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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, 2005 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
    
    75-2259890(State of incorporation)
    
    (I.R.S. EmployerIdentification 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 þ 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 þ Number of shares of common stock outstanding of the issuers Common Stock, par value $0.01 per
share, as of May 13, 2005: 36,949,698




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Explanatory Note CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION TO CERTAIN
STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS QUALIFIED BY THE WORDS BELIEVE,
INTEND, ANTICIPATE, EXPECTS, AND WORDS OF SIMILAR IMPORT, ARE FORWARD-LOOKING STATEMENTS
AND ARE THUS PROSPECTIVE. THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY
REGARDING THE COMPANYS FUTURE PROFITABILITY, PROSPECTS, AND RESULTS OF OPERATIONS. ALL SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS ARE DISCUSSED UNDER THE
HEADING CAUTIONARY STATEMENTS BEGINNING ON PAGE 19 OF THE COMPANYS ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004. 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 ended March 31, 2005 and 2004
    
    
    3Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    4Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2005
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    6Notes to the Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    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
   Three Months EndedMarch 31,2005
    
    
    2004Revenues:Vacation Interval sales
    
    $
    30,137
    
    
    $
    31,987Sampler sales
    
    
    641
    
    
    
    446Total sales
    
    
    30,778
    
    
    
    32,433Interest income
    
    
    9,757
    
    
    
    8,926Management fee income
    
    
    450
    
    
    
    300Gain on sales of notes receivable
    
    
    669
    
    
    
    426Other income
    
    
    426
    
    
    
    392Total revenues
    
    
    42,080
    
    
    
    42,477Costs and Operating Expenses:Cost of Vacation Interval sales
    
    
    4,718
    
    
    
    6,035Sales and marketing
    
    
    17,184
    
    
    
    16,467Provision for uncollectible notes
    
    
    5,275
    
    
    
    6,400Operating, general and administrative
    
    
    6,728
    
    

    
    6,180Depreciation and amortization
    
    
    798
    
    
    
    901Interest expense and lender fees
    
    
    4,385
    
    
    
    4,282Total costs and operating expenses
    
    
    39,088
    
    
    
    40,265Income before benefit (provision) for income taxes
and discontinued operations
    
    
    2,992
    
    
    
    2,212Benefit (provision) for income taxes
    
    
    (598
    )
    
    
    3Net income from continuing operations
    
    
    2,394
    
    
    
    2,215Discontinued OperationsIncome from discontinued operations (net of taxes)
    
    
    128
    
    
    
    129Net income
    
    $
    2,522
    
    
    $
    2,344Basic income per share:Net income from continuing operations
    
    $
    0.07
    
    
    $
    0.06Income from discontinued operations
    
    $
    
    
    
    $
    Net income
    
    $
    0.07
    
    
    $
    0.06Diluted income per share:Net income from continuing operations
    
    $
    0.06
    
    
    $
    0.06Income from discontinued operations
    
    $
    
    
    
    $
    Net income
    
    $
    0.06
    
    
    $
    0.06Weighted average basic shares outstanding:
    
    
    36,861,169
    
    
    
    36,841,557Weighted average diluted shares outstanding:
    
    
    38,943,016
    
    
    
    38,885,864
 The accompanying notes are an integral part of these consolidated financial statements. 3




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
   March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    8,359
    
    
    $
    10,935Restricted cash
    
    
    3,877
    
    
    
    3,428Notes receivable, net of allowance for uncollectible notes of
$52,741 and $52,506, respectively
    
    
    193,946
    
    
    
    196,466Accrued interest receivable
    
    
    2,130
    
    
    
    2,207Investment in special purpose entity
    
    
    3,702
    
    
    
    5,173Amounts due from affiliates
    
    
    124
    
    
    
    288Inventories
    
    
    112,691
    
    
    
    109,303Land, equipment, buildings, and utilities, net
    
    
    11,777
    
    
    
    24,375Land held for sale
    
    
    2,991
    
    
    
    2,991Prepaid and other assets
    
    
    12,004
    
    
    
    14,340TOTAL ASSETS
    
    $
    351,601
    
    
    $
    369,506LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESAccounts payable and accrued expenses
    
    $
    9,012
    
    
    $
    7,980Accrued interest payable
    
    
    1,329
    
    
    
    1,302Amounts due to affiliates
    
    
    1,253
    
    
    
    929Unearned revenues
    
    
    5,736
    
    
    
    4,634Notes payable and capital lease obligations
    
    
    195,392
    
    
    
    218,310Senior subordinated notes
    
    
    34,883
    
    
    
    34,883Total Liabilities
    
    
    247,605
    
    
    
    268,038COMMITMENTS 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, 36,876,616 shares outstanding at March 31,
2005, and 36,860,238 shares outstanding at December 31, 2004
    
    
    372
    
    
    
    372Additional paid-in capital
    
    
    116,426
    
    
    
    116,614Retained deficit
    
    
    (8,392
    )
    
    
    (10,914
    )Treasury stock, at cost, 372,390 shares at March 31, 2005 and 388,768
shares at December 31, 2004
    
    
    (4,410
    )
    
    
    (4,604
    )Total Shareholders Equity
    
    
    103,996
    
    
    
    101,468TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    351,601
    
    
    $
    369,506
 The accompanying notes are an integral part of these consolidated financial statements. 4




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
   Common StockNumber of
    
    
    $0.01
    
    
    AdditionalShares
    
    
    Par
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury StockIssued
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    Shares
    
    
    Cost
    
    
    TotalJanuary 1, 2005
    
    
    37,249,006
    
    
    $
    372
    
    
    $
    116,614
    
    
    $
    (10,914
    )
    
    
    388,768
    
    
    $
    (4,604
    )
    
    $
    101,468Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    (16,378
    )
    
    
    194
    
    
    
