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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For The Fiscal Year Ended December 31, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM _________ TO _________ Commission File Number 001-13003 Silverleaf Resorts, Inc. (Exact Name of Registrant as Specified in its Charter) Texas
    
    75-2259890(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)1221 River Bend Drive, Suite 120
    
    75247Dallas, Texas
    
    (Zip Code)(Address of Principal Executive Offices)
 Registrants Telephone Number, Including Area Code: 214-631-1166 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, $.01 par
value Securities Registered Pursuant to Section 12(g) of the Act: None    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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the Registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ    The aggregate market value of the voting stock held by non-affiliates of the Registrant,
based upon the last sales price of the Common Stock on June 30, 2004 as reported on the OTC
Bulletin Board operated by Nasdaq Stock Market, Inc., was approximately
$18,131,312 (based on 12,950,937 shares held by non-affiliates). There were 36,860,238 shares
of the Registrants Common Stock, $.01 par value, outstanding at June 30, 2004. As of March 25, 2005 there were 36,860,238 shares of the Registrants Common Stock, $.01 par
value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 2005 Annual Meeting of Shareholders,
which will be mailed to shareholders within 120 days after the end of the fiscal year, are
incorporated by reference into Part III hereof.




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FORM 10-K INDEX PagePART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    38Item 6. Selected Financial Data
    
    
    40Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    41Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    55Item 8. Financial Statements and Supplementary Data
    
    
    56Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    56Item 9A. Controls and Procedures
    
    
    56PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    56Item 11. Executive Compensation
    
    
    57Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    57Item 13. Certain Relationships and Related Transactions
    
    
    57Item 14. Principal Accountant Fees and Services
    
    
    57PART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    58Index to Consolidated Financial Statements
    
    
    F-1SubsidiariesConsent of BDO Seidman, LLPCertification 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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CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K UNDER ITEMS 1, 2, AND 7, IN ADDITION TO CERTAIN
STATEMENTS CONTAINED ELSEWHERE IN THIS 10-K, 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 ITS 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 IN PART I, ITEM 1, OF THIS REPORT. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE
DATE OF THIS REPORT ON FORM 10-K AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE
FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THE
PROJECTIONS IN THE FORWARD-LOOKING STATEMENTS. 
 PART I 
 ITEM 1. BUSINESS Overview The principal business of Silverleaf Resorts, Inc. (Silverleaf, the Company, or we) is
the development, marketing, and operation of drive-to and destination timeshare resorts. As of
December 31, 2004, we own eight drive-to resorts in Texas, Missouri, Illinois, and Georgia (the
Drive-to Resorts). We also own four destination resorts in Texas, Missouri, and Massachusetts
(the Destination Resorts). In February 2005, we obtained approval to operate a fifth destination
resort in Florida, which was acquired in October 2004. Also in 2005, we reclassified one of our
Drive-to Resorts in Texas to a Destination Resort. The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable
accommodations in locations convenient to their residences and are located near major metropolitan
areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent
short-stay getaways. We believe such short-stay getaways are growing in popularity as a vacation
trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer
our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and
travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the
Existing Resorts) provide a quiet, relaxing vacation environment. We believe our resorts offer
our customers an economical alternative to commercial vacation lodging. The average price for an
annual one-week vacation ownership (Vacation Interval) for a two-bedroom unit at the Existing
Resorts was $9,671 for 2004 and $9,510 for 2003. Owners of Silverleaf Vacation Intervals at the Existing Resorts (Silverleaf Owners) enjoy
certain distinct benefits. These benefits include (i) use of vacant
lodging facilities at the Existing Resorts through our Bonus Time Program; (ii) year-round access
to the Existing Resorts non-lodging amenities such as fishing, boating, horseback riding, tennis,
or golf on a daily basis for little or no additional charge; and (iii) the right to exchange a
Vacation Interval for a different time period at a different Existing Resort through our internal
exchange program. These benefits are subject to availability and other limitations. Most Silverleaf
Owners may also enroll in the Vacation Interval exchange network operated by Resort Condominiums
International (RCI). Our new destination resort in Florida is not under contract with RCI;
however it is under contract with Interval International, Inc., a competitor of RCI. Certain Significant 2004 Events  
    We completed an offer on June 7, 2004 to exchange $24,671,000 of principal amount of our
6% senior subordinated notes due 2007 for $24,671,000 of principal amount of 8% senior
subordinated notes due 2010 and a cash payment of $271,381, representing accrued, unpaid
interest from April 1, 2004 through June 6, 2004. The primary purpose of this exchange
offer was to extend the due date of the senior subordinated notes from 2007 to 2010.
    In July 2004, we completed the acquisition of a 500-acre tract of land located on Route
7 in Berkshire County, Massachusetts. The 500-acre site, formerly known as the Brodie
Mountain Ski Resort, is approximately 25 miles from our existing Oak N Spruce Resort
located in South Lee, Massachusetts. The property includes ski trails, ski lifts, a lodge,
equipment rental shop, canteen, and restaurant. We have not yet finalized our future
development plans for the site, however we believe that the site is suitable for
development as an additional timeshare resort. Preliminary indications are that the site
would accommodate up to 324 units encompassing 16,848 one-week vacation intervals. 3




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
    In July 2004, we restructured our loan facility with one of our senior lenders whereby
the existing $35 million revolving component was reduced to $25 million and the due date
extended to March 2009, the existing $5.4 million term component was paid in full, and a
new $10 million revolving component was established, due March 2009, collateralized by
either notes receivable or inventory.
    In October 2004, we completed the acquisition of a 4.8 acre tract of land located in
Davenport, Florida, just outside Orlando, Florida, for an aggregate purchase price of
approximately $6.0 million. The site, formerly known as the Villas at Polo Park, is near
the major Florida tourist attractions of Walt Disney World, Sea World, and Universal
Studios. The property is comprised of 48 two and three bedroom units and provides resort
amenities such as a heated outdoor swimming pool with whirlpool, fitness center, arcade,
playground, sand volleyball and basketball courts. Our public offering statement filed with
the Florida Bureau of Standards and Registrations was approved in February 2005, granting
us sales approval for 16 units encompassing 832 one-week vacation intervals. We purchased
this property in lieu of building units at our existing destination resorts, and we plan to
operate the resort as a timeshare resort under the name Orlando Breeze. Certain Significant 2005 Events On March 11, 2005, we sold the water distribution and waste water treatment utilities assets
at eight of our timeshare resorts for an aggregate purchase price of $13.2 million, which will
result in a gain of approximately $1.0 million if all conditions of the sale are met. 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 eight timeshare resorts to which the transferred
utility assets relate. The Purchasers will charge the 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 sale
of these utility assets will be used to reduce senior debt in accordance with our loan agreements
with our 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 us, the
transaction involving the Missouri Assets will be rescinded, and we 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 us, the transaction involving the Texas Assets will be
rescinded, and we will be obligated to return to the Purchasers approximately $6.2 million of the
purchase price attributable to the Texas Assets. Operations Our primary business is marketing and selling Vacation Intervals from our inventory to
individual consumers. Our principal activities in this regard include:  
    acquiring and developing timeshare resorts;
    marketing and selling one-week annual and biennial Vacation Intervals to prospective first-time owners;
    marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners;
    financing the purchase of Vacation Intervals; and
    managing timeshare resorts. We have in-house capabilities which enable us to coordinate all aspects of development and
expansion of the Existing Resorts and the potential development of any future resorts, including
site selection, design, and construction pursuant to standardized plans and specifications. We perform substantial marketing and sales functions internally. We have made significant
investments in operating technology, including telemarketing and computer systems and proprietary
software applications. We identify potential purchasers through internally developed marketing
techniques and through cooperative arrangements with outside vendors. We sell Vacation Intervals 4




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through on-site sales offices located at certain of our resorts, which are located near major
metropolitan areas. This practice provides us an alternative to marketing costs of subsidized
airfare or lodging, which are typically associated with the timeshare industry. As part of the Vacation Interval sales process, we offer potential purchasers financing of up
to 90% of the purchase price over a seven-year to ten-year period. We have historically financed
our operations by borrowing from third-party lending institutions at an advance rate of 75% to 85%
of eligible customer receivables. At December 31, 2004 and 2003, we had a portfolio of
approximately 34,437 and 32,056 customer promissory notes, respectively, totaling approximately
$250.4 and $242.3 million, respectively, with an average yield of 15.1% and 14.9% per annum,
respectively, which compares favorably to our weighted average cost of borrowings of 6.8% per annum
at December 31, 2004. We cease recognition of interest income when collection is no longer deemed
probable. At December 31, 2004 and 2003, approximately $2.0 million and $3.9 million in principal,
or 0.8% and 1.6%, respectively, of our loans to Silverleaf Owners were 61 to 120 days past due. As
of December 31, 2004 and 2003, no loans were over 120 days past due. We continue collection
efforts with regard to all notes until all collection techniques that we utilize have been
exhausted. We provide for uncollectible notes by reserving an estimated amount which our
management believes is sufficient to cover anticipated losses from customer defaults. Each timeshare resort has a timeshare owners association (a Club). At December 31, 2004,
each Club operates through a centralized organization to manage its respective resort on a
collective basis. This centralized organization is Silverleaf Club, a Texas not-for-profit
corporation. Silverleaf Club is under contract with each Club for each of the Existing Resorts to
manage their operations. In turn, we have a contract with Silverleaf Club, under which we perform
the supervisory, management, and maintenance functions of all the Existing Resorts on a collective
basis. All costs of operating the timeshare resorts, including management fees payable to us under
the management agreements, are to be covered by monthly dues paid by the timeshare owners to their
respective Clubs as well as income generated by the operation of certain amenities at the timeshare
resorts. In February 2005, we were granted approval to operate our new resort in Florida, Orlando
Breeze, as a timeshare resort. Orlando Breeze has its own club, which will be operated
independently of Silverleaf Club. Marketing and Sales Marketing is the process by which we attract potential customers to visit and tour an Existing
Resort or attend a sales presentation. Sales is the process by which we seek to sell a Vacation
Interval to a potential customer once he arrives for a tour at an Existing Resort or attends a
sales presentation. Marketing. Our in-house marketing staff creates databases of new prospects, which are
principally developed through cooperative arrangements with outside vendors to identify prospects
who meet our marketing criteria. Using our automated dialing and bulk mailing equipment, in-house
marketing specialists conduct coordinated telemarketing and direct mail procedures which invite
prospects to tour one of our resorts and receive an incentive, such as a free gift. On a limited
basis, we retain outside vendors to arrange tours at our resorts. Sales. We sell our Vacation Intervals primarily through on-site salespersons at certain
Existing Resorts. Upon arrival at an Existing Resort for a scheduled tour, the prospect is met by a
member of our sales force who leads the prospect on a 90-minute tour of the resort and its
amenities. At the conclusion of the tour, the sales representative explains the benefits and costs
of becoming a Silverleaf Owner. The presentation also includes a description of the financing
alternatives that we offer. Prior to the closing of any sale, a verification officer interviews
each prospect to ensure our compliance with sales policies and regulatory agency requirements. The
verification officer also plays a Bonus Time video for the customer to explain the limitations on
the Bonus Time Program. No sale becomes final until a statutory waiting period (which varies from
state to state) of three to fifteen calendar days has passed. In addition, we also sell our
Vacation Intervals as upgraded sales of higher priced units to existing owners and additional week
sales to existing owners. Sales representatives receive commissions ranging from 2.0% to 14% of the sales price
depending on established guidelines. Sales managers also receive commissions of 1.5% to 5.0% and
are subject to commission chargebacks in the event the purchaser fails to make the first required
payment. Sales directors also receive commissions of 1.0% to 3.5%, which are also subject to
chargebacks. Prospects who are interested in a lower priced product are offered biennial (alternate year)
intervals or other low priced products that entitle the prospect to sample a resort for a specified
number of nights. The prospect may apply the cost of a lower priced product against the down
payment on a Vacation Interval if purchased by a certain date. In addition, we actively market both
on-site and off-site upgraded Vacation Intervals to existing Silverleaf Owners, as well as additional week sales to existing Silverleaf Owners. Although most upgrades and
additional week sales are sold by our in-house sales staff, we have contracted with a third party to assist in
offsite marketing of these at the Destination Resorts. We have been
focusing on increasing the percentage mix of sales to existing
customers in 2004 and 2003. These upgrade and additional week programs have been well
received by Silverleaf Owners and accounted for approximately 52.4%
and 45.6% of our gross revenues from 5




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Vacation Interval sales for the years ended December 31, 2004 and 2003, respectively. By
offering lower priced products and upgraded and additional week Vacation Intervals, we believe we offer an affordable
product for all prospects in our target market. Also, by offering products with a range of prices,
we attempt to broaden our market with lower-priced products and gradually upgrade such purchasers
over time. Our sales representatives are a critical component of our sales and marketing effort. We
continually strive to attract, train, and retain a dedicated sales force. We provide intensive
sales instruction and training, which assists the sales representatives in acquainting prospects
with the resorts benefits. Each sales representative is our employee and receives some employment
benefits. At December 31, 2004, we employed 402 sales representatives at our Existing Resorts. Customer Financing We offer financing to buyers of Vacation Intervals at our resorts. These buyers typically make
down payments of at least 10% of the purchase prices and deliver promissory notes for the balances.
The promissory notes generally bear interest at a fixed rate, are generally payable over a
seven-year to ten-year period, and are secured by a first mortgage on the Vacation Interval. We
bear the risk of defaults on these promissory notes, and this risk is heightened inasmuch as we
generally do not verify the credit history of our customers prior to purchase and will provide
financing if the customer is presently employed and meets certain income and buyer profile
criteria. There are a number of risks associated with financing customers purchases of Vacation
Intervals. For an explanation of these risks, please see Cautionary Statements beginning on page
20 of this report. In 2004 we accrued 19.4% of the purchase price of Vacation Intervals as a provision for
uncollectible notes. The allowance for doubtful accounts was 21.1% of gross notes receivable as of
December 31, 2004 compared to 20.0% at December 31, 2003. Management will continue its current
collection programs and seek new programs to reduce note defaults and improve the credit quality of
its customers. However, there can be no assurance that these efforts will be successful. For the year ended December 31, 2004, the Company decreased sales by $4.1 million for customer
returns (cancellations of sales transactions in which the customer fails to make the first
installment payment). If a buyer of a Vacation Interval defaults, we 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 sales and marketing costs must
be incurred again to resell the Vacation Interval. Although, in many cases, we may have recourse
against a Vacation Interval buyer for the unpaid price, certain states have laws which limit or
hinder our ability to recover personal judgments against customers who have defaulted on their
loans. For example, under Texas law, if we pursue a post-foreclosure deficiency claim against a
customer, the customer may file a court proceeding to determine the fair market value of the
property foreclosed upon. In such event, we may not recover a personal judgment against the
customer for the full amount of the deficiency, but may recover only to the extent that the
indebtedness owed to the Company exceeds the fair market value of the property. Accordingly, we do
not generally pursue this remedy because we have not found it to be cost effective. At December 31, 2004, we had notes receivable (including notes unrelated to Vacation
Intervals) in the approximate principal amount of $249.0 million with an allowance for
uncollectible notes of approximately $52.5 million. Approximately $58.9 million principal amount of
notes receivable remain outstanding under our conduit term loan through our wholly-owned financing
subsidiary, Silverleaf Finance II, Inc. (SF-II), which was formed in December 2003. Additionally, at December 31, 2004, our wholly-owned, off-balance sheet subsidiary, Silverleaf
Finance I, Inc. (SF-I), also known as our special purpose entity (SPE), held notes receivable
totaling $84.5 million, with related borrowings of $64.1 million. Except for the repurchase of
notes that fail to meet initial eligibility requirements, we are not obligated to repurchase
defaulted or any other contracts sold to the SPE. As the Servicer of the notes receivable sold to
the SPE, we are obligated by the terms of the conduit facility to foreclose upon the Vacation
Interval securing a defaulted note receivable. We may, but are not obligated to, purchase in a
public sale the foreclosed Vacation Interval for an amount equal to the net fair market value of
the Vacation Interval if the net fair market value is no less than fifteen percent of the original
acquisition price that the customer paid for the Vacation Interval. We anticipate that we will
place bids to repurchase the Vacation Intervals securing the defaulted contracts to facilitate the
re-marketing of those Vacation Intervals. For the years ended December 31, 2004 and 2003, we paid
approximately $2.5 million and $3.5 million, respectively, to repurchase such Vacation Intervals.
Total investment in our SPE was valued at $5.2 million at December 31, 2004. We recognize interest income as earned. Interest income is not recognized on notes receivable
that are four-plus payments late. We recognize only 25% of accrued interest income for notes that
are three payments late, 50% for notes that are two payments late, 75% for notes that are one
payment late, and 90% for all current notes. When inventory is returned to the Company, any unpaid
note receivable balances are charged against the allowance for uncollectible notes net of the
amount at which the Vacation Interval is restored to inventory. 6




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We intend to borrow additional funds under our existing revolving credit facilities and sell
notes to our SPE to finance our operations. At December 31, 2004, we had borrowings under our
senior credit facilities in the approximate principal amount of $210.9 million, of which $184.9
million of such facilities are receivable based and thus currently permit, or permitted, borrowings
of 75% to 85% of the principal amount of performing notes. Payments from Silverleaf Owners on such
notes are credited directly to the lender and applied against our loan balance. At December 31,
2004, we had a portfolio of approximately 34,437 Vacation Interval customer promissory notes in the
approximate principal amount of $250.4 million, of which approximately $2.0 million in principal
amount was 61 days or more past due and therefore ineligible as collateral. At December 31, 2004, our portfolio of customer notes receivable had an average yield of
15.1%. At such date, our borrowings, which bear interest at variable rates, had a weighted average
cost of 6.8%. We have historically derived net interest income from our financing activities
because the interest rates we charge our customers who finance the purchase of their Vacation
Intervals exceed the interest rates we pay our lenders. Because our existing indebtedness currently
bears interest at variable rates and our customer notes receivable bear interest at fixed rates,
increases in interest rates would erode the spread in interest rates that we have historically
experienced and could cause our interest expense on borrowings to exceed our interest income on our
portfolio of customer loans. We have engaged in one interest rate hedging transaction related to
our conduit loan, with a balance of $50.3 million on December 31, 2004. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect on our results of
operations, liquidity, and financial position. Limitations on availability of financing would inhibit sales of Vacation Intervals due to (i)
the lack of funds to finance the initial negative cash flow that results from sales that we
finance, and (ii) reduced demand if we are unable to provide financing to purchasers of Vacation
Intervals. We ordinarily receive only 10% of the purchase price on the sale of a Vacation Interval
but must pay in full the costs of developing, marketing, and selling the Vacation Interval. Maximum
borrowings available under our current credit agreements may not be sufficient to cover these
costs, thereby straining capital resources, liquidity, and capacity to grow. In addition, to the
extent interest rates decrease generally on loans available to our customers, we face an increased
risk that customers will pre-pay their loans and reduce our income from financing activities. We typically provide financing to customers over a seven-year to ten-year period. Our
customer notes had an average maturity of 5.7 years at December 31, 2004. Our credit facilities
have scheduled maturities between February 2006 and March 2009. Additionally, our revolving credit
facilities could be declared immediately due and payable as a result of any default by us. Although
it appears that we have adequate liquidity to meet our needs through March 2006 (the revolving
maturity for the majority of our existing loan agreements), we are continuing to identify
additional financing arrangements beyond such date. Development and Acquisition Process We intend to develop at our Existing Resorts and/or acquire new resorts only to the extent the
capital markets and the covenants of our existing credit facilities permit. If we are able to develop or acquire new resorts, we will do so under our established
development policies. Before committing capital to a site, we test the market using certain
marketing techniques and explore the zoning and land-use laws applicable to the potential site and
the regulatory issues pertaining to licenses and permits for timeshare sales and operations. We
will also contact various governmental entities and review applications for necessary governmental
permits and approvals. If we are satisfied with our market and regulatory review, we will prepare a
conceptual layout of the resort, including building site plans and resort amenities. After we apply
our standard lodging unit design and amenity package, we prepare a budget that estimates the cost
of developing the resort, including costs of lodging facilities, infrastructure, and amenities, as
well as projected sales, marketing, and general and administrative costs. We typically perform
additional due diligence, including obtaining an environmental report by an environmental
consulting firm, a survey of the property, and a title commitment. We employ legal counsel to
review these documents and pertinent legal issues. If we are satisfied with the site after the
environmental and legal review, we will complete the purchase of the property. We manage all construction activities internally. We typically complete the development of a
new resorts basic infrastructure and models within one year, with additional units to be added
within 180 to 270 days based on demand, weather permitting. A normal part of the development
process is the establishment of a functional sales office at the new resort. Clubs / Management Club We have the right to appoint the directors of the Silverleaf Club through our control of the
boards of directors of the individual clubs at each of our resorts. Silverleaf Club is sometimes
referred to as the Management Club. The Silverleaf Owners are obligated to pay monthly dues to
their respective Clubs, which obligation is secured by a lien on their Vacation Interval in favor
of the Club. If a Silverleaf Owner fails to pay his monthly dues, the Club may institute
foreclosure proceedings regarding the delinquent Silverleaf 7




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Owners Vacation Interval. The number of foreclosures that occurred as a result of Silverleaf
Owners failing to pay monthly dues were 545 in 2004 and 673 in 2003. Typically, we purchase at
foreclosure all Vacation Intervals that are the subject of foreclosure proceedings instituted by
the Club because of delinquent dues. At December 31, 2004, each timeshare resort has a Club that operates through a centralized
organization provided by the Management Club to manage the resorts on a collective basis. The
consolidation of resort operations through the Management Club permits: (i) a centralized
reservation system for all resorts; (ii) substantial cost savings by purchasing goods and services
for all resorts on a group basis, which generally results in a lower cost of goods and services
than if such goods and services were purchased by each resort on an individual basis; (iii)
centralized management for the entire resort system; (iv) centralized legal, accounting, and
administrative services for the entire resort system; and (v) uniform implementation of various
rules and regulations governing all resorts. All furniture, furnishings, recreational equipment,
and other personal property used in connection with the operation of the Existing Resorts are owned
by either that resorts Club or the Silverleaf Club, rather than by us. In February 2005, we were granted approval to operate our new resort in Florida, Orlando
Breeze, as a timeshare resort. Orlando Breeze has its own club, which will be operated
independently of Silverleaf Club. At December 31, 2004, Silverleaf Club had 653 full-time employees and is solely responsible
for their salaries. Silverleaf Club is also responsible for the direct expenses of operating the
Existing Resorts, while we are responsible for the direct expenses of new development and all
marketing and sales activities. To the extent the Management Club provides payroll, administrative,
and other services that directly benefit the Company, we reimburse the Management Club for such
services and vice versa. The Management Club collects dues from Silverleaf Owners, plus certain other amounts assessed
against the Silverleaf Owners from time to time, and generates income by the operation of certain
amenities at the Existing Resorts. Silverleaf Club dues are currently $54.98 per month ($27.49 for
biennial owners), except for certain members of Oak N Spruce Resort, who prepay dues at an annual
rate of approximately $350. Such amounts are used by the Management Club to pay the costs of
operating the Existing Resorts and the management fees due to the Company pursuant to Management
Agreements. These Management Agreements authorize the Company to manage and operate the resorts
and provide for a maximum management fee equal to 15% of gross revenues for Silverleaf Club, but
our right to receive such fee on an annual basis is limited to the amount of the Management Clubs
net income. However, if the Company does not receive the maximum fee, such deficiency is deferred
for payment to succeeding years, subject again to the net income limitation. Due to anticipated
refurbishment of units at the Existing Resorts, together with the operational and maintenance
expenses associated with the Companys current expansion and development plans, our 2004 management
fees were subject to the net income limitation. Accordingly, for the year ended December 31, 2004,
management fees recognized were $1.2 million. For financial reporting purposes, management fees
from the Management Club are recognized based on the lower of (i) the aforementioned maximum fees
or (ii) the Management Clubs net income. The Silverleaf Club Management Agreement is effective
through March 2010, and will continue year-to-year thereafter unless cancelled by either party. As
a result of the performance of the Silverleaf Club, it is uncertain whether Silverleaf Club will
consistently generate positive net income. Therefore, future income to the Company could be
limited. At December 31, 2004, there were approximately 88,000 Vacation Interval owners who pay
dues to Silverleaf Club. If we develop new resorts, their respective Clubs are expected to be added
to the Silverleaf Club Management Agreement. Other Operations Operation of Amenities.We own, operate, and receive the revenues from the marina at The
Villages, the golf course and pro shop at Holiday Hills, and the golf course and pro shop at Apple
Mountain. Although we own the golf course at Holly Lake, a homeowners association in the
development operates the golf course. In general, the Management Club receives revenues from the
various amenities which require a usage fee, such as watercraft rentals, horseback rides, and
restaurants. Unit Leasing.We also recognize revenues from sales of Samplers, which allow prospective
Vacation Interval purchasers to sample a resort for a specified number of nights. A five-night
Sampler package currently sells for between $595 and $995. For the years ended December 31, 2004,
2003, and 2002, we recognized $2.2 million, $1.8 million, and $3.6 million, respectively, in
revenues from Sampler sales. Utility Services.At December 31, 2004, we owned the water supply facilities at Piney Shores,
The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills, Timber Creek, and Fox River
resorts. We also owned the waste-water treatment facilities at The Villages, Piney Shores, Ozark
Mountain, Holly Lake, Timber Creek, and Fox River resorts. We have permits to supply and charge
third parties for the water supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark
Mountain, Hill Country, Piney Shores, and Timber Creek resorts, and the waste-water facilities at
the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and The 8




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Villages resorts. In March 2005, all of our utility services assets and liabilities were sold
for an aggregate purchase price of $13.2 million, which will result in a gain of approximately $1.0
million if all conditions of the sale are met. Other Property.We own approximately 11 acres in Mississippi, and we are entitled to 85% of
any profits from this land. An affiliate of a director of the Company owns a 10% net profits
interest in this land. In December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia,
Pennsylvania, for approximately $1.9 million. The property was intended to be developed as a
Drive-to Resort (i.e., Beech Mountain Resort). We received regulatory approval to develop 408 units
(21,216 Vacation Intervals), but we did not schedule dates for construction, completion of initial
units, or commencement of marketing and sales efforts. In 2003, we determined that we would not
develop this property as initially planned and thus we currently intend to sell this property. Policies with Respect to Certain Activities Our board of directors sets policies with regard to all aspects of our business operations
without a vote of security holders. In some instances the power to set certain policies may be
delegated by the board of directors to a committee comprised of its members, or to the officers of
the Company. As set forth herein under the headings Customer Financing and Description of
Certain Indebtedness, we borrow money to finance all of our operations and we make loans to our
customers to finance the purchase of our Vacation Intervals. We do not:  
    invest in the securities of unaffiliated issuers for the purpose of exercising control;
    underwrite securities of other issuers;
    engage in the purchase and sale (or turnover) of investments sponsored by other issuers; or
    offer securities in exchange for property. Nor do we propose to engage in any of the above activities. In the past we have from time to
time repurchased or otherwise reacquired our own common stock and other securities. In May 2002 we
reacquired $56.9 million in principal amount of our 10 1/2% senior subordinated notes in exchange for
$28.5 million of our 6% senior subordinated notes and 23.9 million shares of our common stock. In
July 2003 we reacquired $7.6 million in principal amount of our 10 1/2% senior subordinated notes for
approximately $2.4 million of cash, which resulted in a one-time gain of approximately $5.1
million. In June 2004 we completed an offer to exchange $24.7 million in principal amount of our 6%
senior subordinated notes due 2007 for $24.7 million in principal amount of our 8% senior
subordinated notes due 2010 and a cash payment of approximately $271,000, representing accrued,
unpaid interest from April 1, 2004 through June 6, 2004.We have no policy or proposed policy with
respect to future repurchases or re-acquisitions of our common stock or other securities; however,
our board of directors may approve such repurchase activities if it finds these activities to be in
the best interests of the Company and its shareholders. Investment Policies Our board of directors also determines all of our policies concerning investments, including
the percentage of assets, which we may invest in any one type of investment, and the principles and
procedures we will employ in connection with the acquisition of assets. The board of directors
both determines our policies with regard to investment matters and may change these policies
without a vote of security holders. We do not propose to invest in any investments or activities
not related directly or indirectly to (i) the timeshare business, (ii) the acquisition,
development, marketing, selling or financing of Vacation Intervals, or (iii) the management of
timeshare resorts. We currently have no policies limiting the geographic areas in which we might
engage in investments in the timeshare business, or limiting the percentage of our assets invested
in any specific timeshare related property. We primarily acquire assets for income and not to hold
for possible capital gain. Participation in Vacation Interval Exchange Networks Internal Exchanges.As a convenience to Silverleaf Owners, each purchaser of a Silverleaf
Vacation Interval has certain exchange privileges which may be used to: (i) exchange an interval
for a different interval (week) at the same resort so long as the desired interval is of an equal
or lower rating; and (ii) exchange an interval for the same interval of equal or lower rating at
any other Existing Resort. These intra-company exchange rights are conditioned upon availability of
the desired interval or resort. 9




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Exchanges.We believe that our Vacation Intervals are made more attractive by our
participation in a Vacation Interval exchange network operated by RCI. At December 31, 2004, the
Existing Resorts are registered with RCI, and approximately one-third of Silverleaf Owners
participate in RCIs exchange network. Membership in RCI allows participating Silverleaf Owners to
exchange their occupancy right in a unit in a particular year for an occupancy right at the same
time or a different time of the same or lower color rating in another participating resort, based
upon availability and the payment of a variable exchange fee. A member may exchange a Vacation
Interval for an occupancy right in another participating resort by listing the Vacation Interval as
available with the exchange organization and by requesting occupancy at another participating
resort, indicating the particular resort or geographic area to which the member desires to travel,
the size of the unit desired, and the period during which occupancy is desired. RCI assigns a rating of red, white, or blue to each Vacation Interval for participating
resorts based upon a number of factors, including the location and size of the unit, the quality of
the resort, and the period during which the Vacation Interval is available, and attempts to satisfy
exchange requests by providing an occupancy right in another Vacation Interval with a similar
rating. For example, an owner of a red Vacation Interval may exchange his interval for a red,
white, or blue interval. An owner of a white Vacation Interval may exchange only for a white or
blue interval, and an owner of a blue interval may exchange only for
a blue interval. At December 31, 2004, RCIs designation of
our units of red, white, and blue Vacation Intervals is approximately 55%, 15%, and
30%, respectively. If RCI is unable to meet the members initial request, it suggests alternative
resorts based on availability. The annual membership fees in RCI, which are at the option and
expense of the owner of the Vacation Interval, are currently $89. Exchange rights with RCI require
an additional fee of approximately $149 for domestic exchanges and $189 for foreign exchanges.
Silverleaf Club charges an exchange fee of $75 for each exchange through its internal exchange
program. Resorts participating in the exchange networks are required to adhere to certain minimum
standards regarding available amenities, safety, security, décor, unit supplies, maid service, room
availability, and overall ambiance. See Cautionary Statements for a description of risks
associated with the exchange programs. Orlando Breeze, our new destination resort in Florida, is not under contract with RCI; however
it is under contract with Interval International, Inc., a competitor of RCI. Competition The timeshare industry is highly fragmented and includes a large number of local and regional
resort developers and operators. However, some of the worlds most recognized lodging, hospitality,
and entertainment companies, such as Marriott Ownership Resorts (Marriott), The Walt Disney
Company (Disney), Hilton Hotels Corporation (Hilton), Hyatt Corporation (Hyatt), and Four
Seasons Resorts (Four Seasons) have entered the industry. Other companies in the timeshare
industry, including Sunterra Corporation (Sunterra), Cendant Corporation, through its acquisition
of Fairfield Resorts, Inc. (Fairfield) and Trendwest Resorts, Inc. (Trendwest), Starwood Hotels
& Resorts Worldwide Inc. (Starwood), Ramada Vacation Suites (Ramada), and Bluegreen Corporation
(Bluegreen) are, or are subsidiaries of, public companies with enhanced access to capital and
other resources that public ownership implies. Fairfield, Sunterra, and Bluegreen own timeshare resorts in or near Branson, Missouri, which
compete with our Holiday Hills and Ozark Mountain resorts, and to a lesser extent with our Timber
Creek Resort. Sunterra also owns a resort which is located near and competes with Piney Shores
Resort. Additionally, we believe there are a number of public or privately-owned and operated
timeshare resorts in most states in which we own resorts that compete with the Existing Resorts. We believe Marriott, Disney, Hilton, Hyatt, and Four Seasons generally target consumers with
higher annual incomes than our target market. Our other competitors target consumers with similar
income levels as our target market. Our competitors may possess significantly greater financial,
marketing, personnel, and other resources than we do. We cannot be certain that such competitors
will not significantly reduce the price of their Vacation Intervals or offer greater convenience,
services, or amenities than we do. While our principal competitors are developers of timeshare resorts, we are also subject to
competition from other entities engaged in the commercial lodging business, including condominiums,
hotels, and motels; others engaged in the leisure business; and, to a lesser extent, from
campgrounds, recreational vehicles, tour packages, and second home sales. A reduction in the
product costs associated with any of these competitors, or an increase in the Companys costs
relative to such competitors costs, could have a material adverse effect on our results of
operations, liquidity, and financial position. Numerous businesses, individuals, and other entities compete with us in seeking properties for
acquisition and development of new resorts. Some of these competitors are larger and have greater
financial and other resources. Such competition may result in a higher cost for properties we wish
to acquire or may cause us to be unable to acquire suitable properties for the development of new
resorts. 10




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Governmental Regulation General.Our marketing and sales of Vacation Intervals and other operations are subject to
extensive regulation by the federal government and the states and jurisdictions in which the
Existing Resorts are located and in which Vacation Intervals are marketed and sold. On a federal
level, the Federal Trade Commission has taken the most active regulatory role through the Federal
Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate
commerce. Other federal legislation to which the Company is or may be subject includes the
Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the
Interstate Land Sales Full Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer
Credit Protection Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud
and Abuse Prevention Act, the Fair Housing Act, the Civil Rights Acts of 1964 and 1968, and the
Americans with Disabilities Act. In response to certain fraudulent marketing practices in the timeshare industry in the 1980s,
various states enacted legislation aimed at curbing such abuses. Certain states in which we operate
have adopted specific laws and regulations regarding the marketing and sale of Vacation Intervals.
The laws of most states require us to file a detailed offering statement and supporting documents
with a designated state authority, which describe the Company, the project, and the promotion and
sale of Vacation Intervals. The offering statement must be approved by the appropriate state agency
before we may solicit residents of such state. The laws of certain states require the Company to
deliver an offering statement (or disclosure statement), together with certain additional
information concerning the terms of the purchase, to prospective purchasers of Vacation Intervals
who are residents of such states, even if the resort is not located in such state. The laws of
Missouri generally only require certain disclosures in sales documents for prospective purchasers.
There are also laws in each state where we sell Vacation Intervals which grant the purchaser the
right to cancel a contract of purchase at any time within three to fifteen calendar days following
the sale. We market and sell our Vacation Intervals to residents of certain states adjacent or proximate
to the states where our resorts are located. Many of these neighboring states also regulate the
marketing and sale of Vacation Intervals to their residents. Most states have additional laws which
regulate our activities and protect purchasers, such as real estate licensure laws; travel sales
licensure laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize, gift, and
sweepstakes laws; and other related laws. We do not register all of our resorts in each of the
states where we register certain resorts. Most of the states where we currently operate have enacted laws and regulations which limit
our ability to market our resorts through telemarketing activities. These states have enacted do
not call lists that permit consumers to block telemarketing activities by registering their
telephone numbers for a period of years for a nominal fee. We purchase these lists from the various
states quarterly and do not contact those telephone numbers listed. Additionally, the federal
Do-Not-Call Implementation Act (the DNC Act), which was enacted on March 11, 2003, provided for
the establishment of a National Do Not Call Registry administered by the United States Federal
Trade Commission (FTC) under its Telemarketing Sales Rule (TSR) and the Federal Communications
Commission. The FTC began enforcement actions in October 2003 for violations of the TSR by
telemarketers. Violations could result in penalties up to $11,000 per violation. The FTC recently
reported that approximately 83 million telephone numbers had been registered on the National Do Not
Call List Registry by the end of 2004. Since the introduction of state and federal Do-Not-Call
legislation, we have become somewhat more reliant on direct mail solicitations as an alternative to
some of the telemarketing techniques we have historically utilized. Existing and future
restrictions on telemarketing practices could cause our sales to decline. We believe we are in material compliance with applicable federal and state laws and
regulations relating to the sales and marketing of Vacation Intervals in the jurisdictions in which
we currently do business. However, we are normally and currently the subject of a number of
consumer complaints and regulatory inquiries generally relating to our marketing or sales
practices. We always attempt to resolve all such complaints or inquiries directly with the consumer
or the regulatory authority involved. We cannot be certain that all of these complaints and
inquiries by regulators can be resolved without adverse regulatory actions or other consequences,
such as class action lawsuits or rescission offers. We expect some level of consumer complaints in
the ordinary course of business as we aggressively market and sell Vacation Intervals to
households, which may include individuals who may not be financially sophisticated. We cannot be
certain that the costs of resolving consumer complaints, regulatory inquiries, or of qualifying
under Vacation Interval ownership regulations in all jurisdictions in which we conduct sales or
wish to conduct sales in the future will not be significant, that we are in material compliance
with applicable federal and state laws and regulations, or that violations of law will not have
adverse implications, including negative public relations, potential litigation, and regulatory
sanctions. The expense, negative publicity, and potential sanctions associated with the failure to
comply with applicable laws or regulations could have a material adverse effect on our results of
operations, liquidity, or financial position. Further, we cannot be certain that either the federal
government or states having jurisdiction over our business will not adopt additional regulations or
take other actions which would adversely affect our results of operations, liquidity, and financial
position. 11




