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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-K (Mark One) [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For The Fiscal Year Ended December 31, 2003 or [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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
(State or Other Jurisdiction of
Incorporation or Organization)
    
    75-2259890
(I.R.S. Employer
Identification No.)1221 River Bend Drive, Suite 120
Dallas, Texas
(Address of Principal Executive Offices)
    
    75247
(Zip Code)
 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 [X] No [   ] 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.[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [   ]  No  [X]    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,
2003 as reported by the Electronic Quotation Service of Pink Sheets LLC, was
approximately $4,239,463




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(based on 13,675,687 shares held by non-affiliates). There were
36,826,906 shares of the Registrants Common Stock, $.01 par value, outstanding
at June 30, 2003. As
of March 29, 2004 there were 36,843,572 shares of the Registrants
Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders, which will be held within 120 days after the end of the fiscal
year, are incorporated by reference into Part III hereof.   2




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FORM 10-K INDEX PagePART IItem 1.
    
    Business
    
    
    4Item 2.
    
    Properties
    
    
    31Item 3.
    
    Legal Proceedings
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    42Item 6.
    
    Selected Financial Data
    
    
    43Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    57Item 8.
    
    Financial Statements and Supplementary Data
    
    
    58Item 9.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    58Item 9A.

    
    Controls and Procedures
    
    
    58PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    59Item 11.
    
    Executive Compensation
    
    
    59Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    59Item 13.
    
    Certain Relationships and Related Transactions
    
    
    60Item 14.
    
    Principal Accountant Fees and Services
    
    
    60PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    60Index to Consolidated Financial Statements
    
    
    F-1Articles of CorrectionAmendment to Registrant's Bylaws4th Amendment Amended/Restated Receivables Loan6th Amendment 2nd Amended/Restated Inventory Loan4th Amendment Amended/Restated Revolving CreditAmended/Restated Loan & Security AgreementAmendment dated March 5, 2004 - Tranche AAmendment dated March 5, 2004 - Tranche BAmendment dated March 5, 2004 - Tranche CAmendment to Amended/Restated Loan & Security2003 Stock Option PlanCode of EthicsSubsidiaries of Silverleaf Resorts, Inc.Chief Executive Officer to Sec. 302 CertificationChief Financial Officer to Sec. 302 CertificationCertification of CEO - 18 U.S.C. Section 1350Certification of CFO - 18 U.S.C. Section 1350
 3




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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. We currently 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). 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 $9,510
for 2003 and $9,846 for 2002. Owners of Silverleaf Vacation Intervals at the Existing Resorts
(Silverleaf Owners) enjoy benefits which are uncommon in the timeshare
industry. 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). Prior to October 2003, Oak N Spruce
Resort was not under contract with RCI; however it was under contract with
Interval International, a competitor of RCI. Since October 2003, Oak N Spruce
Resort has been under contract with RCI instead of Interval International. Certain Significant 2003 Events  
    
    Due to the results of operations during the first quarter of 2003, we
were in default under certain financial covenants in our senior credit
facilities throughout the first nine months of 2003. During the fourth
quarter of 2003, we obtained waivers of these defaults, we obtained
amendments to the credit facilities to cure the defaults, and we
obtained extensions of maturity dates under two of our senior revolving
facilities. See Debt Structure on page 6 of this report and
Description of Our Senior Credit Facilities beginning on page 18 of
this report for further details.  
    
    Due to the results of operations during the first quarter of 2003,
Silverleaf Finance I, Inc., our wholly-owned special purpose entity
(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 to
reduce the principal amount of the facility from $100 million to $85
million. See Amended DZ Bank Facility on page 21 of this report for
further details. 4




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
    
    We closed a $66.4 million conduit term loan transaction through a
newly-formed wholly-owned financing subsidiary, Silverleaf Finance II,
Inc. (SF-II) during the fourth quarter of 2003, the results of which
are consolidated and included in our consolidated financial statements.
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. The new conduit loan to SF-II will
mature in 2014 and bears interest at a fixed annual rate of
7.035%. See Debt Structure on page 6 of this report for
further details.  
    
    We retired the remaining $8.8 million balance of our $60 million loan
agreement with a senior lender due in August 2003 at a discount during
the first quarter of 2003, which resulted in a gain of $1.3 million.  
    
    We retired $7.6 million of our 10 1/2% senior subordinated notes
due 2008 at a discount this year, which resulted in a gain of $5.1
million.  
    
    We sold property in Las Vegas in the first quarter of 2003 and
property in Kansas City during the fourth quarter of 2003. We also sold
our management rights under Crown Club during 2003. These sales
collectively resulted in net proceeds of $4.7 million, which were paid
to our senior lenders to reduce our debt, and net gains of $454,000. 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 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 and 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, 2003 and 2002, we had a portfolio of
approximately 32,056 and 33,022 customer promissory notes, respectively,
totaling approximately $242.3 and $262.1 million, respectively, with an average
yield of 14.9% and 14.4% per annum, respectively, which compares favorably to
our weighted average cost of borrowings of 6.3% per annum at December 31, 2003.
We cease recognition of interest income when collection is no longer deemed
probable. At December 31, 2003 and 2002, approximately $3.9 million and $4.7
million in principal, or 1.6% and 1.8%, respectively, of our loans to
Silverleaf Owners were 61 to 120 days past due. As of December 31, 2003 and
2002, no loans were over 120 days past due. However, we continue collection
efforts with regard to all notes deemed uncollectible 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). 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. We only managed certain resorts (Crown Club) until the third quarter of
2003, when we sold our management rights and unsold timeshare inventory in the
seven timeshare resorts we had managed since we originally acquired them from
Crown Resorts Co., LLC 5




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in May 1998. Crown Club was not a separate entity, but consisted of
several individual management agreements, which had terms of two to five years. Debt Structure 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 annual interest payment obligations to the holders of the 10 1⁄2% senior
subordinated notes, (ii) convert a substantial portion of the debt represented
by the 10 1⁄2% senior subordinated notes into our common stock, and (iii)
substantially modify the indenture which secures the 10 1⁄2% senior
subordinated notes by the consent of the holders. Therefore, the underlying
purpose of the restructuring 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 (Exchange Offer) 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 all of our operating
covenants. However, due to the results of the quarter ended March 31, 2003, we
were not in compliance with three of our financial covenants. First, sales and
marketing expense for the quarter ended March 31, 2003 was 56.1% of sales,
compared to a maximum threshold of 52.5%. Second, the interest coverage ratio
for the twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a
minimum requirement of 1.25 to 1.0. And third, net loss for the two consecutive
quarters ended March 31, 2003 was $24.9 million, compared to a minimum
requirement of $1.00 net income. Also, due to the results for the six months
ended June 30, 2003, we were in default of two of our financial covenants.
First, 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. Second, 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. In addition, due to the
results for the nine months ended September 30, 2003, we were in default of one
of our financial covenants. 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 our financial covenants under
which we had been in default since the first quarter of 2003. The amended
covenants increased from 52.5% to 55% the maximum permitted ratio of sales and
marketing expenses to total sales for each quarter beginning with the quarter
ended March 31, 2003. They also exclude 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 are now in full
compliance with all of the financial covenants to 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 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. We used the proceeds from the sale of the receivables to
SF-II to pay down approximately $65.5 million of amounts outstanding under two
of our 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%. 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 are now 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 to reduce
the principal amount of the facility from $100 million to $85 million. 6




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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% to 14% of the
sales price depending on established guidelines. Sales managers also receive
commissions of 1.5% to 4.0% 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. Although most upgrades are sold by our in-house sales staff,
we have contracted with a third party to assist in offsite marketing of
upgrades at the Destination Resorts. These upgrade programs have been well
received by Silverleaf Owners and accounted for approximately 26.4% and 34.1%
of the Companys gross revenues from Vacation Interval sales for the years
ended December 31, 2003 and 2002, respectively. By offering lower priced
products and upgraded 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, 2003, we employed 337 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 22 of this report. In 2003 we accrued 20% of the purchase price of Vacation Intervals as a
provision for uncollectible notes. We also accrued an additional $28.7 million
of the purchase price of Vacation Intervals as a provision for uncollectible
notes during the first quarter of 2003. Management observed that cancellations
in the first quarter 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: 7




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
    
    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. 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. In addition, for the year ended December 31, 2003, the Company decreased
sales by $4.0 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, 2003, we had notes receivable (including notes unrelated
to Vacation Intervals) in the approximate principal amount of $241.8 million
with an allowance for uncollectible notes of approximately $48.4 million. Additionally, at December 31, 2003, the SPE held notes receivable totaling
$101.4 million, with related borrowings of $81.3 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, 2002 and 2003, we paid approximately $171,000 and $3.5 million,
respectively, to repurchase such Vacation Intervals. Total investment in our SPE
was valued at $6.1 million at December 31, 2003. We recognize interest income as earned. Interest income is not recognized
on notes receivable that are four-plus payments late. The Company reserves 75%
of accrued interest income for notes that are three payments late, 50% for
notes that are two payments late, 25% for notes that are one payment late, and
10% 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. 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,
2003, we had borrowings under our senior credit facilities in the approximate
principal amount of $212.3 million, of which $194.6 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, 2003, we had a portfolio of
approximately 32,056 Vacation Interval customer 8




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promissory notes in the approximate principal amount of $242.3 million, of
which approximately $3.9 million in principal amount was 61 days or more past
due and therefore ineligible as collateral. At December 31, 2003, our portfolio of customer notes receivable had an
average yield of 14.9%. At such date, our borrowings, which bear interest at
variable rates, had a weighted average cost of 6.3%. 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 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,
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 5.9 years at December
31, 2003. Our revolving credit facilities have scheduled maturities between
August 2004 (extended to February 2006 in early 2004) and March 2007.
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 in 2004 and 2005, we are continuing to
identify additional financing arrangements into 2006 and beyond. Development and Acquisition Process As part of our current business model, 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 Clubs We have the right to appoint the directors of the Silverleaf Club.
However, we did not have this right related to the Crown Club. Silverleaf Club
and the Crown Club are collectively sometimes referred to as the Management
Clubs. 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 Owners Vacation Interval. The number of foreclosures that occurred
as a result of Silverleaf Owners failing to pay monthly dues were 673 in 2003
and 269 in 2002. Typically, we purchase at foreclosure all Vacation Intervals
that are the subject of foreclosure proceedings instituted by the Club because
of delinquent dues. 9




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Each timeshare resort has a Club that operates through a centralized
organization to manage the resorts on a collective basis. The consolidation of
resort operations through the Management Clubs permits: (i) a centralized
reservation system for all resorts; (ii) substantial cost savings by purchasing
goods and services for all resorts on a group basis, which generally results in
a lower cost of goods and services than if such goods and services were
purchased by each resort on an individual basis; (iii) centralized management
for the entire resort system; (iv) centralized legal, accounting, and
administrative services for the entire resort system; and (v) uniform
implementation of various rules and regulations governing all resorts. All
furniture, furnishings, recreational equipment, and other personal property
used in connection with the operation of the Existing Resorts are owned by
either that resorts Club or the Silverleaf Club, rather than by us. At December 31, 2003, Silverleaf Club, the sole remaining Management Club,
had 626 full-time employees, and is solely responsible for their salaries. The
Management Clubs are also responsible for the direct expenses of operating the
Existing Resorts, while we are responsible for the direct expenses of new
development and all marketing and sales activities. To the extent the
Management Clubs provide payroll, administrative, and other services that
directly benefit the Company, we reimburse the Management Clubs for such
services and vice versa. The Management Clubs collect dues from Silverleaf Owners, plus certain
other amounts assessed against the Silverleaf Owners from time to time, and
generate 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. Crown Club dues ranged from $285 to $390
annually. Such amounts are used by the Management Clubs to pay the costs of
operating the Existing Resorts and the management fees due to the Company
pursuant to Management Agreements. 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 or 10% to 20% of dues
collected for Clubs within Crown Club, but our right to receive such fee on an
annual basis is limited to the amount of each Management Clubs net income.
However, if the Company does not receive the maximum fee, such deficiency is
deferred for payment to succeeding 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 2003 management fees
were subject to the net income limitation. Accordingly, for the year ended
December 31, 2003, management fees recognized were $1.5 million. For financial
reporting purposes, management fees from the Management Clubs are recognized
based on the lower of (i) the aforementioned maximum fees or (ii) each
Management Clubs net income. The Silverleaf Club Management Agreement 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.
Crown Club consisted of several individual Club agreements which had terms of
two to five years. At December 31, 2003, there were
approximately 82,000
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. As mentioned previously, we sold our management rights and unsold
timeshare inventory in the seven Crown resorts in July 2003. We had managed
these resorts since acquiring them from Crown Resorts Co., LLC in May 1998. 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 Clubs receive 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, 2003 and 2002, we
recognized $1.8 million and $3.6 million, respectively, in revenues from
Sampler sales. Utility Services.We own 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 own the waste-water treatment facilities
at The Villages, Piney Shores, Ozark Mountain, Holly Lake, Timber Creek, and
Fox River resorts. We are currently applying for permits to build expanded
water supply and waste-water facilities at the 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 Villages resorts. 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. 10