    6Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,522
    
    
    
    
    
    
    
    
    
    
    
    2,522March 31, 2005
    
    
    37,249,006
    
    
    $
    372
    
    
    $
    116,426
    
    
    $
    (8,392
    )
    
    
    372,390
    
    
    $
    (4,410
    )
    
    $
    103,996
 The accompanying notes are an integral part of these consolidated financial statements. 5




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Three Months EndedMarch 31,2005
    
    
    2004OPERATING ACTIVITIES:Net income
    
    $
    2,522
    
    
    $
    2,344Adjustments to reconcile net income to net cash provided by operating activities:Income from discontinued operations, net of taxes
    
    
    (128
    )
    
    
    (129
    )Provision for uncollectible notes
    
    
    5,275
    
    
    
    6,400Depreciation and amortization
    
    
    798
    
    
    
    901Gain on sales of notes receivable
    
    
    (669
    )
    
    
    (426
    )Proceeds from sales of notes receivable
    
    
    6,021
    
    
    
    6,153Cash effect from changes in assets and liabilities:Restricted cash
    
    
    (449
    )
    
    
    (1,041
    )Notes receivable
    
    
    (8,216
    )
    
    
    (11,520
    )Accrued interest receivable
    
    
    77
    
    
    
    71Investment in special purpose entity
    
    
    1,471
    
    
    
    (769
    )Amounts due from affiliates
    
    
    1,272
    
    
    
    1,705Inventories
    
    
    (3,283
    )
    
    
    1,406Prepaid and other assets
    
    
    2,220
    
    
    
    (1,432
    )Accounts payable and accrued expenses
    
    
    1,026
    
    
    
    926Accrued interest payable
    
    
    27
    
    
    
    140Unearned revenues
    
    
    224
    
    
    
    192Net cash provided by operating activities  continuing operations
    
    
    8,188
    
    
    
    4,921Net cash used in operating activities  discontinued operations
    
    
    (841
    )
    
    
    (222
    )INVESTING ACTIVITIES:Purchases of land, equipment, buildings, and utilities
    
    
    (112
    )
    
    
    (98
    )Proceeds from sale of discontinued operations
    
    
    13,101
    
    
    
    Net cash provided by (used in) investing activities
    
    
    12,989
    
    
    
    (98
    )FINANCING ACTIVITIES:Proceeds from borrowings from unaffiliated entities
    
    
    41,855
    
    
    
    20,300Payments on borrowings to unaffiliated entities
    
    
    (64,773
    )
    
    
    (23,999
    )Proceeds from exercise of stock options
    
    
    6
    
    
    
    5Net cash used in financing activities
    
    
    (22,912
    )
    
    
    (3,694
    )Net change in cash and cash equivalents
    
    
    (2,576
    )
    
    
    907CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    10,935
    
    
    
    4,093End of period
    
    $
    8,359
    
    
    $
    5,000SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid, net of amounts capitalized
    
    $
    3,615
    
    
    $
    3,577Income taxes paid
    
    $
    350
    
    
    $
    SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Land and equipment acquired under capital leases
    
    $
    21
    
    
    $
    
 The accompanying notes are an integral part of these 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, 2005 are
not necessarily indicative of the results that may be expected for the year ending December 31,
2005 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, 2004 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 until collection is
deemed probable. Revenues related to one-time sampler contracts, which entitles the prospective owner to sample a
resort during certain periods, are recognized when earned. Revenue recognition is deferred until
the customer uses the stay, purchases a Vacation Interval, or allows the contract to expire. The Company receives fees for management services provided to each timeshare resorts 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 a $75 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 allowance for uncollectible notes is reduced by actual cancellations and losses experienced,
including losses related to previously sold notes receivable which became delinquent and were
reacquired pursuant to the recourse obligations discussed herein. Actual cancellations and losses
experienced represents all notes identified by management as being probable of cancellation.
Recourse to the Company on sales of customer notes receivable is governed by the agreements between
the purchasers and the Company. The Company classifies the components of the provision for uncollectible notes as either credit
losses or customer 8




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returns (cancellations of sales whereby the customer fails to make the first installment payment).
The provision for uncollectible notes pertaining to credit losses and customer returns are
classified in provision for uncollectible notes and Vacation Interval sales, respectively. Inventories Inventories are stated at the lower of cost or market value. Cost includes amounts
for land, construction materials, direct labor and overhead, taxes, and capitalized interest
incurred in the construction or through the acquisition of resort dwellings held for timeshare
sale. Timeshare unit costs are capitalized as inventory and are allocated to Vacation Intervals
based upon their relative sales values. Upon sale of a Vacation Interval, these costs are charged
to cost of sales on a specific identification basis. Vacation Intervals reacquired are placed back
into inventory at the lower of their original historical cost basis or market value. 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, 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. 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 Per Share Basic earnings per share is computed by dividing net income by the weighted
average shares outstanding. Earnings per share assuming dilution is computed by dividing net income
by the weighted average number of shares and 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). 9




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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 is required as if the Company had accounted for its employee
stock options under the fair value method of SFAS No. 123. Pro forma net income applicable to the
options granted is not likely to be representative of the effects on reported net income 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
and net income per share would have been the following pro forma amounts: March 31,
    
    
    March 31,2005
    
    
    2004Net income, as reported
    
    $
    2,522
    
    
    $
    2,344Stock-based compensation expense recorded under
the intrinsic value method
    
    
    
    
    
    
    Pro forma stock-based compensation expense
computed under the fair value method
    
    
    (64
    )
    