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During the 1980s and continuing through the present, the timeshare industry has been and
continues to be afflicted with negative publicity and prosecutorial attention due to, among other
things, marketing practices which were widely viewed as deceptive or fraudulent. Among the many
timeshare companies which have been the subject of federal, state, and local enforcement actions
and investigations in the past were certain of the partnerships and corporations that were merged
into the Company prior to 1996 (the Merged Companies, or individually Merged Company). Some of
the settlements, injunctions, and decrees resulting from litigation and enforcement actions (the
Orders) to which certain of the Merged Companies consented purport to bind all successors and
assigns, and accordingly binds the Company. In addition, at that time the Company was directly a
party to one such Order issued in Missouri. No past or present officers, directors, or employees of
the Company or any Merged Company were named as subjects or respondents in any of these Orders;
however, each Order purports to bind generically unnamed officers, directors, and employees of
certain Merged Companies. Therefore, certain of these Orders may be interpreted to be enforceable
against the present officers, directors, and employees of the Company even though they were not
individually named as subjects of the enforcement actions which resulted in these Orders. These
Orders require, among other things, that all parties bound by the Orders, including the Company,
refrain from engaging in deceptive sales practices in connection with the offer and sale of
Vacation Intervals. In one particular case in 1988, a Merged Company pled guilty to deceptive uses
of the mails in connection with promotional sales literature mailed to prospective timeshare
purchasers and agreed to pay a judicially imposed fine of $1.5 million and restitution of $100,000.
The requirements of the Orders are substantially what applicable state and federal laws and
regulations mandate, but the consequence of violating the Orders may be that sanctions (including
possible financial penalties and suspension or loss of licensure) may be imposed more summarily and
may be harsher than would be the case if the Orders did not bind the Company. In addition, the
existence of the Orders may be viewed negatively by prospective regulators in jurisdictions where
the Company does not now do business, with attendant risks of increased costs and reduced
opportunities. In early 1997, we were the subject of some consumer complaints which triggered governmental
investigations into the Companys affairs. In March 1997, we entered into an Assurance of Voluntary
Compliance with the Texas Attorney General, in which we agreed to make additional disclosure to
purchasers of Vacation Intervals regarding the limited availability of its Bonus Time Program
during certain periods. We paid $15,200 for investigatory costs and attorneys fees of the Attorney
General in connection with this matter. Also, in March 1997, we entered into an agreed order (the
Agreed Order) with the Texas Real Estate Commission requiring that we comply with certain aspects
of the Texas Timeshare Act, Texas Real Estate License Act, and Rules of the Texas Real Estate
Commission, with which we had allegedly been in non-compliance until mid-1995. The allegations
included (i) our admitted failure to register the Missouri Destination Resorts in Texas (due to our
misunderstanding of the reach of the Texas Timeshare Act); (ii) payment of referral fees for
Vacation Interval sales, the receipt of which was improper on the part of the recipients; and (iii)
miscellaneous other actions alleged to violate the Texas Timeshare Act, which we denied. While the
Agreed Order acknowledged that we independently resolved ten consumer complaints referenced in the
Agreed Order, discontinued the practices complained of, and registered the Missouri Destination
Resorts during 1995 and 1996, the Texas Real Estate Commission ordered us to cease these
discontinued practices and enhance our disclosure to purchasers of Vacation Intervals. In the
Agreed Order, we agreed to make a voluntary donation of $30,000 to the State of Texas. The Agreed
Order also directed that we revise our training manual for timeshare salespersons and verification
officers. While the Agreed Order resolved all of the alleged violations contained in complaints
received by the Texas Real Estate Commission through December 31, 1996, we have encountered and
expect to encounter some level of additional consumer complaints, regulatory scrutiny, and periodic
remedial action in the ordinary course of our business. In this regard, during 2004 we renewed our
timeshare-offering plan in the state of New York, which we inadvertently allowed to lapse in 2001.
As part of this renewal process, we rescinded approximately $897,000 of sales to New York residents
that were made in 2001 after our timeshare offering plan lapsed. We employ the following methods in training sales and marketing personnel as to legal
requirements. With regard to direct mailings, a designated compliance employee reviews all mailings
to determine if they comply with applicable state legal requirements. With regard to telemarketing,
our marketing management prepares a script for telemarketers based upon applicable state legal
requirements. All telemarketers receive training which includes, among other things, directions to
adhere strictly to the approved script. Telemarketers are also monitored by their supervisors to
ensure that they do not deviate from the approved script. Additionally, sales personnel receive
training as to such applicable legal requirements. We have a salaried employee at each sales office
who reviews the sales documents prior to closing a sale to review compliance with legal
requirements. Periodically, we are notified by regulatory agencies to revise our disclosures to
consumers and to remedy other alleged inadequacies regarding the sales and marketing process. In
such cases, we revise our direct mailings, telemarketing scripts, or sales disclosure documents, as
appropriate, to comply with such requests. We have supervisors to monitor compliance with all state
and federal Do-Not-Call regulations. Environmental Matters.Under various federal, state, and local environmental laws, ordinances,
and regulations, a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product releases at such
property, and may be held liable to a governmental entity or to third parties for property damage
and tort liability and for investigation and clean-up costs incurred by such parties in connection
with the contamination. Such laws typically impose clean-up responsibility and liability without
regard to whether the owner or operator knew of or caused the presence of the 12




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contaminants, and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The
cost of investigation, remediation, or removal of such substances may be substantial, and the
presence of such substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owners ability to sell such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic
substances at a disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or treatment facility,
whether or not such facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for damages and costs it
incurs in connection with the contamination. Finally, the owner or operator of a site may be
subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site or from environmental regulatory violations. In
connection with its ownership and operation of its properties, the Company may be potentially
liable for such claims. Certain federal, state, and local laws, regulations, and ordinances govern the removal,
encapsulation, or disturbance of asbestos-containing materials (ACMs) when such materials are in
poor condition or in the event of construction, remodeling, renovation, or demolition of a
building. Such laws may impose liability for release of ACMs and may provide for third parties to
seek recovery from owners or operators of real properties for personal injury associated with ACMs.
In connection with its ownership and operation of its properties, the Company may be potentially
liable for such costs. In 1994, the Company conducted a limited asbestos survey at each of the
Existing Resorts, which surveys did not reveal material potential losses associated with ACMs at
certain of the Existing Resorts. In addition, recent studies have linked radon, a naturally-occurring substance, to increased
risks of lung cancer. While there are currently no state or federal requirements regarding the
monitoring for, presence of, or exposure to radon in indoor air, the EPA and the Surgeon General
recommend testing residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4 picocuries per
liter of air (Pci/L) (the Recommended Action Level). The presence of radon in concentrations
equal to or greater than the Recommended Action Level in one or more of the Companys properties
may adversely affect the Companys ability to sell Vacation Intervals at such properties and the
market value of such property. The Company has not tested its properties for radon.
Recently-enacted federal legislation will eventually require the Company to disclose to potential
purchasers of Vacation Intervals at the Companys resorts that were constructed prior to 1978 any
known lead-paint hazards and will impose treble damages for failure to so notify. Electric transmission lines are located in the vicinity of some of the Companys properties.
Electric transmission lines are one of many sources of electromagnetic fields (EMFs) to which
people may be exposed. Research into potential health impacts associated with exposure to EMFs has
produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some
states now regulate the strength of electric and magnetic fields emanating from electric
transmission lines, while others have required transmission facilities to measure for levels of
EMFs. In addition, the Company understands that lawsuits have, on occasion, been filed (primarily
against electric utilities) alleging personal injuries resulting from exposure as well as fear of
adverse health effects. In addition, fear of adverse health effects from transmission lines has
been a factor considered in determining property value in obtaining financing and in condemnation
and eminent domain proceedings brought by power companies seeking to construct transmission lines.
Therefore, there is a potential for the value of a property to be adversely affected as a result of
its proximity to a transmission line and for the Company to be exposed to damage claims by persons
exposed to EMFs. In 2001, the Company conducted Phase I environmental assessments at each of the Company-owned
resorts in order to identify potential environmental concerns. These Phase I assessments were
carried out in accordance with accepted industry practices and consisted of non-invasive
investigations of environmental conditions at the properties, including a preliminary investigation
of the sites and identification of publicly known conditions concerning properties in the vicinity
of the sites, physical site inspections, review of aerial photographs and relevant governmental
records where readily available, interviews with knowledgeable parties, investigation for the
presence of above ground and underground storage tanks presently or formerly at the sites, and the
preparation and issuance of written reports. The Companys Phase I assessments of the properties
did not reveal any environmental liability that the Company believes would have a material adverse
effect on the Companys business, assets, or results of operations taken as a whole; nor is the
Company aware of any such material environmental liability. Nevertheless, it is possible that the
Companys Phase I assessments did not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances, or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the properties will not be
affected by the condition of land or operations in the vicinity of the properties (such as the
presence of underground storage tanks) or by third parties unrelated to the Company. The Company
does not believe that compliance with applicable environmental laws or regulations will have a
material adverse effect on the Companys results of operations, liquidity, or financial position. The Company believes that its properties are in compliance in all material respects with all
federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic
substances. The Company has not been notified by any governmental 13




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authority or any third party, and is not otherwise aware, of any material noncompliance,
liability, or claim relating to hazardous or toxic substances or petroleum products in connection
with any of its present properties. Utility Regulation.At December 31, 2004, we owned the water supply and waste-water treatment
facilities at several of the Existing Resorts, which are regulated by various governmental
agencies. The Texas Natural Resource Conservation Commission is the primary state umbrella agency
regulating utilities at the resorts in Texas; and the Missouri Department of Natural Resources and
Public Service Commission of Missouri are the primary state umbrella agencies regulating utilities
at the resorts in Missouri. The Environmental Protection Agency, division of Water Pollution
Control, and the Illinois Commerce Commission are the primary state agencies regulating water
utilities in Illinois. These agencies regulate the rates and charges for the services (allowing a
reasonable rate of return in relation to invested capital and other factors), the size and quality
of the plants, the quality of water supplied, the efficacy of waste-water treatment, and many other
aspects of the utilities operations. The agencies have approval rights regarding the entity owning
the utilities (including its financial strength) and the right to approve a transfer of the
applicable permits upon any change in control of the entity holding the permits. Other federal,
state, regional, and local environmental, health, and other agencies also regulate various aspects
of the provision of water and waste-water treatment services. In March 2005, all of our utility
services assets and liabilities were sold for an aggregate purchase price of $13.2 million, which
will result in a gain of approximately $1.0 million if all conditions of the sale are met. Other Regulation.Under various state and federal laws governing housing and places of public
accommodation, we are required to meet certain requirements related to access and use by disabled
persons. Many of these requirements did not take effect until after January 1, 1991. Although we
believe that our facilities are generally in compliance with present requirements of such laws, we
are aware of certain of our properties that are not in full compliance with all aspects of such
laws. We are presently responding, and expect to respond in the future, to inquiries, claims, and
concerns from consumers and regulators regarding our compliance with existing state and federal
regulations affording the disabled access to housing and accommodations. It is our practice to
respond positively to all such inquiries, claims and concerns and to work with regulators and
consumers to resolve all issues arising under existing regulations concerning access and use of our
properties by disabled persons. We believe that we will incur additional costs of compliance
and/or remediation in the future with regard to the requirements of such existing regulations.
Future legislation may also impose new or further burdens or restrictions on owners of timeshare
resort properties with respect to access by the disabled. The ultimate cost of compliance with such
legislation and/or remediation of conditions found to be non-compliant is not currently
ascertainable, and while such costs are not expected to have a material effect on our business,
such costs could be substantial. Limitations or restrictions on the completion of certain
renovations may limit application of our growth strategy in certain instances or reduce profit
margins on our operations. Employees At December 31, 2004, we had 1,370 employees, and the Clubs collectively had 653 employees.
Our employee relations are good, both at the Company and at the Clubs. None of our employees are
represented by a labor union. Insurance We carry comprehensive liability, fire, hurricane, and storm insurance with respect to our
resorts, with policy specifications, insured limits, and deductibles customarily carried for
similar properties which we believe are adequate. There are, however, certain types of losses (such
as losses arising from floods and acts of war) that are not generally insured because they are
either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose the capital invested in a resort, as well as the anticipated
future revenues from such resort, and would continue to be obligated on any mortgage indebtedness
or other obligations related to the property. Any such loss could have a material adverse effect on
our results of operations, liquidity, or financial position. We self-insure for employee medical
claims reduced by certain stop-loss provisions. We also self-insure for property damage to certain
vehicles and heavy equipment. Description of Certain Indebtedness Existing Indebtedness.The following table summarizes our credit agreements with our senior
lenders and our off-balance sheet SPE as of December 31, 2004 (in thousands): Facility
    
    
    12/31/04Amount
    
    
    BalanceReceivable Based Revolvers
    
    $
    120,000
    
    
    $
    98,492Receivable Based Term Loans
    
    
    21,258
    
    
    
    21,258Receivable Based Non-Revolvers
    
    
    65,114
    
    
    
    65,114Revolving Inventory Loan
    
    
    26,000
    
    
    
    26,000Sub-Total On Balance Sheet
    
    
    232,372
    
    
    
    210,864Off-Balance Sheet Receivable Based Revolvers *
    
    
    85,000
    
    
    
    64,131Grand Total
    
    $
    317,372
    
    
    $
    274,995
 14




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*
    
    Represents the Companys SPE, discussed in detail under the heading Amended DZ Bank
Facility on page 19 of this report We use these credit agreements to finance the sale of Vacation Intervals, to finance
construction, and for working capital needs. The loans mature between February 2006 and March 2009,
and are collateralized (or cross-collateralized) by customer notes receivable, construction in
process, land, improvements, and related equipment at certain of the Existing Resorts. These credit
facilities bear interest at variable rates tied to the prime rate, LIBOR, or the corporate rate
charged by certain banks. The credit facilities secured by customer notes receivable allow advances
from 75% to 85% of the unpaid balance of certain eligible customer notes receivable. In addition,
we have $3.8 million of senior subordinated notes due 2007, $2.1 million of senior subordinated
notes due 2008, and $24.7 million of senior subordinated notes due 2010, with interest payable
semi-annually on April 1 and October 1, guaranteed by all of our present and future domestic
restricted subsidiaries. As of December 31, 2004, certain of our credit facilities include restrictions on our ability
to pay dividends based on minimum levels of net income and cash flow. The debt agreements contain
covenants including requirements that we (i) preserve and maintain the collateral securing the
loans; (ii) pay all taxes and other obligations relating to the collateral; and (iii) refrain from
selling or transferring the collateral or permitting any encumbrances on the collateral. The debt
agreements also contain restrictive covenants which include (i) restrictions on liens against and
dispositions of collateral, (ii) restrictions on distributions to affiliates and prepayments of
loans from affiliates, (iii) restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and (v) restrictions on
mergers, consolidations, or other reorganizations of the Company. Under certain credit facilities,
a sale of all or substantially all of the assets of the Company, a merger, consolidation, or
reorganization of the Company, or other changes of control of the ownership of the Company, would
constitute an event of default and permit the lenders to accelerate the maturity thereof. Our credit facilities also contain operating covenants requiring us to maintain a minimum
tangible net worth of $100 million or greater, as defined, maintain sales and marketing expenses as
a percentage of sales below 55.0% for the latest rolling 12 months, maintain notes receivable
delinquency rate below 25%, maintain a minimum interest coverage ratio of 1.25 to 1 for the latest
rolling 12 months, and maintain positive net income for each year end, and for any two consecutive
fiscal quarters. In addition, our senior lenders have provided us with waivers and amended
financial covenants whereby we exclude the $28.7 million increase in our allowance for
uncollectable notes during the first quarter of 2003 from the calculation of our minimum required
consolidated net income, and from the calculation of our minimum required interest coverage ratio
of 1.25 to 1.0. We were also given a waiver for our failure to maintain our ratio of sales and
marketing expense below the required standard in the first quarter of 2003. As of December 31, 2003
and 2004, we were in compliance with these operating covenants. However, such future results cannot
be assured. The following table summarizes our notes payable, capital lease obligations, and senior
subordinated notes at December 31, 2003 and 2004 (in thousands): December 31,2003
    
    
    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%)
    
    $
    25,095
    
    
    $
    37,514$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,998
    
    
    
    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%)
    
    
    28,325
    
    
    
    37,039$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,845
    
    
    
    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%)
    
    
    3,734
    
    
    
    5,250$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    1,558
    
    
    
    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%
    
    
    66,381
    
    
    
    50,299
 15




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##### Table of Contents



December 31,2003
    
    
    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)
    
    
    16,897
    
    
    
    18,689$5.4 million term loan with an interest rate of 8%, due in March 2007 (paid
in full as of July 2004)
    
    
    5,412
    
    
    
    $70 million loan agreement, capacity reduced by amounts outstanding under
the $10 million inventory loan agreement and the $9 million supplemental
revolving loan agreement, which contains certain financial covenants, due
February 2006, principal and interest payable from the proceeds obtained on
customer notes receivable pledged as collateral for the note, at an
interest rate of LIBOR plus 2.65% with a 6.0% floor (additional draws are
no longer available under this facility)
    
    
    17,009
    
    
    
    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
    
    
    8,345
    
    
    
    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 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest rate of
LIBOR plus 3.25%
    
    
    10,000
    
    
    
    10,000$8 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest rate of
Prime plus 3% with a 6% floor (as of August 2004 the loan agreement is
limited to $6 million)
    
    
    
    
    
    
    6,000$10 million inventory loan agreement, which contains certain financial
covenants, due March 2007, interest payable monthly, at an interest rate of
LIBOR plus 3.5% with a 6% floor
    
    
    7,733
    
    
    
    Various notes, due from May 2005 through February 2009, collateralized
by various assets with interest rates ranging from 0.9% to 10.3%
    
    
    1,676
    
    
    
    7,122Total notes payable
    
    
    214,008
    
    
    
    217,986Capital lease obligations
    
    
    1,329
    
    
    
    324Total notes payable and capital lease obligations
    
    
    215,337
    
    
    
    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
    
    
    
    
    
    
    24,6716.0% 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
    
    
    28,467
    
    
    
    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
    
    
    5,978
    
    
    
    4,270Total senior subordinated notes
    
    
    36,591
    
    
    
    34,883Total
    
    $
    251,928
    
    
    $
    253,193
 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%. DESCRIPTION OF OUR SENIOR CREDIT FACILITIES AT DECEMBER 31, 2004 Amended Agreements with Senior Lenders Textron Facility. We originally entered into a Loan and Security Agreement (the Original
Loan Agreement) with Textron in August 1995 pursuant to which we borrowed $5 million. Since that
time, the Original Loan Agreement has been amended various times. Effective December 2003, the
Company and Textron entered into an amendment (the Textron Amendment) to the Original Loan
Agreement. Pursuant to the Textron Amendment, the facility (the Textron Tranche A Facility) provides us
with a revolving loan (Revolving Loan Component) in the amount of $44.6 million. The Textron
Tranche A Facility also provides for a term loan (Term Loan Component) of $11.3 million. The
interest rate on the Revolving Loan Component is a variable rate equal to LIBOR plus 3% per annum,
but at no time less than 6% per annum. The rate on the Term Loan Component is a fixed rate equal
to 8% per annum. The maturity date of the Revolving Loan Component of the Textron Tranche A
Facility is the earlier of March 31, 2007 or the weighted 16




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average maturity date of the eligible consumer loans pledged as collateral as of the end of
the Revolving Loan Term. The maturity date of the Term Loan Component is March 31, 2007. The Textron Amendment also provides for a Textron Tranche B Facility, with a revolving loan
component of $44.1 million and a term loan component of $11.0 million. The Textron Tranche B
Facility is substantially identical to the Textron Tranche A Facility. The maturity of the
revolving loan component of the Textron Tranche B Facility is the earlier of March 31, 2007 or the
weighted average maturity date of the eligible consumer loans pledged as collateral. The maturity
date of the term loan component is also March 31, 2007. The Inventory Loan in the amount of $10 million which we initially entered into with Textron
in December 1999, as amended in April 2001, was further amended to extend the final maturity date
to March 31, 2007. In 2004 this facility was amended to increase the availability under it to
$18.0 million, then further amended to decrease the availability to $16.0 million. The Inventory
Loan is collateralized by a first priority security interest in certain of our inventory and a
second priority security interest in the stock of SF-I and the customer notes receivable pledged as
collateral under the other Textron loan agreements. In April 2001, we entered into another Loan and Security Agreement with Textron for a $10.2
million credit facility. The original note issued in April 2001 was replaced with a Revolving Loan
Component Note equal to $6.2 million and a Term Loan Component Note equal to $1.7 million (Textron
Tranche C Facility). The Textron Tranche C Facility is substantially identical to the Textron
Tranche A Facility. The maturity date of the Revolving Loan Component Note is the earlier of March
31, 2007 or the weighted average maturity date of the eligible consumer loans pledged as
collateral. The maturity date of the Term Loan Component Note is March 31, 2007. The Textron Amendment includes a change of control provision which provides that Textron
would have no obligation to make any advances under the facilities if there is a change in more
than fifty percent of the executive management of Silverleaf, as such management is designated in a
schedule to the Textron Amendment, unless Textron determines that the replacement management
personnels experience, ability and reputation is equal to or greater than that of the members of
management specified. Additionally, Textron would have no obligation to make any additional
advances under the facility if more than two of the five members of our Board of Directors are
controlled by the holders of the Exchange Notes. In December 2003, we closed a $66.4 million conduit term loan transaction through SF-II. This
conduit loan was arranged through Textron. Under the terms of the new conduit loan, we sold
approximately $78.1 million of our Vacation Interval receivables to our subsidiary SF-II for an
amount equal to the aggregate principal balances of the receivables. The purchase of these
receivables was financed by Textron through a one-time advance to SF-II of $66.4 million, which is
approximately 85% of the outstanding balance of the receivables SF-II purchased from us. All
customer receivables that we transferred to SF-II have been pledged as security to Textron. Textron
has also received as additional collateral a pledge of all of our equity interest in SF-II and a
$15.7 million demand note from us to SF-II under which payment may be demanded if SF-II defaults on
its loan from the lender. We used the proceeds from the sale of the receivables to SF-II to pay
down approximately $65.5 million of amounts outstanding under our two senior revolving credit
facilities with Textron and Sovereign. Textrons new conduit loan to SF-II will mature in 2014 and
bears interest at a fixed annual rate of 7.035%. As a result of the closing of the $66.4 million conduit loan, we obtained a two-year extension
of our senior revolving credit facilities with Textron. These facilities now revolve through March
31, 2006, and are due in March 2007. The Textron senior facilities are now limited to, in
aggregate, $118.9 million, with receivable-based revolvers of $95.0 million and term loans of $23.9
million. Sovereign Facility.Our Revolving Credit Agreement (Sovereign Facility) with a group of
lenders led by Sovereign Bank (collectively, Sovereign) was amended effective December 2003 to
provide a two-tranche receivables financing arrangement in an aggregate amount not to exceed $40.4
million. The first tranche (Sovereign Tranche A) is a revolving loan component of approximately
$35.0 million. The Sovereign Tranche A maturity date is the earlier of March 30, 2007 or the
weighted average maturity date of the eligible consumer loans pledged as collateral as of the
Sovereign Tranche A Conversion Date. Sovereign Tranche A bears interest at a base rate equal to the
higher of (i) a variable annual rate of interest equal to the prime rate charged by Sovereign or
(ii) 2.75% above the rate established by the Federal Reserve Bank of New York on overnight federal
funds transactions with members of the Federal Reserve System; provided, that in no event shall the
base rate be less than 6%. The second tranche (Sovereign Tranche B) is a term loan component equal to approximately
$5.4 million. Sovereign Tranche B shall be reduced automatically on a monthly basis as of the first
day of each calendar month based on a 20-year amortization schedule. Sovereign Tranche B bears
interest at the rate of 8% per annum. Interest is payable on the first day of each month. The
Sovereign Tranche B maturity date is March 30, 2007. Sovereign Tranche B is secured by the same
collateral pledged under Sovereign Tranche A. 17




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During 2004, Sovereign Tranche A was reduced to a $25 million revolver, Sovereign Tranche B
was paid in full, and a new $10 million revolving component was established, collateralized by
either notes receivable or inventory. Both of the existing facilities with Sovereign are due in
March 2009. Heller Facility.We originally entered into a Loan and Security Agreement (Heller
Receivables Loan) with Heller in October 1994 pursuant to which we have pledged notes receivable
as collateral. The Heller Receivables Loan has been amended several times to increase the amount
of borrowing capacity to $70 million. We also entered into a Loan and Security Agreement (Heller
Inventory Loan) in December 1999 for $10 million. The Heller Inventory Loan is secured by our
unsold inventory of Vacation Intervals. In March 2001, we obtained a supplemental $10 million
inventory and receivables loan (Heller Supplemental Loan). There is currently no availability under the Heller Receivables Loan. The Heller Receivables
Loan will mature in February 2006. The Heller Inventory Loan was amended effective April 30, 2002 to extend the availability
period to March 31, 2004 and the maturity date to March 31, 2007. During 2004, we reached an
agreement with Heller and Textron whereby the amount outstanding under the Heller Inventory Loan
agreement was paid off via an additional $8.0 million of availability under the Textron inventory
loan agreement. The maturity date of the Heller Supplemental Loan was amended effective April 30,
2002 to extend the maturity to March 31, 2007. Features Common to Amended Senior Credit Facilities with Textron, Sovereign, and Heller. The Amended Senior Credit Facilities with Textron, Sovereign and Heller described above
provide for a first priority security interest in (i) substantially all of our customer notes
receivable that have been pledged to one of the senior secured lenders previously, and the
mortgages attached thereto, (ii) substantially all of our real and personal property, including the
Companys rights under the management agreements for the Existing Resorts, (iii) the stock of
Silverleaf Finance, I, Inc., the SPE owned by us, and SF-II, (iv) the agreement with the Standby
Manager (as defined below), (v) all books, records, reports, computer tapes, disks and software
relating to the collateral pledged to Textron, Sovereign, and Heller; and (vi) all extensions,
additions, improvements, betterments, renewals, substitutions and replacements of, for or to any of
the collateral pledged to Textron, Sovereign, and Heller, together with the products, proceeds,
issues, rents and profits thereof. The Amended Senior Credit Facilities with Textron, Sovereign, and Heller also provide that we
shall retain, at our expense, a Standby Manager approved by the Senior Lenders who shall at any
time that an event of default occurs and the Senior Lenders so direct, assume full control of the
management of the Existing Resorts. We may also be replaced at the sole discretion of these Senior
Lenders as servicing agent for the customer notes receivable pledged under the Amended Senior
Credit Facilities. The Standby Manager designated by Textron, Sovereign and Heller under the
Amended Senior Credit Facilities is J&J Limited, Inc. located in Windermere, Florida. Financial Covenants Under Amended Senior Credit Facilities. The Amended Senior Credit Facilities with Heller, Textron and Sovereign provide certain
financial covenants which we must satisfy. Any failure to comply with the financial covenants will
result in a default under such Amended Senior Credit Facilities. In November 2003, we entered into
agreements with our three senior lenders to amend our senior credit facilities to modify our
financial covenants under which we had been in default since the first quarter of 2003. The amended
covenants increase from 52.5% to 55% the maximum permitted ratio of sales and marketing expenses to
total sales for each quarter beginning with the quarter ended March 31, 2003, exclude our $28.7
million increase in our allowance for uncollectible notes in the quarter ended March 31, 2003 from
the calculation of our minimum required consolidated net income, and from the calculation of our
minimum required interest coverage ratio of 1.25 to 1.0. In addition to the above amendments, we
also received waivers under our senior credit facilities of covenant defaults which occurred in the
first quarter of 2003 due to our increase in our allowance for uncollectible notes and our failure
to maintain a ratio of sales and marketing expense to total sales of no more than 52.5%. As a
result of these amendments and waivers, we have been in full compliance with all of our credit
facilities with our senior lenders since December 31, 2003. The financial covenants are described below. Tangible Net Worth Covenant.We must maintain a Tangible Net Worth at all times equal to (i)
the greater of (A) $100,000,000 or (B) an amount equal to 90% of the Tangible Net Worth of the
Company as of September 30, 2001, plus (ii) (A) on a cumulative basis, 100% of the positive
Consolidated Net Income after January 1, 2002, plus (B) 100% of the proceeds of (1) any sale by the
Company of (x) equity securities issued by the Company or (y) warrants or subscriptions rights for
equity securities issued by the Company or (2) any indebtedness incurred by the Company, other than
the loans under the Heller Facility, the Textron Facility or the Sovereign Facility, in the case of
each of (1) and (2) above occurring after January 1, 2002. For purposes of the three Amended
Senior Credit Facilities, Tangible 18




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Net Worth is (i) the consolidated net worth of the Company and its consolidated subsidiaries,
plus (ii) to the extent not otherwise included in the such consolidated net worth, unsecured
subordinated indebtedness of the Company and its consolidated subsidiaries the terms and conditions
of which are reasonably satisfactory to the required banks, minus (iii) the consolidated
intangibles of the Company and its consolidated subsidiaries, including, without limitation,
goodwill, trademarks, tradenames, copyrights, patents, patent applications, licenses and rights in
any of the foregoing and other items treated as intangibles in accordance with generally accepted
accounting principles. Consolidated Net Income is the consolidated net income of the Company and
its subsidiaries, after deduction of all expenses, taxes, and other proper charges (but excluding
any extraordinary profits or losses), determined in accordance with generally accepted accounting
principles. It also excludes the $28.7 million increase in our allowance for uncollectible notes
booked in the first quarter of 2003. Marketing and Sales Expenses Covenant.As of the last day of each fiscal quarter, commencing
with the fiscal quarter ending March 31, 2003, we will not permit the ratio of marketing expenses
to total sales for the latest rolling 12 months then ending to equal or exceed .55 to 1. Minimum Loan Delinquency Covenant.We will not permit as of the last day of each fiscal
quarter our over 30-day delinquency rate on our entire consumer loan portfolio to be greater than
25%. In the event that such delinquency rate is over 20% on the last day of the quarter, one or
more Senior Lenders may conduct an audit of the Company. As part of our credit and collection
process, we grant payment concessions on occasion to customers, whereby we bring a delinquent note
current and extend the maturity date if two consecutive payments have been made. Debt Service. As of the last day of each fiscal quarter, commencing with the fiscal quarter
ending March 31, 2003, we will not permit the ratio of (i) EBITDA less capital expenditures
(excluding the $28.7 million increase in our allowance for uncollectible notes booked in the first
quarter of 2003) as determined in accordance with generally accepted accounting principles to (ii)
the interest expense minus all non-cash items constituting interest expense for such period, for
the latest rolling 12 months then ending to be less than 1.25 to 1. Profitable Operations Covenant.We will not permit Consolidated Net Income (i) for any fiscal
year, commencing with the fiscal year ending December 31, 2002, to be less than $1.00 and (ii) for
any two consecutive fiscal quarters (reviewed on an individual rather than on an aggregate basis)
to be less than $1.00, excluding the $28.7 million increase in our allowance for uncollectible
notes booked in the first quarter of 2003. Amended DZ Bank Facility Effective as of October 30, 2000, we entered into a Receivables Loan and Security Agreement
(the RLSA) with SF-I, as Borrower, and Autobahn Funding Company LLC (Autobahn), as Lender, DZ
Bank, as Agent, and other parties. Pursuant to the DZ Bank facility, we service receivables which
we sold to SF-I under a separate agreement and which SF-I pledged as collateral for funds borrowed
from Autobahn. The facility (DZ Bank Facility) has a maximum borrowing capacity of $100 million,
of which SF-I borrowed approximately $62.9 million during the year ended December 31, 2000. The
RLSA established certain financial conditions which we must satisfy in order for SF-I to borrow
additional funds under the facility. Effective April 30, 2002, the RLSA was amended and restated (the Amended DZ Bank Facility)
with modifications to the term of the facility and the financial covenants imposed on us
thereunder. The principal balance of the loan, which was originally scheduled to mature on October
30, 2005, will now mature on April 30, 2007. We must maintain financial covenants under the Amended
DZ Bank Facility, including maintaining a minimum tangible net worth of $100 million and an
Interest Coverage Ratio of 1.1 to 1 until April 30, 2003, with an increase to 1.25 to 1 thereafter.
Interest Coverage Ratio is defined as the ratio of (i) EBITDA for such period less Capital
Expenditures for such period to (ii) the Cash Interest Expense for such period. Additional
amendments to the agreement with Autobahn include (i) a reduction in the borrowing limits on an
eligible receivable from a range of 80.0% to 85.0% of the principal balance outstanding to a range
of 73.0% to 75.0% of the principal balance outstanding, and (ii) the requirement that the
receivables pledged by SF-I as collateral must have received a weighted average score of 650 and,
individually, a minimum score of 500 under a nationally recognized credit rating developed by Fair,
Isaac and Co. at the time the original obligor purchased the Vacation Interval related to the
pledged receivable. As a result of the loss for the quarter ended March 31, 2003, the SPE was in default of
financial covenants with its lender. The lender subsequently waived the defaults as of March 31,
2003 and modified its agreement with the SPE whereby there were no defaults for the remainder of
2003. As a result of the closing of the $66.4 million conduit loan through our new financing
subsidiary, SF-II, we obtained an extension of our existing revolving credit facility through our
SPE through March 31, 2006. In order to obtain the two-year extension of this 19




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facility, however, we agreed that the principal amount of the facility would be reduced from
$100 million to $85 million effective December 2003, and from $85 million to $75 million effective
March 31, 2005. CAUTIONARY STATEMENTS If our assumptions and estimates in our Business Model are wrong, we could be in default under our
credit agreements. The financial covenants in our credit facilities are based upon a business model prepared by
our management and submitted to our banks. We used a number of assumptions and estimates in
preparing the business model, including:  °
    We estimated that we will sell our existing and planned inventory of Vacation Intervals within 15 years;°
    We assumed that our level of sales and operating profits and costs can be maintained; and°
    We assumed that we can raise the prices on our products and services as market conditions allow. These assumptions and estimates are subject to significant business, economic and competitive
risks and uncertainties. If our assumptions and estimates are wrong, our future financial
condition and results of operations may vary significantly from those projected in the business
model. In that case, we would be in default under our credit facilities and our banks could cease
all funding. Neither our past nor present independent auditors have reviewed or expressed an opinion about
our business model or our ability to achieve it. Changes in the timeshare industry could affect our operations. We operate solely within the timeshare industry. Our results of operations and financial
position could be negatively affected by any of the following events:  °
    An oversupply of timeshare units,°
    A reduction in demand for timeshare units,°
    Changes in travel and vacation patterns,°
    A decrease in popularity of our resorts with our consumers,°
    Governmental regulations or taxation of the timeshare industry, and°
    Negative publicity about the timeshare industry. Changes in accounting procedures and standards could negatively impact our future financial
statements. The Accounting Standards Executive Committee of the American Institute of Certified Public
Accountants has released an AICPA Statement of Position (the SOP), which provides guidance on the
accounting by a seller of all real estate timesharing transactions. The SOP is effective for fiscal
years beginning after June 15, 2005, and is to be applied retroactively to financial statements by
means of a cumulative effect of a change in accounting principle. The SOP provides guidance on a
sellers accounting for real estate time-sharing transactions, including, but not limited to,
accounting guidance in the following areas:  °
    sales incentives,°
    reload and upgrade sales transactions,°
    credit losses,°
    cost of sales and time-sharing inventory,°
    costs incurred to sell time-shares,°
    rental and other operations during holding periods (for inventory),°
    sampler programs and mini-vacations,°
    special purpose entities,°
    points systems,°
    vacation clubs, and°
    owners associations. We are still evaluating the impact the adoption of the SOP will have on our results of
operations, financial position, and future financial statements, and there can be no assurance that
the SOP will not have a material impact on our consolidated financial position or results of
operations. We may not be able to obtain additional financing. 20




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Several unpredictable factors may cause our adjusted earnings before interest, income taxes,
depreciation and amortization to be insufficient to meet debt service requirements or satisfy
financial covenants. We incurred net losses in one of the past three years. Should we record net
losses in future periods, our cash flow and our ability to obtain additional financing could be
materially and adversely impacted. Many of the factors that will determine whether or not we generate sufficient earnings before
interest, income taxes, depreciation and amortization to meet current or future debt service
requirements and satisfy financial covenants are inherently difficult to predict. These factors
include:  °
    the number of sales of Vacation Intervals;°
    the average purchase price per interval;°
    the number of customer defaults;°
    our cost of borrowing;°
    our sales and marketing costs and other operating expenses; and°
    the continued sale of notes receivable. Our current and planned expenses and debt repayment levels are and will be to a large extent
fixed in the short term, and are based in part on past expectations as to future revenues and cash
flows. We have previously reduced our costs of operations through a reduction in workforce and
other cost-savings measures. We may be unable to further reduce spending in a timely manner to
compensate for any past or future revenue or cash flow shortfall. It is possible that our revenue,
cash flow or operating results may not meet the expectations of our business model, and may even
result in our being unable to meet the debt repayment schedules or financial covenants contained in
our loan agreements, including the Old and New Indentures. Our leverage is significant and will continue to burden our operations, impair our ability to
obtain additional financing, reduce the amount of cash available for operations and required debt
payments, and make us more vulnerable to financial downturns. Our bank credit agreements may:  °
    require a substantial portion of our cash flow to be used to pay interest expense and
principal;°
    impair our ability to obtain on acceptable terms, if at all, additional financing that
might be necessary for working capital, capital expenditures or other purposes; and°
    limit our ability to further refinance or amend the terms of our existing debt
obligations, if necessary or advisable. We may not be able to reduce our financial leverage as we intend, and we may not be able to
achieve an appropriate balance between the rate of growth which we consider acceptable and future
reductions in financial leverage. If we are not able to achieve growth in adjusted earnings before
interest, income taxes, depreciation and amortization, we may not be able to amend or refinance our
existing debt obligations and we may be precluded from incurring additional indebtedness due to
cash flow coverage requirements under existing or future debt instruments. We may be impacted by general economic conditions. Our customers may be more vulnerable to deteriorating economic conditions than consumers in
the luxury or upscale markets. An economic slowdown in the United States could depress consumer
spending for Vacation Intervals. Additionally, significant increases in the cost of transportation
may limit the number of potential customers who travel to our resorts for a sales presentation.
During an economic slowdown and in past economic slowdowns and recessions, we have experienced
increased delinquencies in the payment of Vacation Interval promissory notes and monthly Club dues. We are at risk for defaults by our customers. We offer financing to the buyers of Vacation Intervals at our resorts. These buyers make down
payments of at least 10% of the purchase price and deliver promissory notes to us for the balances.
The promissory notes generally bear interest at a fixed rate, are payable over a seven-year to
ten-year period, and are secured by a first mortgage on the Vacation Interval. We bear the risk of
defaults on these promissory notes. Although we prescreen prospects in the early stages of the
marketing and sales process, we generally do not perform a detailed credit history review of our
customers, as is the case with most other timeshare developers. We recorded 19.4% of the purchase price of Vacation Intervals as a provision for uncollectible
notes for the year ended December 31, 2004. Our sales were decreased by $4.1 million for customer
returns in 2004. When a buyer of a Vacation Interval defaults, we 21