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In January 2003, we sold two acres of undeveloped land in Las Vegas,
Nevada, and in October 2003, we sold 260 acres of land near Kansas City,
Missouri. These sales collectively resulted in net proceeds of $4.7 million,
which were paid to our senior lenders to reduce our debt. 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. See Debt Structure on page 6 above. 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. 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. Exchanges.We believe that our Vacation Intervals are made more attractive
by our participation in a Vacation Interval exchange network operated by RCI.
The Existing Resorts are registered with RCI, and approximately one-third of
Silverleaf Owners participate 11




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in RCIs exchange network. Prior to October 2003, Oak N Spruce Resort was
not under contract with RCI; however it was under contract with Interval
International, a competitor of RCI. Since October 2003, Oak N Spruce Resort
has been under contract with RCI instead of Interval International. Membership
in RCI allows participating Silverleaf Owners to exchange their occupancy right
in a unit in a particular year for an occupancy right at the same time or a
different time of the same or lower color rating in another participating
resort, based upon availability and the payment of a variable exchange fee. A
member may exchange a Vacation Interval for an occupancy right in another
participating resort by listing the Vacation Interval as available with the
exchange organization and by requesting occupancy at another participating
resort, indicating the particular resort or geographic area to which the member
desires to travel, the size of the unit desired, and the period during which
occupancy is desired. RCI assigns a rating of red, white, or blue to each Vacation
Interval for participating resorts based upon a number of factors, including
the location and size of the unit, the quality of the resort, and the period
during which the Vacation Interval is available, and attempts to satisfy
exchange requests by providing an occupancy right in another Vacation Interval
with a similar rating. For example, an owner of a red Vacation Interval may
exchange his interval for a red, white, or blue interval. An owner of a white
Vacation Interval may exchange only for a white or blue interval, and an owner
of a blue interval may exchange only for a blue interval. Currently, the
Companys composition of red, white, and blue Vacation Intervals is
approximately 65%, 19%, and 15%, 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 $139 for domestic
exchanges and $179 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. 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), Fairfield
Resorts, Inc. (Fairfield), Starwood Hotels & Resorts Worldwide Inc.
(Starwood), Ramada Vacation Suites (Ramada), TrendWest Resorts, Inc.
(TrendWest), 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. 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 12




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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 57% of adults living in the United States had registered their
telephone numbers on the National Do Not Call Registry by the end of 2003,
which represented approximately 56 million telephone numbers. Limitations on
our 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. 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 13




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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, we are
currently negotiating to renew our timeshare offering plan in the state of New
York, which we allowed to lapse in 2001. In order for us to renew our New York
timeshare offering plan, we intend to offer to rescind approximately $1.1
million in sales to New York residents that were made in 2001 after our
timeshare offering plan lapsed. The New York customers who purchased these
interests in 2001 have not complained to us, and we do not believe that the
rescission offer will be accepted by a material number of customers. 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. With regard to sales functions, we
distribute sales manuals which summarize applicable state legal requirements.
Additionally, such 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. Environmental Matters.Under various federal, state, and local
environmental laws, ordinances, and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous
or toxic substances or petroleum product releases at such property, and may be
held liable to a governmental entity or to third parties for property damage
and tort liability and for investigation and clean-up costs incurred by such
parties in connection with the contamination. Such laws typically impose
clean-up responsibility and liability without regard to whether the owner or
operator knew of or caused the presence of the contaminants, and the liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
cost of investigation, remediation, or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate the contamination on such property, may adversely affect the owners
ability to sell such property or to borrow using such property as collateral.
Persons who arrange for the 14




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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 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. 15




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Utility Regulation.We own 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. 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 its 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, 2003, we had 1,321 employees, and the Clubs collectively
had 626 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 the Company
believes are adequate. There are, however, certain types of losses (such as
losses arising from floods and acts of war) that are not generally insured
because they are either uninsurable or not economically insurable. Should an
uninsured loss or a loss in excess of insured limits occur, 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, 2003 (in thousands): Facility
    
    12/31/03Amount
    
    BalanceReceivable Based Revolvers
    
    $
    139,000
    
    
    $
    82,396Receivable Based Term Loans
    
    
    29,300
    
    
    
    28,813Receivable Based Non-Revolvers
    
    
    83,390
    
    
    
    83,390Revolving Inventory Loan
    
    
    10,000
    
    
    
    10,000Non-Revolving Inventory Loan
    
    
    7,733
    
    
    
    7,733Sub-Total On Balance Sheet
    
    
    269,423
    
    
    
    212,332Off Balance Sheet Receivable Based Revolvers *
    
    
    85,000
    
    
    
    81,278Grand Total
    
    $
    354,423
    
    
    $
    293,610
 * Represents the Companys SPE, discussed in detail under the heading
Amended DZ Bank Facility on page 21 of this report 16




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We use these credit agreements to finance the sale of Vacation Intervals,
to finance construction, and for working capital needs. The loans mature
between August 2004 (subsequently extended to February 2006 in early 2004) and
March 2007, 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 had $28.5 million of senior subordinated
notes due 2007 and $2.1 million of senior subordinated notes due 2008, with
interest payable semi-annually on April 1 and October 1, guaranteed by all of
our present and future domestic restricted subsidiaries. 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, the Company was 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, 2002 and 2003 (in
thousands): December 31,2002
    
    2003$55.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.6 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.3
million term loan with an interest rate of 8%)
    
    $
    46,078
    
    
    $
    25,095$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    14,665
    
    
    
    10,998$55.1 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.1 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.0
million term loan with an interest rate of 8%)
    
    
    44,288
    
    
    
    28,325$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    14,461
    
    
    
    10,845$7.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $6.2 million revolver
with an interest rate of Prime plus 3% with a 6% floor and a $1.7
million term loan with an interest rate of 8%)
    
    
    6,493
    
    
    
    3,734$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    2,078
    
    
    
    1,558$66.4 million conduit loan, due December 2014, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of 7.035%
    
    
    
    
    
    
    66,381$40.4 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $35 million revolver
with an interest rate of Federal Funds plus 2.75% with a 6% floor and a
$5.4 million term loan with an interest rate of 8%)
    
    
    31,128
    
    
    
    16,897$5.4 million term loan with an interest rate of 8%, due in March 2007
    
    
    9,465
    
    
    
    5,412
 17




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December 31,2002
    
    2003$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 August 2004, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 2.65% with a 6.0% floor
(additional draws are no longer available under this facility)
(Subsequent to December 31, 2003, the due date of this facility
was extended to February 2006)
    
    
    25,549
    
    
    
    17,009$9 million supplemental revolving loan agreement, which contains
certain financial covenants, due March 2007, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of LIBOR plus 2.67%
with a 6% floor
    
    
    8,536
    
    
    
    8,345$60 million loan agreement, which contains certain financial covenants,
due August 2003, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the
note, at an interest rate of LIBOR plus 3.55%. (This loan was paid off
in March 2003. Additional draws are no longer available under this
facility)
    
    
    9,836
    
    
    
    $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% (Subsequent to December 31, 2003, this
facility was increased to accommodate all of the inventory loans of the
Company. See Footnote 16. Subsequent Events)
    
    
    9,375
    
    
    
    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 3.5% with a 6% floor (Subsequent to December 31,
2003, this facility was paid off. See Footnote 16. Subsequent Events).
    
    
    9,936
    
    
    
    7,733Various notes, due from April 2004 through February 2009, collateralized
by various assets with interest rates ranging from 0.9% to 10.5%
    
    
    2,035
    
    
    
    1,676Total notes payable
    
    
    233,923
    
    
    
    214,008Capital lease obligations
    
    
    2,490
    
    
    
    1,329Total notes payable and capital lease obligations
    
    
    236,413
    
    
    
    215,3376.0% senior subordinated notes, due 2007, interest payable
semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    28,467
    
    
    
    28,467101⁄2% senior subordinated notes, subordinate to the 6.0% senior
subordinated notes above, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Companys present and
future domestic restricted subsidiaries
    
    
    9,766
    
    
    
    2,146Interest on the 6.0% senior subordinated notes, due 2007, interest
payable semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    7,686
    
    
    
    5,978Total senior subordinated notes
    
    
    45,919
    
    
    
    36,591Total
    
    $
    282,332
    
    
    $
    251,928
 At December 31, 2003, LIBOR rates were from 1.15% to 1.18%, and the Prime
rate was 4.00%. DESCRIPTION OF OUR SENIOR CREDIT FACILITIES 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 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. Subsequent to
December 31, 2003, this facility was further amended to increase the
availability under it to $18.0 million. The Inventory Loan is collateralized by
a first priority security 18




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interest in certain of our inventory and a second priority security
interest in the stock of SFI 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 a newly-formed wholly-owned financing subsidiary, Silverleaf Finance II, Inc.
(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. As a result of the closing of the $66.4 million conduit loan mentioned
above, we obtained a two-year extension of our senior revolving credit
facilities with Sovereign. These facilities now revolve through March 31, 2006,
and are due in March 2007. 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 on August 31, 2004 (subsequently extended
in March 2004 to February 28, 2006). 19




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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. Subsequent to December 31, 2003, we reached an agreement with Heller and
Textron whereby the amount outstanding under the Heller Inventory Loan
agreement would be 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. Credit Suisse First Boston Mortgage Capital LLC.We entered into a
Revolving Loan and Security Agreement in October 1996 with Credit Suisse First
Boston Mortgage Capital LLC (CSFB). The agreement has been amended several
times since that date, with the maturity date being extended to August 2002.
The agreement was amended, effective upon completion of the Restructuring Plan
to extend the maturity date to August 2003 and to revise the collateralization
requirements. In March 2003, we paid off the remaining $8.8 million balance of
this facility and recognized a $1.3 million gain on early extinguishment of
debt. 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 will 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 are in full compliance with all of our credit facilities with our senior
lenders as of 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 and (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 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 20




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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. As of December 31, 2002, we were in compliance with these operating
covenants. However, due to the results of the quarter ended March 31, 2003, we
were not in compliance with three of the financial covenants described above.
First, sales and marketing expense for the quarter ended March 31, 2003 was
56.1% of sales, compared to a maximum threshold of 52.5%. Second, the interest
coverage ratio for the twelve months ended March 31, 2003 was 1.02 to 1.0,
compared to a minimum requirement of 1.25 to 1.0. And third, net loss for the
two consecutive quarters ended March 31, 2003 was $24.9 million, compared to a
minimum requirement of $1.00 net income. Also, due to the results for the six
months ended June 30, 2003, we were in default of two of the financial
covenants described above. First, 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. Second, 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. In addition, due to the results for the nine months ended September 30,
2003, we were in default of one of the financial covenants described above. 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. As stated above,
these defaults have been waived. Amended DZ Bank Facility Effective as of October 30, 2000, we entered into a Receivables Loan and
Security Agreement (the RLSA) with our wholly-owned subsidiary, Silverleaf
Finance I, Inc. (SFI), as Borrower, and Autobahn Funding Company LLC
(Autobahn), as Lender, DZ Bank, as Agent, and other parties. SFI is a
special purpose entity (SPE) of Silverleaf. Pursuant to the DZ Bank
facility, we service receivables which we sold to SFI under a separate
agreement and which SFI pledged as collateral for funds borrowed from Autobahn.
The facility (DZ Bank Facility) has a maximum borrowing capacity of $100
million, of which SFI 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 SFI 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 77.5% to 82.5% of the principal
balance outstanding, and (ii) the requirement that the receivables pledged by
SFI 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. 21




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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 facility, however, we agreed to reduce
the principal amount of the facility from $100 million to $85 million. 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 approved by 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
financial results. The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has proposed an AICPA Statement of Position (the
Proposed SOP) which, if approved, could change the way we account for our
sales of Vacation Intervals. The Proposed SOP was released to the public for
comments on February 20, 2003. The Proposed SOP:  ¡
    
    provides criteria for a real estate time-sharing transaction to be
recognized as a sale;¡
    
    limits the use of the full accrual method for revenue recognition and
provides that, under various conditions, the percentage-of-completion
method, cash received method, combined method, or deposit method must be
used; and¡
    
    provides further guidance on accounting for various other items such
as sales incentives, costs incurred to sell time-shares, cost of sales
and time-sharing inventory, credit losses, rental and other operations
during the holding periods for inventory, special purpose entities,
points systems, vacation clubs, sampler programs and mini-vacations,
reloads, upgrades, and payments to owners associations. In its present form, the Proposed SOP would be generally effective for
financial statements for fiscal years beginning after June 15, 2004. At
transition, the Proposed SOP would be applied retroactively to financial
statements by means of a cumulative effect of a change in accounting principle
rather than the alternatives of prospective application to new transactions
only and retroactive restatement of financial statements. 22