    
    (77
    )Pro forma net income
    
    $
    2,458
    
    
    $
    2,267Net income per share, basicAs reported
    
    $
    0.07
    
    
    $
    0.06Pro forma
    
    $
    0.07
    
    
    $
    0.06Net income per share, dilutedAs reported
    
    $
    0.06
    
    
    $
    0.06Pro forma
    
    $
    0.06
    
    
    $
    0.06
 There were no stock options granted during the first quarters of 2004 or 2005. 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 costs to inventories and cost of sales. Reclassifications Certain reclassifications have been made to the 2004 consolidated financial
statements to conform to the 2005 presentation. These reclassifications had no effect on net income
(loss). In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), the water utility property assets and liabilities have been designated as
held for sale effective December 31, 2004. In accordance with the provisions of SFAS No. 144, the
results of operations of these properties are included in income from discontinued operations. The
first quarter of 2004 has been reclassified for comparability, as required. Recent Accounting Pronouncements SFAS No. 151  In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4
(SFAS No. 151). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current
period charges. It also requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of
SFAS No. 151 will not impact the Companys consolidated financial position or results of
operations. SFAS No. 152  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial 10




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##### Table of Contents



Accounting Standards No. 152, Accounting for Real Estate Time-Sharing Transactions (SFAS No.
152). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference
the financial accounting and reporting guidance for real estate time-sharing transactions that is
provided in AICPA Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions
(SOP 04-2). This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2.
SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005,
and is to be reported as a cumulative effect of a change in accounting principle. The Company is
still evaluating the impact the adoption of SFAS No. 152 will have on its results of operations,
financial position, and future financial statements. SFAS No. 123  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Share-Based Payment, revised (SFAS No. 123R). SFAS No.
123R addresses the accounting for share-based payments to employees, including grants of employee
stock options. Under the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Instead, companies will be required to account for such
transactions using a fair-value method and recognize the expense in the consolidated statement of
income. SFAS No. 123R will be effective for the next fiscal year beginning after June 15, 2005 and
allows, but does not require, companies to restate the fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS No. 123R. The Company has not yet determined which
fair-value method and transitional provision it will follow. The adoption of SFAS No. 123R is not
expected to have a material impact on the Companys consolidated financial position or results of
operations. See Stock-Based Compensation in Note 2 for the pro forma impact on net income and net
income per share from calculating stock-based compensation costs under the fair value alternative
of SFAS No. 123. SFAS No. 153  In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, An Amendment of APB
Opinion No. 29 (SFAS No. 153). The guidance in APB Opinion No. 29, Accounting for Non-monetary
Transactions, is based on the principle that exchanges of non-monetary assets should be measured
based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however,
included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary
asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is
not expected to impact the Companys consolidated financial position or results of operations. Note 3  Earnings Per Share The following table illustrates the reconciliation between basic and diluted weighted average
shares outstanding for the three months ended March 31, 2005 and 2004: Three Months EndedMarch 31,2005
    
    
    2004Weighted average shares outstanding  basic
    
    
    36,861,169
    
    
    
    36,841,557Issuance of shares from stock options exercisable
    
    
    2,718,909
    
    
    
    2,793,813Repurchase of shares from stock options proceeds
    
    
    (637,063
    )
    
    
    (749,506
    )Weighted average shares outstanding  diluted
    
    
    38,943,016
    
    
    
    38,885,864
 Outstanding stock options totaling approximately 2,621,346 and 2,793,813 were dilutive securities
that were included in the computation of diluted EPS at March 31, 2005 and 2004, respectively.
Outstanding stock options totaling approximately 871,500 and 889,500 were not dilutive at March 31,
2005 and 2004, respectively, because the exercise price for such options substantially exceeded the
market price for the Companys shares. Note 4 Notes Receivable The Company provides financing to the purchasers of Vacation Intervals, which are collateralized by
their interest in 11




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##### Table of Contents



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, 2005 was
approximately 15.2%. In connection with the sampler program, the Company routinely enters into
notes receivable with terms of 10 months. Notes receivable from sampler sales were $1.9 million and
$1.5 million at March 31, 2005 and 2004, respectively, and are non-interest bearing. The activity in gross notes receivable is as follows for the three-month period ended March 31,
2005 and 2004 (in thousands): March 31,2005
    
    
    2004Balance, beginning of period
    
    $
    248,972
    
    
    $
    241,751Sales
    
    
    25,995
    
    
    
    26,793Collections
    
    
    (16,151
    )
    
    
    (14,649
    )Receivables charged off
    
    
    (4,111
    )
    
    
    (5,503
    )Sold notes receivable
    
    
    (8,018
    )
    
    
    (8,200
    )Balance, end of period
    
    $
    246,687
    
    
    $
    240,192
 The Company considers accounts over 60 days past due to be delinquent. As of March 31, 2005,
$700,000 of notes receivable, net of accounts charged off, were considered delinquent. An
additional $42.4 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, 2005 and 2004 (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Balance, beginning of period
    
    $
    52,506
    
    
    $
    48,372Provision for credit losses
    
    
    5,275
    
    
    
    6,400Receivables charged off
    
    
    (4,111
    )
    
    
    (5,503
    )Allowance related to notes sold
    
    
    (929
    )
    
    
    (704
    )Balance, end of period
    
    $
    52,741
    
    
    $
    48,565
 During the first quarter of 2005, the Company sold $8.0 million of notes receivable and
recognized pre-tax gains of $669,000. 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 $6.0 million, which was used to pay down borrowings under its revolving loan
facilities. Note 5  Debt Notes payable, capital lease obligations, and senior subordinated notes as of March 31, 2005 and
December 31, 2004 (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004$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,
revolving through March 2006, and a $11.3 million term loan with an
interest rate of 8%)
    
    $
    30,891
    
    
    $
    37,514$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    
    
    
    
    9,991$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,
revolving through March 2006, and a $11.0 million term loan with an
interest rate of 8%)
    
    
    30,647
    
    
    
    37,039$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    
    
    
    
