have been no significant changes in the Companys internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation referred to above. 
 Item 5. Other Information On May 11, 2004, the Compensation Committee of the Board of Directors approved
a compensation structure for 2004 and 2005 for Robert E. Mead, Chairman and
Chief Executive Officer of the Company, which includes possible annual
incentive bonuses in 2004 and 2005 if certain performance goals based on the
Corporations pre-tax net income for those years are reached. Additionally,
Mr. Meads base salary was increased from $500,000 to $750,000 per year for the
two-year term of the compensation arrangement. The independent members of the
Board of Directors have also approved the compensation structure for Mr. Mead.
The approval of the compensation package for Mr. Mead by the Compensation
Committee and the Board of Directors was conditioned upon the Company obtaining
the approval of the shareholders of the Company of the material terms for the
payment of the annual incentive bonus for calendar year 2005 in accordance with
the requirements of the Internal Revenue Code of 1986, as amended, for
deduction of annual compensation in excess of $1 million for certain covered
employees. Shareholders of the Company, including Mr. Mead, representing a
majority of the Companys shares outstanding have agreed to approve the 2005 annual
incentive bonus. The action of the Companys shareholders will become
effective twenty days after the mailing by the Company of an Information
Statement to its remaining shareholders advising them of the action taken by
the holders of a majority of the Companys shares outstanding. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.
et al, Circuit Court of Christian County, Missouri. The homeowners
associations of five condominium projects that a former subsidiary of the
Company constructed in Missouri filed two separate actions against the Company
in 1999 and 2000, respectively, alleging breach of warranty, construction
defects and breach of management agreements. These two cases have been
consolidated, but no trial date has been set. The plaintiffs have filed an
amended petition alleging actual damages in excess of $25,000 and punitive
damages. A special master has been appointed by agreement of all the parties
in this case. The special master will decide discovery disputes and make
recommendations on substantive motions. Discovery continued in the lawsuit
during the quarter ended March 31, 2004, but is not yet complete. The Company
has filed a counterclaim seeking contractual indemnification under the terms of
management agreements with each of the plaintiffs. At this time, the Companys
legal fees and costs of litigation are being paid by its insurance carriers,
subject to a reservation of rights by these insurers. The Company cannot
predict the final outcome of these claims, nor can it estimate the additional
costs it could incur, or whether its insurance carriers will continue to cover
its costs in connection with these claims. Ozark Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,
Circuit Court of Stone County, Missouri. The homeowners associations of three
condominium projects that a former subsidiary of the Company constructed in
Missouri filed an action against the Company in 2000 alleging construction
defects, misrepresentation, breach of fiduciary duty, negligence, and breach of
management agreements and seeking damages and certain other equitable relief.
The plaintiffs seek actual and punitive damages in excess of $500,000,
attorneys fees and costs. The Company has filed a counterclaim seeking
contractual indemnification under the terms of management agreements with the
plaintiffs. At this time, a majority of the Companys legal fees and costs of
litigation are being paid by its insurance carriers, subject to a reservation
of rights by these insurers. Discovery in the case is ongoing. The case is
scheduled for trial in November 2004. The Company cannot predict the final
outcome of these claims, nor can it estimate the additional costs it could
incur, or whether its insurance carriers will continue to cover its costs in
connection with these claims. The Company intends to vigorously defend this
litigation. The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of 23




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an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed herewith. 31.1     Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 31.2     Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 32.1     Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.2     Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002    (b) Reports on Form 8-K The Company filed the following Current Reports on Form 8-K with the SEC
during the quarter ended March 31, 2004: Current Report on Form 8-K filed with the SEC on February 17, 2004
announcing the commencement of the quotation of its common stock on the Over
the Counter Bulletin Board. Current Report on Form 8-K filed with the SEC on March 12, 2004 announcing
an extension of a loan agreement with one of its senior lenders. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Dated:  May 12, 2004
    By:
    /s/  ROBERT E. MEADRobert E. MeadChairman of the Board and
Chief Executive Officer Dated:  May 12, 2004
    By:
    /s/  HARRY J. WHITE, JR.Harry J. White, Jr.Chief Financial Officer 24




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INDEX TO EXHIBITS Exhibit No.
    
    Description31.1
    
    Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002