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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 we will incur such
costs again when we resell the Vacation Interval. Although we may have recourse against a Vacation
Interval buyer for the unpaid price, certain states have laws which limit our ability to recover
personal judgments against customers who have defaulted on their loans. For example, if we were to
file a lawsuit to collect the balance owed to us by a customer in Texas (where approximately 45.0%
of Vacation Interval sales took place in 2004), the customer could file a court proceeding to
determine the fair market value of the property foreclosed upon. In such event, we may not recover
a personal judgment against the customer for the full amount of the deficiency. We would only
recover an amount that the indebtedness owed to us exceeds the fair market value of the property.
Accordingly, we have generally not pursued this remedy. At December 31, 2004, we had Vacation Interval customer notes receivable in the approximate
principal amount of $250.4 million, and had an allowance for uncollectible notes of approximately
$52.5 million. We cannot be certain that this allowance is adequate. We must borrow funds to finance our operations. Our business is dependent on our ability to finance customer notes receivable through our
banks. At December 31, 2004, we owed approximately $210.9 million of principal to our senior
lenders. Borrowing Base.We have receivable-based loan agreements with lenders to borrow up to
approximately $209.0 million. We pledged our customer promissory notes and mortgages as
security under these agreements. Our lenders typically lend us 75% to 85% of the principal
amount of our customers notes, and payments from Silverleaf Owners on such notes are credited
directly to the lender and applied against our loan balance. At December 31, 2004, we had a
portfolio of approximately 34,437 Vacation Interval customer notes receivable in the
approximate principal amount of $250.4 million. Approximately $2.0 million in principal
amount of our customers notes were 61 days or more past due and, therefore, ineligible as
collateral. Negative Cash Flow.We ordinarily receive only 10% of the purchase price on the sale of a
Vacation Interval, but we must pay in full the costs of development, marketing, and sale of
the interval. Maximum borrowings available under our credit facilities may not be sufficient
to cover these costs, thereby straining our capital resources, liquidity, and capacity to
grow. Interest Rate Mismatch.At December 31, 2004, our portfolio of customer loans had a
weighted average fixed interest rate of 15.1%. At such date, our borrowings (which bear
interest predominantly at variable rates) against the portfolio had a weighted average cost of
funds of 6.8%. We have historically derived net interest income from our financing activities
because the interest rates we charge our customers who finance the purchase of their Vacation
Intervals exceed the interest rates we pay to our lenders. Because our existing indebtedness
currently bears interest at variable rates and our customer notes receivable bear interest at
fixed rates, increases in interest rates charged by our lenders would erode the spread in
interest rates that we have historically enjoyed and could cause the interest expense on our
borrowings to exceed our interest income on our portfolio of customer notes receivable. We
have engaged in one interest rate hedging transaction related to our conduit loan, with a
balance of $50.3 million on December 31, 2004. Therefore, any increase in interest rates,
particularly if sustained, could have a material adverse effect on our results of operations,
liquidity, and financial position. To the extent interest rates decrease on loans available to
our customers, we face an increased risk that customers will pre-pay their loans, which would
reduce our income from financing activities. Maturity Mismatch.We typically provide financing to our customers over a seven-year to
ten-year period. Our customer notes had an average maturity of 5.7 years at December 31,
2004. Our senior credit facilities have scheduled maturity dates between February 2006 and
March 2009. Additionally, should our revolving credit facilities be declared in default, the
amount outstanding could be declared to be immediately due and payable. Accordingly, there
could be a mismatch between our anticipated cash receipts and cash disbursements in 2005 and
subsequent periods. Although we have historically been able to secure financing sufficient to
fund our operations, we do not presently have agreements with our lenders to extend the term
of our existing funding commitments or to replace such commitments upon their expiration. If
we are unable to refinance our existing loans, we could be required to sell our portfolio of
customer notes receivable, probably at a substantial discount, or to seek other alternatives
to enable us to continue in business. We cannot be certain that we will be able to obtain
required financing in the future. Impact on Sales.Limitations on the availability of financing would inhibit sales of
Vacation Intervals due to (i) the lack of funds to finance the initial negative cash flow that
results from sales that we finance and (ii) reduced demand if we are unable to provide
financing to purchasers of Vacation Intervals. Our business is highly regulated. 22




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We are subject to substantial governmental regulation in the conduct of our business. See
Item 1. Business, Governmental Regulation, Environmental Matters, Utility Regulation, Other
Regulation, and Item 3. Legal Proceedings. If we are found to have violated any statute, rule, or
regulation applicable to us, our assets, or our business, it could have a material effect on our
results of operations, liquidity, and financial condition. We are dependent on our key personnel. During 2001, we were forced to downsize our staff, and we terminated many employees with
extended in-depth experience. However, we retained key members of management. The loss of the
services of the key members of management could have a material adverse effect on our operations.
Should our business develop and expand again in the future, we would require additional management
and employees. Inability to hire when needed, retain, and integrate needed new or replacement
management and employees could have a material adverse effect on our results of operations,
liquidity, and financial position in future periods. We will incur costs for additional development and construction activities at our Existing Resorts. We intend to continue to develop the Existing Resorts; however, continued development of our
resorts places substantial demands on our liquidity and capital resources, as well as on our
personnel and administrative capabilities. Risks associated with our development and construction
activities include:  °
    construction costs or delays at a property may exceed original estimates which could
make the development uneconomical or unprofitable;°
    sales of Vacation Intervals at a newly completed property may not be sufficient to make
the property profitable; and°
    financing may not be available on favorable terms for development of or the continued
sales of Vacation Intervals at a property. We cannot be certain that we will have the liquidity and capital resources to develop and
expand the Existing Resorts. Our development and construction activities, as well as our ownership and management of real
estate, are subject to comprehensive federal, state, and local laws regulating such matters as
environmental and health concerns, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction, marketing and sales, and other matters.
Our failure to maintain the requisite licenses, permits, allocations, authorizations, and other
entitlements pursuant to such laws could impact the development, completion, and sale of Vacation
Intervals at our resorts. The enactment of slow growth or no-growth initiatives or changes in
labor or other laws in any area where our resorts are located could also delay, affect the cost or
feasibility of, or preclude entirely the expansion planned at each of the Existing Resorts. Most of our resorts are located in rustic areas which often requires us to provide public
utility water and sanitation services in order to proceed with development. This development is
subject to permission and regulation by governmental agencies, the denial or conditioning of which
could limit or preclude development. Operation of the utilities also subjects us to risk of
liability in connection with both the quality of fresh water provided and the treatment and
discharge of waste-water. We must incur costs to comply with laws governing accessibility of facilities to disabled persons. We are subject to a number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the ADA), that impose requirements related to access and use by
disabled persons of a variety of public accommodations and facilities. The ADA requirements did not
become effective until after January 1, 1991. Although we believe the Existing Resorts are
substantially in compliance with these laws, we will incur additional costs to fully comply with
these laws. Additional federal, state, and local legislation may impose further restrictions on the
Company, the Club, or the Management Club at the Existing Resorts or other resorts, with respect to
access by disabled persons. The ultimate cost of compliance with such legislation is not currently
known. Such costs are not expected to have a material effect on our results of operations,
liquidity, and financial condition, but these costs could be substantial. We may be vulnerable to regional conditions. Prior to August 1997, all of our operating resorts and substantially all of our customers and
borrowers were located in Texas and Missouri. Since August 1997, we have expanded into other
states. Our performance and the value of our properties are affected by regional factors,
including local economic conditions (which may be adversely impacted by business layoffs or
downsizing, industry 23




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slowdowns, changing demographics, and other factors) and the local regulatory climate. Our
current geographic concentration could make us more susceptible to adverse events or conditions
which affect these areas in particular. We may be liable for environmental claims. Under various federal, state, and local laws, ordinances, and regulations, as well as common
law, the owner or operator of real property generally is liable for the costs of removal or
remediation of certain hazardous or toxic substances located on, in, or emanating from, such
property, as well as related costs of investigation and property damage. Such laws often impose
liability without regard to whether the owner knew of, or was responsible for, the presence of the
hazardous or toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owners ability to sell or lease a property or
to borrow money using such real property as collateral. Other federal and state laws require the
removal or encapsulation of asbestos-containing material when such material is in poor condition or
in the event of construction, demolition, remodeling, or renovation. Other statutes may require the
removal of underground storage tanks. Noncompliance with these and other environmental, health, or
safety requirements may result in the need to cease or alter operations at a property. Further, the
owner or operator of a site may be subject to common law claims by third parties based on damages
and costs resulting from violations of environmental regulations or from contamination associated
with the site. Phase I environmental reports (which typically involve inspection without soil
sampling or ground water analysis) were prepared in 2001 by independent environmental consultants
for all of the Existing Resorts. The reports did not reveal, nor are we aware of, any
environmental liability that would have a material adverse effect on our results of operations,
liquidity, or financial position. We cannot be certain that the Phase I reports revealed all
environmental liabilities or that no prior owner created any material environmental condition not
known to us. Certain environmental laws impose liability on a previous owner of property to the extent
hazardous or toxic substances were present during the prior ownership period. A transfer of the
property may not relieve an owner of such liability. Thus, we may have liability with respect to
properties previously sold by us or by our predecessors. We believe that we are in compliance in all material respects with all federal, state, and
local ordinances and regulations regarding hazardous or toxic substances. We have not been notified
by any governmental authority or third party of any non-compliance, liability, or other claim in
connection with any of our present or former properties. Our sales could decline if our resorts do not qualify for participation in an exchange network. The attractiveness of Vacation Interval ownership is enhanced by the availability of exchange
networks that allow Silverleaf Owners to exchange in a particular year the occupancy right in their
Vacation Interval for an occupancy right in another participating network resort. According to
ARDA, the ability to exchange Vacation Intervals was cited by many buyers as an important reason
for purchasing a Vacation Interval. Several companies, including RCI, provide broad-based Vacation
Interval exchange services, and as of December 31, 2004, the Existing Resorts are qualified for
participation in the RCI exchange network. We cannot be certain that we will be able to continue to
qualify the Existing Resorts or any future resorts for participation in these networks or any other
exchange network. If such exchange networks cease to function effectively, or if our resorts are
not accepted as exchanges for other desirable resorts, our sales of Vacation Intervals could
decline. Our new destination resort in Florida is not under contract with RCI; however it is under
contract with Interval International, Inc., a competitor of RCI. Our sales would be affected by a secondary market for Vacation Intervals. We believe the market for resale of Vacation Intervals is very limited and that resale prices
are substantially below the original purchase price of a Vacation Interval. This may make ownership
of Vacation Intervals less attractive to prospective buyers. Owners of Vacation Intervals who wish
to sell their Vacation Interval compete with our sales. Vacation Interval resale clearing houses
and brokers do not currently have a material impact on our sales. However, if the secondary market
for Vacation Intervals becomes more organized and liquid, the availability of resale intervals at
lower prices could materially adversely affect our prices and our ability to sell new Vacation
Intervals. Our sales are seasonal in nature. Our sales of Vacation Intervals have generally been lower in the months of November and
December. Cash flow and earnings may be impacted by the timing of development, the completion of
future resorts, and the potential impact of weather or other conditions in the regions where we
operate. Our quarterly operating results could be negatively impacted by these factors. 24




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We are not insured for certain types of losses. We do not insure certain types of losses (such as losses arising from floods and acts of war)
either because insurance is unavailable or unaffordable. Should an uninsured loss or a loss in
excess of insured limits occur, we could be required to repair damage at our expense or lose our
capital invested in a resort, as well as the anticipated future revenues from such resort. We
would continue to be obligated on any mortgage indebtedness or other obligations related to the
property. Our results of operations, liquidity, and financial position could be adversely affected
by such losses. We will continue to be highly leveraged. Our ability to finance customer notes receivable and develop our resorts will be financed
through borrowed funds. The funds borrowed would be collateralized by substantially all of our
assets. In addition, our loan agreements contain financial and other restrictive covenants that
will limit our ability to borrow additional funds or invest in additional resorts. Failure by us to
comply with such covenants could result in an event of default which, if not cured or waived, could
have a material adverse effect on our results of operations, liquidity, and financial position.
Future loan agreements would likely contain similar restrictions. The indentures pertaining to our 6% and 8% senior subordinated notes permit us to incur
certain additional indebtedness, including indebtedness secured by our customer notes receivable.
Accordingly, to the extent our customer notes receivable increase and we have sufficient credit
facilities available, we may be able to borrow additional funds. The indentures pertaining to our
6% and 8% senior subordinated notes also permit us to borrow additional funds in order to finance
development of our resorts. Future construction loans will likely result in liens against the
respective properties. Common Stock could be impacted by our indebtedness. The level of our indebtedness could negatively impact holders of our Common Stock, because:  °
    a substantial portion of our cash flow from operations must be dedicated to the payment
of principal and interest on our indebtedness;°
    our ability to obtain additional debt financing in the future for working capital,
capital expenditures or acquisitions may be limited;°
    our level of indebtedness could limit our flexibility in reacting to changes in the
industry and economic conditions generally;°
    some of our loans are at variable rates of interest, and a substantial increase in
interest rates could adversely affect our ability to meet debt service obligations; and°
    increased interest expense will reduce earnings, if any. We could lose control over the Clubs. Each Existing Resort has a Club that operates through a centralized organization to manage the
Existing Resorts on a collective basis. The consolidation of resort operations through the
Silverleaf Club permits:  °
    a centralized reservation system for all resorts;°
    substantial cost savings by purchasing goods and services for all resorts on a group
basis, which generally results in a lower cost of goods and services than if such goods and
services were purchased by each resort on an individual basis;°
    centralized management for the entire resort system;°
    centralized legal, accounting, and administrative services for the entire resort system; and°
    uniform implementation of various rules and regulations governing all resorts. We currently have the right to unilaterally appoint the board of directors or governors of the
Clubs until the respective control periods have expired (typically triggered by the percentage of
sales of the planned development), unless otherwise provided by the bylaws of the association or
under applicable law. Thereafter, the bylaws of certain of the Clubs require that a majority of
the members of the board of directors or governors of the Club be owners of Vacation Intervals of
that resort. The loss of control of the board of directors or governors of a Club could result in
our being unable to unilaterally cause the renewal of the collective Management Agreement with that
Club when it expires in 2010. We could issue Preferred Stock that would have rights and preferences senior to Common Stock. Our Articles of Incorporation authorize the Board of Directors to issue up to 10,000,000
shares of Preferred Stock in one or more series and to establish the preferences and rights
(including the right to vote and the right to convert into Common Stock) of any series 25




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of Preferred Stock issued. Such preferences and rights would likely grant to the holders of
the Preferred Stock certain preferences in right of payment upon a dissolution of the Company and
the liquidation of our assets that would not be available to the holders of our Common Stock. To
the extent that our credit facilities would permit, the Board could also establish a dividend
payable to the holders of the Preferred Stock that would not be available to the holders of the
Common Stock. Our cash flow may not be adequate upon an acceleration of deferred taxes. While we report sales of Vacation Intervals as income for financial reporting purposes at the
time of the sale, for federal income tax purposes, we report substantially all Vacation Interval
sales on the installment method. Under the installment method, we recognize income for regular
federal income tax purposes on the sale of Vacation Intervals when cash is received in the form of
a down payment and as payments on customer loans are received. Our liability for deferred taxes
(i.e., taxes owed to taxing authorities in the future in consequence of income previously reported
in the financial statements) was $85.8 million at December 31, 2004, primarily attributable to this
method of reporting Vacation Interval sales, before utilization of any available deferred tax
benefits (up to $89.1 million at December 31, 2004), including net operating loss carryforwards,
limitations on the use of which are discussed below. These amounts do not include accrued interest
on such deferred taxes which also could be payable when the taxes are due, the amount of which is
not now reasonably ascertainable. In addition, the net deferred tax benefit is fully-reserved at
December 31, 2004. If we should sell the installment notes or be required to factor them or if the
notes were foreclosed on by one of our lenders or otherwise disposed of, the deferred gain would be
reportable for regular federal tax purposes and the deferred taxes, including interest on the taxes
for the period the taxes were deferred, as computed under Section 453 of the Internal Revenue Code
of 1986, as amended (the Code), would become due. We cannot be certain that we would have
sufficient cash resources to pay those taxes and interest nor can we be certain how the payment of
such taxes may affect our operational liquidity needs. Furthermore, if our sales of Vacation
Intervals should decrease in the future, our diminished operations may not generate either
sufficient tax losses to offset taxable income or funds to pay the deferred tax liability from
prior periods. We will be subject to Alternative Minimum Taxes. For purposes of computing the 20% alternative minimum tax (AMT) imposed under Section 55 of
the Code on our alternative minimum taxable income (AMTI), the installment sale method is
generally not allowed. The Code requires an adjustment to our AMTI for a portion of our adjusted
current earnings (ACE). Our ACE must be computed without application of the installment sale
method. Prior to 1997, we used the installment method for the calculation of ACE for federal AMT
purposes. In 1998, we received a ruling from the Internal Revenue Service granting our request for
permission to change to the accrual method for this computation effective January 1, 1997. As a
result, our AMTI for 1997 through 1999 was increased each year by approximately $9 million, which
resulted in our paying substantial additional federal and state taxes in those years. As a result
of this change, we paid $641,000, $4.9 million, and $4.3 million of federal AMT for 1997, 1998, and
1999, respectively. Due to losses incurred in 2000 and 2001, we received refunds totaling $8.3
million during 2001 and $1.6 million during 2002 as a result of the carryback of our 2000 and 2001
AMT losses to 1999, 1998, and 1997. Thus, while Section 53 of the Code provides that we will be
allowed a credit (minimum tax credit) against our regular federal income tax liability for all or
a portion of the AMT previously paid, these refunds have resulted in a refund of all such
previously paid AMT. As a result, no minimum tax credit is available. We anticipate adequate AMT
loss carryforwards to offset 90% of 2004 AMT taxes, resulting in a minimal AMT liability for the
year. However, we further anticipate that any AMT loss carryforward remaining at the end of 2004
will be small and will be deductible in future years only to the extent of 90% of AMTI pursuant to
Section 56(d) of the Code. Accordingly, we anticipate that we will have significant AMT
liabilities in future years. Due to the Exchange Offer previously described, an ownership change, within the meaning of
Section 382(g) of the Code, has occurred. Such an ownership change may result in the imposition of
a limitation on our use of any minimum tax credit as provided in Section 383 of the Code. Under
Section 383, the amount of the excess credits which exist as of the date of the ownership change
can be used to offset our tax liability for post-change years only to the extent of the Section 383
Credit Limitation, which amount is defined as the tax liability which is attributable to so much of
our taxable income as does not exceed the Section 382 limitation for such post-change year to the
extent available after the application of Sections 382 and 383(b) and (c). As a result of the
above-described refunds of previously paid AMT, there is no minimum tax credit that is subject to
Section 383 of the Code. However, if it is subsequently determined that we have an AMT liability
for prior years, and thus a minimum tax credit as of the time of the Exchange Offer, or if
additional ownership changes within the meaning of Section 382(g) of the Code occur in the
future, we cannot be certain that such ownership changes will not result in a limitation on the use
of any such minimum tax credit. Our use of net operating loss carryforwards could be limited by an ownership change. We had net operating loss (NOL) carryforwards of approximately $224.8 million at December
31, 2004, for regular federal income tax purposes, related primarily to the immediate deduction of
expenses and the simultaneous deferral of installment sale gains. 26




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In addition to the general limitations on the carryback and carryforward of NOLs under Section
172 of the Code, Section 382 of the Code imposes additional limitations on the utilization of NOLs
by a corporation following various types of ownership changes which result in more than a 50
percentage point change in ownership of a corporation within a three year period. The Exchange
Offer resulted in an ownership change within the meaning of Section 382(g) of the Code as of May 2,
2002 (the change date). As a result, a portion of our NOL is subject to an annual limitation for
a portion of the taxable year, which includes the change date as well as the taxable years
beginning after the change date. The annual limitation will be equal to the value of our stock
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 is
small in comparison to the size of the NOL carryforwards. However, the annual limitation may be
increased for any recognized built-in gain, which existed as of the change date to the extent
allowed in Section 382(h) of the Code. We anticipate that the built-in gain associated with the installment sale gains as of the
change date will increase the Section 382 Limitation and allow the utilization of the NOL as
needed. Nevertheless, we cannot be certain that the limitations of Section 382 will not limit or
deny our future utilization of the NOL. Such limitation or denial would require us to pay
substantial additional federal and state taxes and interest for any periods following a change in
ownership as described above. Moreover, pursuant to Section 383 of the Code, an ownership change
may also limit or deny our future utilization of certain carryover excess credits, including any
unused minimum tax credit, if any, attributable to payment of alternative minimum taxes, as
described above. Accordingly, we cannot be certain that these additional limitations will not limit or deny our
future utilization of any NOL and/or excess tax credits. If we cannot utilize these NOL and/or
excess tax credits, we will pay substantial additional federal and state taxes and interest for any
periods following applicable changes in ownership as described above. Such tax and interest
liabilities may adversely affect our liquidity. We could be liable for back payroll taxes if our independent contractors are reclassified as
employees. Although we treat all on-site sales personnel as employees for payroll tax purposes, we do
have independent contractor agreements with certain sales and marketing persons or entities. We
have not treated these independent contractors as employees and do not withhold payroll taxes from
the amounts paid to such persons or entities. In the event the Internal Revenue Service or any
state or local taxing authority were to successfully classify such persons or entities as
employees, rather than as independent contractors, we could be liable for back payroll taxes. This
could have a material adverse effect on our results of operations, liquidity and financial
position. We could be negatively impacted by National and state Do Not Call Lists. We rely heavily on telemarketing activities to arrange tours of our resorts to potential
customers. On July 3, 2003, the Federal Communications Commission (FCC) released new rules and
regulations promulgated under the Telephone Consumer Protection Act of 1991, which could have a
negative impact on our telemarketing activities. The FCC has implemented, in conjunction with the
Federal Trade Commission (FTC), a National Do Not Call Registry, which applies to both interstate
and intrastate commercial telemarketing calls. The FTC recently reported that approximately 83
million telephone numbers had been registered on the National Do Not Call Registry by the end of
2004. This could sharply limit the number of contacts we will be able to make through our
telemarketing activities. We will continue to telemarket to individuals who do not place their
telephone numbers on a do-not-call list and those with whom we have an established business
relationship. Our use of autodialers to call potential customers in our database could also be
restricted by new call abandonment standards specified in the FCC rules and regulations. We cannot
currently determine the impact that these new regulations could have on our sales; however, the
large number of telephone numbers registered on the National Do Not Call Registry and the
restrictions on our use of autodialers could negatively affect our sales and marketing efforts and
require us to use less effective, more expensive alternative marketing methods. The new rules
became effective on October 1, 2003 and we have experienced a decline in the number of
telemarketing calls we are able to complete as a result of the changes in the rules relating to the
use of automatic dialers. All companies involved in telemarketing expect some negative impact to
their businesses as a result of the do-not-call rules and other federal and state legislation which
seeks to protect the privacy of consumers from various types of marketing solicitations. Because
of our historical dependence on telemarketing, we believe that these changes in the law will
continue to have a material impact on our operations and will require us to modify our historical
marketing practices in order to both remain compliant with the law and to achieve the levels of
resort tours by consumers which are necessary for our profitable operation. We will continue to
assess both the rules impact on operations and alternative methods of marketing, such as direct
mail, that are not impacted by the new rules. In addition to the National Do Not Call List, various states have implemented Do Not Call legislation which also may affect our business. 27




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ITEM 2. PROPERTIES At December 31, 2004, we owned a total of 12 timeshare resorts. Each of these resorts was
encumbered at December 31, 2004 due to inventory from each being pledged as collateral under our
inventory credit facilities with our senior lenders. See Footnote 8 - Debt in the Notes to Consolidated Financial Statements for further explanation. Principal
developmental activity which occurred during 2004 and future plans are summarized below. Continued Development of The Villages Resort.The Villages Resort, located approximately 100
miles east of Dallas, Texas, has 334 existing units. Silverleaf intends to develop approximately 96
additional units (4,992 Vacation Intervals) at this resort in the future. During 2004, we did not
add units at this resort. Continued Development of Piney Shores Resort.Piney Shores Resort, located near Conroe, Texas,
north of Houston, has 178 existing units. We intend to develop approximately 114 additional units
(5,928 Vacation Intervals) at this resort. During 2004, we added six units at this resort. Continued Development of Hill Country Resort.Hill Country Resort, located near Canyon Lake in
the hill country of central Texas between Austin and San Antonio, has 278 existing units. We intend
to develop approximately 234 additional units (12,168 Vacation Intervals) at this resort. During
2004, we did not add units at this resort. Continued Development of Timber Creek Resort.Timber Creek Resort, located in Desoto,
Missouri, has 72 existing units. We intend to develop approximately 84 additional units (4,368
Vacation Intervals) at this resort. During 2004, we did not add units at this resort. Continued Development of Fox River Resort.Fox River Resort, located 70 miles southwest of
Chicago, in Sheridan, Illinois, has 198 existing units. We intend to develop approximately 252
additional units (13,104 Vacation Intervals) at this resort. During 2004, we did not add units at
this resort. Continued Development of Apple Mountain Resort.Apple Mountain Resort, located approximately
125 miles north of Atlanta, Georgia, has 72 existing units. We intend to develop approximately 180
additional units (9,360 Vacation Intervals) at this resort. During 2004, we added 12 units at this
resort. Continued Development of Holiday Hills Resort.Holiday Hills Resort, located two miles east of
Branson, Missouri, in Taney County, has 392 existing units. We intend to develop approximately 396
additional units (20,564 Vacation Intervals) at this resort. During 2004, we added 12 units at
this resort. Continued Development of Oak N Spruce Resort.Oak N Spruce Resort, located 134 miles west of
Boston, Massachusetts, has 272 existing units. Silverleaf intends to develop approximately 78
additional units (4,056 Vacation Intervals) at this resort in the future. During 2004, we added 12
units at this resort. Continued Development of Silverleafs Seaside Resort.Silverleafs Seaside Resort, located in
Galveston, Texas, has 84 existing units. We intend to develop approximately 198 additional units
(10,296 Vacation Intervals) at this resort. During 2004, we did not add units at this resort. Acquisition of Orlando Breeze.In October 2004, we completed the acquisition of a 4.8 acre
tract of land located in Davenport, Florida, just outside Orlando, Florida, for an aggregate
purchase price of approximately $6.0 million. The site, formerly known as the Villas at Polo Park,
is near the major Florida tourist attractions of Walt Disney World, Sea World, and Universal
Studios. The property is comprised of 48 two and three bedroom units and provides resort amenities
such as a heated outdoor swimming pool with whirlpool, fitness center, arcade, playground, sand
volleyball and basketball courts. Our public offering statement filed with the Florida Bureau of
Standards and Registrations was approved in February 2005, granting us sales approval for 16 units
encompassing 832 one-week Vacation Intervals. We plan to seek approval to sell the remaining 32
units, encompassing 1,664 one-week Vacation Intervals in the future. We also intend to develop
approximately 24 additional units (1,248 Vacation Intervals) at this resort in the future. As of December 31, 2004, we had construction commitments of approximately $9.6 million. In December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia,
Pennsylvania, for approximately $1.9 million. The property was intended to be developed as a
Drive-to Resort (i.e., Beech Mountain Resort). We received regulatory approval to develop 408 units
(21,216 Vacation Intervals), but we did not schedule dates for construction, completion of initial
units, or commencement of marketing and sales efforts. In 2003, we determined that we would not
develop this property as initially planned. 28




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##### Table of Contents



Future Growth Strategy Our credit facilities limit our ability to expand our resort system beyond a limited amount of
development, as shown in the business model. As a result, we will continue to develop new or
existing resorts within the limitations set forth in the business model by maintaining marketing,
sales, and development activities at those resorts in accordance with our current business model.
We will also continue to emphasize our secondary products, such as biennial (alternate year)
intervals, to broaden our potential market with a wider price range of product. We will
concentrate more on marketing to existing members, including sales of upgraded Vacation Intervals,
second weeks, and existing owner referral programs. Competitive Advantages We believe our business affords us the following competitive advantages: Convenient Drive-to Locations.Our Drive-to Resorts are located within a two-hour drive of a
majority of our target customers residences, which accommodates the growing demand for shorter,
more frequent, close-to-home vacations. This proximity facilitates use of our Bonus Time Program,
allowing Silverleaf Owners to use vacant units, subject to availability and certain limitations. We
believe we are the only timeshare operator that offers customers these benefits. Silverleaf Owners
can also conveniently enjoy non-lodging resort amenities year-round on a country-club type basis. Substantial Internal Growth Capacity.At December 31, 2004, we had an inventory of 22,857
Vacation Intervals and a master plan to construct new units which will result in up to 84,836
additional Vacation Intervals at the Existing Resorts. Our master plan for construction of new
units is contingent upon future sales at the Existing Resorts and the availability of financing,
granting of governmental permits, and future land-planning and site-layout considerations. In-House Operations.We have in-house marketing, sales, financing, development, and property
management capabilities. While we utilize outside contractors to supplement internal resources, our
internal capabilities provide greater control over all phases of our operations, help maintain
operating standards, and reduce overall costs. Lower Construction and Operating Costs.We have developed and generally employ standard
architectural designs and operating procedures which we believe significantly reduce construction
and operating expenses. Standardization and integration also allow us to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing Resorts can normally be
constructed on an as needed basis within 180 to 270 days. Centralized Property Management.We presently operate all of the Existing Resorts on a
centralized and collective basis with operating and maintenance costs paid from Silverleaf Owners
monthly dues. We believe that consolidation of resort operations benefits Silverleaf Owners by
providing them with a uniform level of service, accommodations, and amenities on a standardized,
cost-effective basis. Integration also facilitates our internal exchange program and the Bonus Time
Program. Experienced Management.Our senior management has extensive experience in the acquisition,
development, and operation of timeshare resorts. The senior officers have an average of nineteen
years of experience in the timeshare industry. 29




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##### Table of Contents



Resorts Summary The following tables set forth certain information regarding each of the Existing Resorts at
December 31, 2004, unless otherwise indicated. Existing Resorts Vacation IntervalsUnits at Resorts
    
    
    At Resorts
    
    
    
    
    Vacation Intervals Sold
    
    
    AveragePrimary
    
    Inventory
    
    
    
    
    
    
    Inventory
    
    
    
    
    
    
    Date
    
    
    
    
    
    In
    
    
    Percentage
    
    
    SalesMarket
    
    At
    
    
    Planned
    
    
    At
    
    
    Planned
    
    
    Sales
    
    Through
    
    
    2004
    
    
    Through
    
    
    Price in
    
    
    Amenities/Resort/Location
    
    Served
    
    12/31/04
    
    
    Expansion(b)
    
    
    12/31/04
    
    
    Expansion
    
    
    Commenced
    
    12/31/04 (c)
    
    
    Only (a)
    
    
    12/31/04
    
    
    2004 (a)
    
    
    Activities(d)Drive-to ResortsHolly Lake
    
    Dallas-
    
    
    130
    
    
    
    
    
    
    
    1,987
    
    
    
    
    
    
    1982
    
    
    4,513
    
    
    
    237
    
    
    
    69.4
    %
    
    $
    8,788
    
    
    B,F,G,H,M,S,THawkins, TX
    
    Ft. Worth, TXThe Villages
    
    Dallas-
    
    
    334
    
    
    
    96
    
    
    
    5,383
    
    
    
    4,992
    (g)
    
    1980
    
    
    11,577
    
    
    
    1,360
    
    
    
    68.3
    %
    
    
    9,805
    
    
    B,F,H,M,S,TFlint, TX
    
    Ft. Worth, TXLake O The Woods
    
    Dallas-
    
    
    64
    
    
    
    
    
    
    
    1,079
    
    
    
    
    
    
    1987
    
    
    2,121
    
    
    
    349
    
    
    
    66.3
    %
    
    
    9,266
    
    
    F,M,S,T(e)Flint, TX
    
    Ft. Worth, TXPiney Shores
    
    Houston, TX
    
    
    178
    
    
    
    114
    (g)
    
    
    3,056
    
    
    
    5,928
    (g)
    
    1988
    
    
    6,008
    
    
    
    866
    
    
    
    66.3
    %
    
    
    9,851
    
    
    B,F,H,M,S,TConroe, TXHill Country
    
    Austin-San
    
    
    278
    (f)
    
    
    234
    (g)
    
    
    2,205
    
    
    
    12,168
    (g)
    
    1984
    
    
    11,880
    
    
    
    1,823
    
    
    
    84.3
    %
    
    
    9,402
    
    
    H,M,S,T(e)Canyon Lake, TX
    
    Antonio, TXTimber Creek
    
    St. Louis,
    
    
    72
    
    
    
    84
    (g)
    
    
    1,143
    
    
    
    4,368
    (g)
    
    1997
    
    
    2,601
    
    
    
    940
    
    
    
    69.5
    %
    
    
    10,046
    
    
    B,F,G,M,S,TDeSoto, MO
    
    MOFox River
    
    Chicago, IL
    
    
    198
    
    
    
    252
    (g)
    
    
    1,747
    
    
    
    13,104
    (g)
    
    1997
    
    
    8,549
    
    
    
    1,157
    
    
    
    83.0
    %
    
    
    11,165
    
    
    B,F,G,M,S,TSheridan, ILApple Mountain
    
    Atlanta, GA
    
    
    72
    
    
    
    180
    (g)
    
    
    2,263
    
    
    
    9,360
    (g)
    
    1999
    
    
    1,481
    
    
    
    6
    
    
    
    39.6
    %
    
    
    7,583
    
    
    G,M,S,TClarkesville, GADestination Resorts
    
    LocationsOzark Mountain
    
    Branson,
    
    
    136
    
    
    
    
    (g)
    
    
    768
    
    
    
    
    (g)
    
    1982
    
    
    6,080
    
    
    
    570
    
    
    
    88.8
    %
    
    
    8,555
    
    
    B,F,M,S,TKimberling City, MO
    
    MOHoliday Hills
    
    Branson,
    
    
    392
    
    
    
    396
    (g)
    
    
    1,175
    
    
    
    20,564
    (g)
    
    1984
    
    
    19,073
    
    
    
    2,459
    
    
    
    94.2
    %
    
    
    9,421
    
    
    G,S,T(e)Branson, MO
    
    MOOak N Spruce
    
    Boston, MA-
    
    
    272
    
    
    
    78
    (g)
    
    
    1,691
    
    
    
    4,056
    (g)
    
    1998
    
    
    12,453
    
    
    
    1,104
    
    
    
    88.0
    %
    
    
    9,633
    
    
    F,M,S,TSouth Lee, MA
    
    New York, NYSilverleafs Seaside
    
    Galveston,
    
    
    84
    
    
    
    198
    (g)
    
    
    360
    
    
    
    10,296
    (g)
    
    2000
    
    
    4,008
    
    
    
    474
    
    
    
    91.8
    %
    
    
    9,106
    
    
    S,TGalveston, TX
    
    TXTotal
    
    
    
    
    2,210
    
    
    
    1,632
    
    
    
    22,857
    
    
    
    84,836
    
    
    
    
    
    90,344
    
    
    
    11,345
    
    
    
    79.8
    %
    
    $
    9,671
 In February 2005, we obtained approval to operate a fifth destination resort, which was
acquired in October 2004. Information for this resort is as follows: Orlando Breeze
    
    Orlando,
    
    
    48
    
    
    
    24
    (g)
    
    
    2,496
    
    
    
    1,248
    
    
    
    (g
    )
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    SDavenport, FL
    
    FL
 30




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##### Table of Contents



(a)
    These totals do not reflect sales of upgraded Vacation Intervals to existing Silverleaf
Owners. In this context, a sale of an upgraded Vacation Interval refers to an exchange of a
lower priced interval for a higher priced interval in which the Silverleaf Owner is given
credit for all principal payments previously made toward the purchase of the lower priced
interval. For the year ended December 31, 2004, upgrade sales at the Existing Resorts were as
follows: Average Sales PriceUpgraded
    
    
    For the YearVacation
    
    
    Ended 12/31/04Intervals
    
    
     Net ofResort
    
    Sold
    
    
    Exchanged IntervalHolly Lake
    
    
    26
    
    
    $
    3,202The Villages
    
    
    209
    
    
    
    4,887Lake O The Woods
    
    
    41
    
    
    
    4,644Piney Shores
    
    
    144
    
    
    
    5,479Hill Country
    
    
    737
    
    
    
    6,583Timber Creek
    
    
    77
    
    
    
    5,128Fox River
    
    
    75
    
    
    
    4,486Ozark Mountain
    
    
    100
    
    
    
    6,681Holiday Hills
    
    
    1,782
    
    
    
    7,717Oak N Spruce
    
    
    389
    
    
    
    6,378Apple Mountain
    
    
    8
    
    
    
    5,100Silverleafs Seaside
    
    
    500
    
    
    
    7,4284,088
  The average sales price for the 4,088 upgraded Vacation Intervals sold was $6,928 for the
year ended December 31, 2004.(b)
    Represents units included in our master plan. This plan is subject to change based upon
various factors, including consumer demand, the availability of financing, grant of
governmental land-use permits, and future land-planning and site layout considerations. The
following chart reflects the status of certain planned units at December 31, 2004: Land-Use
    
    
    Land-Use
    
    
    Land-UseProcess
    
    
    Process
    
    
    Process
    
    
    Currently inNot Started
    
    
    Pending
    
    
    Complete
    
    
    Construction
    
    
    TotalThe Villages
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    12
    
    
    
    96Piney Shores
    
    
    
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    114Hill Country
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    12
    
    
    
    234Timber Creek
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Fox River
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    24
    
    
    
    252Holiday Hills
    
    
    
    
    
    
    
    
    
    
    372
    
    
    
    24
    
    
    
    396Oak N Spruce
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    12
    
    
    
    78Apple Mountain
    
    
    126
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    180Silverleafs Seaside
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    12
    
    
    
    198126
    
    
    
    
    
    
    
    1,410
    
    
    
    96
    
    
    
    1,632
  Land-Use Process Pending means that we have commenced the process which we believe is
required under current law in order to obtain the necessary land-use authorizations from the
applicable local governmental authority with jurisdiction, including submitting for approval any
architectural drawings, preliminary plats, or other attendant items as may be required.Land-Use Process Complete means either that (i) we believe that we have obtained all necessary
land-use authorizations under current law from the applicable local governmental authority with
jurisdiction, including the approval and filing of any required preliminary or final plat and the
issuance of building permit(s), in each case to the extent applicable, or (ii) upon payment of
any required filing or other fees, we believe that we will under current law obtain such
necessary authorizations without further process.(c)
    These totals are net of intervals received from upgrading customers and from intervals
received from cancellations.(d)
    Principal amenities available to Silverleaf Owners at each resort are indicated by the
following symbols: B  boating; F  fishing; G  golf; H  horseback riding; M  miniature
golf; S  swimming pool; and T  tennis.(e)
    Boating is available near the resort.(f)
    Includes three units which have not been finished-out for accommodations and which are
currently used for other purposes. 31