    9,852$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, revolving
through March 2006, and a $1.7 million term loan with an interest rate
of 8%)
    
    
    4,569
    
    
    
    5,250$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    
    
    
    
    1,415$66.4 million conduit loan, due March 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%
    
    
    47,304
    
    
    
    50,299$26.3 million conduit loan, due September 2011, principal and interest
payable from the proceeds obtained on customer notes receivable
pledged as collateral for the note, at an interest rate of 7.9%
    
    
    26,334
    
    
    
    
 12




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##### Table of Contents



March 31,
    
    
    December 31,2005
    
    
    2004$40.4 million loan agreement, which contains certain financial
covenants, due March 2009, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (as of July 2004 the loan agreement is limited to a $25
million revolver with an interest rate of the higher of Prime or
Federal Funds plus 2.75% with a 6% floor, revolving through March
2006)
    
    
    18,478
    
    
    
    18,689$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)
    
    
    
    
    
    
    9,080$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
    
    
    
    
    
    
    5,735$10 million revolving loan agreement, which contains certain financial
covenants, revolving through March 2006, due March 2009,
collateralized by either notes receivable or inventory, interest
payable monthly, at an interest rate of the higher of Prime plus 2% or
Federal Funds plus 4.75% with a 6.0% floor
    
    
    10,000
    
    
    
    10,000$10 million inventory loan agreement, which contains certain financial
covenants, due March 2009, 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 2009, interest payable monthly, at an interest
rate of Prime plus 3% with a 6% floor (as of August 2004 the loan
agreement is limited to $6 million)
    
    
    6,000
    
    
    
    6,000$5 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest
rate of Prime plus 3% with a 6% floor
    
    
    5,000
    
    
    
    Various notes, due from May 2005 through September 2009, collateralized
by various assets with interest rates ranging from 0.9% to 12.4%
    
    
    5,932
    
    
    
    7,122Total notes payable
    
    
    195,155
    
    
    
    217,986Capital lease obligations
    
    
    237
    
    
    
    324Total notes payable and capital lease obligations
    
    
    195,392
    
    
    
    218,3108.0% senior subordinated notes, due 2010, interest payable
semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    24,671
    
    
    
    24,6716.0% 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
    
    
    3,796
    
    
    
    3,79610 1/2% senior subordinated notes, subordinate to the 6.0% senior
subordinated notes above, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Companys present and
future domestic restricted subsidiaries
    
    
    2,146
    
    
    
    2,146Interest on the 6.0% senior subordinated notes, due 2007, and the 8.0%
senior subordinated notes, due 2010, interest payable semiannually
through October 2007 on April 1 and October 1, guaranteed by all of
the Companys present and future domestic restricted subsidiaries
    
    
    4,270
    
    
    
    4,270Total senior subordinated notes
    
    
    34,883
    
    
    
    34,883Total
    
    $
    230,275
    
    
    $
    253,193
 At March 31, 2005, LIBOR rates on the Companys senior credit facilities were from 2.56% to
2.93%, and the Prime rate was 5.50%. At December 31, 2004, LIBOR rates on the Companys senior
credit facilities were from 2.03% to 2.42%, and the Prime rate was 5.00%. On March 28, 2005, the Company entered into a $26.3 million amendment and expansion of its existing
conduit term loan agreement with SF-II. Under the terms of the amendment, the Company sold
approximately $31.0 million of notes receivable and received cash proceeds of approximately $26.3
million. The cash proceeds were used to retire all of the $12.5 million aggregate balance
outstanding under two of the Companys non-revolving credit facilities with one of its senior
lenders. The remaining $13.8 million of net cash proceeds were used to repay a portion of the
Companys revolving credit facilities. The new conduit term loan with SF-II will mature in 2011 and
bears interest at a fixed annual rate of 7.9%. On March 31, 2005, the $20.7 million aggregate outstanding balance due on the Companys three term
loans with one of its senior lenders were paid in full by the senior lender on behalf of the
Company under the terms and conditions of
the Companys senior revolving credit facilities. Under these terms, the senior lender advanced
funds available under its revolving facilities with the Company and applied those advances to the
balances due under the term loans. 13




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##### Table of Contents



Upon the repayment of the term loans and the fulfillment of certain other conditions that were met
on or before March 31, 2005, various amendments to the loan documents previously entered into
between the Company and one of its senior lenders became effective and fully binding. These
amendments provide for the elimination of certain restrictive covenants under which the Company had
been operating under since its debt restructuring in May 2002. Among other things, the amendments,
which became effective on March 31, 2005, eliminate the requirements that the Company must have a
standby manager for its resorts, or a resort consultant, and that the Company operate within a
business model under which it had been required to do since November 2003. The amendments also
modify the Companys existing tangible net worth covenant to make this covenant less restrictive.
The modification of these covenants allows the Company more flexibility in pursuing both new
financing arrangements and further modifications to its existing credit facilities. The March 31, 2005 repayment of the Companys term loans was made possible in part by a new $5
million inventory loan with one of the Companys senior lenders. The new inventory loan matures in
March 2007 and accrues interest at a variable rate equal to Prime plus 3%, with a 6% floor. The
agreement between the Company and the senior lender also extends the due dates on the two other
inventory loans with the same lender from 2007 to 2009. Note 6  Subsidiary Guarantees As of March 31, 2005, all subsidiaries of the Company, except the SPE and SF-II, have guaranteed
the $34.9 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, 2005 and 2004.
Combined summarized balance sheet information as of March 31, 2005 and December 31, 2004 for the
Guarantor Subsidiaries is as follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Other assets
    
    $
    2
    
    
    $
    2Total assets
    
    $
    2
    
    
    $
    2Investment by parent (includes equity
and amounts due to parent)
    