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At its January 14, 2004 meeting, the Financial Accounting Standards Board
met with representatives of the AICPAs Accounting Standards Executive
Committee (AcSEC) and discussed clearance of the Proposed SOP,which, if
cleared by the Board would have been issued with a Financial Accounting
Standards Board Statement to amend Statements 66 and 67 for real estate
time-sharing transactions. The Board indicated that AcSEC should not include
any revenue recognition guidance in the Proposed SOP. The Board considered a
number of factors in arriving at its conclusion including (1) changes in
revenue recognition practices that have occurred since AcSEC originally added
the project to its agenda, (2) the Boards revenue recognition project and the
potential for requiring preparers to change its revenue recognition practices
twice in a short time frame, and (3) the rules-based nature of the revenue
recognition requirements in the Proposed SOP. The Board requested that the
AcSEC task force work with the Financial Accounting Standards Board staff to
identify those topics to be retained and addressed in the Proposed SOP, which
the Board will consider at a future meeting. The Board suggested that AcSEC
consider publishing the proposed revenue recognition guidance in a
nonauthoritative source. Although we cannot predict what the final version may contain or when it
will be adopted or effective, the above information leads us to believe that
the Proposed SOP will not have a material impact on our consolidated financial
position or results of operations. However, if adopted in its present form, the
Proposed SOP could require very significant changes in our future financial
statements, and may also make it impossible for us to comply with the financial
covenants contained in certain of our credit agreements. In that event, we will
need to negotiate waivers or forbearance agreements with the lenders. We may not be able to obtain additional financing. 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 two 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. 23




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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. Consequently, we have
experienced an increased number of foreclosures and loan losses during this
period. It is likely that these delinquencies and losses will continue to
occur until the general economic conditions in the United States improve. Any
or all of the foregoing conditions could have a material adverse effect on our
results of operations, liquidity, and financial position. 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 43.4% of the purchase price of Vacation Intervals as a
provision for uncollectible notes for the year ended December 31, 2003. Our
sales were decreased by $4.0 million for customer returns in 2003. When a
buyer of a Vacation Interval defaults, we 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 57.2% of Vacation Interval sales took place in 2003), 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, 2003, we had Vacation Interval customer notes receivable
in the approximate principal amount of $242.3 million, and had an allowance for
uncollectible notes of approximately $48.4 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, 2003, we owed approximately
$212.3 million of principal to our lenders. Borrowing Base.We have receivable based loan agreements with lenders
to borrow up to approximately $251.7 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, 2003, we had a portfolio of approximately 32,056 Vacation
Interval customer notes receivable in the approximate principal amount of
$242.3 million. Approximately $3.9 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, 2003, our portfolio of
customer loans had a weighted average fixed interest rate of 14.9%. At such
date, our borrowings (which bear interest at variable rates) against the
portfolio had a weighted average cost of funds of 6.3%. 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 24




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notes receivable. 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, 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 5.9 years at December 31, 2003. Our revolving credit facilities
have scheduled maturity dates between August 2004 (subsequently extended to
February 2006 in early 2004) and March 2007. 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 2004 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. 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. 25




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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 Clubs, or the
Management Clubs 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 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 the Existing Resorts are
currently 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 26




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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 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. 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 effected by such losses.
Additionally, we may be indirectly impacted if disasters such as the terrorist
attacks on the United States which occurred on September 11, 2001 cause a
general increase in property and casualty insurance rates, or cause certain
types of coverage to be unavailable. 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 indenture pertaining to our 6% senior subordinated notes permits 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 indenture pertaining to the 6% senior
subordinated notes also permits 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. 27




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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 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 $84.4 million at December 31, 2003, primarily attributable to
this method of reporting Vacation Interval sales, before utilization of any
available deferred tax benefits (up to $94.8 million at December 31, 2003),
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 will 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, 2003. 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 28




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##### Table of Contents



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 $232.1
million at December 31, 2003, for regular federal income tax purposes, related
primarily to the immediate deduction of expenses and the simultaneous deferral
of installment sale gains. 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 the National Do Not Call List. 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 29




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##### Table of Contents



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 56 million telephone numbers had been
registered by the end of 2003. 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. While the new rules only became effective on
October 1, 2003, 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 recent changes in
the law will clearly 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. Because the changes mandated
by the rules which went into effect on October 1, 2003 are so recent, we will
continue to assess both the rules impact on operations and alternative methods
of marketing that are not impacted by the new rules. 30




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##### Table of Contents



ITEM 2. PROPERTIES At December 31, 2003, we owned a total of 12 timeshare resorts. Principal
developmental activity which occurred during 2003 is 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 2003, 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 172 existing units. We intend to
develop approximately 120 additional units (6,240 Vacation Intervals) at this
resort. During 2003, we did not add 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 2003, we
added 12 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 2003, 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 2003, we added 12 units at this resort. Continued Development of Apple Mountain Resort.Apple Mountain Resort,
located approximately 125 miles north of Atlanta, Georgia, has 60 existing
units. We intend to develop approximately 192 additional units (9,984 Vacation
Intervals) at this resort. During 2003, we did not add units at this resort. Continued Development of Holiday Hills Resort.Holiday Hills Resort,
located two miles east of Branson, Missouri, in Taney County, has 380 existing
units. We intend to develop approximately 408 additional units (21,188 Vacation
Intervals) at this resort. During 2003, the Company added 18 units at the
resort. Continued Development of Oak N Spruce Resort.Oak N Spruce Resort,
located 134 miles west of Boston, Massachusetts, has 260 existing units.
Silverleaf intends to develop approximately 90 additional units (4,680 Vacation
Intervals) at this resort in the future. During 2003, we added 12 units at
this resort. Our application for additional units was denied by local planning
and zoning authorities in 2003. This zoning denial is on appeal. If we are
unsuccessful in obtaining authorizations to build additional units at Oak N
Spruce Resort, it will materially and adversely affect our ability to develop
this resort and to sustain sales of Vacation Intervals at Oak N Spruce at
existing levels. 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 2003, we did not add units at this resort. As of December 31, 2003, we had construction commitments of approximately
$3.0 million. Discontinued Development of Certain Resorts.As a result of the liquidity
problems announced during 2001, we discontinued our development plans for
timeshare resorts in Kansas City, Missouri, and Las Vegas, Nevada. The property
in Las Vegas was sold in January 2003 and the property in Kansas City was sold
in October 2003. All net sales proceeds were paid to our senior lenders. 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. 31




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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, 2003, we had an
inventory of 24,255 Vacation Intervals and a master plan to construct new units
which will result in up to 87,020 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 eighteen years of experience in the timeshare
industry. 32




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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, 2003, unless otherwise indicated. Existing Resorts Vacation IntervalsUnits at Resorts
    
    At ResortsPrimary
    
    Inventory
    
    
    
    
    
    InventoryMarket
    
    At
    
    Planned
    
    At
    
    PlannedResort/Location
    
    Served
    
    12/31/03
    
    Expansion(b)
    
    12/31/03
    
    ExpansionDrive-to ResortsHolly Lake
    
    Dallas-
    
    
    130
    
    
    
    
    
    
    
    1,519
    
    
    
    Hawkins, TX
    
    Ft. Worth, TXThe Villages
    
    Dallas-
    
    
    334
    
    
    
    96
    
    
    
    5,340
    
    
    
    4,992
    (g)Flint, TX
    
    Ft. Worth, TXLake O The Woods
    
    Dallas-
    
    
    64
    
    
    
    
    
    
    
    1,158
    
    
    
    Flint, TX
    
    Ft. Worth, TXPiney Shores
    
    Houston, TX
    
    
    172
    
    
    
    120
    (g)
    
    
    2,652
    
    
    
    6,240
    (g)Conroe, TXHill Country
    
    Austin-San
    
    
    278
    (f)
    
    
    234
    (g)
    
    
    2,985
    
    
    
    12,168
    (g)Canyon Lake, TX
    
    Antonio, TXTimber Creek
    
    St. Louis,
    
    
    72
    
    
    
    84
    (g)
    
    
    1,885
    
    
    
    4,368
    (g)DeSoto, MO
    
    MOFox River
    
    Chicago, IL
    
    
    198
    
    
    
    252
    (g)
    
    
    1,393
    
    
    
    13,104
    (g)Sheridan, ILApple Mountain
    
    Atlanta, GA
    
    
    60
    
    
    
    192
    (g)
    
    
    1,455
    
    
    
    9,984
    (g)Clarkesville, GADestination Resorts
    
    LocationsOzark Mountain
    
    Branson,
    
    
    136
    
    
    
    
    (g)
    
    
    872
    
    
    
    
    (g)Kimberling City, MO
    
    MOHoliday Hills
    
    Branson,
    
    
    380
    
    
    
    408
    (g)
    
    
    2,740
    
    
    
    21,188
    (g)Branson, MO
    
    MOOak N Spruce
    
    Boston, MA
    
    
    260
    
    
    
    90
    (g)
    
    
    1,543
    
    
    
    4,680
    (g)South Lee, MA
    
    New York, NYSilverleafs Seaside
    
    Galveston,
    
    
    84
    
    
    
    198
    (g)
    
    
    713
    
    
    
    10,296
    (g)Galveston, TX
    
    TXTotal
    
    
    
    
    2,168
    
    
    
    1,674
    
    
    
    24,255
    
    
    
    87,020
   [Continued from above table, first column(s) repeated] Vacation Intervals Sold
    
    AveragePrimary
    
    Date
    
    
    
    
    
    In
    
    Percentage
    
    SalesMarket
    
    Sales
    
    Through
    
    2003
    
    Through
    
    Price
    
    Amenities/Resort/Location
    
    Served
    
    Commenced
    
    12/31/03 (c)
    
    Only (a)
    
    12/31/03
    
    in 2003
    
    Activities(d)Drive-to ResortsHolly Lake
    
    Dallas-
    
    
    1982
    
    
    
    4,981
    
    
    
    1,056
    
    
    
    76.6
    %
    
    $
    6,867
    
    
    
    B,F,G,H,M,S,THawkins, TX
    
    Ft. Worth, TXThe Villages
    
    Dallas-
    
    
    1980
    
    
    
    11,620
    
    
    
    1,085
    
    
    
    68.5
    %
    
    
    10,260
    
    
    
    B,F,H,M,S,TFlint, TX
    
    Ft. Worth, TXLake O The Woods
    
    Dallas-
    
    
    1987
    
    
    
    2,042
    
    
    
    149
    
    
    
    63.8
    %
    
    
    8,889
    
    
    
    F,M,S,T(e)Flint, TX
    
    Ft. Worth, TXPiney Shores
    
    Houston, TX
    
    
    1988
    
    
    
    6,100
    
    
    
    857
    
    
    
    69.7
    %
    
    
    10,028
    
    
    
    B,F,H,M,S,TConroe, TXHill Country
    
    Austin-San
    
    
    1984
    
    
    
    11,099
    
    
    
    1,662
    
    
    
    76.6
    %
    
    
    9,600
    
    
    
    H,M,S,T(e)Canyon Lake, TX
    
    Antonio, TXTimber Creek
    
    St. Louis,
    
    
    1997
    
    
    
    1,859
    
    
    
    69
    
    
    
    49.7
    %
    
    
    10,824
    
    
    
    B,F,G,M,S,TDeSoto, MO
    
    MOFox River
    
    Chicago, IL
    
    
    1997
    
    
    
    8,903
    
    
    
    1,213
    
    
    
    86.5
    %
    
    
    12,229
    
    
    
    B,F,G,M,S,TSheridan, ILApple Mountain
    
    Atlanta, GA
    
    
    1999
    
    
    
    1,665
    
    
    
    19
    
    
    
    53.4
    %
    
    
    7,276
    
    
    
    G,M,S,TClarkesville, GADestination Resorts
    
    LocationsOzark Mountain
    
    Branson,
    
    
    1982
    
    
    
    5,976
    
    
    
    300
    
    
    
    87.3
    %
    
    
    9,913
    
    
    
    B,F,M,S,TKimberling City, MO
    
    MOHoliday Hills
    
    Branson,
    
    
    1984
    
    
    
    16,884
    
    
    
    1,097
    
    
    
    86.0
    %
    
    
    8,334
    
    
    
    G,S,T(e)Branson, MO
    
    MOOak N Spruce
    
    Boston, MA
    
    
    1998
    
    
    
    11,977
    
    
    
    1,390
    
    
    
    88.6
    %
    
    
    9,853
    
    
    
    F,G,M,S,TSouth Lee, MA
    
    New York, NYSilverleafs Seaside
    
    Galveston,
    
    
    2000
    
    
    
    3,655
    
    
    
    663
    
    
    
    83.7
    %
    
    
    7,741
    
    
    
    S,TGalveston, TX
    
    TXTotal
    
    
    
    
    
    
    
    
    86,761
    
    
    
    9,560
    
    
    
    78.2
    %
    
    $
    9,510
 33




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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, 2003, upgrade sales at
the Existing Resorts were as follows: Average Sales PriceUpgraded
    