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##### Table of Contents



(g)
    Engineering, architectural, and construction estimates have not been completed, and we cannot
be certain that we will develop these properties at the unit numbers currently projected. Features Common To Existing Resorts Drive-to Resorts are primarily located in rustic areas offering Silverleaf Owners a quiet,
relaxing vacation environment. Furthermore, the resorts offer different vacation activities,
including golf, fishing, boating, swimming, horseback riding, tennis, and archery. Destination
Resorts are located in or near areas with national tourist appeal. Features common to the Existing
Resorts include the following: Bonus Time Program.Silverleaf Clubs Bonus Time Program offers Silverleaf Club members a
benefit not typically enjoyed by any other timeshare owners. In addition to the right to use a unit
one week per year, the Bonus Time Program allows all Silverleaf Club members, who are current on
their dues and installment payments, to use vacant units for up to three nights at a time at any of
our owned resorts. Sunday through Thursday night stays are currently without charge, while Friday
through Saturday stays presently cost $39.95 per night payable to Silverleaf Club. The Bonus Time
Program is limited based on the availability of units. Availability is created when a Silverleaf
Owner does not use his or her owned week. Silverleaf Owners who have utilized the resort less
frequently are given priority to use the program and may only use an interval with an equal or
lower rating than their owned Vacation Interval. We believe this program is important as many
vacationers prefer shorter two to three day vacations. Owners of unused intervals that are utilized
by the Bonus Time Program are not compensated other than by their participation in the Bonus Time
Program. Year-Round Use of Amenities.Even when not using the lodging facilities, Silverleaf Owners
have unlimited year-round day usage of the amenities located at the Existing Resorts, such as
boating, fishing, miniature golf, tennis, swimming, or hiking, for little or no additional cost.
Certain amenities, however, such as golf, horseback riding, or watercraft rentals, may require a
usage fee. Exchange Privileges.Each Silverleaf Owner has certain exchange privileges which may be used
on an annual basis to (i) exchange an interval for a different interval (week) at the same resort
so long as the desired interval is of an equal or lower rating; or (ii) exchange an interval for
the same interval (week) at any other of the Existing Resorts. These intra-company exchange rights
are a convenience we provide our members as an accommodation to them, and are conditioned upon
availability of the desired interval or resort. Approximately 3,269 intra-company exchanges
occurred in 2004. Silverleaf Owners pay an exchange fee of $75 to Silverleaf Club for each such
internal exchange. In addition, most Silverleaf Owners may join the exchange program administered
by RCI for an annual fee of $89. Our new destination resort in Florida, Orlando Breeze, is not
under contract with RCI; however it is under contract with Interval International, Inc., a
competitor of RCI. Deeded Ownership.We typically sell a Vacation Interval which entitles the owner to use a
specific unit for a designated one-week interval each year. The Vacation Interval purchaser
receives a recorded deed which grants the purchaser a percentage interest in a specific unit for a
designated week. We also sell a biennial (alternate year) Vacation Interval that allows the owner
to use a unit for a one-week interval every other year with reduced dues. Management Club.Each of the Existing Resorts has a Club for the benefit of the timeshare
owners. At December 31, 2004, the Clubs operate under Silverleaf Club to manage the Existing
Resorts on a centralized and collective basis. We have contracted with Silverleaf Club to perform
the supervisory, management, and maintenance functions granted by the Clubs. Costs of these
operations are covered by monthly dues paid by timeshare owners to their respective Clubs together
with income generated by the operation of certain amenities at each respective resort. Our new
destination resort in Florida, Orlando Breeze, has its own club which will be operated
independently of Silverleaf Club. On-Site Security.Each of the Resorts is patrolled by security personnel who are either
employees of the Management Club or personnel of independent security service companies which have
contracted with the Clubs. Description Of Timeshare Resorts Owned and Operated By Silverleaf Drive-to Resorts Holly Lake Resort.Holly Lake is a family-oriented golf resort located in the Piney Woods of
east Texas, approximately 105 miles east of Dallas, Texas. The timeshare portion of Holly Lake is
part of a 4,300 acre mixed-use development of single-family lots and timeshare units with other
third-party developers. We own approximately 1,206 acres within Holly Lake, of which approximately
1,133 acres may not be developed due to deed restrictions. At December 31, 2004, approximately 27
acres were developed. We have no future development plans. 32




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##### Table of Contents



At December 31, 2004, 130 units were completed and no additional units are planned for
development. Three different types of units are offered at the resort: (i) two bedroom, two bath,
vinyl siding, fourplexes; (ii) one bedroom, one bath, one sleeping loft, log construction duplexes;
and (iii) two bedroom, two bath, log construction fourplexes. Each unit has a living room with
sleeper sofa and full kitchen. Other amenities within each unit include whirlpool tub, color
television, and vaulted ceilings. Certain units include interior ceiling fans, imported ceramic
tile, over-sized sliding glass doors, and rattan and pine furnishings. Amenities at the resort include an 18-hole golf course with pro shop, 19th-hole private club,
country store, indoor rodeo arena and stables, five tennis courts (four lighted), two different
lakes (one with sandy swimming beach, one with boat launch for water-skiing), three outdoor
swimming pools with bathhouses and pavilion, hiking/nature trails, childrens playground area, two
miniature golf courses, five picnic areas, activity center with grill, big screen television, game
room with arcade games and pool tables, horseback trails, and activity areas for basketball,
horseshoes, volleyball, shuffleboard, and archery. Silverleaf Owners can also rent canoes,
bicycles, and water trikes. Homeowners in neighboring subdivisions are entitled to use the
amenities at Holly Lake pursuant to easements or use agreements. At December 31, 2004, the resort contained 6,500 Vacation Intervals, of which 1,987 intervals
remained available for sale. We have no plans to build additional units. Vacation Intervals at the
resort are currently priced from $7,000 to $12,300 for one-week stays. During 2004, 237 Vacation
Intervals were sold. The Villages and Lake O The Woods Resorts.The Villages and Lake O The Woods are sister
resorts located on the shores of Lake Palestine, approximately 100 miles east of Dallas, Texas. The
Villages, located approximately five miles northwest of Lake O The Woods, is an active sports
resort popular for water-skiing and boating. Lake O The Woods is a quiet wooded resort where
Silverleaf Owners can enjoy the seclusion of dense pine forests less than two hours from the
Dallas-Fort Worth metroplex. The Villages is a mixed-use development of single-family lots and
timeshare units, while Lake O The Woods has been developed solely as a timeshare resort. The two
resorts contain approximately 652 acres, of which approximately 379 may not be developed due to
deed restrictions. At December 31, 2004, approximately 181 acres were developed and 18 acres are
currently planned by the Company to be used for future development. At December 31, 2004, 334 units were completed at The Villages and 64 units were completed at
Lake O The Woods. An additional 96 units are planned for development at The Villages and no
additional units are planned for development at Lake O The Woods. There are five different types
of units at these resorts: (i) three bedroom, two and one-half bath, wood siding exterior duplexes
and fourplexes (two units); (ii) two bedroom, two and one-half bath, wood siding exterior duplexes
and fourplexes; (iii) two bedroom, two bath, brick and siding exterior fourplexes; (iv) two
bedroom, two bath, wood and vinyl siding exterior fourplexes, sixplexes, twelveplexes and a
sixteenplex; and (v) one bedroom, one bath with two-bed loft sleeping area, log construction
duplexes. Amenities within each unit include full kitchen, whirlpool tub, and color television.
Certain units include interior ceiling fans, ceramic tile, and/or a fireplace. Presidents Harbor
units feature a larger, more spacious floor plan (1,255 square feet), back veranda, washer and
dryer, and a more elegant decor. Both resorts are situated on Lake Palestine, a 27,000 acre public lake. Recreational
facilities and improvements at The Villages include a full service marina with convenience store,
gas dock, boat launch, water-craft rentals, and covered and locked rental boat stalls; three
swimming pools; two lighted tennis courts; miniature golf course; nature trails; camp sites; riding
stables; soccer/softball field; childrens playground; RV sites; a new 9,445 square foot activity
center with theater room with wide-screen television, reading room, grill, tanning beds, pool
table, sauna, and small indoor gym; and competitive sports facilities which include horseshoe pits,
archery range, and shuffleboard, volleyball, and basketball courts. Silverleaf Owners at The
Villages can also rent or use motor boats, paddle boats, and pontoon boats. Neighboring homeowners
are also entitled to use these amenities pursuant to a use agreement. Recreational facilities at Lake O The Woods include swimming pool, bathhouse, lighted tennis
court, a recreational beach area with picnic areas, a fishing pier on Lake Palestine, nature
trails, soccer/softball field, childrens playground, RV sites, an activity center with wide-screen
television and pool table, horseshoe pits, archery range, miniature golf course, shuffleboard,
volleyball, and basketball courts. At December 31, 2004, The Villages contained 16,960 total Vacation Intervals, of which 5,383
remained available for sale. The Company plans to build 96 additional units at The Villages, which
would yield an additional 4,992 Vacation Intervals available for sale. At December 31, 2004, Lake
O The Woods contained 3,200 total Vacation Intervals, of which 1,079 remained available for sale.
The Company has no plans to build additional units at Lake O The Woods. Vacation Intervals at The
Villages and Lake O The Woods are currently priced from $7,000 to $16,300 for one-week stays (and
start at $6,250 for biennial intervals), while one-week Presidents Harbor intervals are priced at
$9,900 to $22,500 depending on the value rating of the interval. During 2004, 1,360 and 349
Vacation Intervals were sold at The Villages and Lake O The Woods, respectively. 33




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Piney Shores Resort.Piney Shores Resort is a quiet, wooded resort ideally located for
day-trips from metropolitan areas in the southeastern Gulf Coast area of Texas. Piney Shores Resort
is located on the shores of Lake Conroe, approximately 40 miles north of Houston, Texas. The resort
contains approximately 113 acres. At December 31, 2004, approximately 72 acres were developed and
11 acres are currently planned by the Company to be used for future development. At December 31, 2004, 178 units were completed and 114 units are planned for development at
Piney Shores Resort. All units are two bedroom, two bath units and will comfortably accommodate up
to six people. Amenities include a living room with sleeper, full kitchen, whirlpool tub, color
television, and interior ceiling fans. Certain lodge-style units feature stone fireplaces,
white-washed pine wall coverings, age-worn paint
finishes, and antique furnishings. Presidents
Cove units feature a larger, more spacious floor plan (1255 square feet) with a back veranda,
washer and dryer, and a more elegant décor. The primary recreational amenity at the resort is Lake Conroe, a 21,000 acre public lake.
Other recreational facilities and improvements available at the resort include two swimming pools
and a spa, a bathhouse complete with outdoor shower and restrooms, lighted tennis court, miniature
golf course, stables, horseback riding trails, childrens playground, picnic areas, boat launch,
beach area, 4,626-square foot activity center, 32-seat theatre room with big screen television,
covered wagon rides, and facilities for horseshoes, archery, shuffleboard, and basketball. At December 31, 2004, the resort contained 9,064 Vacation Intervals, of which 3,056 remained
available for sale. We intend to build 114 additional units, which would yield an additional 5,928
Vacation Intervals available for sale. Vacation Intervals at the resort are currently priced from
$7,000 to $16,300 for one-week stays (and start at $6,250 for biennial intervals),
while one-week Presidents Cove intervals are priced at
$9,900 to $22,500 depending on the value rating of the interval. During 2004, 866
Vacation Intervals were sold. Hill Country Resort.Hill Country Resort is located near Canyon Lake in the hill country of
central Texas between Austin and San Antonio. The resort contains approximately 110 acres. At
December 31, 2004, approximately 38 acres were developed and 19 acres are currently planned by the
Company to be used for future development. At December 31, 2004, 278 units were completed and 234 units are planned for development at
Hill Country Resort. Some units are single story, while certain other units are two-story
structures in which the bedrooms and baths are located on the second story. Each unit contains two
bedrooms, two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities within
each unit include whirlpool tub, color television, and interior design details such as vaulted
ceilings. Certain units include interior ceiling fans, imported ceramic tile, over-sized sliding
glass doors, rattan and pine furnishings, or fireplace. 122 units feature the Companys new lodge
style. 44 Presidents Villas units feature a larger, more spacious floor plan (1,255 square
feet), back veranda, washer and dryer, and a more elegant decor. Amenities at the resort include a 7,943-square foot activity center with electronic games,
pool table, and wide-screen television, miniature golf course, a childrens playground areas,
barbecue and picnic area, enclosed swimming pool and heated spa, childrens wading pool, tennis
court, and activity areas for basketball, horseshoes, shuffleboard and sand volleyball court. Area
sights and activities include water-tubing on the nearby Guadeloupe River and visiting the many
tourist attractions in San Antonio, such as Sea World, The Alamo, The River Walk, Fiesta Texas, and
the San Antonio Zoo. At December 31, 2004, the resort contained 14,084 Vacation Intervals, of which 2,205 remained
available for sale. The Company plans to build 234 additional units, which collectively would yield
12,168 additional Vacation Intervals available for sale. Vacation Intervals at the resort are
currently priced from $7,000 to $16,300 for one-week stays (and start at $6,250 for biennial
intervals), while one-week Presidents Villas intervals are priced at $9,900 to $23,500 depending
on the value rating of the interval. During 2004, 1,823 Vacation Intervals were sold. Timber Creek Resort.Timber Creek Resort, in Desoto, Missouri, is located approximately 50
miles south of St. Louis, Missouri. The resort contains approximately 332 acres. At December 31,
2004, approximately 180 acres were developed and 6 acres are currently planned by the Company to be
used for future development. At December 31, 2004, 72 units were completed and an additional 84 units are planned for
future development at Timber Creek Resort. All units are two bedroom, two bath units. Amenities
within each new unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and
color television. Certain units include a fireplace, ceiling fans, imported ceramic tile, French
doors, and rattan or pine furniture. The primary recreational amenity available at the resort is a 40-acre fishing lake. Other
amenities include a clubhouse, a five-hole par three executive golf course, swimming pool, two
lighted tennis courts, themed miniature golf course, volleyball court, 34




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shuffleboard/multi-use sports court, fitness center, horseshoes, archery, a welcome center,
playground, arcade, movie room, tanning bed, cedar sauna, sales and registration building, hook-ups
for recreational vehicles, and boat docks. We are obligated to maintain and provide campground
facilities for members of the previous owners campground system. At December 31, 2004, the resort contained 3,744 Vacation Intervals and 1,143 Vacation
Intervals remained available for sale. We plan to build 84 additional units, which would
collectively yield 4,368 additional Vacation Intervals available for sale. Vacation Intervals at
the resort are currently priced from $8,000 to $16,300 for one-week stays (and start at $6,250 for
biennial intervals). During 2004, 940 Vacation Intervals were sold. Fox River Resort.Fox River Resort, in Sheridan, Illinois, is located approximately 70 miles
southwest of Chicago, Illinois. The resort contains approximately 372 acres. At December 31, 2004,
approximately 156 acres were developed and 26 acres are currently planned by the Company to be used
for future development. At December 31, 2004, 198 units are completed and 252 units are planned for future development
at Fox River Resort. All units are two bedroom, two bath units. Amenities within each unit include
a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units
include ceiling fans, ceramic tile, and rattan or pine furniture.
Presidents Lakeside units feature a larger, more spacious floor (1,288 square feet) with a back veranda,
washer and dryer, and a more elegant decor. Amenities currently available at the resort include five-hole par three executive golf course,
outdoor swimming pool, clubhouse, covered pool, miniature golf course, horseback riding trails,
stable and corral, welcome center, sales and registration buildings, hook-ups for recreational
vehicles, a tennis court, a basketball court / seasonal ice-skating rink, shuffleboard courts, sand
volleyball courts, outdoor pavilion, and playgrounds. The Company also offers winter recreational
activities at this resort, including ice-skating, snowmobiling, and cross-country skiing. The
Company is obligated to maintain and provide campground facilities for members of the previous
owners campground system. At December 31,
2004, the resort contained 10,296 Vacation Intervals and 1,747 Vacation
Intervals remained available for sale. We plan to build 252 additional units, which would
collectively yield 13,104 additional Vacation Intervals available for sale. Vacation Intervals at
the resort are currently priced from $8,000 to $16,300 for one-week stays (and start at $6,250 for
biennial intervals),
while one-week Presidents Lakeside intervals are priced at
$9,900 to $24,000 depending on the value rating of the interval.
During 2004, 1,157 Vacation Intervals were sold. Apple Mountain Resort.Apple Mountain Resort, in Clarkesville, Georgia, is located
approximately 125 miles north of Atlanta, Georgia. The resort is situated on 285 acres of beautiful
open pastures and rolling hills, with 150 acres being the resorts golf course. At December 31,
2004, approximately 191 acres were developed and 16 acres are currently planned by the Company to
be used for future development. At December 31, 2004, 72 units are completed and 180 units are planned for development at
Apple Mountain Resort. The lodge-style units were the first units developed. Each unit is
approximately 824 square feet with all units being two bedrooms, two full baths. Amenities within
each unit include a living room with sleeper sofa, full kitchen, whirlpool tub, and color
television. Certain units include ceiling fans, imported ceramic tile, electronic door locks, and
rattan or pine furniture. Amenities at the resort include a 9,445 square foot administration building and activity
center featuring a theatre room with a wide screen television, a member services building, pool
tables, arcade games, and snack area. Other amenities at the resort include two tennis courts,
swimming pool, shuffleboard, miniature golf course, and volleyball and basketball courts. This
resort is located in the Blue Ridge Mountains and offers accessibility to many other outdoor
recreational activities, including Class 5 white water rapids. The primary recreational amenity available to the resort is an established 18-hole golf course
situated on approximately 150 acres of open fairways and rolling hills. Elevation of the course is
1,530 feet at the lowest point and 1,600 feet at the highest point. The course is designed with
approximately 104,000 square feet of bent grass greens. The courses tees total approximately 2
acres, fairways total approximately 24 acres, and primary roughs total approximately 29 acres, all
covered with TIF 419 Bermuda. The balance of grass totals approximately 95 acres and is covered
with Fescue. The course has 19 sand bunkers totaling 19,800 square feet and there are approximately
seven miles of cart paths. Lining the course are apple orchards totaling approximately four acres,
with white pine roughs along twelve of the fairways. The course has a five-acre irrigation lake and
a pond of approximately 900 square feet located on the fifteenth hole. The driving range covers
approximately nine acres and has 20,000 square feet of tee area covered in TIF 419 Bermuda. The pro
shop offers a full line of golfing accessories and equipment. There is also a golf professional on
site to offer lessons and to plan events for the club. At December 31, 2004, the resort contained 3,744 Vacation Intervals, of which 2,263 remained
available for sale. We plan to build 180 additional lodge-style units, which would yield an
additional 9,360 Vacation Intervals available for sale. Vacation 35




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Intervals at the resort are currently priced from $8,000 to $16,300 for one-week stays (and
start at $6,250 for biennial intervals). During 2004, 6 Vacation Intervals were sold. Destination Resorts Ozark Mountain Resort.Ozark Mountain Resort is a family-oriented resort located on the shores
of Table Rock Lake, which features bass fishing. The resort is located approximately 15 miles from
Branson, Missouri, a family music and entertainment center, 233 miles from Kansas City, and 276
miles from St. Louis. Ozark Mountain Resort is a mixed-use development of timeshare and condominium
units. At December 31, 2004, the resort contained approximately 116 acres. We have no future
development plans. At December 31, 2004, 136 units were completed and no additional units are planned for
development. There are two types of units at the resort: (i) two bedroom, two bath, one-story
fourplexes and (ii) two bedroom, two bath, three-story sixplexes. Each standard unit includes two
large bedrooms, two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities
within each unit include whirlpool tub, color television, and vaulted ceilings. Certain units
contain interior ceiling fans, imported ceramic tile, oversized sliding glass doors, rattan or pine
furnishings, or fireplace. Presidents View units feature a panoramic view of Table Rock Lake, a
larger, more spacious floor plan (1,255 square feet), front and back verandas, washer and dryer,
and a more elegant decor. The primary recreational amenity available at the resort is Table Rock Lake, a 43,100-acre
public lake. Other recreational facilities and improvements at the resort include a swimming beach
with dock, an activities center with pool table, covered boat dock and launch ramp, olympic-sized
swimming pool, lighted tennis court, nature trails, two picnic areas, playground, miniature golf
course, and a competitive sports area accommodating volleyball, basketball, tetherball, horseshoes,
shuffleboard, and archery. Guests can also rent or use canoes, or paddle boats. Owners of
neighboring condominium units developed by the Company in the past are also entitled to use these
amenities pursuant to use agreements with the Company. Similarly, owners of Vacation Intervals are
entitled to use certain amenities of these condominium developments, including a wellness center
featuring a small pool, hot tub, sauna, and exercise equipment. At December 31, 2004,
the resort contained 6,848 Vacation Intervals, of which 768 remained
available for sale. The Company has no plans to build additional units. Vacation Intervals at the
resort are currently priced from $9,500 to $17,000 for one-week stays, while one-week Presidents
View intervals are priced at $13,000 to $25,000 depending on the value rating of the interval.
During 2004, 570 Vacation Intervals were sold. Holiday Hills Resort.Holiday Hills Resort is a resort community located in Taney County,
Missouri, two miles east of Branson, Missouri. The resort is 224 miles from Kansas City and 267
miles from St. Louis. The resort is heavily wooded by cedar, pine, and hardwood trees, and is
favored by Silverleaf Owners seeking quality golf and nightly entertainment in nearby Branson.
Holiday Hills Resort is a mixed-use development of single-family lots, condominiums, and timeshare
units. The resort contains approximately 405 acres, including a 91-acre golf course. At December
31, 2004, approximately 301 acres were developed and 63 acres are currently planned by the Company
to be used for future development. At December 31, 2004, 392 units were completed and an additional 396 units are planned for
future development. There are four types of timeshare units at this resort: (i) two bedroom, two
bath, one-story fourplexes, (ii) one bedroom, one bath, with upstairs loft, log construction
duplexes, (iii) two bedroom, two bath, two-story fourplexes, and (iv) two bedroom, two bath,
three-story sixplexes and twelveplexes. Each unit includes a living room with sleeper sofa, full
kitchen, whirlpool tub, and color television. Certain units will include a fireplace, ceiling fans,
imported tile, oversized sliding glass doors, vaulted ceilings, and rattan or pine furniture.
Presidents Fairways units feature a larger, more spacious floor plan (1,255 square feet), back
veranda, washer and dryer, and a more elegant décor. Taneycomo Lake, a popular lake for trout fishing, is approximately three miles from the
resort, and Table Rock Lake is approximately ten miles from the resort. Amenities at the resort
include an 18-hole golf course, tennis court, picnic areas, camp sites, basketball court, activity
area which includes shuffleboard, horseshoes, and a childrens playground, a 5,356 square foot
clubhouse that includes a pro shop, restaurant, and meeting space, a 2,800 square foot outdoor
swimming pool, and a sports pool. Lot and condominium unit owners are also entitled to use these
amenities pursuant to use agreements between the Company and certain homeowners associations. At December 31, 2004, the resort contained 20,248 Vacation Intervals, of which 1,175 remained
available for sale. The Company plans to build 396 additional units, which would yield an
additional 20,564 Vacation Intervals available for sale. Vacation Intervals at the resort are
currently priced from $9,500 to $17,000 for one-week stays (and start at $7,250 for biennial
intervals), while one-week Presidents Fairways intervals are priced at $13,000 to $27,000
depending on the value rating of the interval. During 2004, 2,459 Vacation Intervals were sold. 36




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Oak N Spruce Resort.In December 1997, we acquired the Oak N Spruce Resort in the Berkshire
mountains of western Massachusetts. The resort is located approximately 134 miles west of Boston,
Massachusetts, and 114 miles north of New York City. Oak N Spruce Resort is a mixed-use
development which includes a hotel and timeshare units. The resort contains approximately 244
acres. At December 31, 2004, approximately 37 acres were developed and 10 acres are currently
planned by the Company to be used for future development. At December 31, 2004, the resort had 272 units completed and 78 units are planned for
development. There are six types of existing units at the resort: (i) one-bedroom flat, (ii)
one-bedroom townhouse, (iii) two-bedroom flat, (iv) two-bedroom townhouse, (v) two-bedroom,
flex-time, and (vi) two-bedroom lodge style and Presidents style units. There is also a 21-room
hotel at the resort which could be converted to timeshare use. Amenities within each new unit
include a living room with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
units include ceiling fans, ceramic tile, and rattan or pine furniture. Amenities at the resort include two indoor heated swimming pools with hot tubs, an outdoor
pool with sauna, health club, lounge, ski rentals, miniature golf, shuffleboard, basketball and
tennis courts, horseshoe pits, hiking and ski trails, and an activity area for badminton. The
resort is also near Beartown State Forest. At December 31, 2004, the resort contained 14,144 Vacation Intervals, of which 1,691 remained
available for sale. We plan to build 78 additional lodge-style units, which would yield an
additional 4,056 Vacation Intervals available for sale. Vacation Intervals at the resort are
currently priced from $8,000 to $18,000 for one-week stays (and start at $6,100 for biennial
intervals). During 2004, 1,104 Vacation Intervals were sold. Silverleafs Seaside Resort.Silverleafs Seaside Resort is located in Galveston, Texas,
approximately 50 miles south of Houston, Texas. The resort contains approximately 87 acres. At
December 31, 2004, approximately 50 acres were developed and 37 acres are currently planned by the
Company to be used for future development. At December 31, 2004, the resort had 84 units and an additional 198 are planned for
development. The two bedroom, two bath units are situated in three-story twelveplex buildings.
Amenities within each unit include two large bedrooms, two bathrooms (one with a whirlpool tub),
living room with sleeper sofa, full kitchen, color television, and electronic door locks. With 635 feet of beachfront, the primary amenity at the resort is the Gulf of Mexico. Other
amenities include a lodge with kitchen, tennis court, swimming pool, sand volleyball court,
playground, picnic pavilion, horseshoes, and shuffleboard. At December 31, 2004, the resort contained 4,368 Vacation Intervals of which 360 remained
available for sale. We plan to build 198 additional units which would yield an additional 10,296
Vacation Intervals for sale. Vacation Intervals at the resort are currently priced from $9,000 to
$18,500 for one-week stays (and start at $6,250 for biennial intervals). During 2004, 474 Vacation
Intervals were sold. Orlando Breeze.In October 2004, we acquired a 4.8-acre tract of land located in Davenport,
Florida, just outside Orlando, Florida, for an aggregate purchase price of approximately $6.0
million. The site, formerly known as the Villas at Polo Park, is near the major Florida tourist
attractions of Walt Disney World, Sea World, and Universal Studios. Our public offering statement
filed with the Florida Bureau of Standards and Registrations was approved in February 2005,
granting us sales approval for 16 units encompassing 832 one-week vacation intervals. The resort has 48 two and three bedroom units, with eight two-bedroom units and eight
three-bedroom units having been recently refurbished as of February 2005. Amenities within each
refurbished unit include a living room with sleeper sofa, full kitchen, color television, ceiling
fans, ceramic tile, Broyhill furniture, and aluminum patio furniture. Amenities at the resort
include a heated outdoor swimming pool with whirlpool, fitness center, arcade, playground, sand
volleyball and basketball courts. Vacation Intervals at the resort are currently priced from $19,500 to $26,500 for one-week
stays. 
 ITEM 3. 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 37




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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 2004, but is not
yet complete. The Company has filed a counterclaim seeking contractual indemnification under the
terms of management agreements with each of the plaintiffs. At this time, the Companys legal fees
and costs of litigation are being paid by its insurance carriers, subject to a reservation of
rights by these insurers. The Company cannot predict the final outcome of these claims, nor can it
estimate the additional costs it could incur, or whether its insurance carriers will continue to
cover its costs in connection with these claims. 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 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 to the terms of a settlement, which terms have not yet been
reduced to a definitive settlement agreement and executed by all parties. If the settlement
agreement is fully implemented, the Company estimates that its maximum future exposure will be
limited to no more than $200,000. 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. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth the high and low closing prices of the Companys Common Stock
for the quarterly periods indicated, which correspond to the quarterly fiscal periods for financial
reporting purposes. During 2003 and a portion of the first quarter of 2004, the prices for the
Common Stock are closing bid prices as quoted on the Electronic Quotation Service of Pink Sheets
LLC (Pink Sheets). Effective February 2004, the Companys shares began trading on the OTC
Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual transactions. The Common
Stock prices from that point forward are the closing bid prices as quoted on the OTC Bulletin
Board. 38




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High
    
    
    LowYear Ended December 31, 2003:First Quarter
    
    $
    .45
    
    
    $
    .30Second Quarter
    
    
    .49
    
    
    
    .23Third Quarter
    
    
    .35
    
    
    
    .21Fourth Quarter
    
    
    .77
    
    
    
    .30Year Ended December 31, 2004:First Quarter
    
    $
    1.50
    
    
    $
    .67Second Quarter
    
    
    1.45
    
    
    
    1.07Third Quarter
    
    
    1.45
    
    
    
    1.00Fourth Quarter
    
    
    1.54
    
    
    
    1.25
 The Companys Common Stock was traded on the NYSE until June 2001 when it was suspended
from trading and subsequently delisted in August 2001. The suspension and subsequent delisting of
the Companys Common Stock by the NYSE was caused by a drop in the per share trading value of the
Companys stock on the NYSE that began in March 2001. This drop in per share trading value
persisted and the Company ceased to meet NYSE listing criteria when its total market capitalization
remained below $15 million and its minimum share price remained below $1 over a 30 trading-day
period. After being delisted by the NYSE, the Companys Common Stock was quoted on the Pink Sheets
under the symbol SVLF until February 2004, when the Companys shares began trading on the OTC
Bulletin Board. As of December 31, 2004, the Company believes that there were approximately 1,100 holders of
its Common Stock, which is the only class of the Companys equity securities outstanding. The Companys stock option plans provide for the award of nonqualified stock options to
directors, officers, and key employees, and the grant of incentive stock options to salaried key
employees. Stock options provide for the right to purchase common stock at a specified price, which
may be less than or equal to fair market value on the date of grant (but not less than par value).
Stock options may be granted for any term and upon such conditions determined by the Board of
Directors of the Company. Dividend Policy The Company is, and will continue to be, restricted from paying dividends due to debt
arrangements, and, therefore, does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to finance its
operations and fund the growth of its business. Any payment of future dividends will be at the
discretion of the Board of Directors of the Company and will depend upon, among other things, the
Companys earnings, financial condition, capital requirements, level of indebtedness, contractual
and other restrictions in respect of the payment of dividends, and other factors that the Companys
Board of Directors deems relevant. Shares Authorized for Issuance under Equity Compensation Plans Please see Security Ownership of Certain Beneficial Owners and Management under item 12 of
this annual report on Form 10-K for information regarding shares authorized under our equity
compensation plans. Recent Sales of Unregistered Securities There have been no recent sales of unregistered securities. 39




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ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Historical Financial and Operating Information The Selected Consolidated Historical Financial and Operating Information should be read in
conjunction with the Consolidated Financial Statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in
this report on Form 10-K. Year Ended December 31,(in thousands, except share and per share amounts)2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Statement of Income Data:Revenues:Vacation Interval sales
    
    $
    234,781
    
    
    $
    139,359
    
    
    $
    122,805
    
    
    $
    123,585
    
    
    $
    138,046Sampler sales
    
    
    3,574
    
    
    
    3,904
    
    
    
    3,634
    
    
    
    1,765
    
    
    
    2,150Total sales
    
    
    238,355
    
    
    
    143,263
    
    
    
    126,439
    
    
    
    125,350
    
    
    
    140,196Interest income
    
    
    37,807
    
    
    
    41,220
    
    
    
    37,537
    
    
    
    34,730
    
    
    
    37,843Management fee income
    
    
    462
    
    
    
    2,516
    
    
    
    1,920
    
    
    
    1,547
    
    
    
    1,201Gain on sale of notes receivable
    
    
    4,299
    
    
    
    
    
    
    
    6,838
    
    
    
    3,205
    
    
    
    1,915Other income
    
    
    3,110
    
    
    
    2,392
    
    
    
    2,324
    
    
    
    2,834
    
    
    
    2,522
 Year Ended December 31,(in thousands, except share and per share amounts)2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Total revenues
    
    
    284,033
    
    
    
    189,391
    
    
    
    175,058
    
    
    
    167,666
    
    
    
    183,677Costs and operating expenses:Cost of Vacation Interval sales
    
    
    59,169
    
    
    
    27,377
    
    
    
    23,123
    
    
    
    22,657
    
    
    
    24,964Sales and marketing
    
    
    125,456
    
    
    
    78,597
    
    
    
    66,384
    
    
    
    65,775
    
    
    
    71,890Provision for uncollectible notes
    
    
    108,751
    
    
    
    30,311
    
    
    
    24,562
    
    
    
    53,673
    
    
    
    26,811Operating, general and administrative
    
    
    35,537
    
    
    
    34,378
    
    
    
    31,432
    
    
    
    26,209
    
    
    
    25,639Depreciation and amortization
    
    
    7,049
    
    
    
    5,939
    
    
    
    4,486
    
    
    
    3,806
    
    
    
    3,588Interest expense and lender fees
    
    
    32,749
    
    
    
    35,015
    
    
    
    22,192
    
    
    
    16,550
    
    
    
    17,627Impairment loss of long-lived assets
    
    
    6,320
    
    
    
    5,442
    
    
    
    
    
    
    
    
    
    
    
    Write-off of affiliate receivable
    
    
    7,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total costs and operating expenses
    
    
    382,530
    
    
    
    217,059
    
    
    
    172,179
    
    
    
    188,670
    
    
    
    170,519Other income:Gain on early extinguishment of debt
    
    
    3,455
    
    
    
    
    
    
    
    17,885
    
    
    
    6,376
    
    
    
    Total other income
    
    
    3,455
    
    
    
    
    
    
    
    17,885
    
    
    
    6,376
    
    
    
    Income (loss) before (benefit) provision for
income taxes and discontinued operations
    
    
    (95,042
    )
    
    
    (27,668
    )
    
    
    20,764
    
    
    
    (14,628
    )
    
    
    13,158(Benefit) provision for income taxes
    
    
    (35,191
    )
    
    
    (99
    )
    
    
    (1,523
    )
    
    
    86
    
    
    
    23Net income (loss) from continuing operations
    
    
    (59,851
    )
    
    
    (27,569
    )
    
    
    22,287
    
    
    
    (14,714
    )
    
    
    13,135Discontinued operations:Income (loss) from discontinued operations
    
    
    (29
    )
    
    
    360
    
    
    
    506
    
    
    
    794
    
    
    
    624Net income (loss)
    
    $
    (59,880
    )
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )
    
    $
    13,759Net income (loss) per share  Basic (a)Net income (loss) from continuing operations
    
    $
    (4.65
    )
    
    $
    (2.14
    )
    
    $
    0.77
    
    
    $
    (0.40
    )
    
    $
    0.35Income (loss) from discontinued operations
    
    
    
    
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Net income (loss)
    
    $
    (4.65
    )
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.37Net income (loss) per share  Diluted (a)Net income (loss) from continuing operations
    
    $
    (4.65
    )
    
    $
    (2.14
    )
    
    $
    0.77
    
    
    $
    (0.40
    )
    
    $
    0.33Income (loss) from discontinued operations
    
    
    
    
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Net income (loss)
    
    $
    (4.65
    )
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.35Weighted average number of shares
outstanding  Basic
    
    
    12,889,417
    
    
    
    12,889,417
    
    
    
    28,825,882
    
    
    
    36,826,906
    
    
    
    36,852,133Weighted average number of shares
outstanding  Diluted
    
    
    12,889,417
    
    
    
    12,889,417
    
    
    
    28,825,882
    
    
    
    36,826,906
    
    
    
    38,947,854
 December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(dollars in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    6,800
    
    
    $
    6,204
    
    
    $
    1,153
    
    
    $
    4,093
    
    
    $
    10,935Notes receivable, net of allowance for
uncollectible notes
    
    
    263,792
    
    
    
    278,592
    
    
    
    233,237
    
    
    
    193,379
    
    
    
    196,466Amounts due from affiliates
    
    
    671
    
    
    
    2,234
    
    
    
    750
    
    
    
    150
    
    
    
    288Inventories
    
    
    105,023
    
    
    
    105,275
    
    
    
    102,505
    
    
    
    101,399
    
    
    
    109,303Total assets
    
    
    467,614
    
    
    
    458,100
    
    
    
    398,245
    
    
    
    351,787
    
    
    
    369,506Amounts due to affiliates
    
    
    3,285
    
    
    
    565
    
    
    
    2,221
    
    
    
    656
    
    
    
    929Notes payable and capital lease obligations
    
    
    270,597
    
    
    
    294,456
    
    
    
    236,413
    
    
    
    215,337
    
    
    
    218,310Senior subordinated notes
    
    
    66,700
    
    
    
    66,700
    
    
    
    45,919
    
    
    
    36,591
    
    
    
    34,883Total liabilities
    
    
    369,478
    
    
    
    387,173
    
    
    
    296,626
    
    
    
    264,088
    
    
    
    268,038Shareholders equity
    
    
    98,136
    
    
    
    70,927
    
    
    
    101,619
    
    
    
    87,699
    
    
    
    101,468Cash Flows Data:Net cash provided
by (used in)
operating
activities
    
    $
    (66,400
    )
    
    $
    (24,824
    )
    
    $
    56,085
    
    
    $
    22,419
    
    
    $
    5,748
 December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004(dollars in thousands)Other Operating Data:Number of Existing Resorts at period end
    
    
    19
    
    
    
    19
    
    
    
    19
    
    
    
    12
    
    
    
    12Number of Vacation Intervals sold (excluding
Upgrades)(b)
    
    
    16,216
    
    
    
    9,741
    
    
    
    8,224
    
    
    
    9,560
    
    
    
    11,345Number of in-house Vacation Intervals sold
    
    
    16,112
    
    
    
    10,576
    
    
    
    7,746
    
    
    
    4,833
    
    
    
    4,088Number of Vacation Intervals in inventory
    
    
    15,554
    
    
    
    20,913
    
    
    
    24,121
    
    
    
    24,255
    
    
    
    22,857Average price of Vacation Intervals sold (excluding
Upgrades)(b)(c)
    
    $
    9,768
    
    
    $
    9,688
    
    
    $
    9,846
    
    
    $
    9,510
    
    
    $
    9,671Average price of upgraded Vacation Intervals sold
(net of exchanged interval)
    
    $
    4,741
    
    
    $
    4,254
    
    
    $
    5,401
    
    
    $
    6,759
    
    
    $
    6,928
 40




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##### Table of Contents



(a)
    
    Net income (loss) per share is based on the weighted average number of shares outstanding.(b)
    
    Vacation Intervals sold during the years ended December 31, 2000, 2001, 2002, 2003, and 2004,
include 6,230 biennial intervals (counted as 3,115 annual Vacation Intervals), 3,061 biennial
intervals (counted as 1,531 annual Vacation Intervals), 1,044 biennial intervals (counted as
522 annual Vacation Intervals), 816 biennial intervals (counted as 408 annual Vacation
Intervals), and 2,560 biennial intervals (counted as 1,280 annual Vacation Intervals),
respectively.(c)
    
    Includes annual and biennial Vacation Interval sales for one-bedroom and two-bedroom units. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Selected Financial Data and
our Financial Statements and the notes thereto and other financial data included elsewhere herein.
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements. Executive Summary We are in the business of owning and operating twelve timeshare resorts as of December 31,
2004. In February 2005, we were granted approval to operate a thirteenth timeshare resort that we
acquired in October 2004. Our income is derived principally from marketing and selling timeshare
interests at our resorts in one-week intervals, and from the interest earned from financed sales of
such timeshare interests. As of December 31, 2004, eight of our resorts are located within one and
one half to two hours of major metropolitan areas (drive-to resorts), which are the primary
market for timeshare sales to new purchasers. Four of our resorts are in destination resort areas
located further from major metropolitan areas (destination resorts). In 2005, we reclassified
one of our drive-to resorts in Texas to a destination resort. The principal purchasers of timeshare
interests at the destination resorts are existing owners who are upgrading or buying additional
interests. The following economic or industry-wide factors are relevant to us:  
    We sell a vacation and recreational product, predominantly to customers who drive to our
locations. We believe that this type of usage is somewhat immune from issues that would
affect the travel industry as a whole (i.e. the disruptions to the airline industry and
destination resort industry after September 11, 2001), but major increases in gasoline
prices or other issues that cause the U.S population to drive less could have a negative
impact on us.
    Telemarketing is a very important element in the generation of tours to potential new
customers of timeshare interests. We presently comply with state and national do not call
regulations. Changes to existing regulations could have a negative impact on our ability
to generate the necessary tours to sell timeshare interests.
    We finance the majority of our sales over seven to ten years. An economic downturn
could negatively affect the ability of our customers to pay their principal and interest,
which might result in additional provision for uncollectible notes.
    We predominantly have variable rate credit facilities. An increase in interest rates
above our floor rates could have a negative impact on our profitability.
    Since we predominantly finance our sales of timeshare interests, we require credit
facilities to have the liquidity necessary to fund our costs and expenses. We presently
have adequate credit facilities to fund our operations through March 2006. A disruption in
the availability of credit facilities would severely impact our ability to continue
marketing and selling timeshare interests as we do today.
    We believe there are two areas which are particularly important to our success as a
business:  §§
    