    $
    2
    
    
    $
    2Total liabilities and equity
    
    $
    2
    
    
    $
    2
 Note 7 Discontinued Operations In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), the water and utility property assets and liabilities were designated as held for
sale effective December 31, 2004. In accordance with the provisions of SFAS No. 144, the results of
operations of these properties are included in income from discontinued operations. The three
months ended March 31, 2004 has been reclassified for comparability, as required. The carrying
amounts of the water and utility property assets and liabilities are summarized below (in
thousands): March 31,
    
    
    December 31,2005
    
    
    2004Cash
    
    $
    
    
    
    $
    841Amount due from affiliates
    
    
    
    
    
    
    150Land, equipment, buildings, and utilities, net
    
    
    
    
    
    
    11,912Prepaid and other assets
    
    
    
    
    
    
    55Total assets
    
    $
    
    
    
    $
    12,958Accounts payable
    
    $
    
    
    
    $
    70Total liabilities
    
    $
    
    
    
    $
    70
 On March 11, 2005, the Company sold the water distribution and waste water treatment utilities
assets at eight of its timeshare resorts for an aggregate purchase price of $13.1 million, which
will result in a gain of approximately 14




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##### Table of Contents



$879,000 when all conditions of the sale are met. At March
31, 2005 this deferred gain is included in unearned revenue. The purchasers of the utilities are
Algonquin Water Resources, of Texas, LLC, a Texas limited liability company; Algonquin Water
Resources of Missouri, LLC, a Missouri limited liability company; Algonquin Water Resources of
Illinois, LLC, an Illinois limited liability company; Algonquin Water Resources of America, Inc., a
Delaware corporation; and Algonquin Power Income Fund, an open-ended investment trust established
under the laws of Ontario, Canada (collectively, the Purchasers). Certain of the Purchasers have
entered into a services agreement to provide uninterrupted water supply and waste water treatment
services to the Companys eight timeshare resorts to which the transferred utility assets relate.
The Purchasers will charge the Companys timeshare resorts the tariffed rate for those utility
services that are regulated by the states in which the resorts are located. For any unregulated
utility services, the Purchasers will charge a rate set in accordance with the ratemaking
procedures of the Texas Commission on Environmental Quality. The proceeds of the Companys sale of
these utility assets were used to reduce senior debt in accordance with the Companys loan
agreements with its senior lenders. Notwithstanding the closing of this sale of utilities assets, the agreement contains provisions
relating to the required post-closing receipt of customary governmental approvals from utility
regulators in Missouri and Texas. Specifically, if the Purchasers do not receive required
approvals from Missouri regulators relating to the utility assets in Missouri (the Missouri
Assets) within twelve months of closing, the Missouri Assets will be reconveyed to the Company,
the transaction involving the Missouri Assets will be rescinded, and the Company will be obligated
to return to the Purchasers approximately $3.8 million of the purchase price attributable to the
Missouri Assets. Similarly, if the Purchasers do not receive required approvals from Texas
regulators relating to the utility assets in Texas (the Texas Assets) within eighteen months of
closing, the Texas Assets will be reconveyed to the Company, the transaction involving the Texas
Assets will be rescinded, and the Company will be obligated to return to the Purchasers
approximately $6.2 million of the purchase price attributable to the Texas Assets. The net income
from discontinued operations is summarized as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004REVENUE:Other income
    
    $
    438
    
    
    $
    627COSTS AND OPERATING EXPENSES:Other expense
    
    
    278
    
    
    
    303Depreciation and amortization
    
    
    
    
    
    
    195Total costs and operating expenses
    
    
    278
    
    
    
    498Income from discontinued operations
    
    
    160
    
    
    
    129Provision for income taxes
    
    
    (32
    )
    
    
    Net income from discontinued operations
    
    $
    128
    
    
    $
    129
 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. 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. A special master is
appointed by the court to assist the court with judicial duties. The special master will decide
discovery disputes and make recommendations on substantive motions. Additionally, by agreement of
the parties, the court has ordered that the special master will hear the lawsuit without a jury
beginning on September 6, 2005 and make a recommendation for disposition of the case to the court.
Discovery continued in the lawsuit during the first quarter of 2005, 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. The Company intends to vigorously defend this litigation. 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, 15




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##### Table of Contents



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.
The trial, which was rescheduled for March 21, 2005 has been continued and the parties, through
their counsel have agreed in writing to the terms of a settlement, which terms have not yet been reduced to a
definitive settlement agreement and executed by all parties. The
Company believes that it will not incur any liability under these
terms of settlement and the likelihood of payment by the Company is
remote; however, in any event, the terms of settlement would limit
any possible future contingent liability of the Company to a maximum
of $200,000. In order for any further claims of this sort to be
asserted against the Company by the plaintiffs, the terms of
settlement require that the plaintiffs must first exhaust all
reasonable efforts to collect at least $200,000 from a third party
insurance carrier and all amounts collected from the carrier would be
a credit against the Company's $200,000 maximum liability. Should the settlement not
be fully implemented, the Company intends to continue 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 the lawsuits currently pending 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. Various legal actions and claims may be instituted or asserted in the future against the Company
and its subsidiaries, including those arising out of the Companys sales and marketing activities
and contractual arrangements. Some of the matters may involve claims, which, if granted, could be
materially adverse to the Companys financial condition. Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not
predictable with assurance. Reserves will be established from time to time by the Company when
deemed appropriate under generally acceptable accounting principles. However, the outcome of a
claim for which the Company has not deemed a reserve to be necessary may be decided unfavorably to
the Company and could require the Company to pay damages or make other expenditures in amounts or a
range of amounts that could be materially adverse to the Company. 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, 2005,
Silverleaf Clubs related note payable balance was $469,000. Note 9  Subsequent Events On April 29, 2005, the Company entered into a $15 million inventory loan agreement and a $50
million receivables loan agreement with CapitalSource Finance, LLC (CapitalSource). Under the
terms of the inventory loan agreement, the Company may from time to time borrow up to $15 million,
which will be secured by a portion of its inventory of unsold timeshare intervals. The inventory
loan agreement will mature on April 29, 2008 and bears interest at the rate of Prime plus 3%. Under
the terms of the receivables loan agreement the Company may from time to time borrow up to an
aggregate of $50 million, which will be secured by notes receivable from timeshare interval
purchasers at an advance rate of 75% of the aggregate outstanding principal balance of all eligible
notes receivable pledged to CapitalSource as security for the loan. The receivables loan agreement
will mature on April 29, 2008 and bears interest at a rate equal to LIBOR plus 4.25%. The proceeds
from each of the CapitalSource loans will be used for general working capital purposes. 16