    For the YearVacation
    
    Ended 12/31/03Intervals
    
     Net ofResort
    
    Sold
    
    Exchanged IntervalHolly Lake
    
    
    67
    
    
    $
    4,247The Villages
    
    
    401
    
    
    
    6,590Lake O The Woods
    
    
    47
    
    
    
    4,609Piney Shores
    
    
    318
    
    
    
    6,526Hill Country
    
    
    657
    
    
    
    6,642Timber Creek
    
    
    26
    
    
    
    5,741Fox River
    
    
    123
    
    
    
    5,380Ozark Mountain
    
    
    196
    
    
    
    7,032Holiday Hills
    
    
    2,026
    
    
    
    7,156Oak N Spruce
    
    
    602
    
    
    
    6,116Apple Mountain
    
    
    16
    
    
    
    4,571Silverleafs Seaside
    
    
    354
    
    
    
    7,4604,833
  The average sales price for the 4,833 upgraded Vacation Intervals sold was
$6,759 for the year ended December 31, 2003.  (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, 2003: Land-Use
    
    Land-Use
    
    Land-UseProcess
    
    Process
    
    Process
    
    Currently inNot Started
    
    Pending
    
    Complete
    
    Construction
    
    TotalThe Villages
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Piney Shores
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    120Hill Country
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    234Timber Creek
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    
    
    
    
    84Fox River
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    
    
    
    
    252Holiday Hills
    
    
    
    
    
    
    
    
    
    
    402
    
    
    
    6
    
    
    
    408Oak N Spruce
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    12
    
    
    
    90Apple Mountain
    
    
    126
    
    
    
    
    
    
    
    54
    
    
    
    12
    
    
    
    192Silverleafs Seaside
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    198126
    
    
    
    78
    
    
    
    1,440
    
    
    
    30
    
    
    
    1,674
  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. 34




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(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 3,504 intra-company exchanges occurred in 2003. 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. Prior to October 2003, Silverleaf
Owners at Oak N Spruce Resort could pay an annual fee of $79 to join the
exchange program administered by Interval International. Since October 2003,
Oak N Spruce Resort has been under contract with RCI instead of Interval
International. Both RCI and Interval International also charge an additional
exchange fee for each exchange. 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 Clubs.Each of the Existing Resorts has a Club for the benefit
of the timeshare owners. 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. On-Site Security.Each of the Resorts is patrolled by security personnel
who are either employees of the Management Clubs or personnel of independent
security service companies which have contracted with the Clubs. 35




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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 2,740 acres within Holly Lake, of which
approximately 2,667 acres may not be developed due to deed restrictions. At
December 31, 2003, approximately 27 acres were developed. We have no future
development plans. At December 31, 2003, 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, wood 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, 2003, the resort contained 6,500 Vacation Intervals, of
which 1,519 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 $11,800 for one-week stays. During 2003, 1,056 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, 2003, approximately 181 acres were developed
and 18 acres are currently planned by the Company to be used for future
development. At December 31, 2003, 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 36




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center with wide-screen television and pool table, horseshoe pits, archery
range, miniature golf course, shuffleboard, volleyball, and basketball courts. At December 31, 2003, The Villages contained 16,960 total Vacation
Intervals, of which 5,340 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, 2003, Lake O The
Woods contained 3,200 total Vacation Intervals, of which 1,158 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 $15,800 for one-week stays (and start at $5,500
for biennial intervals), while one-week Presidents Harbor intervals are
priced at $9,400 to $20,000 depending on the value rating of the interval.
During 2003, 1,085 and 149 Vacation Intervals were sold at The Villages and
Lake O The Woods, respectively. Piney Shores Resort.Piney Shores Resort is a quiet, wooded resort ideally
located for day-trips from metropolitan areas in the southeastern Gulf Coast
area of Texas. Piney Shores Resort is located on the shores of Lake Conroe,
approximately 40 miles north of Houston, Texas. The resort contains
approximately 113 acres. At December 31, 2003, approximately 72 acres were
developed and 11 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 172 units were completed and 120 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. Presidents 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, 2003, the resort contained 8,752 Vacation Intervals, of
which 2,652 remained available for sale. We intend to build 120 additional
units, which would yield an additional 6,240 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $7,000 to
$20,000 for one-week stays (and start at $5,500 for biennial intervals). During
2003, 857 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, 2003, approximately 38 acres
were developed and 19 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 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, and the San Antonio Zoo. At December 31, 2003, the resort contained 14,084 Vacation Intervals, of
which 2,985 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 $15,800 for one-week stays (and start at $5,500 for
biennial intervals), while one-week Presidents Villas intervals are priced at
$9,400 to $22,000 depending on the value rating of the interval. During 2003,
1,662 Vacation Intervals were sold. 37




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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, 2003, approximately 180 acres were
developed and 6 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 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, 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, 2003, the resort contained 3,744 Vacation Intervals and
1,885 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 $7,500 to $15,800 for one-week stays (and start at $5,500 for
biennial intervals). During 2003, 69 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, 2003, approximately 156 acres were
developed and 26 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 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. 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, 2003, the resort contained 10,296 Vacation Intervals and
1,393 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 $7,500 to $15,800 for one-week stays (and start at $5,500 for
biennial intervals). During 2003, 1,213 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, 2003, approximately 191
acres were developed and 16 acres are currently planned by the Company to be
used for future development. At December 31, 2003, 60 units are completed and 192 units are planned for
development at Apple Mountain Resort. The Lodge Get-A-Way 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, 38




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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, 2003, the resort contained 3,120 Vacation Intervals, of
which 1,455 remained available for sale. We plan to build 192 additional
lodge-style units, which would yield an additional 9,984 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,500 to $15,800 for one-week stays (and start at $5,500 for biennial
intervals). During 2003, 19 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, 2003, the resort contained approximately 116
acres. We have no future development plans. At December 31, 2003, 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, 2003, the resort contained 6,848 Vacation Intervals, of
which 872 remained available for sale. The Company has no plans to build
additional units. Vacation Intervals at the resort are currently priced from
$8,000 to $11,500 for one-week stays, while one-week Presidents View
intervals are priced at $10,000 to $22,500 depending on the value rating of the
interval. During 2003, 300 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, 2003, approximately 296 acres were
developed and 68 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 380 units were completed and an additional 408 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, 39




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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, 2003, the resort contained 19,624 Vacation Intervals, of
which 2,740 remained available for sale. The Company plans to build 408
additional units, which would yield an additional 21,188 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$8,000 to $16,500 for one-week stays (and start at $7,000 for biennial
intervals), while one-week Presidents Fairways intervals are priced at
$10,000 to $28,500 depending on the value rating of the interval. During 2003,
1,097 Vacation Intervals were sold. 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, 2003, approximately 37 acres were developed and 10 acres
are currently planned by the Company to be used for future development. Our
application for additional units was denied by local authorities in early 2003.
We have filed supplemental applications for fewer units. If for any reason we
are unsuccessful in obtaining authorizations to build additional units at Oak
N Spruce Resort, it may materially and adversely affect our ability to develop
this resort and to sustain sales of Vacation Intervals at Oak N Spruce at
existing levels. At December 31, 2003, the resort had 260 units completed and 204 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 Presidents 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, three-hole pitch and
putt golf course, 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, 2003, the resort contained 13,520 Vacation Intervals, of
which 1,543 remained available for sale. Subject to obtaining permission from
local authorities, we plan to build 90 additional lodge-style units, which
would yield an additional 4,680 Vacation Intervals available for sale. Vacation
Intervals at the resort are currently priced from $7,650 to $25,000 for
one-week stays (and start at $4,700 for biennial intervals). During 2003, 1,390
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, 2003, approximately 45 acres
were developed and 42 acres are currently planned by the Company to be used for
future development. At December 31, 2003, 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. We are obligated to maintain and provide campground facilities
for members of the previous owners campground system. At December 31, 2003, the resort contained 4,368 Vacation Intervals of
which 713 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 $8,500 to $19,500 for
one-week stays (and start at $7,000 for biennial intervals). During 2003, 663
Vacation Intervals were sold. 
 ITEM 3. LEGAL PROCEEDINGS Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts,
Inc. et al, Circuit Court of Christian County, Missouri, and Ozark Mountain
Condominium Association, Inc. et al v. Silverleaf Resorts, Inc., Stone County,
Missouri. The homeowners associations of three condominium projects that a
former subsidiary of the Company constructed in Missouri filed separate actions
of unspecified amounts against the Company alleging construction defects and
breach of management agreements. 40




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##### Table of Contents



This litigation has been ongoing for several years. Discovery continued in
the lawsuit during the year but is not yet complete. Among other things, the
plaintiffs have not yet turned over the reports of their expert witnesses and
the Company is unclear as to exactly what damages are being claimed by the
Plaintiffs. At this time, a majority of the Companys legal fees and costs of
litigation are being paid by two insurance carriers, subject to a reservation
of rights by these insurers. Since the Company does not know what damages are
being claimed, and cannot predict the final outcome of these claims, it cannot
estimate the additional costs it could incur, or whether its insurance carriers
will continue to cover its costs in connection with these claims. The second
action is scheduled for trial in June 2004. The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition. Additional claims may be made against the Company in the future.
Following a complete assessment of such claims, the Company will either defend
the claims or attempt to settle such claims out of court if management believes
that the cost of settlement would be less than the cost to defend such matters. 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 compensatory, punitive or other treble damage
claims in very large amounts, 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 At the annual meeting of stockholders held on December 16, 2003, in
addition to the election of directors, the stockholders voted upon five other
board proposals contained in the Registrants Proxy Statement dated October 20,
2003. The board nominees were elected as directors with the following vote: Nominee
    
    For
    
    WithheldJ. Richard Budd
    
    
    31,971,353
    
    
    
    174,043James B. Francis, Jr.
    
    
    31,971,353
    
    
    
    174,043Herbert B. Hirsch
    
    
    31,971,353
    
    
    
    174,043Robert E. Mead
    
    
    31,971,353
    
    
    
    174,043Rebecca Janet Whitmore
    
    
    31,971,353
    
    
    
    174,043
 The five other board proposals were approved with the following vote: Abstentions(Other ThanBrokerProposal
    
    For
    
    Against
    
    Non-Votes)
    
    Broker Non-VotesBoard proposal to
amend the Companys
articles of
incorporation and
bylaws to eliminate
staggered terms for
directors
    
    
    31,994,995
    
    
    
    130,006
    
    
    
    20,395
    
    
    
    
 41




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##### Table of Contents



Abstentions(Other ThanBrokerProposal
    
    For
    
    Against
    
    Non-Votes)
    
    Broker Non-VotesBoard proposal to
amend the Companys
articles of
incorporation to
reduce to a simple
majority the number
of votes required
to amend its
articles of
incorporation
    
    
    25,429,757
    
    
    
    301,830
    
    
    
    12,487
    
    
    
    Board proposal to
amend the Companys
articles of
incorporation to
reduce to a simple
majority the votes
required to approve
a merger, share
exchange,
consolidation,
dissolution or sale
of all or
substantially all
of the Companys
assets
    
    
    25,451,313
    
    
    
    280,284
    
    
    
    12,477
    
    
    
    Board proposal to
adopt the 2003
Stock Option Plan
    
    
    25,306,760
    
    
    

    422,012
    
    
    
    15,302
    
    
    
    Board proposal to
ratify the
appointment of BDO
Seidman, LLP as the
Companys
independent
auditors
    
    
    31,993,532
    
    
    
    146,269
    
    
    
    5,595
    
    
    
    
 
 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. Prices for the
Common Stock are closing bid prices as quoted on the Electronic Quotation
Service of Pink Sheets LLC (Pink Sheets). High
    
    LowYear Ended December 31, 2002:First Quarter
    
    $
    .39
    
    
    $
    .07Second Quarter
    
    
    .52
    
    
    
    .19Third Quarter
    
    
    .45
    
    
    
    .27Fourth Quarter
    
    
    .40
    
    
    
    .18Year Ended December 31, 2003:First Quarter
    
    $
    .45
    
    
    $
    .30Second Quarter
    
    
    .49
    
    
    
    .23Third Quarter
    
    
    .35
    
    
    
    .21Fourth Quarter
    
    
    .77
    
    
    
    .30
 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 has
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. Since being delisted by the
NYSE, the Companys Common Stock has been quoted since then on the Pink Sheets
under the symbol SVLF. Because of the various uncertainties related to the
Companys future prospects, it is unlikely that an active public trading market
will develop for the Common Stock in the foreseeable future and the Common
Stock is expected to remain illiquid or experience significant price and volume
volatility. As a part of the May 2, 2002 Exchange Offer, the Company agreed to
use its reasonable efforts to effect the quotation of trades of the Common
Stock on the OTC Bulletin Board. Effective February 2004, the Companys shares
began trading on the OTC Bulletin Board. As of December 31, 2003, the Company believes that there were
approximately 1,200 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. 42