    The first area is identifying potential customers who are likely to pay their
principal and interest payments when due after purchasing timeshare intervals, thereby
resulting in an acceptable provision for uncollectible notes. 41




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##### Table of Contents



§§
    
    The second area is to keep marketing expenses at an acceptable level to result
in a favorable percentage relationship between sales and marketing expense and total
sales. We earn revenue and income and finance our operations as follows:  
    Our primary source of revenue is vacation interval sales. Vacation interval sales are a
combination of sales to new customers and upgrade and/or additional week sales to existing
customers. We have been focusing on increasing the percentage mix of sales to existing
customers in 2002, 2003, and 2004. In addition we have been focusing on identifying
potential new customers who have better credit characteristics that will ultimately be more
likely to pay their principal and interest when due. To manage sales we assess separately
sales to potential new customers and sales to existing customers. For sales to potential
new customers we measure sales per tour in order to ascertain that our marketing programs
are delivering the proper types of family tours to effectively and efficiently sell new
customers. State law allows purchasers of timeshares to rescind their purchase within five
to seven days depending on the state. We also measure rescission amounts and rates of new
customers to ascertain that our marketing and sales programs continue effectively. The
number of tours to existing customers is not meaningful. As a result, we begin our
assessment of sales to existing customers by totaling gross sales to existing customers.
Rescissions by existing customers are generally much lower than rescissions by new
customers. We do measure rescission amounts and rates to calculate net sales to existing
customers. We then combine net sales to new and existing customers to calculate total
sales. One product that is sold to new customers is a Sampler, which gives the customer
the right to use the resorts on an as available basis from Sunday to Thursday. These
sales are presented on a separate line in the operating statement, and are therefore
subtracted from total sales in order to calculate vacation interval sales. The following
table shows the elements management considers important to assessing our vacation interval
sales (dollars in thousands, except for sales per tour): Year Ended December 31,2002
    
    
    2003
    
    
    2004Tours to potential new purchasers
    
    
    83,636
    
    
    
    75,965
    
    
    
    73,065Sales per tour
    
    $
    1,296
    
    
    $
    1,237
    
    
    $
    1,183Gross sales to new customers
    
    
    108,351
    
    
    
    93,945
    
    
    
    86,466Rescission of sales to new customers
    
    
    (27,548
    )
    
    
    (24,948
    )
    
    
    (18,619
    )Net sales to new customers
    
    
    80,803
    
    
    
    68,997
    
    
    
    67,847Gross sales to existing customers
    
    
    48,254
    
    
    
    59,722
    
    
    
    77,010Rescission of sales to existing customers
    
    
    (2,618
    )
    
    
    (3,369
    )
    
    
    (4,661
    )Net sales to existing customers
    
    
    45,636
    
    
    
    56,353
    
    
    
    72,349Total sales
    
    
    126,439
    
    
    
    125,350
    
    
    
    140,196Less sampler sales
    
    
    (3,634
    )
    
    
    (1,765
    )
    
    
    (2,150
    )Total vacation interval sales
    
    $
    122,805
    
    
    $
    123,585
    
    
    $
    138,046Rescission rate for new customers
    
    
    25.4
    %
    
    
    26.6
    %
    
    
    21.5
    %Rescission rate for existing customers
    
    
    5.4
    %
    
    
    5.6
    %
    
    
    6.1
    %Rescission rate for all customers
    
    
    19.3
    %
    
    
    18.4
    %
    
    
    14.2
    %
  
    In assessing the effectiveness of our sales and marketing programs, we believe it
is also important to compare sales and marketing expenses to sales. The separate elements
of sales and marketing expense that we assess are the cost of marketing to new purchasers,
the cost of marketing to existing purchasers, commissions, and sales and marketing
overhead, as detailed in the following table (dollars in thousands, except for cost per
tour): Year Ended December 31,2002
    
    
    2003
    
    
    2004Tours to potential new purchasers
    
    
    83,636
    
    
    
    75,965
    
    
    
    73,065Cost per tour
    
    $
    430
    
    
    $
    422
    
    
    $
    431Cost of marketing to new purchasers
    
    
    35,936
    
    
    
    32,050
    
    
    
    31,490Cost of marketing to existing purchasers
    
    
    2,992
    
    
    
    5,943
    
    
    
    7,885Commissions
    
    
    20,118
    
    
    
    19,613
    
    
    
    23,513Sales and marketing overhead
    
    
    7,338
    
    
    
    8,169
    
    
    
    9,002Total sales and marketing expense
    
    $
    66,384
    
    
    $
    65,775
    
    
    $
    71,890As a percentage of total sales:Cost of marketing to new purchasers
    

    
    28.4
    %
    
    
    25.6
    %
    
    
    22.5
    %Cost of marketing to existing purchasers
    
    
    2.4
    %
    
    
    4.7
    %
    
    
    5.6
    %Commissions
    
    
    15.9
    %
    
    
    15.6
    %
    
    
    16.8
    %Sales and marketing overhead
    
    
    5.8
    %
    
    
    6.5
    %
    
    
    6.4
    %Total sales and marketing expense
    
    
    52.5
    %
    
    
    52.5
    %
    
    
    51.3
    %
  
    Our second most important source of revenue is interest income, which is
predominantly earned on our notes receivable. 42




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Interest income as a percentage of notes receivable has increased each year from 2002 through
2004 as a result of increasing the rate we charged our new customers by 1% in each of the
years ending December 31, 2002 and 2003.  
    We have three lesser revenue sources. They are management fees, predominantly from
Silverleaf Club, gain on sale of notes receivable from our sale of notes receivable to our
SPE, and other income.  
    We generate cash from the collection of down payments, principal and interest from
purchasers of timeshare interval sales, the sales of notes receivable and from management
fees and other income. We also generated cash in 2002 and 2003 from the sale of
undeveloped land at locations that had been previously acquired for the possible
development of new resorts. Since the majority of our sales are financed, we have
revolving credit facilities that are drawn on monthly to fund our costs, expenses and
capital expenditures. We operate in only one business segment, the timeshare industry. Further, we only operate in
the United States. As of December 31, 2004, we operate resorts in five states (Texas, Missouri,
Illinois, Massachusetts and Georgia), and sell primarily to residents of those states, with limited
sales to residents of nearby states. In February 2005, we obtained approval to operate our new
resort in Florida, which was acquired in October 2004. Our principal short-term focus is on continuing to identify new and existing customers with
acceptable credit characteristics that will allow us to profitably sell new timeshare intervals at
existing resorts that will require minimal capital outlays. This focus has resulted in better
early performance of notes receivable originated in 2003 and 2004 as compared to early performance
of notes originated in 1998 through 2002. Long term, if the opportunities present themselves, we
will consider adding resorts where timeshare intervals can be marketed and sold at a profit. Closing of Exchange Offer and Debt Restructuring On May 2, 2002, we completed an exchange offer (the Exchange Offer), commenced on March 15,
2002, regarding our 101/2% senior subordinated notes due 2008 (the Old Notes). A total of
$56,934,000 in principal amount of our Old Notes were exchanged for a combination of $28,467,000 in
principal amount of our new class of 6.0% senior subordinated notes due 2007 (Exchange Notes) and
23,937,489 shares of our common stock, representing approximately 65% of the common stock
outstanding immediately following the Exchange Offer. As a result of the Exchange Offer, we
recorded a pre-tax gain of $17.9 million in the second quarter of 2002. Under the terms of the
Exchange Offer, tendering holders collectively received cash payments of $1,335,545 on May 16,
2002, and $334,455 on October 1, 2002. A total of $9,766,000 in principal amount of our Old Notes
were not tendered and remain outstanding. As a condition of the Exchange Offer, we paid all past
due interest to non-tendering holders of our Old Notes. Under the terms of the Exchange Offer, the
acceleration of the maturity date on the Old Notes, which occurred in May 2001, was rescinded, and
the original maturity date in 2008 was reinstated. Past due interest paid to non-tendering holders
of the Old Notes was $1,827,806. The indenture under which the Old Notes were issued was also
consensually amended as a part of the Exchange Offer. We also completed amendments to our credit facilities with our principal senior lenders as
well as amendments to our $100 million conduit facility through SF-I, our off-balance sheet,
wholly-owned SPE. Finalization of the Exchange Offer and the amendment of its principal credit
facilities marks the completion of our debt restructuring announced on March 15, 2002, which was
necessitated by severe liquidity problems we first announced on February 27, 2001. As a part of the
debt restructuring, our note-holders and senior lenders waived all previously declared events of
default. Critical Accounting Policies We generate revenues primarily from the sale and financing of Vacation Intervals, including
upgraded intervals. Additional revenues are generated from management fees from Silverleaf Club,
sampler sales, gain on sale of notes receivable, and other operations. We recognize Vacation Interval sales revenues on the accrual method in accordance with
Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, and
Staff Accounting Bulletin No. 101, Revenue Recognition. A sale is recognized after a binding
sales contract has been executed, the buyers price is fixed, the buyer has made a down payment of
at least 10%, the statutory rescission period has expired, and collectibility is reasonably
assured. 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 Vacation Interval sales in future periods as the remaining costs are incurred.
Certain Vacation Interval sales transactions are deferred until the minimum down payment has been
received. We account for these transactions utilizing the deposit method. Under this method, the
sale is not recognized, a receivable is not recorded, 43




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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. Sales of notes receivable to our SPE that meet certain underwriting criteria occur on a
periodic basis. We allocate the carrying amount between assets sold and retained interest based on
their relative fair values at the date of sale. The gain or loss on the sale is determined based
on the proceeds received and the recorded value of notes receivable sold. The investment in the SPE
is recorded at fair value. The fair value of the investment in the SPE is estimated based on the
present value of future expected cash flows of our residual interest in the notes receivable sold.
We utilize the following key assumptions to estimate the fair value of such cash flows: customer
prepayment rate  4.3%; expected accounts paid in full as a result of upgrades  6.2%; expected
credit losses  8.1%; discount rate  ranging from 13.5% to 19%; base interest rate  4.4%; agent
fee  2%; and loan servicing fees  1%. Our assumptions are based on experience with our notes
receivable portfolio, available market data, estimated prepayments, the cost of servicing, and net
transaction costs. The provision for uncollectible notes is recorded at an amount sufficient to maintain the
allowance for uncollectible notes at a level our management considers adequate to provide for
anticipated losses resulting from customers failure to fulfill their obligations under the terms
of their notes. The allowance for uncollectible notes takes into consideration both notes held by
us and those sold with recourse. Such allowance for uncollectible notes is adjusted based upon
periodic analysis of the notes receivable portfolio, historical credit loss experience, and current
economic factors. In estimating the allowance, we project future cancellations related to 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 on sales of customer notes receivable is governed by the agreements between us and the
purchasers. We classify the components of the provision for uncollectible notes into the following two
categories based on the nature of the item: credit losses and customer returns (cancellations of
sales whereby the customer fails to make the first installment payment). The provision for
uncollectible notes pertaining to credit losses and customer returns are classified in provision
for uncollectible notes and Vacation Interval sales, respectively. Inventories are stated at the lower of cost or net realizable value. Cost includes amounts for
land, construction materials, direct labor and overhead, taxes, and capitalized interest incurred
in the construction or through the acquisition of resort dwellings held for timeshare sale. These
costs are capitalized as inventory and are allocated to Vacation Intervals based upon their
relative sales values. Upon sale of a Vacation Interval, these costs are charged to cost of sales
on a specific identification basis. Vacation Intervals reacquired are placed back into inventory at
the lower of their original historical cost basis or market value. Our management periodically
reviews the carrying value of our inventory on an individual project basis to ensure that the
carrying value does not exceed market value. Vacation Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu of
foreclosure) and (ii) trade-in associated with the purchase of an upgraded or downgraded Vacation
Interval. Vacation Intervals reacquired are recorded in inventory at the lower of their original
cost or market value. Vacation Intervals that have been reacquired are relieved from inventory on a
specific identification basis when resold. Inventory acquired several years ago through our program
to reacquire Vacation Intervals owned but not actively used by Silverleaf Owners has a
significantly lower average cost basis than recently constructed inventory, contributing
significantly to historical operating margins. Newer inventory added through our construction and
acquisition programs has a higher average cost than our older inventory. We recognize interest income as earned. Interest income is not recognized on notes receivable
that are four-plus payments late. We recognize only 25% of accrued interest income for notes that
are three payments late, 50% for notes that are two payments late, 75% for notes that are one
payment late, and 90% for all current notes. We earn a monthly management fee for providing management services to Silverleaf Club equal to
the lesser of (a) 15% of the Clubs gross revenues for the year or (b) the amount by which gross
revenues exceed expenses, with any shortfalls carried forward into subsequent years. Prior to the
Crown Club sale in the third quarter of 2003, we had been recognizing a management fee ranging from
10% to 20% of Crown Clubs dues. For 2004, we recognized $1.2 million in management fee revenues
from Silverleaf Club. Liquidity and Capital Resources 44




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In February 2001, we disclosed significant liquidity issues, which resulted in the
violation of various financial covenants with our senior credit facilities. In negotiations with
our senior lenders to restructure the credit facilities and to enable us to continue in business,
it was determined that the senior lenders would not accept our proposals to make necessary
amendments to the existing credit facilities, unless we were able to (i) substantially reduce the
payment obligations to the holders of the Old Notes, (ii) convert a substantial portion of the debt
represented by the Old Notes into our common stock, and (iii) substantially modify the Indenture
which secures the Old Notes by the consent of the holders. Therefore, the underlying purpose of
the Exchange Offer was to reorganize our capital structure in such a manner as to induce the senior
lenders to restructure the credit facilities. We completed the restructuring in May 2002, which
reduced the existing debt and provided liquidity to finance our operations. As of December 31, 2002, we were in compliance with our operating covenants. However, due to
the results of the quarter ended March 31, 2003, we were not in compliance with three of our
financial covenants as follows:  
    Sales and marketing expense for the quarter ended March 31, 2003 was 56.1% of sales, compared to a maximum threshold of
52.5%.
    The interest coverage ratio for the twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a minimum requirement
of 1.25 to 1.0.
    Net loss for the two consecutive quarters ended March 31, 2003 was $24.9 million, compared to a minimum requirement of
$1.00 net income.Due to the results for the six months ended June 30, 2003, we were in default of two of the financial covenants as follows:
    The interest coverage ratio for the twelve months ended June 30, 2003 was 0.13 to 1.0, compared to a minimum requirement
of 1.25 to 1.0.
    Net loss for the two consecutive quarters ended June 30, 2003 was $23.1 million, compared to a minimum requirement of
$1.00 net income. Due to the results for the nine months ended September 30, 2003, we were in default of one of
the financial covenants as follows:  
    The interest coverage ratio for the twelve months ended September 30, 2003 was 0.40 to 1.0,
compared to a minimum requirement of 1.25 to 1.0. In addition, as a result of the loss for the quarter ended March 31, 2003, our SPE was in
default of financial covenants with its lender. The lender subsequently waived the defaults as of
March 31, 2003 and modified its agreement with the SPE whereby there were no defaults for the
quarter ended June 30, 2003 or September 30, 2003. In November 2003, we entered into agreements with our three senior lenders to amend our senior
credit facilities to modify the financial covenants under which we had been in default since the
first quarter of 2003. The amended covenants increased from 52.5% to 55% the maximum permitted
ratio of sales and marketing expenses to total sales for each quarter beginning with the quarter
ended March 31, 2003. They also exclude the $28.7 million increase in our allowance for
uncollectible notes in the quarter ended March 31, 2003 from the calculation of our minimum
required consolidated net income, and from the calculation of our minimum required interest
coverage ratio of 1.25 to 1.0. In addition to the above amendments, we also received waivers of
covenant defaults under our senior credit facilities which occurred in the first quarter of 2003
due to the increase in our allowance for uncollectible notes and our failure to maintain a ratio of
sales and marketing expense to total sales of no more than 52.5%. As a result of these amendments and waivers we are now in full compliance with all of our
financial covenants under our credit facilities with our senior lenders. In December 2003, we closed a $66.4 million conduit term loan transaction through a
newly-formed wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (SF-II). This conduit
loan was arranged through one of our existing senior lenders. Under the terms of the new conduit
loan, we sold approximately $78.1 million of our Vacation Interval receivables to our subsidiary
SF-II for an amount equal to the aggregate principal balances of the receivables. The purchase of
these receivables was financed by the existing senior lender through a one-time advance to SF-II of
$66.4 million, which is approximately 85% of the outstanding balance of the receivables SF-II
purchased from us. All customer receivables that we transferred to SF-II have been pledged as
security to the senior lender. The senior lender has also received as additional collateral a
pledge of all of our equity interest in SF-II and a $15.7 million demand note from us to SF-II
under which payment may be demanded if SF-II defaults on its loan from the lender. Proceeds from
the sale of the receivables to SF-II were used to pay down approximately $65.5 million of amounts
outstanding under our two senior revolving credit facilities. The senior lenders new conduit loan to SF-II will mature in 2014
and bears interest at a fixed annual rate of 7.035%. 45




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As a result of the closing of the $66.4 million conduit loan, we obtained a two-year extension
of our senior revolving credit facilities with two of our senior lenders. The revolving period on
these two facilities was extended through March 31, 2006. Additionally, we obtained an extension of
our existing revolving credit facility through our SPE through March 31, 2006. In order to obtain
the two-year extension of this facility, however, we agreed that the principal amount of the
facility would be reduced from $100 million to $85 million. Sources of Cash.We generate 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. We
typically receive a 10% down payment on sales of Vacation Intervals and finance the remainder by
receipt of a seven-year to ten-year customer promissory note. We generate cash from the financing
of customer notes receivable by (i) borrowing at an advance rate of 75% to 85% 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 we use
significant amounts of cash in the development and marketing of Vacation Intervals, but collect
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 years ended
December 31, 2002, 2003, and 2004, our operating activities reflected net cash provided by
operating activities of $56.1 million, $22.4 million, and $5.7 million, respectively. In 2004, the
decrease in cash provided by operating activities was primarily the result of decreased sales of
notes receivable, and to a lesser extent, cash spent towards construction of new inventory. In
2003, the decrease in cash provided by operating activities was primarily the result of decreased
sales of notes receivable. Although it appears the Company has adequate liquidity to meet its needs in 2005, it is
continuing to identify additional financing arrangements into 2006 and beyond. To finance the
Companys growth, development, and any future expansion plans, the Company may at some time be
required to consider the issuance of other debt, equity, or collateralized mortgage-backed
securities. 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.Net cash used in investing activities for the years ended December 31, 2002 and
2004 was $497,000 and $570,000, respectively. Investing activities typically reflect a net use of
cash due to capital additions and property acquisitions, which was the case in these two years.
However in 2003, net cash provided by investing activities was $4.4 million. This was primarily due
to our decision to sell land we owned in Las Vegas and Kansas City, which resulted in $4.7 million
of proceeds, which was offset by $232,000 in purchases of capital additions. We evaluate sites for
additional new resorts or acquisitions on an ongoing basis. Net cash used in financing activities for the years ended December 31, 2002 and 2003 was $60.8
million and $24.0 million, respectively. Net cash provided by financing activities was $1.3 million
during the year ended December 31, 2004. The decrease in cash used in financing activities from
2002 to 2003 was primarily the result of increased borrowings against pledged notes receivable
during 2003, largely due to the $66.4 million conduit term loan transaction through SF-II,
partially offset by increased payments on borrowings against pledged notes receivable. The decrease
in cash used by financing activities from 2003 to 2004 was primarily the result of decreased
payments on borrowings against pledged notes receivable due to lower sales of notes receivable, the
proceeds of which are used to pay down borrowings. At December 31, 2004, our senior credit facilities provided for loans of up to $232.4 million,
of which approximately $210.9 million of principal related to advances under the credit facilities
was outstanding. For the year ended December 31, 2004, the weighted average cost of funds for all
borrowings, including senior subordinated debt, was 6.8%. Customer defaults have a significant
impact on cash available to us from financing customer notes receivable in that notes more than 60
days past due are not eligible as collateral. As a result, we must repay borrowings against such
delinquent notes. As of December 31, 2004, $2.0 million of notes were more than 60 days past due. Certain debt agreements include restrictions on our ability to pay dividends based on minimum
levels of net income and cash flow. The payment of dividends might also be restricted by the Texas
Business Corporation Act. Off-Balance Sheet Arrangements.We entered into a $100 million revolving credit agreement to
finance Vacation Interval notes receivable through an off-balance sheet SPE during 2000. Due to the
results of operations during the first quarter of 2003, our SPE was in default of financial
covenants with its lender. The lender subsequently waived the defaults and modified its agreement
with the SPE in June 2003. We also obtained an extension of our SPEs existing revolving credit
facility through March 2006. In connection with the two-year extension of this facility, however,
we agreed that the principal amount of the facility would be reduced from $100 million to $85
million. Our SPE allows us to realize the benefit of an additional $85 million of revolving credit
in addition to the on-balance-sheet credit arrangements we have with our senior lenders. We require credit
facilities to have the liquidity necessary to fund our costs and expenses, therefore it is vitally
important to our liquidity plan to have financing available to us in order to finance future 46




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sales, since we finance the majority of our timeshare sales over seven to ten years. Effective March 31,
2005, the principal amount of the facility will be reduced from $85 million to $75 million. During 2002, we sold $83.4 million of notes receivable to the SPE and recognized pre-tax gains
of $6.8 million. In conjunction with these sales, we received cash consideration of $68.9 million,
which was used to pay down borrowings under our revolving loan facilities. During 2003, we sold
$40.4 million of notes receivable to the SPE and recognized pre-tax gains of $3.2 million. In
conjunction with these sales, we received cash consideration of $31.8 million, which was primarily
used to pay down borrowings under our revolving loan facilities. During 2004, we sold $27.4 million
of notes receivable to the SPE and recognized pre-tax gains of $1.9 million. In conjunction with
these sales, we received cash consideration of $20.6 million, which was used to pay down borrowings
under our revolving loan facilities. The SPE funded all of these purchases through advances under
a credit agreement arranged for this purpose. We receive fees for servicing sold notes, calculated
based on 1% of eligible notes held by the facility. Such fees were $547,000, $904,000, and $684,000
for the years ended December 31, 2002, 2003, and 2004, respectively. Such fees received approximate
our internal cost of servicing such notes. As a result, the related servicing asset or liability
was estimated to be insignificant. At December 31, 2004, the SPE held notes receivable totaling
$84.5 million, with related borrowings of $64.1 million. Except for the repurchase of notes that
fail to meet initial eligibility requirements, we are not obligated to repurchase defaulted or any
other contracts sold to the SPE. It is anticipated, however, that we 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 $5.2 million at December 31, 2004, which represents our maximum exposure to loss regarding our
involvement with the SPE. Taxes.For regular federal income tax purposes, we report substantially all of the Vacation
Interval sales we finance 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 we otherwise are 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, we are subject to current alternative minimum tax (AMT) as a result of

the deferred income that results from the installment sales treatment, although due to existing AMT
loss carryforwards, it is anticipated that minimal current AMT liability exists. Payment of AMT
creates a deferred tax asset in the form of a minimum tax credit, which, unless otherwise limited,
reduces the future regular tax liability attributable to Vacation Interval sales. In 1998, the
Internal Revenue Service approved a change in the method of accounting for installment sales
effective as of January 1, 1997. As a result, our 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 our paying substantial additional federal and state taxes in those years.
Subsequent to December 31, 2000, we 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 our 2000 AMT loss to
1999, 1998, and 1997. Accordingly, no minimum tax credit exists currently. The federal net operating losses (NOLs) 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. We currently do not believe that we will be able to
utilize our NOL from normal operations. At present, future NOL utilization is expected to be
limited to the temporary differences creating deferred tax liabilities. If necessary, we could
implement a strategy to accelerate income recognition for federal income tax purposes to utilize
the existing NOL. The amount of the deferred tax asset considered realizable could be decreased if
estimates of future taxable income during the carryforward period are reduced. Due to the Exchange Offer that took place during 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 our
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 our Company stock 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. 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 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. 47




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Prior periods have been reclassified for comparability, as
required. The net income from discontinued operations is summarized as follows (in thousands): Year Ended December 31,2002
    
    
    2003
    
    
    2004REVENUES:Other income
    
    
    2,320
    
    
    
    2,739
    
    
    
    2,860Total revenues
    
    
    2,320
    
    
    
    2,739
    
    
    
    2,860COSTS AND OPERATING EXPENSES:Other expense
    
    
    1,115
    
    
    
    1,184
    
    
    
    1,376Depreciation and amortization
    
    
    698
    
    
    
    760
    
    
    
    859Interest expense
    
    
    1
    
    
    
    1
    
    
    
    1Total costs and operating expenses
    
    
    1,814
    
    
    
    1,945
    
    
    
    2,236Net income from discontinued operations
    
    $
    506
    
    
    $
    794
    
    
    $
    624
 Results of Operations The following table sets forth certain operating information for the Company. Years Ended December 31,2002
    
    
    2003
    
    
    2004As a percentage of total revenues:Vacation Interval sales
    
    
    70.2
    %
    
    
    73.7
    %
    
    
    75.1
    %Sampler sales
    
    
    2.1
    
    
    
    1.1
    
    
    
    1.2Total sales
    
    
    72.3
    
    
    
    74.8
    
    
    
    76.3Interest income
    
    
    21.4
    
    
    
    20.7
    
    
    
    20.6Management fee income
    
    
    1.1
    
    
    
    0.9
    
    
    
    0.7Gain on sale of notes receivable
    
    
    3.9
    
    
    
    1.9
    
    
    
    1.0Other income
    
    
    1.3
    
    
    
    1.7
    
    
    
    1.4Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %As a percentage of Vacation Interval sales:Cost of Vacation Interval sales
    
    
    18.8
    %
    
    
    18.3
    %
    
    
    18.1
    %Provision for uncollectible notes
    
    
    20.0
    
    
    
    43.4
    
    
    
    19.4As a percentage of total sales:Sales and marketing
    
    
    52.5
    %
    
    
    52.5
    %
    
    
    51.3
    %As a percentage of total revenues:Operating, general and administrative
    
    
    18.0
    %
    
    
    15.6
    %
    
    
    14.0
    %Depreciation and amortization
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.0Total costs and operating expenses
    
    
    98.4
    %
    
    
    112.5
    %
    
    
    92.8
    %As a percentage of interest income:Interest expense and lender fees
    
    
    59.1
    %
    
    
    47.7
    %
    
    
    46.6
    %
 Results of Operations for the Years Ended December 31, 2004 and December 31, 2003 Revenues Revenues in 2004 were $183.7 million, representing a $16.0 million, or 9.5%, increase compared
to revenues of $167.7 million for the year ended December 31, 2003. This increase primarily relates
to increased Vacation Interval sales, discussed below. The following table summarizes our Vacation Interval sales (dollars in thousands). 2003
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    Average$ Sales
    
    
    Units
    
    
    Price
    
    
    $ Sales
    
    
    Units
    
    
    PriceOutside Sales
    
    $
    67,232
    
    
    
    6,534
    
    
    $
    10,290
    
    
    $
    65,697
    
    
    
    5,950
    
    
    $
    11,041In-house Upgrade Sales
    
    
    32,666
    
    
    
    4,833
    
    
    
    6,759
    
    

    
    28,324
    
    
    
    4,088
    
    
    
    6,928In-house Reload Sales.
    
    
    23,687
    
    
    
    3,026
    
    
    
    7,828
    
    
    
    44,025
    
    
    
    5,395
    
    
    
    8,160Total
    
    $
    123,585
    
    
    
    
    
    
    
    
    
    
    $
    138,046
 Overall, Vacation Interval sales increased 11.7% in 2004 versus 2003. The number of
outside sales (sales to new customers) decreased 8.9% and the number of in-house upgrade sales
decreased 15.4% in 2004 versus 2003. However these decreases were offset by a 78.3% increase in
units of in-house reload sales (sales of second Vacation Intervals to existing customers) from 2003
to 2004. Total interval sales for 2004 included 2,560 biennial intervals (counted as 1,280 Vacation
Intervals) compared to 816 biennial 48




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intervals (counted as 408 Vacation Intervals) in 2003. The
increase in total in-house sales and decrease in outside sales is consistent with the Companys
strategy to increase the proportion of sales to existing customers, which have a lower related
marketing expense, while decreasing proportionately the outside sales to new customers. Sampler sales increased to $2.2 million in 2004 compared to $1.8 million in 2003. Sampler
sales are not recognized as revenue until our 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 2004 relate to 2002 and 2003 sales activity. Interest income increased 9.0% to $37.8 million for the year ended December 31, 2004 from
$34.7 million for 2003. This increase primarily resulted from an increase in notes receivable, net
of allowance for doubtful notes, in 2004 compared to 2003, primarily due to the increase in
Vacation Interval sales during 2004. The average yield on the Companys outstanding notes
receivable at December 31, 2004 was approximately 15.1%, compared to 14.9% at December 31, 2003. Management fee income, which consists of management fees collected from the resorts
management clubs, cannot exceed the management clubs net income. Management fee income decreased
$346,000 in the year ended December 31, 2004 from the same period of 2003, due primarily to the
discontinuation of Crown Club management fees upon our sale of Crown Club in the third quarter of
2003. Gain on sales of notes receivable was $1.9 million during 2004, resulting from the sale of
$27.4 million of notes receivable to our SPE. The $3.2 million gain during 2003 resulted from the
sale of $40.4 million of notes receivable to our SPE. Fewer sales of notes receivable took place
during 2004 versus 2003 due primarily to the facility reduction with our SPE that took place during
the fourth quarter of 2003. Other income consists of marina income, golf course and pro shop income, and other
miscellaneous items. Other income decreased $312,000 to $2.5 million for the year ended December
31, 2004, compared to $2.8 million for the year ended December 31, 2003. The decrease primarily
relates to gains of $498,000 associated with the sale of land in Las Vegas, Nevada and Kansas City,
Missouri in 2003, partially offset by increased marina and golf course pro shop income in 2004
versus 2003. Cost of Sales Cost of sales as a percentage of Vacation Interval sales declined to 18.1% in 2004, from 18.3%
in 2003. In December of 2003, we charged cost of sales with $1.1 million for land and amenities due
to a reduction in our master plan at one of our resorts. Cost of sales before this $1.1 million
charge was 17.4% of Vacation Interval sales for 2003. The increase to 18.1% of Vacation Interval
sales from 17.4% during 2003 was primarily due to our selling a larger percentage of our inventory
at lower margins during 2004. The increased percentage of reload sales, which typically have a
lower sales price and lower margin than outside sales, contributed to the increase from 2003 to
2004. Sales and Marketing Sales and marketing expense as a percentage of total sales decreased to 51.3% for the year
ended December 31, 2004 versus 52.5% for the same period of 2003. This reduction is the result of
our marketing strategy to improve the sales margin and increase the proportion of in-house sales
over outside sales, as in-house sales require less sales and marketing expense. For the year ended
December 31, 2004, in-house sales increased to 52.4% of Vacation Interval sales, up from 45.6%
during 2003. The $6.1 million overall increase in sales and marketing expense is primarily
attributable to the overall increase in Vacation Interval sales during 2004 versus 2003. Provision for Uncollectible Notes Provision for uncollectible notes as a percentage of Vacation Interval sales decreased
substantially to 19.4% for the year ended December 31, 2004 from 43.4% for 2003. However, more than
half of the 43.4% for 2003 was due to the $28.7 million first quarter increase described in detail
below. Excluding the first quarter 2003 increase in the provision, the percentage for 2003 would
have been 20.0% of Vacation Interval sales. We observed that cancellations in the first quarter of
2003 significantly exceeded the level expected under our estimate for the December 31, 2002
allowance for uncollectible notes. Accordingly, the estimate was revised in the first quarter of
2003 as follows:  
    the basis of the estimate of future cancellations was changed from Vacation Interval sales to incremental amounts
financed, resulting in an increase of $1.6 million, 49




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
    certain historical cancellations from 2000 and 2001 that were previously excluded from predictive cancellations, as such
cancellations were assumed to be uncharacteristically large as a result of the Companys class action notices to all
customers and announcements about its liquidity and possible bankruptcy issues in the first half of 2001, were included
in predictive cancellations, resulting in an increase of $5.6 million,
    the estimate of cancellations in years 7, 8, and 9 after a sale were increased, resulting in an increase of $1.6 million,
    the estimate of inventory recoveries resulting from cancellations was revised, resulting in an increase of $300,000,
    the ratio of the excess of cancellations in the first quarter over the estimated cancellations for the same period based
on the weighted average rate of cancellations divided by the incremental amounts financed for the period 1997 through
2002, was applied to all future estimated cancellations, resulting in an increase of $15.0 million, and
    an estimate was added for current notes with customers who received payment or term concessions that would have been
deemed cancellations were it not for the concessions, resulting in an increase of $4.6 million. The result of these revisions to the estimate was a $28.7 million increase from the original
estimate for the provision for uncollectible notes in the first quarter of 2003. A further result
of the revision to the estimate is that the allowance for doubtful accounts was 20.0% of gross
notes receivable as of December 31, 2003 compared to 10.9% at December 31, 2002. The allowance for
doubtful accounts was 21.1% of gross notes receivable as of December 31, 2004. We will continue our
current collection programs and seek new programs to reduce note defaults and improve the credit
quality of our customers. However, there can be no assurance that these efforts will be
successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total revenues decreased to
14.0% in 2004 from 15.6% in 2003. Overall, operating, general and administrative expense remained
fairly constant at $25.6 million for the year ended December 31, 2004 versus $26.2 million for the
year ended December 31, 2003. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues decreased to 2.0% in
2004 from 2.3% in 2003. Overall, depreciation and amortization expense decreased $218,000 in 2004
versus 2003 due to a general reduction in capital expenditures since 2000. Interest Expense and Lender Fees Interest expense and lender fees as a percentage of interest income remained fairly constant
at 46.6% for the year ended December 31, 2004, compared to 47.7% for the year ended December 31,
2003. Gain on Early Extinguishment of Debt Gain on early extinguishment of debt was $0 during the year ended December 31, 2004, compared
to $6.4 million during 2003. $5.1 million of the gain in 2003 resulted from the early
extinguishment of $7.6 million of 10 1/2% senior subordinated notes due 2008. An additional $1.3
million resulted from the early extinguishment of the remaining $8.8 million balance of our $60
million loan agreement in the first quarter of 2003, which would have been due in August 2003. Income (Loss) before (Benefit) Provision for Income Taxes and Discontinued Operations Income (loss) before (benefit) provision for income taxes and discontinued operations
increased to income of $13.2 million for the year ended December 31, 2004, as compared to a loss of
$14.6 million for the year ended December 31, 2003, as a result of the aforementioned operating
results. (Benefit) Provision for Income Taxes (Benefit) provision for income taxes as a percentage of income (loss) before (benefit)
provision for income taxes and discontinued operations was a provision of 0.2% for 2004, as
compared to a provision of 0.6% for 2003. The low effective income tax rate is the result of the
2003 and 2004 projected income tax benefits being reduced by the effect of a valuation allowance,
which reduces the projected net deferred tax assets to zero due to the unpredictability of
recovery. 50




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##### Table of Contents



Net Income (Loss) from continuing operations Net income (loss) from continuing operations increased to income of $13.1 million for the year
ended December 31, 2004, as compared to a loss of $14.7 million for the year ended December 31,
2003, as a result of the aforementioned operating results. Income from discontinued operations Income from discontinued operations consists of the results of operations of our water and
utility property assets and liabilities that have been designated as held for sale effective
December 31, 2004. For the year ended December 31, 2004, income from discontinued operations
decreased to $624,000, from $794,000 during the same period of 2003. This decrease is primarily the
result of increased operational expenses during 2004 versus 2003. Net Income (Loss) Net income (loss) increased to income of $13.8 million for the year ended December 31, 2004,
as compared to a loss of $13.9 million for the year ended December 31, 2003, as a result of the
aforementioned operating results. Results of Operations for the Years Ended December 31, 2003 and December 31, 2002 Revenues Revenues in 2003 were $167.7 million, representing a $7.4 million, or 4.2%, decrease compared
to revenues of $175.1 million for the year ended December 31, 2002. This decrease primarily relates
to decreased interest income and decreased gain on sale of notes receivable, discussed below. The following table summarizes our Vacation Interval sales (dollars in thousands). 2002
    
    
    2003Average
    
    
    
    
    
    
    
    
    
    
    Average$ Sales
    
    
    Units
    
    
    Price
    
    
    $ Sales
    
    
    Units
    
    
    PriceOutside Sales
    
    $
    77,169
    
    
    
    7,812
    
    
    $
    9,878
    
    
    $
    67,232
    
    
    
    6,534
    
    
    $
    10,290In-house Upgrade Sales
    
    
    41,833
    
    
    
    7,746
    
    
    
    5,401
    
    
    
    32,666
    
    
    
    4,833
    
    
    
    6,759In-house Reload Sales.
    