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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, 2004. The Company currently owns and operates 13 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 89,000. 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 31,2005
    
    
    2004As a percentage of total revenues:Vacation Interval sales
    
    
    71.6
    %
    
    
    75.3
    %Sampler sales
    
    
    1.5
    %
    
    
    1.1
    %Total sales
    
    
    73.1
    %
    
    
    76.4
    %Interest income
    
    
    23.2
    %
    
    
    21.0
    %Management fee income
    
    
    1.1
    %
    
    
    0.7
    %Gain on sale of notes receivable
    
    
    1.6
    %
    
    
    1.0
    %Other income
    
    
    1.0
    %
    
    
    0.9
    %Total revenues
    
    
    100.0
    %
    
    
    100.0
    %As a percentage of Vacation Interval sales:Cost of Vacation Interval sales
    
    
    15.7
    %
    
    
    18.9
    %Provision for uncollectible notes
    
    
    17.5
    %
    
    
    20.0
    %As a percentage of total sales:Sales and marketing
    
    
    55.8
    %
    
    
    50.8
    %As a percentage of total revenues:Operating, general and administrative
    
    
    16.0
    %
    
    
    14.5
    %Depreciation and amortization
    
    
    1.9
    %
    
    
    2.1
    %As a percentage of interest income:Interest expense and lender fees
    
    
    44.9
    %
    
    
    48.0
    %
 17




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Results of Operations for the Three Months Ended March 31, 2005 and 2004 Revenues Revenues for the quarter ended March 31, 2005 were $42.1 million, representing a $396,000 decrease
from revenues of $42.5 million for the quarter ended March 31, 2004. The decrease is primarily due
to decreased sales, partially offset by increased interest income and gain on sales of notes
receivable during the first quarter of 2005 versus the same period of 2004. The following table summarizes our Vacation Interval sales (dollars in thousands). 2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    Average$ Sales
    
    
    Intervals
    
    
    Price
    
    
    $ Sales
    
    
    Intervals
    
    
    PriceInterval Sales to New Customers
    
    $
    15,009
    
    
    
    1,280
    
    
    $
    11,726
    
    
    $
    14,905
    
    
    
    1,402
    
    
    $
    10,631Upgrade Interval Sales to Existing Customers
    
    
    4,959
    
    
    
    650
    
    
    
    7,629
    
    
    
    9,676
    
    
    
    1,328
    
    
    
    7,286Additional Interval Sales to Existing Customers
    
    
    10,169
    
    
    
    1,193
    
    
    
    8,524
    
    
    
    7,406
    
    
    
    880
    
    
    
    8,416Total
    
    $
    30,137
    
    
    
    
    
    
    
    
    
    
    $
    31,987
 Overall, Vacation Interval sales decreased $1.9 million during the first quarter of 2005
versus the first quarter of 2004, primarily due to lower interval sales to existing customers, due
to the testing of new sales programs for existing customers during the first quarter of 2005. As of
April 1, 2005 the Company has ended the tests and returned to previous programs. The number of
interval sales to new customers decreased 8.7%, but average prices increased 10.3%, resulting in a
0.7% net increase in the sales amount, and the number of interval sales to existing customers
decreased 16.5%, but average prices increased 6.1%, resulting in an 11.4% net decrease in the sales
amount during the first quarter of 2005 versus the same period of 2004. Total interval sales for
the first quarter of 2005 included 628 biennial intervals (counted as 314 Vacation Intervals)
compared to 264 biennial intervals (counted as 132 Vacation Intervals) in the first quarter of
2004. Sampler sales increased $195,000 to $641,000 for the quarter ended March 31, 2005, compared to
$446,000 for the same period in 2004. 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 2005 relate to 2003 sales activity. Interest income increased $831,000, or 9.3%, to $9.8 million during the first quarter of 2005 from
$8.9 million during the same period of 2004. The increase primarily resulted from the higher
average outstanding notes receivable balance during the first quarter of 2005 versus the same
period of 2004, primarily due to the increase in Vacation Interval sales during the last nine
months of 2004. In addition, the average yield on the Companys outstanding notes receivable
increased to 15.2% at March 31, 2005 from 14.9% at March 31, 2004. Management fee income, which consists of management fees collected from the resorts management
clubs, cannot exceed the management clubs net income. Management fee income increased $150,000 to
$450,000 for the first quarter of 2005 versus $300,000 for the first quarter of 2004, due primarily
to increased profitability of the resorts management clubs during the first quarter of 2005 versus
the same period of 2004. Gain on sales of notes receivable was $669,000 for the first quarter of 2005, resulting from the
sale of $8.0 million of notes receivable to the SPE. The $426,000 gain in the first quarter of 2004
resulted from the sale of $8.2 million of notes receivable to the SPE. Other income consists of marina income, golf course and pro shop income, and other miscellaneous
items. Other income remained fairly constant at $427,000 for the first quarter of 2005 versus
$392,000 for the same period of 2004. Cost of Sales Cost of sales as a percentage of Vacation Interval sales decreased to 15.7% during the first
quarter of 2005 versus 18.9% for the same period of 2004 primarily due to the Company selling a
much higher percentage of its lower cost inventory in the first quarter of 2005 versus selling
primarily its higher cost inventory during the same period of 2004. The $1.3 million decrease in
cost of sales in the first quarter of 2005 compared to the first quarter of 2004 is primarily due
to the inventory costing and to a lesser extent, lower sales. 18