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##### Table of Contents



Dividend Policy The Company is, and will continue to be, restricted from paying dividends
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. 
 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)1999
    
    2000
    
    2001
    
    2002
    
    2003Statement of Income Data:Revenues:Vacation Interval sales
    
    $
    192,767
    
    
    $
    234,781
    
    
    $
    139,359
    
    
    $
    122,805
    
    
    $
    123,585Sampler sales
    
    
    1,665
    
    
    
    3,574
    
    
    
    3,904
    
    
    
    3,634
    
    
    
    1,765Total sales
    
    
    194,432
    
    
    
    238,355
    
    
    
    143,263
    
    
    
    126,439
    
    
    
    125,350Interest income
    
    
    28,271
    
    
    
    37,807
    
    
    
    41,220
    
    
    
    37,537
    
    
    
    34,730Management fee income
    
    
    2,811
    
    
    
    462
    
    
    
    2,516
    
    
    
    1,920
    
    
    
    1,547Other income
    
    
    4,929
    
    
    
    4,912
    
    
    
    4,334
    
    
    
    4,644
    
    
    
    5,573Total revenues
    
    
    230,443
    
    
    
    281,536
    
    
    
    191,333
    
    
    
    170,540
    
    
    
    167,200Costs and Operating Expenses:Cost of Vacation Interval sales
    
    
    30,576
    
    
    
    59,169
    
    
    
    27,377
    
    
    
    23,123
    
    
    
    22,657Sales and marketing
    
    
    101,823
    
    
    
    125,456
    
    
    
    78,597
    
    
    
    66,384
    
    
    
    65,775Provision for uncollectible notes
    
    
    19,441
    
    
    
    108,751
    
    
    
    30,311
    
    
    
    24,562
    
    
    
    53,673Operating, general and administrative
    
    
    27,263
    
    
    
    36,879
    
    
    
    35,435
    
    
    
    32,547
    
    
    
    27,393Depreciation and amortization
    
    
    5,692
    
    
    
    7,537
    
    
    
    6,463
    
    
    
    5,184
    
    
    
    4,566Interest expense and lender fees
    
    
    16,847
    
    
    
    32,750
    
    
    
    35,016
    
    
    
    22,193
    
    
    
    16,551Impairment loss of long-lived assets
    
    
    
    
    
    
    6,320
    
    
    
    5,442
    
    
    
    
    
    
    
    Write-off of affiliate receivable
    
    
    
    
    
    
    7,499
    
    
    
    
    
    
    
    
    
    
    
    Total costs and operating expenses
    
    
    201,642
    
    
    
    384,361
    
    
    
    218,641
    
    
    
    173,993
    
    
    
    190,615Other income:Gain on sale of notes receivable
    
    
    
    
    
    
    4,299
    
    
    
    
    
    
    
    6,838
    
    
    
    3,205Gain on early extinguishment of debt
    
    
    
    
    
    
    3,455
    
    
    
    
    
    
    
    17,885
    
    
    
    6,376Total other income
    
    
    
    
    
    
    7,754
    
    
    
    
    
    
    
    24,723
    
    
    
    9,581Income (loss) before provision (benefit) for income
taxes
    
    
    28,801
    
    
    
    (95,071
    )
    
    
    (27,308
    )
    
    
    21,270
    
    
    
    (13,834
    )Provision (benefit) for income taxes
    
    
    11,090
    
    
    
    (35,191
    )
    
    
    (99
    )
    
    
    (1,523
    )
    
    
    86Net income (loss)
    
    $
    17,711
    
    
    $
    (59,880
    )
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )Net income (loss) per share  Basic and Diluted (a)
    
    $
    1.37
    
    
    $
    (4.65
    )
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )Weighted average number of shares
outstanding  Basic
    
    
    12,889,417
    
    
    
    12,889,417
    
    
    
    12,889,417
    
    
    
    28,825,882
    
    
    
    36,826,906Weighted average number of shares
outstanding  Diluted
    
    
    12,890,044
    
    
    
    12,889,417
    
    
    
    12,889,417
    
    
    
    28,825,882
    
    
    
    36,826,906
 43




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##### Table of Contents



December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(dollars in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    4,814
    
    
    $
    6,800
    
    
    $
    6,204
    
    
    $
    1,153
    
    
    $
    4,093Notes receivable, net of allowance for
uncollectible notes
    
    
    282,290
    
    
    
    263,792
    
    
    
    278,592
    
    
    
    233,237
    
    
    
    193,379Amounts due from affiliates
    
    
    6,596
    
    
    
    671
    
    
    
    2,234
    
    
    
    750
    
    
    
    150Inventories
    
    
    112,613
    
    
    
    105,023
    
    
    
    105,275
    
    
    
    102,505
    
    
    
    101,399Total assets
    
    
    477,942
    
    
    
    467,614
    
    
    
    458,100
    
    
    
    398,245
    
    
    
    351,787Amounts due to affiliates
    
    
    
    
    
    
    3,285
    
    
    
    565
    
    
    
    2,221
    
    
    
    656Notes payable and capital lease obligations
    
    
    194,468
    
    
    
    270,597
    
    
    
    294,456
    
    
    
    236,413
    
    
    
    215,337Senior subordinated notes
    
    
    75,000
    
    
    
    66,700
    
    
    
    66,700
    
    
    
    45,919
    
    
    
    36,591Total liabilities
    
    
    319,926
    
    
    
    369,478
    
    
    
    387,173
    
    
    
    296,626
    
    
    
    264,088Shareholders equity
    
    
    158,016
    
    
    
    98,136
    
    
    
    70,927
    
    
    
    101,619
    
    
    
    87,699Cash Flows Data:Net cash used in operating activities
    
    $
    120,971
    
    
    $
    125,494
    
    
    $
    23,985
    
    
    $
    11,592
    
    
    $
    7,843
 December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003(dollars in thousands)Other Operating Data:Number of Existing Resorts at period end
    
    
    18
    
    
    
    19
    
    
    
    19
    
    
    
    19
    
    
    
    12Number of Vacation Intervals sold (excluding
Upgrades)(b)
    
    
    15,996
    
    
    
    16,216
    
    
    
    9,741
    
    
    
    8,224
    
    
    
    9,560Number of in house Vacation Intervals sold
    
    
    11,400
    
    
    
    16,112
    
    
    
    10,576
    
    
    
    7,746
    
    
    
    4,833Number of Vacation Intervals in inventory
    
    
    17,073
    
    
    
    15,554
    
    
    
    20,913
    
    
    
    24,121
    
    
    
    24,255Average price of Vacation Intervals sold (excluding
Upgrades)(b)(c)
    
    $
    8,901
    
    
    $
    9,768
    
    
    $
    9,688
    
    
    $
    9,846
    
    
    $
    9,510Average price of upgraded Vacation Intervals sold
(net of exchanged interval)
    
    $
    4,420
    
    
    $
    4,741
    
    
    $
    4,254
    
    
    $
    5,401
    
    
    $
    6,759
    (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, 1999, 2000,
2001, 2002, and 2003, include 5,936 biennial intervals (counted as 2,968
annual Vacation Intervals), 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), and 816 biennial intervals (counted as 408
annual Vacation Intervals), respectively.(c)
    
    Includes annual and biennial Vacation Interval sales for one-bedroom and
two-bedroom units. 44




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##### Table of Contents



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.
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. 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. Three of our resorts are in destination resort areas located
further from major metropolitan areas (destination resorts). Our resort in
Massachusetts is a combination of both. 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 February 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, and§
    
    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 and 2003. 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 45




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##### Table of Contents



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 31,2001
    
    2002
    
    2003Tours to potential new purchasers
    
    
    92,663
    
    
    
    83,636
    
    
    
    75,965Sales per tour
    
    $
    1,426
    
    
    $
    1,296
    
    
    $
    1,237Gross sales to new customers
    
    
    132,114
    
    
    
    108,351
    
    
    
    93,945Rescission of sales to new customers
    
    
    (33,841
    )
    
    
    (27,548
    )
    
    
    (24,948
    )Net sales to new customers
    
    
    98,273
    
    
    
    80,803
    
    
    
    68,997Gross sales to existing customers
    
    
    48,046
    
    
    
    48,254
    
    
    
    59,722Rescission of sales to existing customers
    
    
    (3,056
    )
    
    
    (2,618
    )
    
    
    (3,369
    )Net sales to existing customers
    
    
    44,990
    
    
    
    45,636
    
    
    
    56,353Total sales
    
    
    143,263
    
    
    
    126,439
    
    
    
    125,350Less sampler sales
    
    
    (3,904
    )
    
    
    (3,634
    )
    
    
    (1,765
    )Total vacation interval sales
    
    $
    139,359
    
    
    $
    122,805
    
    
    $
    123,585Rescission rate for new customers
    
    
    25.6
    %
    
    
    25.4
    %
    
    
    26.6
    %Rescission rate for existing customers
    
    
    6.4
    %
    
    
    5.4
    %
    
    
    5.6
    %Rescission rate for all customers
    
    
    20.5
    %
    
    
    19.3
    %
    
    
    18.4
    %
  
    
    In assessing the effectiveness of our sales and marketing programs,
we believe it is also important to compare sales to sales and marketing
expenses. 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 31,2001
    
    2002
    
    2003Tours to potential new purchasers
    
    
    92,663
    
    
    
    83,636
    
    
    
    75,965Cost per tour
    
    $
    449
    
    
    $
    430
    
    
    $
    422Cost of marketing to new purchasers
    
    
    41,579
    
    
    
    35,936
    
    
    
    32,050Cost of marketing to existing purchasers
    
    
    1,354
    
    
    
    2,992
    
    
    
    5,943Commissions
    
    
    25,554
    
    
    
    20,118
    
    
    
    19,613Sales and marketing overhead
    
    
    10,110
    
    
    
    7,338
    
    
    
    8,169Total sales and marketing expense

    
    $
    78,597
    
    
    $
    66,384
    
    
    $
    65,775As a percentage of total sales:Cost of marketing to new purchasers
    
    
    29.0
    %
    
    
    28.4
    %
    
    
    25.6
    %Cost of marketing to existing purchasers
    
    
    0.9
    %
    
    
    2.4
    %
    
    
    4.7
    %Commissions
    
    
    17.8
    %
    
    
    15.9
    %
    
    
    15.6
    %Sales and marketing overhead
    
    
    7.1
    %
    
    
    5.8
    %
    
    
    6.5
    %Total sales and marketing expense
    
    
    54.9
    %
    
    
    52.5
    %
    
    
    52.5
    %
  
    
    Our second most important source of revenue is interest income, which
is predominantly earned on our notes receivable. Interest income as a
percentage of notes receivable has increased each year from 2001 through
2003 as result of increasing the rate we charge our new customers by 1%
each of the past two years.
    
    We have two lesser revenue sources. They are management fees,
predominantly from Silverleaf Club, and other income, which is
predominantly comprised of revenues from water and sewer operations at
certain of the Silverleaf resort locations that are not served by local
utilities.
    