    
    3,803
    
    
    
    412
    
    
    
    9,231
    
    
    
    23,687
    
    
    
    3,026
    
    
    
    7,828Total
    
    $
    122,805
    
    
    
    
    
    
    
    
    
    
    $
    123,585
 Overall, Vacation Interval sales remained fairly constant in 2003 versus 2002. The
number of outside sales (sales to new customers) decreased 16.4% and the number of in-house upgrade
sales decreased 37.6% in 2003 versus 2002. However these decreases were offset by a 634% increase
in units of in-house reload sales (sales of second Vacation Intervals to existing customers) from
2002 to 2003. Total interval sales for 2003 included 816 biennial intervals (counted as 408
Vacation Intervals) compared to 1,044 biennial intervals (counted as 522 Vacation Intervals) in
2002. The increase in total in-house sales and decrease in outside sales is consistent with the
Companys strategy to increase the proportion of sales to existing customers, which have a lower
related marketing expense, while decreasing proportionately the outside sales to new customers. Sampler sales decreased to $1.8 million in 2003 compared to $3.6 million in 2002. Sampler
sales are not recognized as revenue until our 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 2003 relate to 2002 sales, when our sales volume
was much lower than during 2000 and 2001, for which we recognized a significant amount of these
higher volume sales in 2002. Interest income decreased 7.5% to $34.7 million for the year ended December 31, 2003 from
$37.5 million for 2002. This decrease primarily resulted from a decrease in notes receivable, net
of allowance for doubtful notes, in 2003 compared to 2002, primarily due to sales of notes
receivable to the SPE. Management fee income, which consists of management fees collected from the resorts
management clubs, cannot exceed the management clubs net income. Management fee income decreased
$373,000 in the year ended December 31, 2003 from the same period of 2002, due primarily to the
discontinuation of Crown Club management fees upon our sale of Crown Club in the third quarter of
2003. Gain on sale of notes receivable was $3.2 million for the year ended December 31, 2003,
resulting from the sale of $40.4 million of notes receivable to our SPE. The $6.8 million gain in
2002 resulted from the sale of $83.4 million of notes receivable to our SPE. 51




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Other income consists of marina income, golf course and pro shop income, and other
miscellaneous items. Other income increased $510,000 to $2.8 million for the year ended December
31, 2003, compared to $2.3 million for the year ended December 31, 2002. The increase primarily
relates to gains of $498,000 associated with the sale of land in Las Vegas, Nevada and Kansas City,
Missouri. Cost of Sales Cost of sales as a percentage of Vacation Interval sales declined to 18.3% in 2003, from 18.8%
in 2002. In December of 2003, we charged cost of sales with $1.1 million for land and amenities due
to a reduction in our master plan at one of our resorts. Cost of sales before this $1.1 million
charge was 17.4% of Vacation Interval sales, a $1.6 million reduction from 2002. This reduction was
primarily due to selling a higher mix of in-house sales or upgrades, which have a significantly
lower cost of sales versus outside sales. Sales and Marketing Sales and marketing expense as a percentage of total sales was 52.5% for both 2003 and 2002.
Overall, sales and marketing costs decreased $609,000, which is primarily attributable to cost
reductions in the call centers since the third quarter of 2002. Provision for Uncollectible Notes Provision for uncollectible notes as a percentage of Vacation Interval sales increased
substantially to 43.4% for the year ended December 31, 2003 from 20.0% for 2002. We observed that
cancellations in the first quarter of 2003 significantly exceeded the level expected under our
estimate for the December 31, 2002 allowance for uncollectible notes. Accordingly, the estimate was
revised in the first quarter of 2003 as follows:  
    the basis of the estimate of future cancellations was changed from Vacation Interval sales to incremental amounts
financed, resulting in an increase of $1.6 million,
    certain historical cancellations from 2000 and 2001 that were previously excluded from predictive cancellations, as such
cancellations were assumed to be uncharacteristically large as a result of the Companys class action notices to all
customers and announcements about its liquidity and possible bankruptcy issues in the first half of 2001, were included
in predictive cancellations, resulting in an increase of $5.6 million,
    the estimate of cancellations in years 7, 8, and 9 after a sale were increased, resulting in an increase of $1.6 million,
    the estimate of inventory recoveries resulting from cancellations was revised, resulting in an increase of $300,000,
    the ratio of the excess of cancellations in the first quarter over the estimated cancellations for the same period based
on the weighted average rate of cancellations divided by the incremental amounts financed for the period 1997 through
2002, was applied to all future estimated cancellations, resulting in an increase of $15.0 million, and
    an estimate was added for current notes with customers who received payment or term concessions that would have been
deemed cancellations were it not for the concessions, resulting in an increase of $4.6 million. The result of these revisions to the estimate was a $28.7 million increase from the original
estimate for the provision for uncollectible notes in the first quarter of 2003. A further result
of the revision to the estimate is that the allowance for doubtful accounts was 20.0% of gross
notes receivable as of December 31, 2003 compared to 10.9% at December 31, 2002. We will continue
our current collection programs and seek new programs to reduce note defaults and improve the
credit quality of our customers. However, there can be no assurance that these efforts will be
successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total revenues decreased to
15.6% in 2003 from 18.0% in 2002. Overall, operating, general and administrative expense decreased
$5.2 million in 2003 versus 2002, partially due to $2.0 million of professional fees that were
incurred in 2002 associated with our restructuring, $1.0 million of audit fees in 2002 related to
the completion of the 2000 audit, and other reduced departmental costs. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues decreased to 2.3% in
2003 from 2.6% in 2002. Overall, depreciation and amortization expense decreased $680,000 in 2003
versus 2002 due to a general reduction in capital expenditures since 2000. 52




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Interest Expense and Lender Fees Interest expense and lender fees as a percentage of interest income decreased to 47.7% for the
year ended December 31, 2003, compared to 59.1% for the year ended December 31, 2002. This decrease
is primarily the result of decreased borrowings against pledged notes receivable and reduced
interest on senior subordinated notes due to the restructuring completed in May 2002. Gain on Early Extinguishment of Debt Gain on early extinguishment of debt was $6.4 million during 2003, of which $5.1 million
resulted from the early extinguishment of $7.6 million of 10 1/2% senior subordinated notes due 2008.
An additional $1.3 million resulted from the early extinguishment of the remaining $8.8 million
balance of our $60 million loan agreement in the first quarter of 2003, which would have been due
in August 2003. The $17.9 million gain in 2002 resulted from the early extinguishment of $56.9
million of 10 1/2% senior subordinated notes in connection with the restructuring of the Companys
debt. Income (Loss) before (Benefit) Provision for Income Taxes and Discontinued Operations Income (loss) before (benefit) provision for income taxes and discontinued operations
decreased to a loss of $14.6 million for the year ended December 31, 2003, as compared to income of
$20.8 million for the year ended December 31, 2002, as a result of the aforementioned operating
results. (Benefit) Provision for Income Taxes (Benefit) provision for income taxes as a percentage of income (loss) before (benefit)
provision for income taxes and discontinued operations was a provision of 0.6% for 2003, as
compared to a benefit of 7.3% for 2002. In 2002, the Company received a $1.6 million refund due to
a tax law change that allowed the Company to recoup additional AMT paid in previous years. The
effective income tax rate is the result of the 2003 and 2002 projected income tax benefits being
reduced by the effect of a valuation allowance, which reduces the projected net deferred tax assets
to zero due to the unpredictability of recovery. Net Income (Loss) from continuing operations Net income (loss) from continuing operations decreased to a loss of $14.7 million for the year
ended December 31, 2003, as compared to income of $22.3 million for the year ended December 31,
2002, as a result of the aforementioned operating results. Income from discontinued operations Income from discontinued operations consists of the results of operations of our water and
utility property assets and liabilities that have been designated as held for sale effective
December 31, 2004. For the year ended December 31, 2003, income from discontinued operations
increased to $794,000, from $506,000 during the same period of 2002. This increase is primarily the
result of additional water and utilities operations added at our Fox River resort during 2003. Net Income (Loss) Net income (loss) decreased to a loss of $13.9 million for the year ended December 31, 2003,
as compared to income of $22.8 million for the year ended December 31, 2002, as a result of the
aforementioned operating results. Contractual Obligations and Commitments The following table summarizes our scheduled contractual commitments as of December 31, 2004
(in thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong-term debt
    
    $
    18,537
    
    
    $
    26,687
    
    
    $
    140,401
    
    
    $
    9,957
    
    
    $
    34,725
    
    
    $
    93,523Capital leases
    
    
    260
    
    
    
    25
    
    
    
    22
    
    
    
    22
    
    
    
    16
    
    
    
    Operating leases
    
    
    1,900
    
    
    
    1,757
    
    
    
    1,627
    
    
    
    1,225
    
    
    
    759
    
    
    
    Litigation settlement
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other purchase obligations:Construction commitments.
    
    
    9,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    1,445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    31,840
    
    
    $
    28,469
    
    
    $
    142,050
    
    
    $
    11,204
    
    
    $
    35,500
    
    
    $
    93,523
 Long term debt includes $71.0 million of future interest and capital leases include
$21,000 of future interest, using an approximate interest rate of 6.8%, which is the Companys
weighted average cost of borrowings as of December 31, 2004. We also have a $15.7 53




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million demand note with SF-II that is not included in long-term debt, since the note
represents only a potential, future cash outlay, and in addition, is eliminated on a consolidated
basis. Inflation Inflation and changing prices have not had a material impact on the Companys revenues,
operating income, and net income during any of the Companys three most recent fiscal years.
However, to the extent inflationary trends affect short-term interest rates, a portion of the
Companys debt service costs may be affected as well as the rates the Company charges on its
customer notes receivable. Recent Accounting Pronouncements FIN No. 46  In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN No. 46). FIN No. 46 requires the
primary beneficiary of a variable interest entitys activities to consolidate the variable interest
entity. FIN No. 46 defines a variable interest entity as an entity in which the equity investors do
not have substantive voting rights and there is not sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. The primary beneficiary
is the party that absorbs a majority of the expected losses and/or receives a majority of the
expected residual returns of the variable interest entitys activities. In December 2003, the
Financial Accounting Standards Board issued FIN No. 46R (FIN No. 46R), which supercedes and
amends certain provisions of FIN No. 46. While FIN No. 46R retains many of the concepts and
provisions of FIN No. 46, it also provides additional guidance related to the application of FIN
No. 46, provides for certain additional scope exceptions, and incorporates several Financial
Accounting Standards Board Staff Positions issued related to the application of FIN No. 46. The provisions of FIN No. 46 are immediately applicable to variable interest entities
created, or interests in variable interest entities obtained, after January 31, 2003 and the
provisions of FIN No. 46R are required to be applied to such entities, except for special purpose
entities, by the end of the first reporting period ending after March 15, 2004. For variable
interest entities created, or interests in variable interest entities obtained, on or before
January 31, 2003, FIN No. 46 or FIN No. 46R is required to be applied to special-purpose entities
by the end of the first reporting period ending after December 15, 2003 (December 31, 2003 for
calendar-year entities) and is required to be applied to all other non-special purpose entities by
the end of the first reporting period ending after March 15, 2004 (March 31, 2004 for calendar-year
entities). FIN No. 46 and FIN No. 46R may be applied prospectively with a cumulative-effect
adjustment as of the date it is first applied, or by restating previously issued financial
statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN
No. 46 and FIN No. 46R also require certain disclosures of an entitys relationship with variable
interest entities. The adoption of FIN No. 46 and Fin No. 46R required the Company to consolidate
its financing subsidiary, SF-II. 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 did 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 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. We are still evaluating the impact the adoption of SFAS No. 152 will have on
our 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 54




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recognize the expense in the consolidated statement of income. SFAS No. 123R will be
effective for periods beginning after June 15, 2005 and allows, but does not require, companies to
restate the full 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. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of and for the year ended December 31, 2004, we had no significant derivative financial
instruments or foreign operations. Interest on our notes receivable portfolio, senior subordinated
debt, capital leases, and miscellaneous notes is fixed, whereas interest on our primary loan
agreements, which totaled $210.9 million at December 31, 2004, is partially fixed and partially
variable. The impact of a one-point effective interest rate change on the $139.3 million balance of
variable-rate financial instruments at December 31, 2004, on our annual results of operations would
be approximately $468,000, or approximately $0.01 per share. At December 31, 2004, the carrying value of our 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 our notes receivable are increased or
perceived to be above market rates, the fair market value of our fixed-rate notes will decline,
which may negatively impact our 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 We are exposed to on-balance sheet credit risk related to our notes receivable.
We are exposed to off-balance sheet credit risk related to notes sold. We offer financing to the buyers of Vacation Intervals at our resorts. These buyers generally
make a down payment of at least 10% of the purchase price and deliver a promissory note to us for
the balance. The promissory notes generally bear interest at a fixed rate, are payable over a
seven-year to ten-year period, and are secured by a first mortgage on the Vacation Interval. We
bear the risk of default on these promissory notes. If a buyer of a Vacation Interval defaults, we 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 in many cases we may have recourse against a Vacation Interval buyer for the
unpaid price, certain states have laws that limit our ability to recover personal judgments against
customers who have defaulted on their loans. Accordingly, we have generally not pursued this
remedy. Interest Rate Risk We have historically derived net interest income from our financing
activities because the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceeds the interest rates we pay to our lenders. Because our indebtedness bears
interest at variable rates and our customer receivables bear interest at fixed rates, increases in
interest rates will erode the income that we have historically obtained due to this spread and
could cause the rate on our borrowings to exceed the rate at which we provide financing to our
customers. We have not engaged in interest rate hedging transactions. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect on our results of
operations, cash flows, and financial position. Availability of Funding Sources We fund substantially all of our notes receivable, timeshare
inventories, and land inventories which we originate or purchased with borrowings through our
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 we receive from
repayments of such notes receivable. To the extent that we are not successful in maintaining or
replacing existing financings, we would have to 55




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curtail our operations or sell assets, thereby having a material adverse effect on our results
of operations, cash flows, and financial condition. Geographic Concentration Our notes receivable are primarily originated in Texas (where
approximately 45.0% of Vacation Interval sales took place in 2004), 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. Our 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 our products and the collection of
notes receivable. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the information set forth on Index to Consolidated Financial Statements appearing on page
F-1 of this report on Form 10-K. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. 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 our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness and design and operation of our disclosure controls
and procedures (as defined in Rules 13a15(e) and 15d-15(e) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that those disclosure controls and procedures were adequate to ensure that information we
are required to disclose in the report we file or submit under the Exchange Act, is recorded,
processed, summarized, and reported within the time periods specified in the Commissions rules and
forms. 
 PART III MANAGEMENT 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is set forth in the Companys proxy statement
relating to its 2005 meeting of annual shareholders under the headings Compliance with Section
16(a) under the Securities Exchange Act of 1934 and Directors and Executive Officers, and this
information is incorporated by reference to such proxy statement. The information with respect to the Companys audit committee financial expert is contained
under the caption Directors and Executive Officers in the Companys proxy statement for its 2005
annual meeting of shareholders and is incorporated by reference to such proxy statement. The following table sets forth certain information concerning each person who was a director
or executive officer of the Company as of December 31, 2004. Name
    
    Age
    
    PositionRobert E. Mead
    
    
    58
    
    
    Chairman of the Board and Chief Executive OfficerSharon K. Brayfield.
    
    
    44
    
    
    PresidentDavid T. OConnor.
    
    
    62
    
    
    Executive Vice President  SalesJoe W. Conner
    
    
    47
    
    
    Chief Operating OfficerHarry J. White, Jr.
    
    
    50
    
    
    Chief Financial Officer, TreasurerEdward L. Lahart
    
    
    40
    
    
    Executive Vice President  OperationsMichael Jones
    
    
    38
    
    
    Vice President  Information SystemsRobert G. Levy
    
    
    56
    
    
    Vice President  Resort OperationsDarla Cordova
    
    
    40
    
    
    Vice President  Employee and Marketing ServicesHerman Jay Hankamer
    
    
    65
    
    
    Vice President  Resort DevelopmentAnthony C. Luis
    
    
    58
    
    
    Vice President  Owner Based Marketing and SalesLelori (Buzz) Marconi
    
    
    52
    
    
    Vice President  Promotions
 56




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Name
    
    Age
    
    PositionSandra G. Cearley
    
    
    43
    
    
    SecretaryJames B. Francis, Jr.
    
    
    56
    
    
    DirectorJ. Richard Budd, III
    
    
    52
    
    
    DirectorHerbert B. Hirsch
    
    
    68
    
    
    DirectorRebecca Janet Whitmore
    
    
    50
    
    
    Director
   The term of office of the above-listed officers is from the date of their election until their
successor shall have been elected and qualified. The Companys directors serve annual terms, which
expire at the Companys next annual meeting of shareholders following the date of election of each
director. The Companys five directors were last elected by the shareholders at the Companys 2004
annual meeting on May 11, 2004. 
 ITEM 11. EXECUTIVE COMPENSATION The information contained under the captions Director Compensation and Executive
Compensation in the Companys proxy statement for its 2005 annual meeting of shareholders is
incorporated herein by reference to such proxy statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Equity Compensation Plan Information The following table sets forth information about the Companys equity compensation plans as of
December 31, 2004: Number of SecuritiesNumber of Securities to
    
    
    Weighted Average
    
    
    Remaining Available forbe Issued Upon Exercise
    
    
    Exercise Price of
    
    
    Future Issuance Underof Outstanding Options,
    
    
    Outstanding Options,
    
    
    Equity CompensationPlan Category
    
    Warrants, and Rights
    
    
    Warrants, and Rights
    
    
    PlansEquity
Compensation Plans
Approved by
Security Holders
    
    
    3,651,647
    
    
    $
    3.60
    
    
    
    124,635Equity Compensation
Plans Not Approved
by Security Holders.
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,651,647
    
    
    $
    3.60
    
    
    
    124,635
   There are 90,500 options remaining available of the 1,600,000 approved options under the
Companys 1997 Stock Option Plan and 34,135 options remaining available of the 2,209,614 approved
options under the Companys 2003 Stock Option Plan. Security Ownership of Certain Beneficial Owners and Management The information concerning (a) persons that have reported beneficial ownership of more than 5
percent of the common stock of the Company, and (b) the ownership of the Companys common stock by
the Chief Executive Officer and the four other most highly compensated executive officers and
directors as a group, that is contained under the caption Security Ownership of Certain Beneficial
Owners and Management in the Companys proxy statement for its 2005 annual meeting, is
incorporated herein by reference to such proxy statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption Certain Relationships and Related Transactions
in the Companys proxy statement for its 2005 annual meeting of shareholders is incorporated herein
by reference to such proxy statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information with respect to principal accountant fees and services contained under the
caption Proposal to Ratify Appointment of Independent Auditors in the Companys proxy statement
for its 2005 annual meeting of shareholders is incorporated herein by reference to such proxy
statement. 57




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: ExhibitNumber
    
    
    
    Description3.1
    
    
    
    Third Amended And Restated Articles of Incorporation of the Registrant dated December 17, 2003 (incorporated by
reference to Exhibit 3.1 to Registrants Form 8-K filed December 29, 2003).3.2
    
    
    
    Articles of Correction dated February 9, 2004 to Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2
of Registrants Form 10-K for year ended December 31, 2003).3.3
    
    
    
    Bylaws of Silverleaf Resorts, Inc. (incorporated by reference to Exhibit 3.2 to Registrants Form 10-K for year
ended December 31, 1997).3.4
    
    
    
    Amendment to Registrants Bylaws dated February 19, 2004 (incorporated by reference to Exhibit 3.4
of Registrants Form 10-K for year ended December 31, 2003).3.5
    
    
    
    Second Amendment to Amended and Restated Bylaws dated June 4, 2004 (incorporated by reference to
Exhibit 3.1 of Registrants Form 10-Q for the quarter ended June 30, 2004).3.6
    
    
    
    Amended and Restated Certificate of Incorporation of Silverleaf Finance II, Inc. dated December 23, 2003
(incorporated by reference to Exhibit 3.2 to Registrants Form 8-K filed December 29, 2003).4.1
    
    
    
    Form of Stock Certificate of Registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 dated May
16, 1997 to Registrants Registration Statement on Form S-1, File No. 333-24273).4.2
    
    
    
    Amended and Restated Indenture dated May 2, 2002, between the Company, Wells Fargo Bank Minnesota, National
Association, as Trustee, and the Subsidiary Guarantors for the Companys 101/2% Senior Subordinated Notes due 2008
(incorporated by reference to Exhibit 4.1 to Registrants Form 10-Q for the quarter ended June 30, 2002).4.3
    
    
    
    Certificate No. 001 of 10 1/2 % Senior Subordinated Notes due 2008 in the amount of $75,000,000 (incorporated by
reference to Exhibit 4.2 to Registrants Form 10-Q for quarter ended March 31, 1998).4.4
    
    
    
    Subsidiary Guarantee dated April 8, 1998 by Silverleaf Berkshires, Inc.; Bulls Eye Marketing, Inc.; Silverleaf
Resort Acquisitions, Inc.; Silverleaf Travel, Inc.; Database Research, Inc.; and Villages Land, Inc. (incorporated
by reference to Exhibit 4.3 to Registrants Form 10-Q for the quarter ended March 31, 1998).4.5
    
    
    
    Indenture dated May 2, 2002, between the Company, Wells Fargo Bank Minnesota, National Association, as Trustee,
and the Subsidiary Guarantors for the Companys 6% Senior Subordinated Notes due 2007 (incorporated by reference
to Exhibit 4.2 to Registrants Form 10-Q for the quarter ended June 30, 2002).4.6
    
    
    
    Certificate No. 001 of 6% Senior Subordinated Notes due 2007 in the amount of $28,467,000 (incorporated by
reference to Exhibit 4.3 to Registrants Form 10-Q for the quarter ended June 30, 2002).4.7
    
    
    
    Subsidiary Guarantee dated May 2, 2002 by Awards Verification Center, Inc., Silverleaf Travel, Inc., Silverleaf
Resort Acquisitions, Inc., Bulls Eye Marketing, Inc., Silverleaf Berkshires, Inc., and eStarCommunications, Inc.
(incorporated by reference to Exhibit 4.4 to Registrants Form 10-Q for the quarter ended June 30, 2002).4.8
    
    
    
    Indenture dated June 7, 2004 by and among the Company, the Subsidiary Guarantors, and Wells Fargo Bank, National
Association for the Companys 8% Senior Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.1 of
Registrants Form 10-Q for the quarter ended June 30, 2004).4.9
    
    
    
    Certificate No. 001 dated June 7, 2004 of 8% Senior Subordinated Notes due 2010 in the amount of $24,761,000
(incorporated by reference to Exhibit 4.2 of Registrants Form 10-Q for the quarter ended June 30, 2004).4.10
    
    
    
    Subsidiary Guarantee dated June 7, 2004 by Awards Verification Center, Inc., Silverleaf Travel, Inc., Silverleaf
Resort Acquisition, Inc., Bulls Eye Marketing, Inc., Silverleaf Berkshires, Inc., eStarCommunications, Inc.,
People Really Win Sweepstakes, Inc., and SLR Research, Inc. (incorporated by reference to Exhibit 4.3 of
Registrants Form 10-Q for the quarter ended June 30, 2004).9.1
    
    
    
    Voting Trust Agreement dated November 1, 1999 between Robert E. Mead and Judith F. Mead (incorporated by
reference to Exhibit 9.1 of the Registrants Form 10-K for the year ended December 31, 1999).10.1
    
    
    
    Form of Registration Rights Agreement between Registrant and Robert E. Mead (incorporated by reference to
Exhibit 10.1 to Amendment No. 1 dated May 16, 1997 to Registrants Registration Statement on Form S-1, File No.
333-24273).10.2
    
    
    
    Employment Agreement with Harry J. White, Jr. (incorporated by Reference to Exhibit 10.1 to Registrants Form
10-Q for quarter ended June 30, 1998).10.3
    
    
    
    1997 Stock Option Plan of Registrant (incorporated by reference to Exhibit 10.3 to Amendment No. 1 dated May 16,
1997 to Registrants Registration Statement on Form S-1, File No. 333-24273).10.4
    
    
    
    Silverleaf Club Agreement between the Silverleaf Club and the resort clubs named therein (incorporated by
reference to Exhibit 10.4 to Registrants Registration Statement on Form S-1, File No. 333-24273).10.5
    
    
    
    Management Agreement between Registrant and the Silverleaf Club (incorporated by reference to Exhibit 10.5 to
Registrants Registration Statement on Form S-1, File No. 333-24273).10.6
    
    
    
    Form of Indemnification Agreement (between Registrant and all officers, directors, and proposed directors)
(incorporated by reference to Exhibit 10.18 to Registrants Registration Statement on Form S-1, File No.
333-24273).
 58




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.7
    
    
    
    Resort Affiliation and Owners Association Agreement between Resort Condominiums International, Inc., Ascension
Resorts, Ltd., and Hill Country Resort Condoshare Club, dated July 29, 1995 (similar agreements for all other
Existing Owned Resorts) (incorporated by reference to Exhibit 10.19 to Registrants Registration Statement on Form
S-1, File No. 333-24273).10.8
    
    
    
    First Amendment to Silverleaf Club Agreement, dated March 28, 1990, among Silverleaf Club, Ozark Mountain Resort
Club, Holiday Hills Resort Club, the Holly Lake Club, The Villages Condoshare Association, The Villages Club,
Piney Shores Club, and Hill Country Resort Condoshare Club (incorporated by reference to Exhibit 10.22 to
Amendment No. 1 dated May 16, 1997 to Registrants Registration Statement on Form S-1, File No. 333-24273).10.9
    
    
    
    First Amendment to Management Agreement, dated January 1, 1993, between Master Endless Escape Club and Ascension
Resorts, Ltd. (incorporated by reference to Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to Registrants
Registration Statement on Form S-1, File No. 333-24273).10.10
    
    
    
    Silverleaf Club Agreement dated September 25, 1997, between Registrant and Timber Creek Resort Club
(incorporated by reference to Exhibit 10.13 to Registrants Form 10-Q for quarter ended September 30, 1997).10.11
    
    
    
    Second Amendment to Management Agreement, dated December 31, 1997, between Silverleaf Club and Registrant
(incorporated by reference to Exhibit 10.33 to Registrants Annual Report on Form 10-K for year Ended December 31,
1997).10.12
    
    
    
    Silverleaf Club Agreement, dated January 5, 1998, between Silverleaf Club and Oak N Spruce Resort Club
(incorporated by reference to Exhibit 10.34 to Registrants Annual Report on Form 10-K for year ended December 31,
1997).10.13
    
    
    
    Master Club Agreement, dated November 13, 1997, between Master Club and Fox River Resort Club (incorporated by
reference to Exhibit 10.43 to Registrants Annual Report on Form 10-K for year ended December 31, 1997).10.14
    
    
    
    Letter Agreement dated March 16, 1998, between the Company and Heller Financial, Inc. (incorporated by
reference to Exhibit 10.44 to Amendment No. 1 to Form S-1, File No. 333-47427 filed March 16, 1998).10.15
    
    
    
    Management Agreement dated October 13, 1998, by and between the Company and Eagle Greens, Ltd. (incorporated by
reference to Exhibit 10.6 to Registrants Form 10-Q for quarter ended September 30, 1998).10.16
    
    
    
    First Amendment to 1997 Stock Option Plan for Silverleaf Resorts, Inc., effective as of May 20, 1998
(incorporated by reference to Exhibit 4.1 to the Companys Form 10-Q for the quarter ended June 30, 1998).10.17
    
    
    
    Amended and Restated Receivables Loan and Security Agreement dated September 1, 1999, between the Company and
Heller Financial, Inc. (incorporated by reference to Exhibit 10.1 to Registrants Form 10-Q for the quarter ended
September 30, 1999).10.18
    
    
    
    Second Amendment to 1997 Stock Option Plan dated November 19, 1999 (incorporated by reference to Exhibit 10.46
to Registrants Form 10-K for the year ended December 31, 1999).10.19
    
    
    
    Eighth Amendment to Management Agreement, dated March 9, 1999, between the Registrant and the Silverleaf Club
(incorporated by reference to Exhibit 10.47 to Registrants Form 10-K for the year ended December 31, 1999).10.20
    
    
    
    Purchase and Contribution Agreement, dated October 30, 2000, between the Company, as Seller, and Silverleaf
Finance I, Inc., as Purchaser (incorporated by reference to Exhibit 10.4 to Registrants Form 10-Q for the quarter
ended September 30, 2000.)10.21
    
    
    
    Second Amendment to Amended and Restated Receivables Loan and Security Agreement dated April 30, 2002 between
the Company and Heller Financial, Inc. (incorporated by reference to Exhibit 10.1 to Registrants Form 10-Q for
the quarter ended June 30, 2002).10.22
    
    
    
    Amended and Restated Revolving Credit Agreement dated as of April 30, 2002 between the Company and Sovereign
Bank, as Agent, and Liberty Bank (incorporated by reference to Exhibit 10.3 to Registrants Form 10-Q for the
quarter ended June 30, 2002).10.23
    
    
    
    Amended And Restated Loan, Security And Agency Agreement (Tranche A), dated as of April 30, 2002, by and among
the Company, Textron Financial Corporation, as a Lender and as facility agent and collateral agent (incorporated
by reference to Exhibit 10.4 to Registrants Form 10-Q for the quarter ended June 30, 2002).10.24
    
    
    
    Amended And Restated Loan, Security And Agency Agreement (Tranche B), dated as of April 30, 2002, by and among
the Company, Textron Financial Corporation and Bank of Scotland, as Lenders and Textron Financial Corporation, as
and collateral agent (Agent) (incorporated by reference to Exhibit 10.5 to Registrants Form 10-Q for the
quarter ended June 30, 2002).10.25
    
    
    
    First Amendment To Loan And Security Agreement (Tranche C), dated as of April 30, 2002, entered into by and
between the Company and Textron Financial Corporation (incorporated by reference to Exhibit 10.6 to Registrants
Form 10-Q for the quarter ended June 30, 2002).10.26
    
    
    
    Second Amendment To Loan And Security Agreement dated as of April 30, 2002 by and between the Company and
Textron Financial Corporation (incorporated by reference to Exhibit 10.7 to Registrants Form 10-Q for the quarter
ended June 30, 2002).10.27
    
    
    
    Amended And Restated Receivables Loan and Security Agreement Dated as of April 30, 2002 among Silverleaf Finance
I, Inc., as the Borrower, the Company, as the Servicer, Autobahn Funding Company LLC, as a Lender, DZ Bank AG
Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main, as the Agent, U.S. Bank Trust National Association, as
the Agents Bank, and Wells Fargo Bank Minnesota, National Association, as the Backup Servicer (incorporated by
reference to Exhibit 10.8 to Registrants Form 10-Q for the quarter ended June 30, 2002).10.28
    
    
    
    Amendment Agreement No. 1, dated as of April 30, 2002 Purchase And Contribution Agreement dated as of October
30, 2000 between the Company and Silverleaf Finance I, Inc. (incorporated by reference to Exhibit 10.9 to
Registrants Form 10-Q for the quarter ended June 30, 2002).10.29
    
    
    
    Employment Agreement dated April 18, 2002 between the Company and Sharon K. Brayfield (incorporated by reference
to Exhibit 10.10 to Registrants Form 10-Q for the quarter ended June 30, 2002).10.30
    
    
    
    First Amendment to Amended and Restated Revolving Credit Agreement dated September 30, 2002 by and among the
Company, Sovereign Bank and Liberty Bank (incorporated by reference to Exhibit
 59




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##### Table of Contents



ExhibitNumber
    
    
    
    Description10.35 of the Registrants Form 10-K for the year ended December 31, 2002).10.31
    
    
    
    Second Amendment and Waiver Agreement dated as of June 19, 2003 to the Amended and Restated Receivables Loan
and Security Agreement dated as of April 30, 2002, among Silverleaf Finance I, Inc.; the Registrant; Autobahn
Funding Company LLC; DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main; U.S. Bank Trust National
Association; and Wells Fargo Bank Minnesota, National Association (incorporated by reference to Exhibit 10.4 to
Registrants Form 10-Q for quarter ended June 30, 2003).10.32
    
    
    
    Contract of Sale dated June 17, 2003 between the Registrant, Richard W. Dickson and Robert G. Garner
(incorporated by reference to Exhibit 10.5 to Registrants Form 10-Q for quarter ended June 30, 2003).10.33
    
    
    
    Contract of Sale dated October 8, 2003 between the Company and Reed Kline (incorporated by reference to Exhibit
10.1 to Registrants Form 10-Q for quarter ended September 30, 2003).10.34
    
    
    
    Third Amendment to Amended and Restated Receivables Loan and Security Agreement dated November 21, 2003 between
the Company and Heller Financial, Inc. (incorporated by reference to Exhibit 10.2 to Registrants Form 8-K filed
December 29, 2003).10.35
    
    
    
    Fifth Amendment to Second Amended and Restated Inventory Loan and Security Agreement and Modification of Notes
dated November 21, 2003 between the Company and Heller Financial, Inc. (incorporated by reference to Exhibit 10.3
to Registrants Form 8-K filed December 29, 2003).10.36
    
    
    
    Second Amendment to Amended and Restated Revolving Credit Agreement dated October 1, 2003 between the Company,
Sovereign Bank and Liberty Bank (incorporated by reference to Exhibit 10.4 to Registrants Form 8-K filed December
29, 2003).10.37
    
    
    
    Amendment dated November 17, 2003 between the Company and Textron Financial Corporation (Tranche A)
(incorporated by reference to Exhibit 10.5 to Registrants Form 8-K filed December 29, 2003).10.38
    
    
    
    Amendment dated November 17, 2003 between the Company and Textron Financial Corporation (Tranche B)
(incorporated by reference to Exhibit 10.6 to Registrants Form 8-K filed December 29, 2003).10.39
    
    
    
    Amendment dated November 17, 2003 between the Company and Textron Financial Corporation (Tranche C)
(incorporated by reference to Exhibit 10.7 to Registrants Form 8-K filed December 29, 2003).10.40
    
    
    
    Amendment dated November 17, 2003 between the Company and Textron Financial Corporation (Inventory Loan)
(incorporated by reference to Exhibit 10.8 to Registrants Form 8-K filed December 29, 2003).10.41
    
    
    
    First Amendment to Employment Agreement dated August 18, 2003 between the Company and Sharon K. Brayfield
(incorporated by reference to Exhibit 10.2 to Registrants Form 10-Q for quarter ended September 30, 2003).10.42
    
    
    
    Fourth Amendment to Amended and Restated Receivables Loan and Security Agreement dated March 5, 2004 between
the Company and Heller Financial, Inc. (incorporated by reference to Exhibit 10.47 to Registrants Form 10-K for
year ended December 31, 2003).10.43
    
    
    
    Fourth Amendment to Amended and Restated Revolving Credit Agreement dated March 5, 2004 between the Company and
Sovereign Bank (incorporated by reference to Exhibit 10.49 to Registrants Form 10-K for year ended December 31,
2003).10.44
    
    
    
    Amended and Restated Loan and Security Agreement, dated as of March 5, 2004 between the Company and Textron
Financial Corporation (incorporated by reference to Exhibit 10.50 to Registrants Form 10-K for year ended
December 31, 2003).10.45
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche A) (incorporated
by reference to Exhibit 10.51 to Registrants Form 10-K for year ended December 31, 2003).10.46
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche B) (incorporated
by reference to Exhibit 10.52 to Registrants Form 10-K for year ended December 31, 2003).10.47
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche C) (incorporated
by reference to Exhibit 10.53 to Registrants Form 10-K for year ended December 31, 2003).10.48
    
    
    
    Amendment to Amended and Restated Loan and Security Agreement dated as of March 5, 2004 by and between
Borrower and Textron Financial Corporation (Inventory Loan) (incorporated by reference to Exhibit 10.54 to
Registrants Form 10-K for year ended December 31, 2003).10.49
    
    
    
    2003 Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.55 to Registrants Form 10-K
for year ended December 31, 2003).10.50

    
    
    
    Second Amended and Restated Revolving Credit Agreement dated as of July 30, 2004 among the Company, the
Lending Institutions Referred to therein, and Sovereign Bank (incorporated by reference to Exhibit 10.1 of
Registrants Form 10-Q for the quarter ended June 30, 2004).10.51
    
    
    
    Inventory and Receivables Revolving Credit Agreement dated as of July 30, 2004 among the Company, the Lending
Institutions Referred to therein, and Sovereign Bank (incorporated by reference to Exhibit 10.2 of Registrants
Form 10-Q for the quarter ended June 30, 2004).10.52
    
    
    
    Contract of Sale dated December 24, 2002 by and among the Company, FO Ski Resorts, LLC and Brodie Mountain Ski
Resorts, Inc. (incorporated by reference to Exhibit 10.3 of Registrants Form 10-Q for the quarter ended June 30,
2004).10.53
    
    
    
    First Amendment to Contract of Sale dated April 3, 2003 by and among the Company, FO Ski Resorts, LLC, and
Brodie Mountain Ski Resorts, Inc. (incorporated by reference to Exhibit 10.4 of Registrants Form 10-Q for the
quarter ended June 30, 2004).10.54
    
    
    
    Second Amendment to Contract of Sale dated March 17, 2004, by and among the Company, FO Ski Resorts, LLC, and
Brodie Mountain Ski Resorts, Inc (incorporated by reference to Exhibit 10.5 of Registrants Form 10-Q for the
quarter ended June 30, 2004).10.55
    
    
    
    Third Amendment to Contract of Sale dated May 14, 2004, by and among the Company, FO Ski Resorts, LLC, and
Brodie Mountain Ski Resorts, Inc. (incorporated by reference to Exhibit 10.6 of Registrants Form 10-Q for the
quarter ended June 30, 2004).10.56
    
    
    
    Employment Agreement dated June 3, 2004 to be effective January 1, 2004 between the Company
 60




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##### Table of Contents



ExhibitNumber
    
    
    
    Descriptionand Robert E. Mead (incorporated by reference to Companys Proxy Statement filed with the Commission on July 12, 2004).10.57
    
    
    
    Amendment Agreement No. 2 dated September 7, 2004 to Purchase and Contribution Agreement between the Company
and Silverleaf Finance I, Inc. (incorporated by reference to Exhibit 10.1 to Registrants Form 10-Q for the
quarter ended September 30, 2004).10.58
    
    
    
    Fourth Amendment Agreement dated as of September 7, 2004 to the Amended and Restated Receivables Loan and
Security Agreement dated as of April 20, 2002 among the Company, Silverleaf Finance I, Inc., Autobahn Funding
Company LLC, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main, U.S. Bank Trust National
Association and Wells Fargo Bank National Association (incorporated by reference to Exhibit 10.2 to Registrants
Form 10-Q for the quarter ended September 30, 2004).10.59
    
    
    
    Amendment dated July 30, 2004 to Amended and Restated Loan and Security Agreement dated as of March 5, 2004
between the Company and Textron Financial Corporation (incorporated by reference to Exhibit 10.3 to Registrants
Form 10-Q for the quarter ended September 30, 2004).10.60
    
    
    
    Amendment dated July 30, 2004 to Loan and Security Agreement dated as of April 17, 2001 between the Company
and Textron Financial Corporation (incorporated by reference to Exhibit 10.4 to Registrants Form 10-Q for the
quarter ended September 30, 2004).10.61
    
    
    
    Amendment to Amended and Restated Loan, Security and Agency Agreement (Tranche B) dated as of April 30, 2002
between the Company and Textron Financial Corporation (incorporated by reference to Exhibit 10.5 to Registrants
Form 10-Q for the quarter ended September 30, 2004).10.62
    
    
    
    Amendment dated July 30, 2004 to Amended and Restated Loan, Security and Agency Agreement (Tranche B) dated as
of April 30, 2002 between the Company and Textron Financial Corporation (incorporated by reference to Exhibit 10.6
to Registrants Form 10-Q for the quarter ended September 30, 2004).10.63
    
    
    
    Amendment dated July 30, 2004 to Amended and Restated Loan, Security and Agency Agreement (Tranche A) dated as
of April 30, 2002 between the Company and Textron Financial Corporation (incorporated by reference to Exhibit 10.7
to Registrants Form 10-Q for the quarter ended September 30, 2004).10.64
    
    
    
    Contract of Sale dated February 12, 2004 between the Company and Cook, Inc. (incorporated by reference to
Exhibit 10.1 to Registrants Form 8-K dated November 1, 2004).10.65
    
    
    
    First Amendment to Contract of Sale dated March 18, 2004 between the Company and Cook, Inc. (incorporated by
reference to Exhibit 10.2 to Registrants Form 8-K dated November 1, 2004).10.66
    
    
    
    Second Amendment to Contract of Sale dated March 22, 2004 between the Company and Cook, Inc. (incorporated by
reference to Exhibit 10.3 to Registrants Form 8-K dated November 1, 2004).10.67
    
    
    
    Third Amendment to Contract of Sale dated April 27, 2004 between the Company and Cook, Inc. (incorporated by
reference to Exhibit 10.4 to Registrants Form 8-K dated November 1, 2004).10.68
    
    
    
    Fourth Amendment to Contract of Sale dated October 15, 2004 between the Company and Cook, Inc. (incorporated
by reference to Exhibit 10.5 to Registrants Form 8-K dated November 1, 2004).10.69
    
    
    
    Amendment to Contract of Sale dated October 21, 2004 between the Company and Cook, Inc. (incorporated by
reference to Exhibit 10.6 to Registrants Form 8-K dated November 1, 2004).10.70
    
    
    