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Sales and Marketing Sales and marketing expenses as a percentage of total sales increased to 55.8% for the quarter
ended March 31, 2005, from 50.8% for the same period of 2004. The increased percentage is the
result of lower interval sales to existing customers, as described in Revenues above, and higher
sales and marketing expenses. Sales and marketing expense increased $717,000 for the first quarter
of 2005, as compared to the same period of 2004. This was primarily the result of increased
marketing expenses related to more expensive direct mail marketing programs established during the
first quarter of 2005 for outside sales to new customers, and the expansion of programs to existing
customers during the first quarter of 2005. Certain credit facilities of the Company contain a financial covenant that requires sales and
marketing expense to be 55% or less of total sales for the latest rolling twelve months. For the
latest rolling twelve months ended March 31, 2005, this percentage was 52.4%. Historically, this
percentage is higher in the first and fourth quarters when sales volumes are lower, and lower in
the second and third quarters when sales volumes are higher. Accordingly, we do not currently
foresee issues regarding compliance with this financial covenant for the remainder of the year
ending December 31, 2005. Provision for Uncollectible Notes The provision for uncollectible notes as a percentage of Vacation Interval sales was 17.5% in the
first quarter of 2005 compared to 20.0% for the first quarter of 2004. The decrease from 2004 to
2005 is due to improved performance of notes originated in 2003, 2004, and 2005 as compared to
notes originated in earlier years, before the Company focused on selling to customers with a higher
quality of credit. The allowance for doubtful accounts was 21.4% and 21.1% of gross notes
receivable as of March 31, 2005 and 2004, respectively. 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 increased to 16.0%
for the first quarter of 2005, from 14.5% for the same period of 2004. Overall, operating, general
and administrative expense increased by $548,000 for the first quarter of 2005, as compared to the
same period of 2004. This was primarily due to increased salaries and professional fees. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues decreased to 1.9% for the
quarter ended March 31, 2005 versus 2.1% for the same quarter of 2004. Overall, depreciation and
amortization expense decreased $103,000 for the first quarter of 2005, as compared to 2004,
primarily due to a general reduction in capital expenditures since 2000. In addition, depreciation
of the Companys water distribution and waste water treatment utilities assets was ceased effective
December 31, 2004 due to the assets being designated as held for sale. Interest Expense and Lender Fees Interest expense and lender fees as a percentage of interest income decreased to 44.9% for the
first quarter of 2005, from 48.0% for the same period of 2004. This decrease is primarily the
result of the increased interest income during the first quarter of 2005 versus the same period of
2004, partially offset by an increase in the Companys weighted average cost of borrowings from
6.7% as of March 31, 2004 to 6.9% as of March 31, 2005. Overall, interest expense and lender fees
increased $103,000 during the first three months of 2005 versus the same period of 2004. Income before Benefit (Provision) for Income Taxes and Discontinued Operations Income before benefit (provision) for income taxes and discontinued operations increased to $3.0
million for the quarter ended March 31, 2005, as compared to $2.2 million for the quarter ended
March 31, 2004, as a result of the above-mentioned operating results. Benefit (Provision) for Income Taxes 19




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Benefit (provision) for income taxes as a percentage of income before benefit (provision) for
income taxes and discontinued operations was a provision of 20.0% for the first quarter of 2005 as
compared to a benefit of 0.1% for the first quarter of 2004. The higher effective income tax rate
during the first quarter of 2005 was the result of utilizing fully the NOL carryforward during the
year and incurring tax expense. The low effective income tax rate during the first quarter of 2004
was the result of the 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 from Continuing Operations Net income from continuing operations increased to $2.4 million for the quarter ended March 31,
2005, as compared to $2.2 million for the quarter ended March 31, 2004, as a result of the
above-mentioned operating results. Income from Discontinued Operations Income from discontinued operations, net of income taxes, remained approximately the same at
$128,000 for the first quarter of 2005, as compared to $129,000 for the same period of 2004. Net Income Net income increased to $2.5 million for the quarter ended March 31, 2005, as compared to $2.3
million for the quarter ended March 31, 2004, as a result of the above-mentioned operating results. Liquidity and Capital Resources Sources of Cash.The Company generates cash primarily from the cash received on the sale of
Vacation Intervals, the financing of customer notes receivable from Silverleaf Owners, 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, 2005, the Companys operating activities reflected cash provided by
operating activities of $8.2 million versus $4.9 million during the same period of 2004. The
increase in cash provided by operating activities was primarily the result of $2.7 million of
refunds received during the first quarter of 2005 due to reducing funds being held in escrow
related to customer down payments on new sales, the decrease in customer notes receivable during
the quarter ended March 31, 2005 versus the same period of 2004, and the increase in waterfall
payments received from the Companys SPE during the first quarter of 2005 versus the same period of
2004. Although it appears the Company has adequate liquidity to meet its needs in 2005 and 2006, it is
continuing to identify additional financing arrangements into 2007 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. 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. However, during the first quarter of 2005, net cash provided by investing
activities was $13.0 million, due primarily to the sale of the Companys water distribution and
waste water treatment utilities assets at eight of the Companys resorts. During the first quarter
of 2004, net cash used in investing activities was $98,000, due to equipment purchases. The Company
evaluates sites for additional new resorts or acquisitions on an ongoing basis. During the three months ended March 31, 2005, net cash used in financing activities was $22.9
million compared to $3.7 million in the comparable 2004 period. The increase in cash used in
financing activities was the result of increased payments on borrowings against pledged notes
receivable as the Company paid in full its two non-revolving loans with one of its senior lenders
in an aggregate amount of $12.5 million during the first quarter of 2005, as well as paying off its
$20.7 million of term notes with one of its senior lenders. This activity was partially 20