    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 have also
generated cash in 2001, 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. 46




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We operate in only one business segment, the timeshare industry. Further,
we only operate in the United States. We have 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. 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. 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
nontendering 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 a $100 million conduit facility through
Silverleaf Finance I, Inc., our off-balance-sheet, wholly-owned special purpose
entity (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 noteholders 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 the Management Clubs, lease income from Sampler sales, and
utility 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, 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 the SPEs
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 47




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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. The Company reserves 75%
of accrued interest income for notes that are three payments late, 50% for
notes that are two payments late, 25% for notes that are one payment late, and
10% 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 2003, we recognized $1.2 million and
$347,000 in management fee revenues from Silverleaf Club and Crown Club,
respectively. Liquidity and Capital Resources 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. 48




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
    
    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%. 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 are now 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 to reduce
the principal amount of the facility 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, 2001,
2002, and 2003, our operating activities reflected net cash used in operating
activities of $24.0 million, $11.6 million, and 49




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$7.8 million, respectively. In 2003, the decrease in cash used in
operating activities was primarily the result of the need for less restricted
cash in 2003 versus 2002, as well as timing differences associated with the
actual payment of our accounts payable and accrued expenses. In 2002, the
decrease in cash used in operating activities was the result of a decrease in
new customer notes receivable due to a reduction in sales in 2002. Net cash provided by financing activities for the years ended December 31,
2001, 2002, and 2003, was $24.9 million, $8.1 million, and $7.8 million,
respectively. Net cash provided by financing activities was fairly consistent
from 2002 to 2003. In 2002, the decrease in cash provided by financing
activities versus 2001 was the result of reduced borrowings against pledged
notes receivable and increased payments on borrowings against pledged notes
receivable, partially offset by proceeds from sales of notes receivable. At
December 31, 2003, our senior credit facilities provided for loans of up to
$269.4 million, of which approximately $212.3 million of principal related to
advances under the credit facilities was outstanding. For the year ended
December 31, 2003, the weighted average cost of funds for all borrowings,
including senior subordinated debt, was 6.3%. 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, 2003, $3.9 million of notes were more than 60 days
past due. 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 net operating losses (NOLs) expire between 2012 through 2021.
Realization of the deferred tax assets arising from NOLs is dependent on
generating sufficient taxable income prior to the expiration of the loss
carryforwards. 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. The
ownership change may also limit, as described above, the use of our minimum tax
credit, if any, as provided in Section 383 of the Code. Given our current economic condition, the access to capital and other
financial markets is anticipated to be limited. However, to finance our growth,
development, and any future expansion plans, we may at some time be required to
consider the issuance of other debt, equity, or collateralized mortgage-backed
securities, the proceeds of which would be used to finance future acquisitions,
refinance debt, finance mortgage receivables, or for other purposes. Any debt
that we incur or issue may be secured or unsecured, have fixed or variable rate
interest, and may be subject to such terms as we deem prudent. Uses of Cash.Investing activities typically reflect a net use of cash due
to capital additions and property acquisitions. However in 2003, net cash
provided by investing activities was $3.0 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 $1.7 million in purchases of
capital additions. 50




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Net cash used in investing activities for the years ended December 31,
2001 and 2002 was $1.5 million each year. In 2002, the cash used in investing
activities increased compared to 2001 primarily due to an increase in equipment
purchases in 2002. We evaluate sites for additional new resorts or acquisitions
on an ongoing basis. As of December 31, 2003, we had construction commitments
of approximately $3.0 million. 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 to reduce the principal amount
of the facility 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 sales, since we finance
the majority of our timeshare sales over seven to ten years. 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. 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 $613,000, $547,000, and $904,000 for the years ended
December 31, 2001, 2002, and 2003, 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, 2003, the
SPE held notes receivable totaling $101.4 million, with related borrowings of
$81.3 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 $6.1 million at
December 31, 2003. Results of Operations The following table sets forth certain operating information for the
Company. Years Ended December 31,2001
    
    2002
    
    2003As a percentage of total revenues:Vacation Interval sales
    
    
    72.8
    %
    
    
    72.0
    %
    
    
    73.9
    %Sampler sales
    
    
    2.1
    
    
    
    2.1
    
    
    
    1.1Total sales
    
    
    74.9
    
    
    
    74.1
    
    
    
    75.0Interest income
    
    
    21.5
    
    
    
    22.0
    
    
    
    20.8Management fee income
    
    
    1.3
    
    
    
    1.1
    
    
    
    0.9Other income
    
    
    2.3
    
    
    
    2.8
    
    
    
    3.3Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %As a percentage of Vacation Interval sales:Cost of Vacation Interval sales
    
    
    19.6
    %
    
    
    18.8
    %
    
    
    18.3
    %Provision for uncollectible notes
    
    
    21.8
    
    
    
    20.0
    
    
    
    43.4As a percentage of total sales:Sales and marketing
    
    
    54.9
    %
    
    
    52.5
    %
    
    
    52.5
    %As a percentage of total revenues:Operating, general and administrative
    
    
    18.5
    %
    
    
    19.1
    %
    
    
    16.4
    %Depreciation and amortization
    
    
    3.4
    
    
    
    3.0
    
    
    
    2.7Total costs and operating expenses
    
    
    114.3
    %
    
    
    102.0
    %
    
    
    114.0
    %As a percentage of interest income:Interest expense and lender fees
    
    
    84.9
    %
    
    
    59.1
    %
    
    
    47.7
    %
 51




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Results of Operations for the Years Ended December 31, 2003 and December 31,
2002 Revenues Revenues in 2003 were $167.2 million, representing a $3.3 million, or
2.0%, decrease compared to revenues of $170.5 million for the year ended
December 31, 2002. This decrease primarily relates to decreased interest
income, discussed below. The following table summarizes our Vacation Interval sales (dollars in
thousands). 2003
    
    2002Average
    
    
    
    
    
    
    
    
    
    Average$ Sales
    
    Units
    
    Price
    
    $ Sales
    
    Units
    
    PriceOutside Sales
    
    $
    67,232
    
    
    
    6,534
    
    
    $
    10,290
    
    
    $
    77,169
    
    
    
    7,812
    
    
    $
    9,878In-house Upgrade Sales
    
    
    32,666
    
    
    
    4,833
    
    
    
    6,759
    
    
    
    41,833
    
    
    
    7,746
    
    
    
    5,401In-house Reload Sales
    
    
    23,687
    
    
    
    3,026
    
    
    
    7,828
    
    
    
    3,803
    
    
    
    412
    
    
    
    9,231Total
    
    $
    123,585
    
    
    
    
    
    
    
    
    
    
    $
    122,805
 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. 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. Other income consists of water and utilities income, marina income, golf
course and pro shop income, and other miscellaneous items. Other income
increased $929,000 to $5.6 million for the year ended December 31, 2003,
compared to $4.6 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, as well as increased water and
utilities income. 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, the Company charged cost of
sales with $1.1 million for land and amenities due to a reduction in its master
plan at one of the Companys 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 inside 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 52




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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 16.4% in 2003 from 19.1% 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 2.7% in 2003 from 3.0% in 2002. Overall, depreciation and
amortization expense decreased $618,000 in 2003 versus 2002 due to a general
reduction in capital expenditures since 2000. Interest Expense and Lender Fees Interest expense and lender fees as a percentage of interest income
decreased to 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 Sale of Notes Receivable 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. 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 101⁄2% 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 101⁄2% senior subordinated notes in
connection with the restructuring of the Companys debt. 53




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Income (Loss) before (Benefit) Provision for Income Taxes Income (loss) before (benefit) provision for income taxes decreased to a
loss of $13.8 million for the year ended December 31, 2003, as compared to
income of $21.3 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 was a provision of 0.6% for 2003,
as compared to a benefit of 7.2% 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) 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. Results of Operations for the Years Ended December 31, 2002 and December 31,
2001 Revenues Revenues in 2002 were $170.5 million, representing a $20.8 million, or
10.9%, decrease compared to revenues of $191.3 million for the year ended
December 31, 2001. This decrease primarily relates to decreases in Vacation
Interval sales and interest income discussed below. Vacation Interval sales decreased $16.6 million to $122.8 million, down
from $139.4 million in 2001. For the year ended December 31, 2002, the number
of Vacation Intervals sold, exclusive of in-house Vacation Intervals, decreased
15.6% to 8,224 from 9,741 in 2001; and the average price per interval increased
to $9,846 versus $9,688 in the same period of 2001. Total interval sales for
2002 included 1,044 biennial intervals (counted as 522 Vacation Intervals)
compared to 3,061 biennial intervals (counted as 1,531 Vacation Intervals) in
2001. During 2002, 7,746 in-house Vacation Intervals were sold at an average
price of $5,401, compared to 10,576 in-house Vacation Intervals sold at an
average price of $4,254 during the year ended December 31, 2001. Vacation
Interval sales decreased in 2002 compared to 2001 due to operational cutbacks
implemented during the first quarter of 2001. Sampler sales decreased to $3.6 million in 2002 compared to $3.9 million
in 2001. Consistent with the overall decrease in our operations, fewer samplers
were sold in 2002 compared to 2001. However, 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 2002 relate to 2001
sales. Interest income decreased 8.9% to $37.5 million for the year ended
December 31, 2002 from $41.2 million for 2001. This decrease primarily resulted
from a decrease in notes receivable, net of allowance for doubtful notes, in
2002 compared to 2001, 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 $596,000 for the year ended December 31, 2002
versus the same period of 2001, due primarily to increased operating expenses
at the management clubs in 2002 compared to 2001. Other income consists of water and utilities income, marina income, golf
course and pro shop income, and other miscellaneous items. Other income
increased $310,000 to $4.6 million for the year ended December 31, 2002,
compared to $4.3 million for the year ended December 31, 2001. The increase
relates to increased water and utilities income in 2002 and a $114,000 gain
associated with the sale of land. Cost of Sales Cost of sales as a percentage of Vacation Interval sales decreased to
18.8% in 2002 from 19.6% in 2001. The decrease primarily resulted from an
increase in sales prices in 2002 compared to 2001. Overall, the $4.3 million
decrease in cost of sales for the year ended December 31, 2002 compared to the
same period of 2001 was due to the decrease in Vacation Interval sales. 54




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Sales and Marketing Sales and marketing costs as a percentage of total sales decreased to
52.5% for the year ended December 31, 2002, from 54.9% for 2001. The decrease
is primarily attributable to the following cost saving measures implemented in
2001 as a result of our liquidity issues: the closure of three outside sales
offices, closing three telemarketing centers, discontinuing certain lead
generation programs, and reducing headcount in both sales and marketing
functions. Since the third quarter of 2001, we have been operating under new sales
practices whereby no sales are permitted unless the touring customer has a
minimum income level beyond that previously required and has a valid major
credit card. Further, the marketing division is employing a best practices
program, which should facilitate marketing to customers who management believes
are more likely to be a good credit risk. Provision for Uncollectible Notes Provision for uncollectible notes as a percentage of Vacation Interval
sales remained fairly constant at 20.0% for the year ended December 31, 2002
from 21.8% for 2001. The slight improvement was due to the improved sales
practices mentioned above. However, due to continuing economic concerns and the
relatively high level of defaults experienced in customer receivables
throughout 2001 and 2002, the provision for uncollectible notes remained
relatively high. Management will continue its current collection programs and
seek new programs to reduce note defaults. However, there can be no assurance
that these efforts will be successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total
revenues increased to 19.1% in 2002 from 18.5% in 2001 due to the decrease in
Vacation Interval sales. Overall, operating, general and administrative expense
decreased by $2.9 million for the year ended December 31, 2002, as compared to
2001. This was due primarily to (i) $4.0 million of financial consulting and
legal fees incurred in 2001 associated with the restructuring of our debt, and
(ii) $1.2 million in auditing fees incurred in 2001. In comparison, in 2002 we
incurred $2.0 million of professional fees associated with the restructuring of
our debt and $1.0 million in audit fees related to completion of the 2000
audit. In addition, we substantially reduced our corporate headcount in 2001 as
part of our downsizing efforts to align overhead with the reduced sales levels. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues
decreased to 3.0% in 2002 from 3.4% in 2001. Overall, depreciation and
amortization expense decreased $1.3 million for the year ended December 31,
2002, as compared to 2001, primarily due to the write-off of $1.3 million of
fixed assets previously used in the sales and marketing functions in 2001 and a
general reduction in capital expenditures since 2000. Impairment Loss of Long-Lived Assets We recognized an impairment loss of long-lived assets of $5.4 million in
2001, which primarily consisted of a $1.3 million write-off of fixed assets
related to the closure of three outside sales offices and three telemarketing
centers, a $1.4 million write-off of prepaid marketing costs related to the
discontinuance of certain lead generation programs, a $230,000 loss related to
the renegotiation and transfer of a capital lease to Silverleaf Club, and a
$2.3 million impairment to write-down both corporate airplanes to their
estimated sales prices. There was no impairment loss of long-lived assets
during 2002. Gain on Sale of Notes Receivable Gain on sale of notes receivable was $6.8 million for the year ended
December 31, 2002, compared to $0 in 2001. The gain in 2002 resulted from the
sale of $83.4 million of notes receivable to SPE. There were no such sales in
2001. Gain on Early Extinguishment of Debt Gain on early extinguishment of debt was $17.9 million for the year ended
December 31, 2002, compared to $0 in 2001. The gain in 2002 resulted from the
early extinguishment of $56.9 million of 10-1/2% senior subordinated notes,
related to the restructuring of our debt completed in May 2002. There were no
such early extinguishments of debt in 2001. 55




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Interest Expense and Lender Fees Interest expense as a percentage of interest income decreased to 59.1% for
the year ended December 31, 2002, compared to 84.9% for the year ended December
31, 2001. This decrease is primarily the result of decreased borrowings against
pledged notes receivable, a decrease in our weighted average cost of borrowing
to 6.4% in 2002 from 8.1% in 2001, and reduced interest on senior subordinated
notes due to the restructuring completed in May 2002. Income (Loss) before Benefit for Income Taxes Income (loss) before benefit for income taxes increased to income of $21.3
million for the year ended December 31, 2002, as compared to a loss of $27.3
million for the year ended December 31, 2001, as a result of the aforementioned
operating results. Benefit for Income Taxes Benefit for income taxes as a percentage of income (loss) before benefit
for income taxes was 7.2% for the year ended December 31, 2002, as compared to
0.4% for 2001. In 2002, we received a $1.6 million refund due to a tax law
change that allowed us to recoup additional AMT paid in previous years. The
effective income tax rate for 2002 and 2001 is also the result of the 2002 and
2001 projected income tax benefits being reduced by the effect of a valuation
allowance, which reduces the projected net deferred tax assets to zero due to
the unpredictability of recovery. Net Income (Loss) Net income (loss) increased to income of $22.8 million for the year ended
December 31, 2002, as compared to a loss of $27.2 million for the year ended
December 31, 2001, as a result of the aforementioned operating results. Contractual Obligations and Commitments The following table summarizes our scheduled contractual commitments as of
December 31, 2003 (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong-term debt
    