    Asset Purchase Agreement dated August 29, 2004 between the Company; Algonquin Water Resources of Texas, LLC;
Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC; Algonquin Water Resources
of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit 10.1 to Registrants Form
8-K dated March 16, 2005).10.71
    
    
    
    First Amendment dated as of October 12, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.2 to Registrants Form 8-K dated March 16, 2005).10.72
    
    
    
    Second Amendment dated as of October 20, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.3 to Registrants Form 8-K dated March 16, 2005).10.73
    
    
    
    Third Amendment dated as of November 10, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.4 to Registrants Form 8-K dated March 16, 2005).10.74
    
    
    
    Fourth Amendment dated as of November 12, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.5 to Registrants Form 8-K dated March 16, 2005).10.75
    
    
    
    Fifth Amendment dated as of November 16, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.6 to Registrants Form 8-K dated March 16, 2005).10.76
    
    
    
    Sixth Amendment dated as of November 30, 2004 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.7 to Registrants Form 8-K dated March 16, 2005).10.77
    
    
    
    Seventh Amendment dated as of January 2005 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC;
 61




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ExhibitNumber
    
    
    
    DescriptionAlgonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.8 to Registrants Form 8-K dated March 16, 2005).10.78
    
    
    
    Eighth Amendment dated as of February 22, 2005 to Asset Purchase Agreement between the Company; Algonquin Water
Resources of Texas, LLC; Algonquin Water Resources of Missouri, LLC; Algonquin Water Resources of Illinois, LLC;
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.9 to Registrants Form 8-K dated March 16, 2005).10.79
    
    
    
    Services Agreement dated as of March 8, 2005 between the Company, Algonquin Water Resources of Texas, LLC,
Algonquin Water Resources of America, Inc.; and Algonquin Power Income Fund (incorporated by reference to Exhibit
10.10 to Registrants Form 8-K dated March 16, 2005).14.1
    
    
    
    Code of Ethics adopted by the Registrant on December 16, 2003 (incorporated by reference to Exhibit 14.1 to
Registrants Form 10-K for year ended December 31, 2003).*21.1
    
    
    
    Subsidiaries of Silverleaf Resorts, Inc.*23.1
    
    
    
    Consent of BDO Seidman, LLP.*31.1
    
    
    
    Certification of Chief Executive Officer Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*31.2
    
    
    
    Certification of Chief Financial Officer Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith (b) The Company filed two reports on Form 8-K during the three-month period ended
December 31, 2004. These reports were filed on November 1, 2004 and November 12, 2004 and related
to the acquisition of property in Florida and the Companys earnings release for the third quarter
ended September 30, 2004, respectively. (c) The exhibits required by Item 601 of Regulation S-K have been listed in Item 15(a) above.
The exhibits listed in Item 15(a) above are either (a) filed with this report, or (b) have
previously been filed with the SEC and are incorporated herein by reference to the particular
previous filing. (d) Financial Statement Schedules None. Schedules are omitted because of the absence of the conditions under which they are
required or because the information required by such omitted schedules is set forth in the
consolidated financial statements or the notes thereto. 62




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized in the City of Dallas, State of Texas, on March 25, 2005. SILVERLEAF RESORTS, INC.By:
    
    /s/ ROBERT E. MEADName:
    
    Robert E. MeadTitle:
    
    Chairman of the Board andChief Executive Officer
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the Registrant in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ ROBERT E. MEAD
    
    Chairman of the Boardand Chief Executive OfficerRobert E. Mead
    
    (Principal Executive Officer)
    
    March 25, 2005/s/ HARRY J. WHITE, JR,
    
    Chief Financial Officer
    
    March 25, 2005(Principal FinancialHarry J. White, Jr.
    
    and Accounting Officer)/s/ J. RICHARD BUDD, IIIDirector
    
    March 25, 2005J. Richard Budd, III/s/ JAMES B. FRANCIS, JR.Director
    
    March 25, 2005James B. Francis, Jr./s/ HERBERT B. HIRSCHDirector
    
    March 25, 2005Herbert B. Hirsch/s/ REBECCA JANET WHITMORE

Rebecca Janet Whitmore
    
    Director
    
    March 25, 2005
 63




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    F-2Financial StatementsConsolidated Balance Sheets as of December 31, 2003 and 2004
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2002, 2003, and 2004
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2002, 2003,
and 2004
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, and 2004
    
    F-6Notes to Consolidated Financial Statements
    
    F-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Silverleaf Resorts, Inc.
Dallas, Texas We have audited the accompanying consolidated balance sheets of Silverleaf Resorts, Inc. as of
December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Silverleaf Resorts, Inc. at December 31, 2004 and
2003, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles generally accepted in the
United States of America. /s/ BDO Seidman, LLP
Dallas, Texas
February 24, 2005 F-2




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) December 31,2003
    
    
    2004ASSETSCash and cash equivalents
    
    $
    4,093
    
    
    $
    10,935Restricted cash
    
    
    1,624
    
    
    
    3,428Notes receivable, net of allowance for uncollectible notes of
$48,372 and $52,506, respectively
    
    
    193,379
    
    
    
    196,466Accrued interest receivable
    
    
    2,169
    
    
    
    2,207Investment in special purpose entity
    
    
    6,053
    
    
    
    5,173Amounts due from affiliates
    
    
    150
    
    
    
    288Inventories
    
    
    101,399
    
    
    
    109,303Land, equipment, buildings, and utilities, net
    
    
    27,488
    
    
    
    24,375Land held for sale
    
    
    2,991
    
    
    
    2,991Prepaid and other assets
    
    
    12,441
    
    
    
    14,340TOTAL ASSETS
    
    $
    351,787
    
    
    $
    369,506LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESAccounts payable and accrued expenses
    
    $
    6,705
    
    
    $
    7,980Accrued interest payable
    
    
    1,087
    
    
    
    1,302Amounts due to affiliates
    
    
    656
    
    
    
    929Unearned revenues
    
    
    3,712
    
    
    
    4,634Notes payable and capital lease obligations
    
    
    215,337
    
    
    
    218,310Senior subordinated notes
    
    
    36,591
    
    
    
    34,883Total Liabilities
    
    
    264,088
    
    
    
    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, 36,826,906 shares outstanding at December 31,
2003, and 36,860,238 shares outstanding at December 31, 2004
    
    
    372
    
    
    
    372Additional paid-in capital
    
    
    116,999
    
    
    
    116,614Deficit
    
    
    (24,673
    )
    
    
    (10,914
    )Treasury stock, at cost, 422,100 shares at December 31, 2003 and 388,768
shares at December 31, 2004
    
    
    (4,999
    )
    
    
    (4,604
    )Total Shareholders Equity
    
    
    87,699
    

    
    
    101,468TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    351,787
    
    
    $
    369,506
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts) Year Ended December 31,2002
    
    
    2003
    
    
    2004REVENUES:Vacation Interval sales
    
    $
    122,805
    
    
    $
    123,585
    
    
    $
    138,046Sampler sales
    
    
    3,634
    
    
    
    1,765
    
    
    
    2,150Total sales
    
    
    126,439
    
    
    
    125,350
    
    
    
    140,196Interest income
    
    
    37,537
    
    
    
    34,730
    
    
    
    37,843Management fee income
    
    
    1,920
    
    
    
    1,547
    
    
    
    1,201Gain on sale of notes receivable
    
    
    6,838
    
    
    
    3,205
    
    
    
    1,915Other income
    
    
    2,324
    
    
    
    2,834
    
    
    
    2,522Total revenues
    
    
    175,058
    
    
    
    167,666
    
    
    
    183,677COSTS AND OPERATING EXPENSES:Cost of Vacation Interval sales
    
    
    23,123
    
    
    
    22,657
    
    
    
    24,964Sales and marketing
    
    
    66,384
    
    
    
    65,775
    
    
    
    71,890Provision for uncollectible notes
    
    
    24,562
    
    
    
    53,673
    
    
    
    26,811Operating, general and administrative
    
    
    31,432
    
    
    
    26,209
    
    
    
    25,639Depreciation and amortization
    
    
    4,486
    
    
    
    3,806
    
    
    
    3,588Interest expense and lender fees
    
    
    22,192
    
    
    
    16,550
    
    
    
    17,627Total costs and operating expenses
    
    
    172,179
    
    
    
    188,670
    
    
    
    170,519OTHER INCOME:Gain on early extinguishment of debt
    
    
    17,885
    
    
    
    6,376
    
    
    
    Total other income
    
    
    17,885
    
    
    
    6,376
    
    
    
    Income (loss) before (benefit) provision
for income taxes and discontinued
operations
    
    
    20,764
    
    
    
    (14,628
    )
    
    
    13,158(Benefit) provision for income taxes
    
    
    (1,523
    )
    
    
    86
    
    
    
    23Net income (loss) from continuing operations
    
    
    22,287
    
    
    
    (14,714
    )
    
    
    13,135DISCONTINUED OPERATIONS:Income from discontinued operations
    
    
    506
    
    
    
    794
    
    
    
    624NET INCOME (LOSS)
    
    $
    22,793
    
    
    $
    (13,920
    )
    
    $
    13,759NET INCOME (LOSS) PER SHARE  BASIC:Net income (loss) from continuing operations
    
    $
    0.77
    
    
    $
    (0.40
    )
    
    $
    0.35Income from discontinued operations
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Net income (loss)
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.37NET INCOME (LOSS) PER SHARE  DILUTED:Net income (loss) from continuing operations
    
    $
    0.77
    
    
    $
    (0.40
    )
    
    $
    0.33Income from discontinued operations
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.02Net income (loss)
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.35WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
    
    
    28,825,882
    
    
    
    36,826,906
    
    
    
    36,852,133Diluted
    
    
    28,825,882
    
    
    
    36,826,906
    
    
    
    38,947,854
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share amounts) Common StockNumber of
    
    
    $0.01
    
    
    Additional
    
    
    RetainedShares
    
    
    Par
    
    
    Paid-in
    
    
    Earnings
    
    
    Treasury StockIssued
    
    
    Value
    
    
    Capital
    
    
    (Deficit)
    
    
    Shares
    
    
    Cost
    
    
    TotalJANUARY 1, 2002
    
    
    13,311,517
    
    
    $
    133
    
    
    $
    109,339
    
    
    $
    (33,546
    )
    
    
    422,100
    
    
    $
    (4,999
    )
    
    $
    70,927Issuance of common stock.
    
    
    23,937,489
    
    
    
    239
    
    
    
    7,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,899Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,793
    
    
    
    
    
    
    
    
    
    
    
    22,793DECEMBER 31, 2002
    
    
    37,249,006
    
    
    
    372
    
    
    
    116,999
    
    
    
    (10,753
    )
    
    
    422,100
    
    
    
    (4,999
    )
    
    
    101,619Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,920
    )
    
    
    
    
    
    
    
    
    
    
    (13,920
    )DECEMBER 31, 2003
    
    
    37,249,006
    
    
    
    372
    
    
    
    116,999
    
    
    
    (24,673
    )
    
    
    422,100
    
    
    
    (4,999
    )
    
    
    87,699Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (385
    )
    
    
    
    
    
    
    (33,332
    )
    
    
    395
    
    
    
    10Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,759
    
    

    
    
    
    
    
    
    
    
    
    13,759DECEMBER 31, 2004
    
    
    37,249,006
    
    
    $
    372
    
    
    $
    116,614
    
    
    $
    (10,914
    )
    
    
    388,768
    
    
    $
    (4,604
    )
    
    $
    101,468
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,2002
    
    
    2003
    
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    22,793
    
    
    $
    (13,920
    )
    
    $
    13,759Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Income from discontinued operations
    
    
    (506
    )
    
    
    (794
    )
    
    
    (624
    )Provision for uncollectible notes
    
    
    24,562
    
    
    
    53,673
    
    
    
    26,811Depreciation and amortization
    
    
    4,486
    
    
    
    3,806
    
    
    
    3,588Gain on sale of notes receivable
    
    
    (6,838
    )
    
    
    (3,205
    )
    
    
    (1,915
    )Gain on early extinguishment of debt
    
    
    (17,885
    )
    
    
    (6,376
    )
    
    
    Gain on sale of land held for sale
    
    
    
    
    
    
    (498
    )
    
    
    Loss on sale of Crown management properties
    
    
    
    
    
    
    44
    
    
    
    Proceeds from sales of notes receivable
    
    
    68,886
    
    
    
    31,796
    
    
    
    20,587Cash effect from changes in assets and liabilities:Restricted cash
    
    
    1,097
    
    
    
    2,000
    
    
    
    (1,804
    )Notes receivable
    
    
    (39,239
    )
    
    
    (40,811
    )
    
    
    (47,733
    )Accrued interest receivable
    
    
    247
    
    
    
    156
    
    
    
    (38
    )Investment in Special Purpose Entity
    
    
    (1,863
    )
    
    
    603
    
    
    
    880Amounts due from affiliates
    
    
    3,090
    
    
    
    (1,574
    )
    
    
    471Inventories
    
    
    754
    
    
    
    (489
    )
    
    
    (8,741
    )Prepaid and other assets
    
    
    (977
    )
    
    
    (2,094
    )
    
    
    (1,906
    )Income taxes receivable
    
    
    164
    
    
    
    
    
    
    
    Accounts payable and accrued expenses
    
    
    (1,772
    )
    
    
    (572
    )
    
    
    1,276Accrued interest payable
    
    
    1,176
    
    
    
    (10
    )
    
    
    215Unearned revenues
    
    
    (2,090
    )
    
    
    684
    
    
    
    922Net
cash provided by operating activities  continuing operations
    
    
    56,085
    
    
    
    22,419
    
    
    
    5,748Net
cash provided by operating activities - discontinued operations
    
    
    169
    
    
    
    88
    
    
    
    389INVESTING ACTIVITIES:Purchases of land, equipment, buildings, and utilities
    
    
    (1,113
    )
    
    
    (232
    )
    
    
    (570
    )Proceeds from land held for sale
    
    
    616
    
    
    
    4,660
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (497
    )
    
    
    4,428
    
    
    
    (570
    )FINANCING ACTIVITIES:Proceeds from borrowings from unaffiliated entities
    
    
    84,668
    
    
    
    157,264
    
    
    
    111,767Payments on borrowings to unaffiliated entities
    
    
    (145,476
    )
    
    
    (181,259
    )
    
    
    (110,502
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    10Net cash provided by (used in) financing activities
    
    
    (60,808
    )
    
    
    (23,995
    )
    
    
    1,275NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (5,051
    )
    
    
    2,940
    
    
    
    6,842CASH AND CASH EQUIVALENTS:BEGINNING OF PERIOD
    
    
    6,204
    
    
    
    1,153
    
    
    
    4,093END OF PERIOD
    
    $
    1,153
    
    
    $
    4,093
    
    
    $
    10,935SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid, net of amounts capitalized
    
    $
    17,864
    
    
    $
    15,747
    
    
    $
    16,557Income taxes paid (refunds received)
    
    
    (1,563
    )
    
    
    86
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Land and equipment acquired under capital leases
    
    
    
    
    
    
    
    
    
    
    99Issuance of common stock in connection with the Exchange
Offer
    
    
    7,899
    
    
    
    
    
    
    
    Issuance of senior subordinated debt
    
    
    28,467
    
    
    
    
    
    
    
    Retirement of senior subordinated debt
    
    
    56,934
    
    
    
    
    
    
    
    Note received from sale of Crown management properties
    
    
    
    
    
    
    1,000
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2003, and 2004 1. NATURE OF BUSINESS Silverleaf Resorts, Inc., a Texas Corporation (the Company or Silverleaf) is in the
business of marketing and selling vacation intervals (Vacation Intervals). Silverleafs principal
activities, in this regard, consist of (i) developing and acquiring timeshare resorts; (ii)
marketing and selling one-week annual and biennial Vacation Intervals to new owners; (iii)
marketing and selling upgraded Vacation Intervals to existing Silverleaf owners (Silverleaf
Owners); (iv) providing financing for the purchase of Vacation Intervals; and (v) operating
timeshare resorts. The Company has in-house sales, marketing, financing, and property management
capabilities and coordinates all aspects of the operation of its 12 owned resorts (the Existing
Resorts) as of December 31, 2004, and the development of any new timeshare resort, including site
selection, design, and construction. In February 2005, the Company was granted approval to operate
a thirteenth resort, which was acquired in October 2004. Sales of Vacation Intervals are marketed
to individuals primarily through direct mail and telephone solicitation. Each Existing Resort has a timeshare owners association (a Club). Each Club operates
through a centralized organization to manage the Existing Resorts on a collective basis. The
principal such organization is Silverleaf Club. Certain resorts, which were managed, but not owned
by the Company, were operated through Crown Club until the third quarter of 2003, when the Company
sold its management rights and unsold timeshare inventory in the seven timeshare resorts the
Company had managed since it originally acquired these from Crown Resorts Co., LLC in May 1998.
Silverleaf Club has contracted with the Company to perform the supervisory, management, and
maintenance functions at the Existing Resorts. All costs of operating the Existing Resorts,
including management fees to the Company, are to be covered by monthly dues paid by Silverleaf
Owners to their respective Clubs as well as income generated by the operation of certain amenities
at the Existing Resorts. Subject to availability of funds from the Clubs, the Company is entitled
to a management fee to compensate it for the services provided. In addition to Vacation Interval sales revenues, interest income derived from financing
activities, and management fees received from the Club, the Company generates additional revenue
from leasing unsold intervals (i.e., sampler sales), utility operations related to the resorts, and
other sources. All of the operations are directly related to the resort real estate development
industry. The consolidated financial statements of the Company as of and for the years ended December
31, 2002, 2003, and 2004 reflect the operations of the Company and its wholly-owned subsidiaries,
Silverleaf Travel, Inc., Awards Verification Center, Inc., Silverleaf Resort Acquisitions, Inc.,
Bulls Eye Marketing, Inc., Silverleaf Berkshires, Inc., eStarCommunications, Inc., People Really
Win Sweepstakes, Inc., SLR Research, Inc., and Silverleaf Finance II, Inc., which was formed in
December 2003 and described in more detail under the heading Debt in footnote 8. Silverleaf
Resort Acquisitions, Inc. and eStarCommunications, Inc. were both dissolved during the fourth
quarter of 2004. 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 F-7




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deferred and recognized as the remaining costs are incurred. The deferral of sales and costs
related to the percentage-of-completion method is not significant. Certain Vacation Interval sales transactions are deferred until the minimum down payment has
been received. The Company accounts for these transactions utilizing the deposit method. Under this
method, the sale is not recognized, a receivable is not recorded, and inventory is not relieved.
Any cash received is carried as a deposit until the sale can be recognized. When these types of
sales are cancelled without a refund, deposits forfeited are recognized as income and the interest
portion is recognized as interest income. In addition to sales of Vacation Intervals to new prospective owners, the Company sells
upgraded Vacation Intervals to existing Silverleaf Owners. Revenues are recognized on these upgrade
Vacation Interval sales when the criteria described above are satisfied. The revenue recognized is
the net of the incremental increase in the upgrade sales price and cost of sales is the incremental
increase in the cost of the Vacation Interval purchased. A provision for estimated customer returns is reported net against Vacation Interval sales.
Customer returns represent cancellations of sales transactions in which the customer fails to make
the first installment payment. The Company recognizes interest income as earned. Interest income is accrued on notes
receivable, net of an estimated amount that will not be collected, until the individual notes
become 90 days delinquent. Once a note becomes 90 days delinquent, the accrual of additional
interest income ceases until collection is deemed probable. Revenues related to one-time sampler contracts, which entitles the prospective owner to sample
a resort during certain periods, are recognized when earned. Revenue recognition is deferred until
the customer uses the stay, purchases a Vacation Interval, or allows the contract to expire. The Company receives fees for management services provided to the Clubs. These revenues are
recognized on an accrual basis in the period the services are provided if collection is deemed
probable. Utilities, services, and other income are recognized on an accrual basis in the period service
is provided. Sales and marketing costs are charged to expense in the period incurred. Commissions, however,
are recognized in the same period as the related sales. Cash and Cash Equivalents Cash and cash equivalents consist of all highly liquid investments
with an original maturity at the date of purchase of three months or less. Cash and cash
equivalents include cash, certificates of deposit, and money market funds. Restricted Cash- Restricted cash consists of certificates of deposit that serve as collateral
for construction bonds and cash restricted for repayment of debt. Investment in Special Purpose Entity- The Company is party to an $85 million revolving credit
agreement to finance Vacation Interval notes receivable through an off-balance sheet SPE. The
Company accounts for and evaluates its investment in the SPE in accordance with SFAS 140, EITF
99-20, and SFAS 115, as applicable. Sales of notes receivable from the Company to its SPE that meet
certain underwriting criteria occur on a periodic basis. The SPE funds these purchases through
advances under a credit agreement arranged for this purpose. The gain or loss on the sale is
determined based on the proceeds received, the fair value assigned to the investment in SPE, and
the recorded value of notes receivable sold. The fair value of the investment in the SPE is
estimated based on the present value of future expected cash flows back to the Company from the
notes receivable sold. The Company utilized the following key assumptions to estimate the fair
value of such cash flows: customer prepayment rate  4.3%; expected accounts paid in full as a
result of upgrades  6.2%; expected credit losses  8.1%; discount rate  ranging from 13.5% to
19%; base interest rate  4.4%; agent fee  2%; and loan servicing fees  1%. The Companys
assumptions are based on experience with its notes receivable portfolio, available market data,
estimated prepayments, the cost of servicing, and net transaction costs. Such assumptions are
assessed quarterly and, if necessary, adjustments are made to the carrying value of the investment
in SPE. The carrying value of the investment in SPE represents the Companys maximum exposure to
loss regarding its involvement with the SPE. At December 31, 2004, the sensitivity of the current fair value of residual cash flows to
immediate 10 percent and 20 percent adverse changes to key assumptions are as follows (in
thousands): Customer Prepayment Rate:Impact on fair value of a 10% adverse change
    
    $
    136Impact on fair value of a 20% adverse change
    
    $
    382
 F-8




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##### Table of Contents



Accounts Paid In Full as a Result of Upgrades Rate:Impact on fair value of a 10% adverse change
    
    $
    13Impact on fair value of a 20% adverse change
    
    $
    12Expected Credit Losses Rate:Impact on fair value of a 10% adverse change
    
    $
    2,213Impact on fair value of a 20% adverse change
    
    $
    4,348Discount Rate:Impact on fair value of a 10% adverse change
    
    $
    (17
    )Impact on fair value of a 20% adverse change
    
    $
    (31
    )
 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 into the
following two categories based on the nature of the item: credit losses and customer returns
(cancellations of sales whereby the customer fails to make the first installment payment). The
provision for uncollectible notes pertaining to credit losses and customer returns are classified
in provision for uncollectible notes and Vacation Interval sales, respectively. Inventories Inventories are stated at the lower of cost or market value. Cost includes
amounts for land, construction materials, direct labor and overhead, taxes, and capitalized
interest incurred in the construction or through the acquisition of resort dwellings held for
timeshare sale. Timeshare unit costs are capitalized as inventory and are allocated to Vacation
Intervals based upon their relative sales values. Upon sale of a Vacation Interval, these costs are
charged to cost of sales on a specific identification basis. Vacation Intervals reacquired are
placed back into inventory at the lower of their original historical cost basis or market value. 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. As of December 31, 2004,
the Company had construction commitments of approximately $9.6 million. The Company allocates the
estimated total amenities cost to cost of Vacation Interval sales based on Vacation Intervals sold
in a given period as a percentage of total Vacation Intervals expected to sell over the life of a
particular resort project. Company management periodically reviews the carrying value of its inventory on an individual
project basis to ensure that the carrying value does not exceed market value. Land, Equipment, Buildings, and Utilities- Land, equipment (including equipment under capital
lease), buildings, and utilities are stated at cost, which includes amounts for construction
materials, direct labor and overhead, and capitalized interest. When assets are disposed of, the
cost and related accumulated depreciation are removed, and any resulting gain or loss is reflected
in income for the period. Maintenance and repairs are charged to expense as incurred; significant
betterments and renewals, which extend the useful life of a particular asset, are capitalized.
Depreciation is calculated for all fixed assets, other than land, using the straight-line method
over the estimated useful life of the assets, ranging from 3 to 20 years. Company management
periodically reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Prepaid and Other Assets- Prepaid and other assets consists primarily of prepaid insurance,
prepaid postage, intangibles, commitment fees, debt issuance costs, novelty inventories, deposits,
and miscellaneous receivables. Commitment fees and debt issuance costs are amortized over the life
of the related debt. Intangibles, other than goodwill, are amortized over their useful lives, which
do not exceed ten years. F-9




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Income Taxes- Deferred income taxes are recorded for temporary differences between the bases
of assets and liabilities as recognized by tax laws and their carrying value as reported in the
consolidated financial statements. A provision is made or benefit recognized for deferred income
taxes relating to temporary differences for financial reporting purposes. To the extent a deferred
tax asset does not meet the criteria of more likely than not for realization, a valuation
allowance is recorded. Earnings (Loss) Per Share- Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average shares outstanding. Earnings per share assuming dilution is computed
by dividing net income by the weighted average number of shares and potentially dilutive shares
outstanding. The number of potentially dilutive shares is computed using the treasury stock method,
which assumes that the increase in the number of shares resulting from the exercise of the stock
options is reduced by the number of shares that could have been repurchased by the Company with the
proceeds from the exercise of the stock options. For the years ended December 31, 2002 and 2003, basic and diluted weighted average shares were
equal. Outstanding stock options totaling approximately 1,402,000 were not dilutive at December
31, 2002, because the exercise price for such options substantially exceeded the market price for
the Companys shares. Outstanding stock options totaling approximately 3,704,979 were potentially
dilutive securities at December 31, 2003, but were not included in the computation of diluted EPS
because to do so would have been anti-dilutive for the year ended December 31, 2003. Outstanding
stock options totaling approximately 2,777,147 were dilutive securities that were included in the
computation of diluted EPS at December 31, 2004. Outstanding stock options totaling approximately
874,500 were not dilutive at December 31, 2004, because the exercise price for such options
substantially exceeded the market price for the Companys shares. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS 148). SFAS 148 amends the disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation, and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting policies of the effects
of an entitys accounting policy with respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial statements. While SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that compensation using
the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25,
Accounting for Stock Issued to Employee (APB No. 25). As allowed by SFAS No. 123, the Company has elected to continue to utilize the accounting
method prescribed by APB No. 25, provide the disclosure requirements of SFAS No. 123 and, as of
December 31, 2002, adopted the disclosure requirements of SFAS No. 148. Although the Company
selected an accounting policy which requires only the excess of the market value of its common
stock over the exercise price of options granted to be recorded as compensation expense (intrinsic
method), pro forma information regarding net income (loss) is required as if the Company had
accounted for its employee stock options under the fair value method of SFAS No. 123. Pro forma
net income (loss) applicable to the options granted is not likely to be representative of the
effects on reported net income (loss) for future years. The fair value for these options is
estimated at the date of grant using the Black-Scholes option-pricing model. Stock compensation
determined under the intrinsic method is recognized over the vesting period using the straight-line
method. Had compensation cost for the Companys stock option grants been determined based on the fair
value at the date of grant in accordance with the provisions of SFAS No. 123, the Companys net
income (loss) and net income (loss) per share would have been the following pro forma amounts: 2002
    
    
    2003
    
    
    2004Net income (loss), as reported
    
    $
    22,793
    
    
    $
    (13,920
    )
    
    $
    13,759Stock-based compensation expense recorded
under the intrinsic value method
    
    
    
    
    
    
    
    
    
    
    Pro forma stock-based compensation expense
Computed under the fair value method
    
    
    (760
    )
    
    
    (468
    )
    
    
    (297
    )Pro forma net income (loss)
    
    $
    22,033
    
    
    $
    (14,388
    )
    
    $
    13,462Net income (loss) per share, basicAs reported
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.37Pro forma
    
    $
    0.76
    
    
    $
    (0.39
    )
    
    $
    0.37Net income (loss) per share, dilutedAs reported
    
    $
    0.79
    
    
    $
    (0.38
    )
    
    $
    0.35Pro forma
    
    $
    0.76
    
    
    $
    (0.39
    )
    
    $
    0.35
 The fair value of the stock options granted during 2002 and 2003 were $0.31 and $0.29,
respectively. There were no stock options granted in 2004. The fair value of the stock options
granted is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility ranging from 143.2% to 217.3% for all
grants, risk-free F-10




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##### Table of Contents



interest rates which vary for each grant and range from 4.1% to 12.2%, expected life of 7
years for all grants, and no distribution yield for all grants. Use of Estimates The preparation of the consolidated financial statements requires the use
of managements estimates and assumptions in determining the carrying values of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts for certain revenues and expenses during the
reporting period. Actual results could differ from those estimated. Significant management
estimates include the allowance for uncollectible notes, valuation of SPE, and the future sales
plan used to allocate certain costs to inventories and cost of sales. Reclassifications Certain reclassifications have been made to the 2002 and 2003 consolidated
financial statements to conform to the 2004 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 and 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. Prior periods have been reclassified for comparability, as required. The Gain on Sales of Notes Receivable are no longer being classified as Other Income on the
consolidated statements of income. The reclassification more accurately reflects the true
operations of the Company. Recent Accounting Pronouncements FIN No. 46 In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities (FIN No. 46). FIN No. 46 requires the
primary beneficiary of a variable interest entitys activities to consolidate the variable interest
entity. FIN No. 46 defines a variable interest entity as an entity in which the equity investors do
not have substantive voting rights and there is not sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. The primary beneficiary
is the party that absorbs a majority of the expected losses and/or receives a majority of the
expected residual returns of the variable interest entitys activities. In December 2003, the
Financial Accounting Standards Board issued FIN No. 46R (FIN No. 46R), which supercedes and
amends certain provisions of FIN No. 46. While FIN No. 46R retains many of the concepts and
provisions of FIN No. 46, it also provides additional guidance related to the application of FIN
No. 46, provides for certain additional scope exceptions, and incorporates several Financial
Accounting Standards Board Staff Positions issued related to the application of FIN No. 46. The provisions of FIN No. 46 are immediately applicable to variable interest entities
created, or interests in variable interest entities obtained, after January 31, 2003 and the
provisions of FIN No. 46R are required to be applied to such entities, except for special purpose
entities, by the end of the first reporting period ending after March 15, 2004. For variable
interest entities created, or interests in variable interest entities obtained, on or before
January 31, 2003, FIN No. 46 or FIN No. 46R is required to be applied to special-purpose entities
by the end of the first reporting period ending after December 15, 2003 (December 31, 2003 for
calendar-year entities) and is required to be applied to all other non-special purpose entities by
the end of the first reporting period ending after March 15, 2004 (March 31, 2004 for calendar-year
entities). FIN No. 46 and FIN No. 46R may be applied prospectively with a cumulative-effect
adjustment as of the date it is first applied, or by restating previously issued financial
statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN
No. 46 and FIN No. 46R also require certain disclosures of an entitys relationship with variable
interest entities. The adoption of FIN No. 46 and Fin No. 46R required the Company to consolidate
its financing subsidiary, SF-II. 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 did 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 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. F-11




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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. We are
still evaluating the impact the adoption of SFAS No. 152 will have on our 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 periods beginning after June 15, 2005 and allows, but
does not require, companies to restate the full 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. 3. CONCENTRATIONS OF RISK Credit Risk The Company is exposed to on-balance sheet credit risk related to its notes
receivable. The Company is exposed to off-balance sheet credit risk related to notes sold. The Company offers financing to the buyers of Vacation Intervals at the Companys resorts.
These buyers generally make a down payment of at least 10% of the purchase price and deliver a
promissory note to the Company for the balance. The promissory notes generally bear interest at a
fixed rate, are payable over a seven-year to ten-year period, and are secured by a first mortgage
on the Vacation Interval. The Company bears the risk of default on these promissory notes, and this
risk is heightened inasmuch as the Company generally does not verify the credit history of its
customers and will provide financing if the customer is presently employed and meets certain
household income criteria. If a buyer of a Vacation Interval defaults, the Company generally must foreclose on the
Vacation Interval and attempt to resell it; the associated marketing, selling, and administrative
costs from the original sale are not recovered; and such costs must be incurred again to resell the
Vacation Interval. Although the Company in many cases may have recourse against a Vacation Interval
buyer for the unpaid price, certain states have laws that limit the Companys ability to recover
personal judgments against customers who have defaulted on their loans. Accordingly, the Company
has generally not pursued this remedy. Interest Rate Risk The Company has historically derived net interest income from its
financing activities because the interest rates it charges its customers who finance the purchase
of their Vacation Intervals exceed the interest rates the Company pays to its lenders. Because the
Companys indebtedness bears interest at variable rates and the Companys customer receivables bear
interest at fixed rates, increases in interest rates will erode the spread in interest rates that
the Company has historically obtained and could cause the rate on the Companys borrowings to
exceed the rate at which the Company provides financing to its customers. The Company has not
engaged in interest rate hedging transactions. Therefore, any increase in interest rates,
particularly if sustained, could have a material adverse effect on the Companys results of
operations, cash flows, and financial position. Availability of Funding Sources The Company funds substantially all of the notes receivable,
timeshare inventories, and land inventories which it originates or purchases with borrowings
through its financing facilities, sales of notes receivable, internally generated funds, and
proceeds from public debt and equity offerings. Borrowings are in turn repaid with the proceeds
received by the Company from repayments of such notes receivable. To the extent that the Company is
not successful in maintaining or replacing F-12




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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
(where approximately 45.0% of Vacation Interval sales took place in 2004), 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. 4. NOTES RECEIVABLE The Company provides financing to the purchasers of Vacation Intervals, which are
collateralized by their interest in such Vacation Intervals. The notes receivable generally have
initial terms of seven to ten years. The average yield on outstanding notes receivable at December
31, 2004 was approximately 15.1%. In connection with the sampler program, the Company routinely
enters into notes receivable with terms of 10 months. Notes receivable from sampler sales were $1.5
million and $1.9 million at December 31, 2003 and 2004, respectively, and are non-interest bearing. The Company had a remaining note discount of $138,000 and $76,000 in aggregate as of December
31, 2003 and 2004, respectively, utilizing a 10% discount rate, in connection with promotional
sales to certain customers whereby the Company entered into non-interest bearing notes receivable.
In addition, the Company ceased accruing interest on delinquent notes of $32.8 million and $32.7
million as of December 31, 2003 and 2004, respectively, as collection of interest on such notes was
deemed improbable. Notes receivable are scheduled to mature as follows at December 31, 2004 (in thousands): 2005
    
    $
    32,7532006
    
    
    34,5992007
    
    
    37,0892008
    
    
    36,0532009
    
    
    33,2722010
    
    
    28,860Thereafter
    
    
    46,422249,048Less discounts on notes
    
    
    (76
    )Less allowance for uncollectible notes
    
    
    (52,506
    )Notes receivable, net
    
    $
    196,466
 There were no notes sold with recourse during the years ended December 31, 2002, 2003,
and 2004. The outstanding principal balance of notes receivable sold with recourse was $17,000 and
$0, respectively, as of December 31, 2003 and 2004. During 2003, the Company sold $40.4 million of notes receivable to the SPE and recognized
pre-tax gains of $3.2 million. In conjunction with these sales, the Company received cash
consideration of $31.8 million, which was primarily used to pay down borrowings under its revolving
loan facilities. During 2004, the Company sold $27.4 million of notes receivable to the SPE and
recognized pre-tax gains of $1.9 million. In conjunction with these sales, the Company received
cash consideration of $20.6 million, which was primarily used to pay down borrowings under its
revolving loan facilities. The SPE funded all of these purchases through advances under a credit
agreement arranged for this purpose. In the event cash flows from the notes receivable held by the SPE are sufficient to pay all
debt service obligations, fees, and expenses, the Company may receive distributions from the SPE.
For the years ended December 31, 2004 and 2003, the Company received $12.0 million and $7.9
million, respectively, in cash distributions from the SPE. At December 31, 2004, the SPE held notes receivable totaling $84.5 million, with related
borrowings of $64.1 million. The Company continues to service all notes receivable sold for a fee
of 1% of eligible notes held by the SPE. Fees received by the Company for servicing sold notes were
$547,000, $904,000, and $684,000 for the years ended December 31, 2002, 2003, 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. Under the terms of the revolving credit agreement, the Registrant has no obligation to
repurchase defaulted receivables sold to the SPE. If the obligor on a receivable sold to the SPE
defaults, the Registrant, as servicer, is required to follow agreed upon collection procedures on
behalf of the SPE. In the event these collection procedures are unsuccessful, the SPE may sell the
defaulted asset at auction. The credit agreement with the SPEs lender provides that the Registrant
is not precluded from bidding at an auction held to F-13




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sell defaulted Vacation Intervals; however, the credit agreement also provides that the
Registrant may not bid less than the net fair market value of the defaulted Vacation Interval,
which by agreement with the SPEs lender will be at least 15% of the original acquisition price
paid by the obligator for the defaulted Vacation Interval. For the years ended December 31, 2004
and 2003, the Registrant paid approximately $2.5 million and $3.5 million, respectively, at public
auction to repurchase defaulted Vacation Intervals from its SPE. The Company considers accounts over 60 days past due to be delinquent. As of December 31,
2004, $2.0 million of notes receivable, net of accounts charged off, were considered delinquent. An
additional $42.8 million of notes would have been considered to be delinquent had the Company not
granted payment concessions to the customers, which brings a delinquent note current and extends
the maturity date if two consecutive payments are made. The activity in gross notes receivable is as follows for the years ended December 31, 2003 and
2004 (in thousands): December 31,2003
    
    
    2004Balance, beginning of period
    
    $
    261,784
    
    
    $
    241,751Sales
    
    
    105,123
    
    
    
    116,573Collections
    
    
    (57,420
    )
    
    
    (62,078
    )Receivables charged off
    
    
    (27,342
    )
    
    
    (19,845
    )Sold notes receivable
    
    
    (40,394
    )
    
    
    (27,429
    )Balance, end of period
    
    $
    241,751
    
    
    $
    248,972
 The activity in the allowance for uncollectible notes is as follows for the years ended
December 31, 2002, 2003, and 2004 (in thousands): December 31,2002
    
    
    2003
    
    
    2004Balance, beginning of period
    
    $
    54,744
    
    
    $
    28,547
    
    
    $
    48,372Provision for credit losses
    
    
    24,562
    
    
    
    53,673
    
    
    
    26,811Receivables charged off
    
    
    (36,486
    )
    
    
    (27,342
    )
    
    
    (19,845
    )Allowance related to notes sold
    
    
    (14,273
    )
    
    
    (6,506
    )
    