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offset by increased borrowings against pledged notes receivable, largely due to the $26.3 million
conduit term loan transaction through SF-II during the first quarter of 2005. During the first
quarter of 2004, net cash of $3.7 million used in financing activities was the result of $24.0
million of payments on borrowings against pledged notes receivable, partially offset by $20.3
million of proceeds received from borrowings against pledged notes receivable. At March 31, 2005, the Companys senior credit facilities provided for loans of up to $224.6
million of which approximately $189.2 million of principal related to advances under the credit
facilities was outstanding. For the three months ended March 31, 2005, the weighted average cost of
funds for all borrowings, including the senior subordinated debt, was 6.9%. 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. The Company 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. On March 31, 2005
the facility amount was further reduced to $75 million. The SPE allows the Company to realize the
benefit of an additional $75 million credit facility 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 2005, the Company sold $8.0 million of notes receivable to the SPE and
recognized pre-tax gains of $669,000. In conjunction with these sales, the Company received cash
consideration of $6.0 million, which was used to pay down borrowings under its revolving loan
facilities. 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 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 $161,000 and $187,000 for the
quarters ended March 31, 2005 and 2004, 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, 2005, the SPE held notes receivable totaling $70.7
million, with related borrowings of $62.7 million. Except for the repurchase of notes that fail to
meet initial eligibility requirements, the Company is not obligated to repurchase defaulted or any
other contracts sold to the SPE. It is anticipated, however, that 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 $3.7 million at March 31, 2005. 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. It is
anticipated that significant AMT will be due during 2005. 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 21




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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. As of December 31, 2004, the Company had $225 million in net operating losses (NOLs), which
expire between 2018 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. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk As of and for the three months ended March 31, 2005, 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 $189.2 million at March 31, 2005, is partially
fixed and partially variable. The impact of a one-point interest rate change on the outstanding
balance of variable-rate financial instruments at March 31, 2005, on the Companys quarterly
results of operations would be approximately $238,000 or approximately $0.01 per share. At March 31, 2005, 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 $5.7 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 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 primarily and the Companys customer receivables bear
interest at fixed rates, increases in interest rates will erode the income that the Company has
historically obtained due to this spread and could cause the rate on the Companys borrowings 22




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to
exceed the rate at which the Company provides financing to its customers. The Company has not
engaged in interest rate hedging transactions. Therefore, any increase in interest rates,
particularly if sustained, could have a material adverse effect on the Companys results of
operations, cash flows, and financial position. Availability of Funding Sources The Company funds substantially all of the notes receivable,
timeshare inventories, and land inventories which it originates or purchases with borrowings
through its financing facilities, sales of notes receivable, internally generated funds, and
proceeds from public debt and equity offerings. Borrowings are in turn repaid with the proceeds
received by the Company from repayments of such notes receivable. To the extent that the Company is
not successful in maintaining or replacing existing financings, it would have to curtail its
operations or sell assets, thereby having a material adverse effect on the Companys results of
operations, cash flows, and financial condition. Geographic Concentration The Companys notes receivable are primarily originated in Texas,
Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in such concentrations is
dependent upon regional and general economic stability, which affects property values and the
financial stability of the borrowers. The Companys Vacation Interval inventories are concentrated
in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in such concentrations
is in the continued popularity of the resort destinations, which affects the marketability of the
Companys products and the collection of notes receivable. 
 Item 4. Controls and Procedures 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. 
 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. 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. A special master is
appointed by the court to assist the court with judicial duties. The special master will decide
discovery disputes and make recommendations on substantive motions. Additionally, by agreement of
the parties, the court has ordered that the special master will hear the lawsuit without a jury
beginning on September 6, 2005 and make a recommendation for disposition of the case to the court.
Discovery continued in the lawsuit during the first quarter of 2005, 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. The Company intends to vigorously defend this litigation. 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 23




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of litigation
are being paid by its insurance carriers, subject to a reservation of rights by these insurers.
The trial, which was rescheduled for March 21, 2005 has been continued and the parties, through
their counsel have agreed in writing to the terms of a settlement, which terms have not yet been reduced to a
definitive settlement agreement and executed
by all parties. The
Company believes that it will not incur any liability under these
terms of settlement and the likelihood of payment by the Company is
remote; however, in any event, the terms of settlement would limit
any possible future contingent liability of the Company to a maximum
of $200,000. In order for any further claims of this sort to be
asserted against the Company by the plaintiffs, the terms of
settlement require that the plaintiffs must first exhaust all
reasonable efforts to collect at least $200,000 from a third party
insurance carrier and all amounts collected from the carrier would be
a credit against the Company's $200,000 maximum liability. Should the settlement not be fully implemented, the Company
intends to continue 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 the lawsuits currently pending 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 200231.2
    Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1
    Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
    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, 2005: Current Report on Form 8-K filed with the SEC on March 16 relating to the sale by the
Registrant of certain of its water distribution and wastewater facilities. Current Report on Form 8-K filed with the SEC on March 23 relating to the Registrants
earnings release for the quarter and year ended December 31, 2004. Current Report on Form 8-K filed with the SEC on March 31 relating to the amendment to the
Registrants loan agreements 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 13, 2005
    
    By:
    
    /s/ ROBERT E. MEADRobert E. MeadChairman of the Board andChief Executive OfficerDated: May 13, 2005
    
    By:
    
    /s/ HARRY J. WHITE, JR.Harry J. White, Jr.Chief Financial Officer
 24




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##### Table of Contents



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
 25