    $
    32,908
    
    
    $
    15,205
    
    
    $
    15,188
    
    
    $
    165,586
    
    
    $
    7,309
    
    
    $
    94,483Capital leases
    
    
    1,202
    
    
    
    238
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    1,876
    
    
    
    1,807
    
    
    
    1,667
    
    
    
    1,541
    
    
    
    1,193
    
    
    
    749Litigation settlement
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other purchase obligations:Construction commitments
    
    
    3,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    39,829
    
    
    $
    17,250
    
    
    $
    16,858
    
    
    $
    167,127
    
    
    $
    8,502
    
    
    $
    95,232
 Long term debt includes $80.1 million of future interest and capital
leases include $114,000 of future interest, using an approximate interest rate
of 6.3%, which is the Companys weighted average cost of borrowings as of
December 31, 2003. Long-term debt of $17.0 million, which is included in the
2004 total, was extended to February 2006 in March 2004. We also have a $15.7
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 56




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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. 149  In April 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities (SFAS No.
149). SFAS No. 149 amends and clarifies certain derivative instruments
embedded in other contracts, and for hedging activities under Statement of
Financial Accounting Standards No. 133. SFAS No. 149 is effective for certain
contracts entered into or modified by the Company after June 30, 2003. The
adoption of SFAS No. 149 did not impact the Companys consolidated financial
position or results of operations. SFAS No. 150  In May 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 150,Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity (SFAS No. 150). SFAS No. 150 specifies that certain financial
instruments within its scope constitute obligations of the issuer and that,
therefore, the issuer must classify them as liabilities. Such financial
instruments include mandatorily redeemable financial instruments, obligations
to repurchase the issuers equity shares by transferring assets, and certain
obligations to issue a variable number of shares. SFAS No. 150 is effective
immediately for all financial instruments entered into or modified after May
31, 2003. For all other instruments, SFAS No. 150 is effective at the
beginning of the third quarter of 2003. The adoption of SFAS No. 150 did not
impact the Companys consolidated financial position or results of operations. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of and for the year ended December 31, 2003, 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 $212.3 million at December 31, 2003, is variable. The impact of a
one-point interest rate change on the outstanding balance of variable-rate
financial instruments at December 31, 2003, on our annual results of operations
would be approximately $2.1 million or approximately $0.06 per share. At December 31, 2003, 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
$5.6 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. 57




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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
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 57.2% of Vacation Interval sales took place in
2003), 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. 58




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##### Table of Contents



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 2004 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 on
page 8 of the Companys proxy statement for its 2004 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, 2003. Name
    
    Age
    
    PositionRobert E. Mead
    
    
    57
    
    
    Chairman of the Board and Chief Executive OfficerSharon K. Brayfield
    
    
    43
    
    
    PresidentDavid T. OConnor
    
    
    61
    
    
    Executive Vice President  SalesJoe W. Conner
    
    
    46
    
    
    Chief Operating OfficerHarry J. White, Jr.
    
    
    49
    
    
    Chief Financial Officer, TreasurerEdward L. Lahart
    
    
    39
    
    
    Executive Vice President  OperationsMichael Jones
    
    
    37
    
    
    Vice President  Information SystemsRobert G. Levy
    
    
    55
    
    
    Vice President  Resort OperationsDarla Cordova
    
    
    39
    
    
    Vice President  Employee and Marketing ServicesHerman Jay Hankamer
    
    
    64
    
    
    Vice President  Resort DevelopmentAnthony C. Luis
    
    
    57
    
    
    Vice President  Owner Based Marketing and SalesLelori (Buzz) Marconi
    
    
    51
    
    
    Executive Vice President  Marketing OperationsSandra G. Cearley
    
    
    42
    
    
    SecretaryJames B. Francis, Jr.
    
    
    55
    
    
    DirectorJ. Richard Budd, III
    
    
    51
    
    
    DirectorHerbert B. Hirsch
    
    
    67
    
    
    DirectorRebecca Janet Whitmore
    
    
    49
    
    
    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 term
of office of the Companys five directors was changed by a vote of the
shareholders, which occurred at the Companys 2003 annual meeting of
shareholders on December 16, 2003. 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 2003 annual meeting on December
16, 2003. 
 ITEM 11. EXECUTIVE COMPENSATION The information contained under the captions Director Compensation and
Executive Compensation in the Companys proxy statement for its 2004 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, 2003: 59




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##### Table of Contents



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
    
    
    3,704,979
    
    
    $
    3.64
    
    
    
    104,635Equity Compensation Plans
Not Approved by Security
Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,704,979
    
    
    $
    3.64
    
    
    
    104,635
 There are 70,500 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 2004
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 2004 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 2004 annual meeting of
shareholders is incorporated herein by reference to such proxy statement. 
 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.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, 2004.3.5
    
    
    
    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 101⁄2 % 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).
 60




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##### Table of Contents



ExhibitNumber
    
    
    
    Description4.4
    
    
    
    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).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).10.7
    
    
    
    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
    
    
    
    Amended and Restated Inventory Loan and Security Agreement dated September 1, 1999, between the Company and
Heller Financial, Inc. (incorporated by reference to Exhibit 10.2 to Registrants Form 10-Q for the quarter ended
September 30, 1999).10.19
    
    
    
    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).10.20
    
    
    
    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).10.21
    
    
    
    Purchase and Contribution Agreement, dated October 30, 2000, between the Company, as Seller, and
 61




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##### Table of Contents



ExhibitNumber
    
    
    
    DescriptionSilverleaf
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.)10.22
    
    
    
    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).10.23
    
    
    
    Fourth Amendment to Second Amended and Restated Inventory Loan and Security Agreement dated April 30, 2002
between the Company and Heller Financial, Inc. (incorporated by reference to Exhibit 10.2 to Registrants Form 10-Q
for the quarter ended June 30, 2002).10.24
    
    
    
    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).10.25
    
    
    
    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).10.26
    
    
    
    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).10.27
    
    
    
    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).10.28
    
    
    
    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).10.29
    
    
    
    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).10.30
    
    
    
    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).10.31
    
    
    
    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).10.32
    
    
    
    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 10.35 of the Registrants Form 10-K
for the year ended December 31, 2002).10.33
    
    
    
    Contract of Sales dated August 17, 2002 between the Registrant and Fairfield Resorts, Inc (incorporated by
reference to Exhibit 10.1 to Registrants Form 10-Q for quarter ended June 30, 2003).10.34
    
    
    
    First Amendment To Contract Of Sale dated November 27, 2002 between the Registrant and Fairfield Resorts,
Inc. (incorporated by reference to Exhibit 10.2 to Registrants Form 10-Q for quarter ended June 30, 2003).10.35
    
    
    
    First Amendment to Contract of Sale dated December 23, 2002 between the Registrant and Fairfield Resorts,
Inc. (incorporated by reference to Exhibit 10.3 to Registrants Form 10-Q for quarter ended June 30, 2003).10.36
    
    
    
    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).10.37
    
    
    
    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).10.38
    
    
    
    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)10.39
    
    
    
    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).10.40
    
    
    
    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).10.41
    
    
    
    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).10.42
    
    
    
    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).10.43
    
    
    
    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).10.44
    
    
    
    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).10.45
    
    
    
    Amendment dated November 17, 2003 between the Company and Textron Financial Corporation
 62




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##### Table of Contents



ExhibitNumber
    
    
    
    Description(Inventory Loan)
(incorporated by reference to Exhibit 10.8 to Registrants Form 8-K filed December 29, 2003).10.46
    
    
    
    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).*10.47
    
    
    
    Fourth Amendment to Amended and Restated Receivables Loan and Security Agreement dated March 5, 2004 between
the Company and Heller Financial, Inc.*10.48
    
    
    
    Sixth Amendment to Second Amended and Restated Inventory Loan and Security Agreement dated March 5, 2004
between the Company and Heller Financial Inc.*10.49
    
    
    
    Fourth Amendment to Amended and Restated Revolving Credit Agreement dated March 5, 2004 between the Company
and Sovereign Bank.*10.50
    
    
    
    Amended and Restated Loan and Security Agreement, dated as of March 5, 2004 between the Company and Textron
Financial Corporation.*10.51
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche A)*10.52
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche B)*10.53
    
    
    
    Amendment dated March 5, 2004 between the Company and Textron Financial Corporation (Tranche C)*10.54
    
    
    
    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).*10.55
    
    
    
    2003 Stock Option Plan of the Registrant*14.1
    
    
    
    Code of Ethics adopted by the Registrant on December 16, 2003.*21.1
    
    
    
    Subsidiaries of Silverleaf Resorts, Inc.*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, 2003. These reports were filed on November 26, 2003
and December 29, 2003. (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. 63




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##### Table of Contents



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 29, 2004. 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 Board
and Chief Executive
Officer (Principal
Executive Officer)
    
    March 29, 2004Robert E. Mead/s/ HARRY J. WHITE, JR,

Harry J. White, Jr.
    
    Chief Financial Officer
(Principal Financial
and Accounting Officer)
    
    March 29, 2004/s/ J. RICHARD BUDD, III
    
    Director
    
    March 29, 2004J. Richard Budd, III/s/ JAMES B. FRANCIS, JR.

James B. Francis, Jr.
    
    Director
    
    March 29, 2004/s/ HERBERT B. HIRSCH

Herbert B. Hirsch
    
    Director
    
    March 29, 2004/s/ REBECCA JANET WHITMORE
Rebecca Janet Whitmore
    
    Director
    
    March 29, 2004
 64




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageIndependent Auditors Report
    
    
    F-2Financial StatementsConsolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2001, 2002, and 2003
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended December 31, 2001, 2002,
and 2003
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2002, and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



INDEPENDENT AUDITORS REPORT 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, 2003 and 2002 and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Silverleaf Resorts,
Inc. at December 31, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States of America. /s/ BDO Seidman, LLP
Dallas, Texas
February 27, 2004 F-2




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##### Table of Contents



SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) December 31,2002
    
    2003ASSETSCash and cash equivalents
    
    $
    1,153
    
    
    $
    4,093Restricted cash
    
    
    3,624
    
    
    
    1,624Notes receivable, net of allowance for uncollectible notes of
$28,547 and $48,372, respectively
    
    
    233,237
    
    
    
    193,379Accrued interest receivable
    
    
    2,325
    
    
    
    2,169Investment in special purpose entity
    
    
    6,656
    
    
    
    6,053Amounts due from affiliates
    
    
    750
    
    
    
    150Inventories
    
    
    102,505
    
    
    
    101,399Land, equipment, buildings, and utilities, net
    
    
    33,778
    
    
    
    27,488Land held for sale
    
    
    4,545
    
    
    
    2,991Prepaid and other assets
    
    
    9,672
    
    
    
    12,441TOTAL ASSETS
    
    $
    398,245
    
    
    $
    351,787LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESAccounts payable and accrued expenses
    
    $
    7,394
    
    
    $
    6,705Accrued interest payable
    
    
    1,269
    
    
    
    1,087Amounts due to affiliates
    
    
    2,221
    
    
    
    656Unearned revenues
    
    
    3,410
    
    
    
    3,712Notes payable and capital lease obligations
    
    
    236,413
    
    
    
    215,337Senior subordinated notes
    
    
    45,919
    
    
    
    36,591Total Liabilities
    
    
    296,626
    
    
    
    264,088COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITYPreferred stock, 10,000,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 100,000,000 shares authorized,
37,249,006 shares issued, and 36,826,906 shares outstanding
    
    
    372
    
    
    
    372Additional paid-in capital
    
    
    116,999
    
    
    
    116,999Deficit
    
    
    (10,753
    )
    
    
    (24,673
    )Treasury stock, at cost (422,100 shares)
    
    
    (4,999
    )
    
    
    (4,999
    )Total Shareholders Equity
    
    
    101,619
    
    
    
    87,699TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    398,245
    
    
    $
    351,787
 See independent auditors report and notes to consolidated financial statements. F-3




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##### Table of Contents



SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts) Year Ended December 31,2001
    
    2002
    
    2003REVENUES:Vacation Interval sales
    
    $
    139,359
    
    
    $
    122,805
    
    
    $
    123,585Sampler sales
    
    
    3,904
    
    
    
    3,634
    
    
    
    1,765Total sales
    
    
    143,263
    
    
    
    126,439
    
    
    
    125,350Interest income
    
    
    41,220
    
    
    
    37,537
    
    
    
    34,730Management fee income
    
    
    2,516
    
    
    
    1,920
    
    
    
    1,547Other income
    
    
    4,334
    
    
    
    4,644
    
    
    
    5,573Total revenues
    
    
    191,333
    
    
    
    170,540
    
    
    