    
    (2,832
    )Balance, end of period
    
    $
    28,547
    
    
    $
    48,372
    
    
    $
    52,506
 The provision for customer returns, which are cancellations of sales whereby the customer
fails to make the first installment payment, are recorded as a charge to Vacation Interval sales.
For the years ended December 31, 2002, 2003, and 2004, the provision for customer returns was $4.0
million, $4.0 million, and $4.1 million, respectively. Management observed that cancellations in the first quarter of 2003 significantly exceeded the
level expected under its estimate for the December 31, 2002 allowance for uncollectible notes.
Accordingly, the estimate was revised in the first quarter of 2003 as follows:  
    the basis of the estimate of future cancellations was changed from Vacation Interval sales to incremental amounts
financed, resulting in an increase of $1.6 million,  
    certain historical cancellations from 2000 and 2001 that were previously excluded from predictive cancellations, as such
cancellations were assumed to be uncharacteristically large as a result of the Companys class action notices to all
customers and announcements about its liquidity and possible bankruptcy issues in the first half of 2001, were included
in predictive cancellations, resulting in an increase of $5.6 million,  
    the estimate of cancellations in years 7, 8, and 9 after a sale were increased, resulting in an increase of $1.6 million,  
    the estimate of inventory recoveries resulting from cancellations was revised, resulting in an increase of $300,000,  
    the ratio of the excess of cancellations in the first quarter over the estimated cancellations for the same period based
on the weighted average rate of cancellations divided by the incremental amounts financed for the period 1997 through
2002, was applied to all future estimated cancellations, resulting in an increase of $15.0 million, and  
    an estimate was added for current notes with customers who received payment or term concessions that would have been
deemed cancellations were it not for the concessions, resulting in an increase of $4.6 million. The result of these revisions to the estimate was a $28.7 million increase from the original
estimate for the provision for uncollectible notes in the first quarter of 2003. A further result
of the revision to the estimate is that the allowance for doubtful accounts was 20.0% of gross
notes receivable as of December 31, 2003 compared to 10.9% at December 31, 2002. The allowance for
doubtful accounts was 21.1% of gross notes receivable as of December 31, 2004. Management will
continue its current collection programs and seek new programs to reduce note defaults and improve
the credit quality of its customers. However, there can be no assurance that these efforts will be
successful. F-14




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5. INVENTORIES Inventories consist of the following at December 31, 2003 and 2004 (in thousands): December 31,2003
    
    
    2004Timeshare units
    
    $
    46,165
    
    
    $
    50,169Amenities
    
    
    38,007
    
    
    
    38,467Land
    
    
    7,805
    
    
    
    11,114Recovery of canceled and traded intervals
    
    
    9,411
    
    
    
    9,553Other
    
    
    11
    
    
    
    Total
    
    $
    101,399
    
    
    $
    109,303
 Realization of inventories is dependent upon execution of managements long-term sales
plan for each resort, which extend for up to fifteen years. Such sales plans depend upon
managements ability to obtain financing to facilitate the build-out of each resort and marketing
of the Vacation Intervals over the planned time period. 6. LAND, EQUIPMENT, BUILDINGS, AND UTILITIES Land, equipment, buildings, and utilities consist of the following at December 31, 2003 and
2004 (in thousands): December 31,2003
    
    
    2004Land
    
    $
    2,276
    
    
    $
    2,276Vehicles and equipment
    
    
    4,278
    
    
    
    4,291Utility plant, buildings, and facilities
    
    
    15,187
    
    
    
    15,902Office equipment and furniture
    
    
    28,482
    
    
    
    28,739Improvements
    
    
    10,378
    
    
    
    10,43060,601
    
    
    
    61,638Less accumulated depreciation
    
    
    (33,113
    )
    
    
    (37,263
    )Land, equipment, buildings, and utilities, net
    
    $
    27,488
    
    
    $
    24,375
 Depreciation and amortization expense for the years ended December 31, 2002, 2003, and
2004 was $4.5 million, $3.8 million, and $3.6 million, respectively. 7. INCOME TAXES Income tax expense (benefit) consists of the following components for the years ended December
31, 2002, 2003, and 2004 (in thousands): 2002
    
    
    2003
    
    
    2004Current income tax expense (benefit)  Federal
    
    $
    (1,563
    )
    
    $
    
    
    
    $
    Current income tax expense (benefit)  State
    
    
    40
    
    
    
    86
    
    
    
    23Deferred income tax expense (benefit)  FederalDeferred income tax expense (benefit)  State
    
    
    
    
    
    
    
    
    
    
    Total income tax expense (benefit)
    
    $
    (1,523
    )
    
    $
    86
    
    
    $
    23
 A reconciliation of income tax expense (benefit) on reported pre-tax income (loss) at
statutory rates to actual income tax expense (benefit) for the years ended December 31, 2002, 2003,
and 2004 is as follows (in thousands): 2002
    
    
    2003
    
    
    2004Dollars
    
    
    Rate
    
    
    Dollars
    
    
    Rate
    
    
    Dollars
    
    
    RateIncome tax expense (benefit) at statutory rates
    
    $
    7,445
    
    
    
    35.0
    %
    
    $
    (4,842
    )
    
    
    (35.0
    )%
    
    $
    4,824
    
    
    
    35.0
    %State income taxes, net of Federal
income tax benefit
    
    
    659
    
    
    
    3.1
    %
    
    
    (429
    )
    
    
    (3.1
    )%
    
    
    427
    
    
    
    3.1
    %Deferred tax asset allowance
    
    
    (9,798
    )
    
    
    (46.1
    )%
    
    
    3,744
    
    
    
    27.0
    %
    
    
    (7,376
    )
    
    
    (53.5
    )%Reconciliation to prior year tax return
    
    
    
    
    
    
    
    
    
    
    811
    
    
    
    5.9
    %
    
    
    1,464
    
    
    
    10.6
    %Other, primarily permanent differences
    
    
    171
    
    
    
    0.8
    %
    
    
    802
    
    
    
    5.8
    %
    
    
    684
    
    
    
    5.0
    %Total income tax expense (benefit)
    
    $
    (1,523
    )
    
    
    (7.2
    )%
    
    $
    86
    
    
    
    0.6
    %
    
    $
    23
    
    
    
    0.2
    %
 Deferred income tax assets and liabilities as of December 31, 2003 and 2004 are as
follows (in thousands): 2003
    
    
    2004Deferred tax liabilities:Depreciation
    
    $
    4,809
    
    
    $
    4,872Installment sales income
    
    
    79,588
    
    
    
    80,383Total deferred tax liabilities
    
    
    84,397
    
    
    
    85,255
 F-15




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##### Table of Contents



2003
    
    
    2004Deferred tax assets:Net operating loss carryforward  pre Exchange Offer
    
    
    60,672
    
    
    
    49,097Net operating loss carryforward  post Exchange Offer
    
    
    28,676
    
    
    
    34,116Impairment of long-lived assets
    
    
    5,081
    
    
    
    4,698Other
    
    
    406
    
    
    
    406Total deferred tax assets
    
    
    94,835
    
    
    
    88,317Net deferred tax liability (asset)
    
    
    (10,438
    )
    
    
    (3,062
    )Deferred tax asset allowance
    
    
    10,438
    
    
    
    3,062Net deferred tax asset
    
    $
    
    
    
    $
    
 The Company reports substantially all Vacation Interval sales, which it finances, on the
installment method for federal income tax purposes. Under the installment method, the Company does
not recognize income on sales of Vacation Intervals until the down payment or installment payment
on customer receivables are received by the Company. 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. The amount of interest
expense is not estimable as of December 31, 2004. The Company has been subject to Alternative Minimum Tax (AMT) as a result of the deferred
income that results from the installment sales treatment of Vacation Interval sales for regular tax
purposes. However, due to existing AMT loss carryforwards, it is anticipated that minimal current
AMT liability exists. The current AMT payable balance was adjusted in 1997 to reflect the change in
method of accounting for installment sales under AMT granted by the Internal Revenue Service,
effective as of January 1, 1997. As a result, the Companys alternative minimum taxable income for
1997 through 1999 was increased each year by approximately $9 million, which resulted in the
Company paying substantial additional federal and state taxes in those years. Subsequent to
December 31, 2000, the Company applied for and received refunds of $8.3 million and $1.6 million
during 2001 and 2002, respectively, as the result of the carryback of its 2000 AMT loss to 1999,
1998, and 1997. The AMT liability creates a deferred tax asset in the form of a minimum tax credit,
which, unless otherwise limited, reduces any future tax liability from regular federal income tax.
This deferred tax asset has an unlimited carryover period. The federal net operating losses (NOL) expire between 2018 through 2021. Realization of the
deferred tax assets arising from NOL is dependent on generating sufficient taxable income prior to
the expiration of the loss carryforwards. Management currently does not believe that it will be
able to utilize its NOL as a result of 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 (Exchange Offer) in 2002, an ownership change within the meaning of
Section 382(g) of the Internal Revenue Code (the Code) has occurred. As a result, the Companys
NOL is subject to an annual limitation for the current and future taxable years. The annual
limitation will be equal to the value of the stock of the Company immediately before the ownership
change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted Federal
long-term rates in effect for any month in the three-calendar-month period ending with the calendar
month in which the change date occurs). This annual limitation may be increased for any recognized
built-in gain to the extent allowed in Section 382(h) of the Code. The following are the expiration dates and the approximate net operating loss carryforwards at
December 31, 2004 (in thousands): Expiration Dates 2018
    
    $
    7,3302019
    
    
    57,8872020
    
    
    132,2412021
    
    
    27,390$
    224,848
 8. DEBT Notes payable, capital lease obligations, and senior subordinated notes as of December 31,
2003 and 2004 are as follows (in thousands): F-16




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##### Table of Contents



December 31,2003
    
    
    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%)
    
    $
    25,095
    
    
    $
    37,514$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,998
    
    
    
    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%)
    
    
    28,325
    
    
    
    37,039$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    10,845
    
    
    
    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%)
    
    
    3,734
    
    
    
    5,250$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    1,558
    
    
    
    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%
    
    
    66,381
    
    
    
    50,299$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)
    
    
    16,897
    
    
    
    18,689$5.4 million term loan with an interest rate of 8%, due in March 2007 (paid in full as of July 2004)
    
    
    5,412
    
    
    
    $70 million loan agreement, capacity reduced by amounts outstanding under the $10 million inventory
loan agreement and the $9 million supplemental revolving loan agreement, which contains certain
financial covenants, due February 2006, principal and interest payable from the proceeds obtained
on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus
2.65% with a 6.0% floor (additional draws are no longer available under this facility)
    
    
    17,009
    
    
    
    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
    
    
    8,345
    
    
    
    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 million inventory loan agreement, which contains certain financial covenants, due March 2007,
interest payable monthly, at an interest rate of LIBOR plus 3.25%
    
    
    10,000
    
    
    
    10,000$8 million inventory loan agreement, which contains certain financial covenants, due March 2007,
interest payable monthly, at an interest rate of Prime plus 3% with a 6% floor (as of August 2004
the loan agreement is limited to $6 million)
    
    
    
    
    
    
    6,000$10 million inventory loan agreement, which contains certain financial covenants, due March 2007,
interest payable monthly, at an interest rate of LIBOR plus 3.5% with a 6% floor
    
    
    7,733
    
    
    
    Various notes, due from May 2005 through February 2009, collateralized by various assets with
interest rates ranging from 0.9% to 10.3%
    
    
    1,676
    
    
    
    7,122Total notes payable
    
    
    214,008
    
    
    
    217,986Capital lease obligations
    
    
    1,329
    
    
    
    324Total notes payable and capital lease obligations
    
    
    215,337
    
    
    
    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
    
    
    
    
    
    
    24,6716.0% 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
    
    
    28,467
    
    
    
    3,796101/2% 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
    
    
    5,978
    
    
    
    4,270Total senior subordinated notes
    
    
    36,591
    
    
    
    34,883Total
    
    $
    251,928
    
    
    $
    253,193
 F-17




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##### Table of Contents



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%. Certain of the above debt agreements include restrictions on the Companys ability to pay
dividends based on minimum levels of net income and cash flow. The debt agreements contain
covenants including requirements that the Company (i) preserve and maintain the collateral securing
the loans; (ii) pay all taxes and other obligations relating to the collateral; and (iii) refrain
from selling or transferring the collateral or permitting any encumbrances on the collateral. The
debt agreements also contain restrictive covenants, which include (i) restrictions on liens against
and dispositions of collateral, (ii) restrictions on distributions to affiliates and prepayments of
loans from affiliates, (iii) restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and (v) restrictions on
mergers, consolidations, or other reorganizations of the Company. Under certain credit facilities,
a sale of all or substantially all of the assets of the Company, a merger, consolidation, or
reorganization of the Company, or other changes of control of the ownership of the Company, would
constitute an event of default and permit the lenders to accelerate the maturity thereof. Such credit facilities also contain operating covenants requiring the Company to (i) maintain
a minimum tangible net worth of $100 million or greater, as defined, sales and marketing expenses
as a percentage of sales below 55.0%, notes receivable delinquency rate below 25%, a minimum
interest coverage ratio of 1.25 to 1, and positive net income; (ii) maintain its legal existence
and be in good standing in any jurisdiction where it conducts business; (iii) remain in the active
management of the Resorts; and (iv) refrain from modifying or terminating certain timeshare
documents. The credit facilities also include customary events of default, including, without
limitation (i) failure to pay principal, interest, or fees when due, (ii) untruth of any
representation of warranty, (iii) failure to perform or timely observe covenants, (iv) defaults
under other indebtedness, and (v) bankruptcy. As of December 31, 2002, the Company was in compliance with these operating covenants.
However, due to the results of the quarter ended March 31, 2003, the Company was not in compliance
with several of the financial covenants described above during 2003. In November 2003, the Company
entered into agreements with its three senior lenders whereby the covenant defaults were waived,
and as a result, the Company was in compliance with these operating covenants as of December 31,
2003 and 2004. However, such future results cannot be assured. In addition, as a result of the loss for the quarter ended March 31, 2003, the Companys SPE
was in default of financial covenants with its lender. The lender subsequently waived the defaults
as of March 31, 2003 and modified its agreement with the SPE whereby there were no defaults for the
quarter ended June 30, 2003 or September 30, 2003. In December 2003, the Company closed a $66.4 million conduit term loan transaction through a
wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (SF-II). This conduit loan was
arranged through one of the Companys existing senior lenders. Under the terms of the conduit loan,
the Company sold approximately $78.1 million of its Vacation Interval receivables to its subsidiary
SF-II for an amount equal to the aggregate principal balances of the receivables. The purchase of
these receivables from Silverleaf was financed by the existing senior lender through a one-time
advance to SF-II of $66.4 million, which is approximately 85% of the outstanding balance of the
receivables SF-II purchased from the Company. All customer receivables transferred from the Company
to SF-II have been pledged as security to the senior lender. The senior lender also received as
additional collateral a pledge of all of the Companys equity interest in SF-II and a $15.7 million
demand note from the Company to SF-II under which payment may be demanded if SF-II defaults on its
loan from the lender. There is no additional recourse to the Company other than SF-II and the
demand note. Proceeds from the sale of the receivables to SF-II were used by the Company to pay
down approximately $65.5 million of amounts outstanding under its two senior revolving credit
facilities. The senior lenders conduit loan to SF-II will mature in 2014 and bears interest at a
fixed annual rate of 7.035%. As a result of the closing of the $66.4 million conduit loan, the Company obtained a two-year
extension of its senior revolving credit facilities with two of its senior lenders. The revolving
period on these two facilities are now extended through March 31, 2006. Additionally, the Company
obtained an extension of its existing revolving credit facility through the Companys SPE through
March 31, 2006. In order to obtain the two-year extension of this facility, however, we agreed that
the principal amount of the facility would be reduced from $100 million to $85 million. Effective
March 31, 2005, the principal amount of the facility will be reduced from $85 million to $75
million. Furthermore, in the third quarter of 2004 the Company restructured its loan facility with
one of its senior lenders whereby the existing $35 million revolving component was reduced to $25
million and the due date was extended to March 2009. In addition, the existing $5.4 million term
component was paid in full, and a new $10 million revolving component was established, which will
be due in March 2009, and will be collateralized by either the Companys notes receivable or
inventory. The Company recorded a gain on early extinguishment of debt of $6.4 million during 2003, of
which $5.1 million resulted from the early extinguishment of $7.6 million of 10 1/2% senior
subordinated notes due 2008. An additional $1.3 million resulted from the F-18




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##### Table of Contents



early extinguishment of the remaining $8.8 million balance of our $60 million loan agreement
in the first quarter of 2003, which would have been due in August 2003. In June 2004 the Company completed an offer to exchange $24.7 million in principal amount of
its 6% senior subordinated notes due 2007 for $24.7 million in principal amount of its 8% senior
subordinated notes due 2010 and a cash payment of approximately $271,000, representing accrued,
unpaid interest from April 1, 2004 through June 6, 2004. Notes payable secured by customer notes receivable require that collections from customers be
remitted to the lenders upon receipt. In addition, the Company is required to calculate the
appropriate Borrowing Base for each note payable monthly. Such Borrowing Base determines whether
the loans are collateralized in accordance with the applicable loan agreements and whether
additional amounts can be borrowed. In preparing the monthly Borrowing Base reports for the
lenders, the Company has classified certain notes as eligible for Borrowing Base that might be
considered ineligible in accordance with the loan agreements. A significant portion of the
potentially ineligible notes relates to cancelled notes from customers who have upgraded to a
higher value product and notes that have been subject to payment concessions. The Company has developed programs under which customers may be granted payment concessions in
order to encourage delinquent customers to make additional payments. The effect of these
concessions is to extend the term of the customer notes. Upon granting a concession, the Company
considers the customer account to be current. Under the Companys notes payable agreements,
customer notes that are less than 60 days past due are considered eligible as Borrowing Base. As
of December 31, 2003 and 2004, a total of $42.8 million and $38.7 million of customer notes,
respectively, have been considered eligible for Borrowing Base purposes which would have been
considered ineligible had payment concessions and the related reclassification as current not been
granted. In addition, as of December 31, 2003 and 2004, approximately $77,000 and $83,000,
respectively, of cancelled notes from customers who have upgraded to a different product have been
treated as eligible for Borrowing Base purposes. Principal maturities of notes payable, capital lease obligations, and senior subordinated
notes are as follows at December 31, 2004 (in thousands): 2005
    
    $
    3,7132006
    
    
    12,2232007
    
    
    130,9972008
    
    
    2,5232009
    
    
    28,767Thereafter
    
    
    74,970Total
    
    $
    253,193
 Total interest expense for the years ended December 31, 2002, 2003, and 2004 was $22.2
million, $16.6 million, and $17.6 million, respectively. Interest of $271,000, $279,000, and
$322,000 was capitalized to inventory during the years ended December 31, 2002, 2003, and 2004,
respectively. As of December 31, 2004, eligible customer notes receivable with a face amount of $228.8
million and interval inventory of $29.9 million were pledged as collateral. 9. 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 2004, but is not yet complete. The Company has filed a
counterclaim seeking contractual indemnification under the terms of management agreements with each
of the plaintiffs. At this time, the Companys legal fees and costs of litigation are being paid
by its insurance carriers, subject to a reservation of rights by these insurers. The Company
cannot predict the final outcome of these claims, nor can it estimate the additional costs it could
incur, or whether its insurance carriers will continue to cover its costs in connection with these
claims. The Company intends to vigorously defend this litigation. F-19




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##### Table of Contents



Ozark Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,Circuit Court
of Stone County, Missouri. The homeowners associations of three condominium projects that a
former subsidiary of the Company constructed in Missouri filed an action against the Company in
2000 alleging construction defects, misrepresentation, breach of fiduciary duty, negligence, and
breach of management agreements and seeking damages and certain other equitable relief. The
plaintiffs seek actual and punitive damages in excess of $500,000, attorneys fees and costs. The
Company has filed a counterclaim seeking contractual indemnification under the terms of management
agreements with the plaintiffs. At this time, a majority of the Companys legal fees and costs of
litigation are being paid by its insurance carriers, subject to a reservation of rights by these
insurers. The trial, which was rescheduled for March 21, 2005 has been continued and the parties,
through their counsel have agreed to the terms of a settlement, which terms have not yet been
reduced to a definitive settlement agreement and executed by all parties. If the settlement
agreement is fully implemented, the Company estimates that its maximum future exposure will be
limited to no more than $200,000. 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. The Company has entered into noncancelable operating leases covering office and storage
facilities and equipment, which will expire at various dates through 2009. The total rental expense
incurred during the years ended December 31, 2002, 2003, and 2004 was $2.8 million, $2.4 million,
and $2.3 million, respectively. The Company has also acquired equipment by entering into capital
leases. The following table summarizes our scheduled contractual commitments as of December 31, 2004
(in thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCapital leases
    
    $
    260
    
    
    $
    25
    
    
    $
    22
    
    
    $
    22
    
    
    $
    16
    
    
    $
    Operating leases
    
    
    1,900
    
    
    
    1,757
    
    
    
    1,627
    
    
    
    1,225
    
    
    
    759
    
    
    
    Other purchase obligations:Construction commitments
    
    
    9,563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    1,445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    13,168
    
    
    $
    1,782
    
    
    $
    1,649
    
    
    $
    1,247
    
    
    $
    775
    
    
    $
    
 Capital leases include $21,000 of future interest, using an approximate interest rate of
6.8%, which is the Companys weighted average cost of borrowings as of December 31, 2004. We also
have a $15.7 million demand note with SF-II that is not included, since the note represents only a
potential, future cash outlay, and in addition, is eliminated on a consolidated basis. Equipment acquired under capital leases consists of the following at December 31, 2003 and
2004 (in thousands): 2003
    
    
    2004Amount of equipment under capital leases
    
    $
    9,168
    
    
    $
    5,447Less accumulated depreciation
    
    
    (6,793
    )
    
    
    (4,507
    )$
    2,375
    
    
    $
    940
 At December 31, 2004, we had notes receivable (including notes unrelated to Vacation
Intervals) in the approximate principal amount of $249.0 million with an allowance for
uncollectible notes of approximately $52.5 million. Periodically, the Company enters into employment agreements with certain executive officers,
which provide for minimum annual base salaries and other fringe benefits as determined by the Board
of Directors of the Company. Certain of these agreements provide for bonuses based on the Companys
operating results. The agreements have varying terms of up to three years and typically can be
terminated by either party upon 30 days notice, subject to severance provisions. Certain employment
agreements provide that such person will not directly or indirectly compete with the Company in any
county in which it conducts its business or markets its products for a period of two years
following the termination of the agreement. These agreements also provide that such persons will
not influence any employee or independent contractor to terminate its relationship with the Company
or disclose any confidential information of the Company. F-20




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##### Table of Contents



10. EQUITY The Companys stock option plans provide for the award of nonqualified stock options to
directors, officers, and key employees, and the grant of incentive stock options to salaried key
employees. Nonqualified stock options provide for the right to purchase common stock at a specified
price which may be less than or equal to fair market value on the date of grant (but not less than
par value). Nonqualified stock options may be granted for any term and upon such conditions
determined by the Board of Directors of the Company. The Company has reserved 3.8 million shares of
common stock for issuance pursuant to its stock option plans. Outstanding options have a graded vesting schedule, with equal installments of shares vesting
up through four years from the original grant date. These options are exercisable at prices ranging
from $0.29 to $25.50 per share and expire 10 years from the date of grant. Stock option transactions during 2002, 2003, and 2004 are summarized as follows: 2002
    
    
    2003
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Exercise
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    Exerciseof Shares
    
    
    Price per Share
    
    
    Of Shares
    
    
    Price per Share
    
    
    Of Shares
    
    
    Price per ShareOptions outstanding, beginning
of year
    
    
    1,078,500
    
    
    $
    14.08
    
    
    
    1,402,000
    
    
    $
    9.76
    
    
    
    3,704,979
    
    
    $
    3.64Granted
    
    
    460,000
    
    
    $
    0.29
    
    
    
    4,550,958
    
    
    $
    0.32
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    (33,332
    )
    
    $
    0.32Expired
    
    
    
    
    
    $
    
    
    
    
    (2,175,479
    )
    
    $
    0.32
    
    
    
    
    
    
    $
    Forfeited
    
    
    (136,500
    )
    
    $
    11.97
    
    
    
    (72,500
    )
    
    $
    13.24
    
    
    
    (20,000
    )
    
    $
    16.74Options outstanding, end of year
    
    
    1,402,000
    
    
    $
    9.76
    
    
    
    3,704,979
    
    
    $
    3.64
    
    
    
    3,651,647
    
    
    $
    3.60Exercisable, end of year
    
    
    863,500
    
    
    $
    15.17
    
    
    
    990,250
    
    
    $
    12.69
    
    
    
    1,953,549
    
    
    $
    6.45
 For stock options outstanding at December 31, 2004: Weighted
    
    Weighted
    
    
    
    
    
    Weighted AverageAverage
    
    Average
    
    Number of
    
    Exercise Price ofNumber of Options
    
    Exercise Price
    
    Remaining
    
    Options
    
    OptionsRange of Exercise Prices
    
    Outstanding
    
    per Option
    
    Life in Years
    
    Exercisable
    
    Exercisable$16.00  $25.50
    
    
    650,500
    
    
    $
    16.76
    
    
    
    3.5
    
    
    
    650,500
    
    
    $
    16.76$  7.31
 $  7.31
    
    
    149,000
    
    
    
    7.31
    
    
    
    5.0
    
    
    
    149,000
    
    
    
    7.31$  3.59
 $  3.69
    
    
    75,000
    
    
    
    3.64
    
    
    
    6.0
    
    
    
    75,000
    
    
    
    3.64$  0.29
 $  0.32
    
    
    2,777,147
    
    
    
    0.31
    
    
    
    8.8
    
    
    
    1,079,049
    
    
    
    0.31Total
    
    
    3,651,647
    
    
    
    
    
    
    
    
    
    
    
    1,953,549
 The Company has adopted the disclosure-only provisions of Statement of Financial
Standards No. 123, Accounting for Stock- Based Compensation (SFAS No. 123). The Company applies
the accounting methods of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
To Employees (APB No. 25), and related Interpretations in accounting for its stock options.
Accordingly, no compensation costs have been recognized for stock options. Had compensation costs
for the options been determined based on the fair value at the grant date for the awards in 2002,
2003, and 2004 consistent with the provisions of SFAS No. 123, the Companys net income (loss) and
net income (loss) per share would approximate the pro forma amounts indicated below (in thousands,
except per share amounts): Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2004Net income (loss)  as reported
    
    $
    22,793
    
    
    $
    (13,920
    )
    
    $
    13,759Net income (loss)  pro forma
    
    
    22,033
    
    
    
    (14,388
    )
    
    
    13,462Net income (loss) per share  as reported: Basic
    
    
    0.79
    
    
    
    (0.38
    )
    
    
    0.37Net income (loss) per share  as reported: Diluted
    
    
    0.79
    
    
    
    (0.38
    )
    
    
    0.35Net income (loss) per share  pro forma: Basic
    
    
    0.76
    
    
    
    (0.39
    )
    
    
    0.37Net income (loss) per share  pro forma: Diluted
    
    
    0.76
    
    
    
    (0.39
    )
    
    
    0.35
 There were no stock options granted in 2004. The weighted average fair value per common
stock option granted during 2002 and 2003 were $0.31 and $0.29, respectively. The fair value of the
stock options granted is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: expected volatility ranging from 143.2% to
217.3% for all grants, risk-free interest rates which vary for each grant and range from 4.1% to
12.2%, expected life of 7 years for all grants, and no distribution yield for all grants. F-21




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##### Table of Contents



11. DISCONTINUED OPERATIONS As of December 31, 2004, the water and utility property assets and liabilities have been
designated as held for sale. In accordance with the provisions of SFAS No. 144, the results of
operations of these properties are included in income from discontinued operations. The carrying
amounts of the water and utility property assets and liabilities are summarized below (in
thousands): December 31,2003
    
    
    2004Cash
    
    $
    452
    
    
    $
    841Amount due from affiliates
    
    
    142
    
    
    
    150Land, equipment, buildings, and utilities, net
    
    
    12,007
    
    
    
    11,912Prepaid and other assets
    
    
    62
    
    
    
    55Total assets
    
    $
    12,663
    
    
    $
    12,958Accounts payable
    
    $
    71
    
    
    $
    70Total liabilities
    
    $
    71
    
    
    $
    70
 The condensed consolidated statements of operations of discontinued operations are
summarized as follows (in thousands): Year Ended December 31,2002
    
    
    2003
    
    
    2004REVENUES:Other income
    
    
    2,320
    
    
    
    2,739
    
    
    
    2,860Total revenues
    
    
    2,320
    
    
    
    2,739
    
    
    
    2,860COSTS AND OPERATING EXPENSES:Other expense
    
    
    1,115
    
    
    
    1,184
    
    
    
    1,376Depreciation and amortization
    
    
    698
    
    
    
    760
    
    
    
    859Interest expense
    
    
    1
    
    
    
    1
    
    
    
    1Total costs and operating expenses
    
    
    1,814
    
    
    
    1,945
    
    
    
    2,236Net income from discontinued operations
    
    $
    506
    
    
    $
    794
    
    
    $
    624
 12. RELATED PARTY TRANSACTIONS Each timeshare owners association has entered into a management agreement, which authorizes
the Clubs to manage the resorts. The Clubs, in turn, have entered into management agreements with
the Company, whereby the Company manages the operations of the resorts. Pursuant to the management
agreements, the Company receives a management fee equal to the lesser of 15% of gross revenues for
Silverleaf Club or the net income of each Club. However, if the Company does not receive the
aforementioned maximum fee, such deficiency is deferred for payment in the succeeding years,
subject again to the net income limitation. The Silverleaf Club management agreement is effective
through March 2010, and will continue year-to-year thereafter unless cancelled by either party.
During the years ended December 31, 2002, 2003, and 2004, the Company recorded management fees of
$1.9 million, $1.5 million, and $1.2 million, respectively, in management fee income. The direct expenses of operating the resorts are paid by the Clubs. To the extent the Clubs
provide payroll, administrative, and other services that directly benefit the Company, a separate
allocation is charged by the Clubs to the Company. During the years ended December 31, 2002, 2003,
and 2004, the Company incurred $183,000, $247,000, and $252,000, respectively, of expenses under
these agreements. Likewise, to the extent the Company provides payroll, administrative, and other
services that directly benefit the Clubs, a separate allocation is charged by the Company to the
Clubs. During the years ended December 31, 2002, 2003, and 2004, the Company charged the Clubs
$2.5 million, $3.3 million, and $3.3 million, respectively, under these agreements. The following schedule represents amounts due from and to affiliates at December 31, 2003 and
2004 (in thousands): December 31,2003
    
    
    2004Timeshare owners associations and other, net
    
    $
    145
    
    
    $
    153Amount due from Silverleaf Club
    
    
    
    
    
    
    135Amount due from Crown Club
    
    
    5
    
    
    
    Total amounts due from affiliates
    
    $
    150
    
    
    $
    288Amount due to Silverleaf Club
    
    $
    78
    
    
    $
    Amount due to SPE
    
    
    576
    
    
    
    929Amount due to officer
    
    
    2
    
    
    
    Total amounts due to affiliates
    
    $
    656
    
    
    $
    929
 F-22




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##### Table of Contents



During 2001, Silverleaf Club entered into a loan agreement for $1.8 million, whereby the
Company guaranteed such debt with certain of its assets. As of December 31, 2004, Silverleaf Clubs
related note payable balance was $579,000. At December 31, 2003 and 2004, the amount due to SPE primarily relates to upgrades of sold
notes receivable. Upgrades represent sold notes that are replaced by new notes when holders of said
notes upgrade to a more valuable Vacation Interval. The William H. Francis Trust (the Trust), a trust for which a director of the Company serves
as trustee, is entitled to a 10% net profits interest from sales of certain land in Mississippi.
The net profits interest was granted to the Trust pursuant to a Net Profits Agreement dated July
20, 1995, between the Trust and a subsidiary of the Company, which was dissolved after its assets
and liabilities, including the Net Profits Agreement, were acquired by the Company. Pursuant to
the Net Profits Agreement, the affiliate agreed to provide consulting services to the Company.
During 2000, the affiliate was paid $49,637 under this agreement. During 2001, the Company sold
additional parcels of this land and accrued a liability of $10,614 to the affiliate, which was paid
in the first quarter of 2003. As of December 31, 2004, the Company owns approximately 11 acres of
land that is subject to this net profits interest. Prior to 2003, the Company held ownership interests and other rights in several tracts of
mostly flood plain land which were unsuitable for residential or commercial development (flood plain land). These tracts are
adjacent to the Companys Holly Lake Ranch resort in Texas. In 1997, the Company entered into a
ten-year hunting lease with Mr. Mead, who is a principal shareholder, officer and director of the
Company. The hunting lease granted Mr. Mead the exclusive right to use for hunting purposes
certain parts of the flood plain land for an annual payment equal to the property taxes attributable to
the land. The lease also provides for up to four additional ten-year extensions of its term. The
flood plain land is also partially encumbered by recreational use agreements in favor of certain
surrounding homeowners and agreements with an unrelated third party governmental entity, the Sabine
River Authority (SRA). The Company does not possess any of the mineral rights associated with
this land. As a 2003 bonus to Mr. Mead, the Compensation Committee approved assigning to him the
approximately 449 acres of this flood plain land actually owned by the Company. The Company also
agreed to quitclaim to Mr. Mead all of its rights, including reversionary rights from the SRA, in
two other tracts of flood plain land of approximately 619 and 466 acres each, which are owned by the SRA
but currently held by the Company and a homeowners association under a long term ground lease. If
the SRA ever abandons its plans to create a reservoir involving these two tracts or fails to pay a
prior owner for the tracts by December 31, 2009, title to these tracts will revert to Mr. Mead as a
result of the Companys quitclaim to him. The Compensation Committee determined that the aggregate
market value at December 31, 2003 of the Companys ownership interests and other rights in these
three tracts of flood plain land was approximately $73,000. This determination of market value was
based upon an independent appraisal from an independent appraisal firm retained by the Compensation
Committee. The Companys basis in these three tracts of flood plain land was zero, and it had an
offsetting gain of approximately $73,000 in adjusting it to fair value at December 31, 2003.
Subsequently, in February 2005 the Board of Directors (with Mr. Mead abstaining) approved a
correction of the 2003 bonus transaction to make a county road the dividing line between the
properties. This involved a conveyance of approximately 25 acres back to the Company, the
conveyance of approximately 42 acres to Mr. Mead, and a cash payment by Mr. Mead for the 17 acre
difference based on market value, as previously determined by the independent appraiser retained by
the Compensation Committee. During 2004, the Company retained the services of Francis Enterprises, Inc., a government
affairs consulting firm owned by Mr. Francis, to advise the Company with respect to certain
regulatory actions taken by the Federal Trade Commission and the Federal Communications Commission
in implementing the national do-not-call list. The Company paid Mr. Francis firm $75,000 during
2004 for such services. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, other receivables, amounts due from or to
affiliates, and accounts payable and accrued expenses approximates fair value due to the relatively
short-term nature of the financial instruments. The carrying value of the notes receivable
approximates fair value because the weighted average interest rate on the portfolio of notes
receivable approximates current interest rates to be received on similar current notes receivable.
The carrying value of notes payable and capital lease obligations approximates their fair value
because the interest rates on these instruments are adjustable or approximate current interest
rates charged on similar current borrowings. The Company had senior subordinated notes of $36.6 million and $34.9 million as of December
31, 2003 and 2004, respectively. The estimated fair value of these senior subordinated notes at
December 31, 2003 and 2004 was approximately $23.0 million and $21.9 million, respectively, based
on the market value of notes exchanged in the Exchange Offer in 2002. However, these notes were not
traded on a regular basis and were therefore subject to large variances in offer prices.
Accordingly, the estimated fair value may not be indicative of the amount at which a transaction
could be completed. F-23




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##### Table of Contents



Considerable judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair value amounts. 14. SUBSIDIARY GUARANTEES 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 years ended December 31, 2002, 2003, and
2004. Combined summarized balance sheet information of the Guarantor Subsidiaries as of December
31, 2003 and 2004, is as follows (in thousands): December 31,2003
    
    
    2004Other assets
    
    $
    1
    
    
    $
    2Total assets
    
    $
    1
    
    
    $
    2Investment by parent (includes equity and amounts due to parent)
    
    $
    1
    
    
    $
    2Total liabilities and equity
    
    $
    1
    
    
    $
    2
 15. 401(k) PLAN The Companys 401(k) plan (the Plan), a qualified defined contribution retirement plan,
covers employees 21 years of age or older who have completed six months of service. The Plan allows
eligible employees to defer receipt of up to 15% of their compensation and contribute such amounts
to various investment funds. The employee contributions vest immediately. The Company is not
required by the Plan to match employee contributions, however, it may do so on a discretionary
basis. The Company incurred nominal administrative costs related to maintaining the Plan and made
no contributions to the Plan during the years ended December 31, 2002, 2003, and 2004. 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for 2003 and 2004 is set forth below (in thousands, except
per share amounts): First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenues2004
    
    $
    42,477
    
    
    $
    48,172
    
    
    $
    47,771
    
    
    $
    45,2572003
    
    $
    40,812
    
    
    $
    43,684
    
    
    $
    44,102
    
    
    $
    39,068Total costs and operating expenses2004
    
    $
    40,265
    
    
    $
    45,255
    
    
    $
    43,953
    
    
    $
    41,0462003
    
    $
    68,019
    
    
    $
    41,132
    
    
    $
    41,177
    
    
    $
    38,342Net income (loss) from continuing operations2004
    
    $
    2,215
    
    
    $
    2,892
    
    
    $
    3,818
    
    
    $
    4,2112003
    
    $
    (25,963
    )
    
    $
    2,493
    
    
    $
    8,033
    
    
    $
    723Income from discontinued operations2004
    
    $
    129
    
    
    $
    160
    
    
    $
    214
    
    
    $
    1212003
    
    $
    142
    
    
    $
    197
    
    
    $
    271
    
    
    $
    184Net income (loss)2004
    
    $
    2,344
    
    
    $
    3,052
    
    
    $
    4,032
    
    
    $
    4,3322003
    
    $
    (25,821
    )
    
    $
    2,690
    
    
    $
    8,304
    
    
    $
    907Net income (loss) per common share from continuing operations: basic2004
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.122003
    
    $
    (0.70
    )
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.02Income per common share from discontinued operations: basic2004
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.002003
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.00Net income (loss) per common share: basic2004
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.122003
    
    $
    (0.70
    )
    
    $
    0.07
    
    
    $
    0.23
    
    
    $
    0.02Net income (loss) per common share from continuing operations: diluted2004
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.112003
    
    $
    (0.70
    )
    
    $
    0.06
    
    
    $
    0.22
    
    
    $
    0.02Income per common share from discontinued operations: diluted2004
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.00
 F-24




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##### Table of Contents



First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2003
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.00Net income (loss) per common share: diluted2004
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.112003
    
    $
    (0.70
    )
    
    $
    0.07
    
    
    $
    0.23
    
    
    $
    0.02
 Net income (loss) increased to income of $2.3 million during the first quarter of 2004
versus a loss of $25.8 million for the same period of 2003, primarily due to the $28.7 million
increase to the original estimate for the provision for uncollectible notes in the first quarter of
2003, discussed further in Note 4  Notes Receivable. Net income decreased to $4.0 million during the third quarter of 2004 from $8.3 million during
the third quarter of 2003, due to a $5.1 million gain on early extinguishment of debt during the
third quarter of 2003, partially offset by improved operating margins during the third quarter of
2004 versus the same period of 2003. Net income increased to $4.3 million during the fourth quarter of 2004 from $907,000 during
the fourth quarter of 2003, primarily due to higher sales and interest income, partially offset by
larger operating expenses, during the fourth quarter of 2004 versus the same period of 2003. 17. SUBSEQUENT EVENTS 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 $13.2 million, which
will result in a gain of approximately $1.0 million if all conditions of the sale are met. 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 will be 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. F-25