    167,200COSTS AND OPERATING EXPENSES:Cost of Vacation Interval sales
    
    
    27,377
    
    
    
    23,123
    
    
    
    22,657Sales and marketing
    
    
    78,597
    
    
    
    66,384
    
    
    
    65,775Provision for uncollectible notes
    
    
    30,311
    
    
    
    24,562
    
    
    
    53,673Operating, general and administrative
    
    
    35,435
    
    
    
    32,547
    
    
    
    27,393Depreciation and amortization
    
    
    6,463
    
    
    
    5,184
    
    
    
    4,566Interest expense and lender fees
    
    
    35,016
    
    
    
    22,193
    
    
    
    16,551Impairment loss of long-lived assets
    
    
    5,442
    
    
    
    
    
    
    
    Total costs and operating expenses
    
    
    218,641
    
    
    
    173,993
    
    
    
    190,615OTHER INCOME:Gain on sale of notes receivable
    
    
    
    
    
    
    6,838
    
    
    
    3,205Gain on early extinguishment of debt
    
    
    
    
    
    
    17,885
    
    
    
    6,376Total other income
    
    
    
    
    
    
    24,723
    
    
    
    9,581Income (loss) before (benefit) provision for income taxes
    
    
    (27,308
    )
    
    
    21,270
    
    
    
    (13,834
    )(Benefit) provision for income taxes
    
    
    (99
    )
    
    
    (1,523
    )
    
    
    86NET INCOME (LOSS)
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )NET INCOME (LOSS) PER SHARE  Basic and Diluted
Net income (loss)
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING  Basic and Diluted
    
    
    12,889,417
    
    
    
    28,825,882
    
    
    
    36,826,906
 See independent auditors report and notes to consolidated financial statements. F-4




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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share and per share amounts) Common StockNumber of
    
    $0.01
    
    Additional
    
    Retained
    
    Treasury StockShares
    
    Par
    
    Paid-in
    
    EarningsIssued
    
    Value
    
    Capital
    
    (Deficit)
    
    Shares
    
    Cost
    
    TotalJANUARY 1, 2001
    
    
    13,311,517
    
    
    $
    133
    
    
    $
    109,339
    
    
    $
    (6,337
    )
    
    
    422,100
    
    
    $
    (4,999
    )
    
    $
    98,136Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,209
    )
    
    
    
    
    
    
    
    
    
    
    (27,209
    )DECEMBER 31, 2001
    
    
    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
    )
    
    $
    87,699
 See independent auditors report and notes to consolidated financial statements. F-5




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##### Table of Contents



SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31,2001
    
    2002
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Provision for uncollectible notes
    
    
    30,311
    
    
    
    24,562
    
    
    
    53,673Depreciation and amortization
    
    
    6,463
    
    
    
    5,184
    
    
    
    4,566Gain on sale of notes receivable
    
    
    
    
    
    
    (6,838
    )
    
    
    (3,205
    )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
    
    
    
    
    
    
    
    
    
    
    44Impairment loss of long-lived assets
    
    
    5,442
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (168
    )
    
    
    
    
    
    
    Cash effect from changes in assets and liabilities:Restricted cash
    
    
    (3,061
    )
    
    
    1,097
    
    
    
    2,000Notes receivable
    
    
    (48,376
    )
    
    
    (39,239
    )
    
    
    (40,811
    )Accrued interest receivable
    
    
    (378
    )
    
    
    247
    
    
    
    156Investment in Special Purpose Entity
    
    
    487
    
    
    
    (1,863
    )
    
    
    603Amounts due from affiliates
    
    
    (3,190
    )
    
    
    3,140
    
    
    
    (1,592
    )Inventories
    
    
    2,877
    
    
    
    754
    
    
    
    (489
    )Prepaid and other assets
    
    
    3,746
    
    
    
    (985
    )
    
    
    (2,096
    )Income taxes receivable
    
    
    12,347
    
    
    
    164
    
    
    
    Accounts payable and accrued expenses
    
    
    (6,749
    )
    
    
    (1,809
    )
    
    
    (572
    )Accrued interest payable
    
    
    7,480
    
    
    
    1,176
    
    
    
    (10
    )Unearned revenues
    
    
    (4,007
    )
    
    
    (2,090
    )
    
    
    684Net cash used in operating activities
    
    
    (23,985
    )

    
    
    (11,592
    )
    
    
    (7,843
    )INVESTING ACTIVITIES:Purchases of land, equipment, buildings, and utilities
    
    
    (1,606
    )
    
    
    (2,153
    )
    
    
    (1,678
    )Proceeds from land held for sale
    
    
    95
    
    
    
    616
    
    
    
    4,660Net cash provided by (used in) investing activities
    
    
    (1,511
    )
    
    
    (1,537
    )
    
    
    2,982FINANCING ACTIVITIES:Proceeds from borrowings from unaffiliated entities
    
    
    100,314
    
    
    
    84,668
    
    
    
    157,264Payments on borrowings to unaffiliated entities
    
    
    (75,414
    )
    
    
    (145,476
    )
    
    
    (181,259
    )Proceeds from sales of notes receivable
    
    
    
    
    
    
    68,886
    
    
    
    31,796Net cash provided by financing activities
    
    
    24,900
    
    
    
    8,078
    
    
    
    7,801NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (596
    )
    
    
    (5,051
    )
    
    
    2,940CASH AND CASH EQUIVALENTS:BEGINNING OF PERIOD
    
    
    6,800
    
    
    
    6,204
    
    
    
    1,153END OF PERIOD
    
    $
    6,204
    
    
    $
    1,153
    
    
    $
    4,093SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid, net of amounts capitalized
    
    $
    22,527
    
    
    $
    17,864
    
    
    $
    15,747Income taxes paid (refunds received)
    
    
    (12,347
    )
    
    
    (1,563
    )
    
    
    86SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:Land and equipment acquired under capital leases
    
    
    171
    
    
    
    
    
    
    
    Issuance 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
 See independent auditors report and notes to consolidated financial statements. F-6




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##### Table of Contents



SILVERLEAF RESORTS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2002, and 2003 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) and
the development of any new timeshare resort, including site selection, design,
and construction. 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. Crown Club was not actually a separate
entity, but consisted of several individual Club management agreements (which
had terms of two to five years). Silverleaf Club and Crown Club, in turn,
have/had 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 Clubs, 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, 2001, 2002, and 2003 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., and
Silverleaf Finance II, Inc., which was formed in December 2003 and described in
more detail under the heading Debt in footnote 8. 2. SIGNIFICANT ACCOUNTING POLICIES SUMMARY Basis of Presentation The accompanying consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). In the opinion of the Company, the accompanying
consolidated financial statements contain all material adjustments, consisting
only of normal recurring adjustments necessary to present fairly the financial
condition, the results of operations and changes in cash flows of the Company
and its subsidiaries. Principles of Consolidation The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
excluding Silverleaf Finance I, Inc., the Companys wholly-owned special
purpose entity (SPE). All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements. Revenue and Expense Recognition A substantial portion of Vacation
Interval sales are made in exchange for mortgage notes receivable, which are
secured by a deed of trust on the Vacation Interval sold. The Company
recognizes the sale of a Vacation Interval under the accrual method after a
binding sales contract has been executed, the buyer has made a down payment of
at least 10%, and the statutory rescission period has expired. If all accrual
method criteria are met except that construction is not substantially complete,
revenues are recognized on the percentage-of-completion basis. Under this
method, the portion of revenue applicable to costs incurred, as compared to
total estimated construction and direct selling costs, is recognized in the
period of sale. The remaining amount is deferred and recognized as the
remaining costs are incurred. The deferral of sales and costs related to the
percentage-of-completion method is not significant. F-7




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##### Table of Contents



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, 2003, 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
    
    $
    185Impact on fair value of a 20% adverse change
    
    $
    424Accounts Paid In Full as a Result of Upgrades Rate:Impact on fair value of a 10% adverse change
    
    $
    42Impact on fair value of a 20% adverse change
    
    $
    76
 F-8




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##### Table of Contents



Expected Credit Losses Rate:Impact on fair value of a 10% adverse change
    
    $
    1,536Impact on fair value of a 20% adverse change
    
    $
    3,016Discount Rate:Impact on fair value of a 10% adverse change
    
    $
    179Impact on fair value of a 20% adverse change
    
    $
    353
 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, 2003, the Company had construction commitments of
approximately $3.0 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. 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. F-9




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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, 2001, 2002, and 2003, basic and diluted
weighted average shares were equal. Outstanding stock options totaling
approximately 1,078,500 and 1,402,000 were not dilutive at December 31, 2001
and 2002, respectively, 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 options 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. 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: 2001
    
    2002
    
    2003Net income (loss), as reported
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )Stock-based compensation expense recorded
under the intrinsic value method
    
    
    
    
    
    
    
    
    
    
    Pro forma stock-based compensation expense
Computed under the fair value method
    
    
    (691
    )
    
    
    (752
    )
    
    
    (456
    )Pro forma net income (loss)
    
    $
    (27,900
    )
    
    $
    22,041
    
    
    $
    (14,376
    )Net income (loss) per share, basicAs reported
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )Pro forma
    
    $
    (2.16
    )
    
    $
    0.76
    
    
    $
    (0.39
    )Net income (loss) per share, dilutedAs reported
    
    $
    (2.11
    )
    
    $
    0.79
    
    
    $
    (0.38
    )Pro forma
    
    $
    (2.16
    )
    
    $
    0.76
    
    
    $
    (0.39
    )
 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 2001. The
fair value of the stock options granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility ranging from 143.2% to 217.3% for all grants,
risk-free interest rates which vary for each grant and range from 4.1% to
12.2%, expected life of 7 years for all grants, and no distribution yield for
all grants. Use of Estimates The preparation of the consolidated financial
statements requires the use of managements estimates and assumptions in
determining the carrying values of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts for certain revenues and expenses
during the reporting period. Actual results could differ from those estimated.
Significant management estimates include the allowance for uncollectible notes,
valuation of SPE, and the future sales plan used to allocate certain
inventories to cost of sales. F-10




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##### Table of Contents



Reclassifications Certain reclassifications have been made to the 2001
consolidated financial statements to conform to the 2002 and 2003 presentation.
These reclassifications had no effect on net income (loss). The most
significant reclassification to the consolidated statements of operations
relates to the gain on early extinguishment of debt. The gain on early
extinguishment of debt is no longer classified as an extraordinary gain. 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. 149  In April 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities (SFAS No.
149). SFAS No. 149 amends and clarifies certain derivative instruments
embedded in other contracts, and for hedging activities under Statement of
Financial Accounting Standards No. 133. SFAS No. 149 is effective for certain
contracts entered into or modified by the Company after June 30, 2003. The
adoption of SFAS No. 149 did not impact the Companys consolidated financial
position or results of operations. SFAS No. 150  In May 2003, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 150,Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity (SFAS No. 150). SFAS No. 150 specifies that certain financial
instruments within its scope constitute obligations of the issuer and that,
therefore, the issuer must classify them as liabilities. Such financial
instruments include mandatorily redeemable financial instruments, obligations
to repurchase the issuers equity shares by transferring assets, and certain
obligations to issue a variable number of shares. SFAS No. 150 is effective
immediately for all financial instruments entered into or modified after May
31, 2003. For all other instruments, SFAS No. 150 is effective at the
beginning of the third quarter of 2003. The adoption of SFAS No. 150 did not
impact the Companys consolidated financial position or results of operations. 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 defaults on
these promissory notes, and this risk is heightened inasmuch as the Company
generally does not verify the credit history of its customers and will provide
financing if the customer is presently employed and meets certain household
income criteria. F-11




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##### Table of Contents



If a buyer of a Vacation Interval defaults, the Company generally must
foreclose on the Vacation Interval and attempt to resell it; the associated
marketing, selling, and administrative costs from the original sale are not
recovered; and such costs must be incurred again to resell the Vacation
Interval. Although the Company in many cases may have recourse against a
Vacation Interval buyer for the unpaid price, certain states have laws that
limit the Companys ability to recover personal judgments against customers who
have defaulted on their loans. Accordingly, the Company has generally not
pursued this remedy. Interest Rate Risk The Company has historically derived net interest
income from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Companys
indebtedness bears interest at variable rates and the Companys customer
receivables bear interest at fixed rates, increases in interest rates will
erode the spread in interest rates that the Company has historically obtained
and could cause the rate on the Companys borrowings to exceed the rate at
which the Company provides financing to its customers. The Company has not
engaged in interest rate hedging transactions. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect
on the Companys results of operations, cash flows, and financial position. Availability of Funding Sources The Company funds substantially all of
the notes receivable, timeshare inventories, and land inventories which it
originates or purchases with borrowings through its financing facilities, sales
of notes receivable, internally generated funds, and proceeds from public debt
and equity offerings. Borrowings are in turn repaid with the proceeds received
by the Company from repayments of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Companys results of operations, cash flows, and
financial condition. Geographic Concentration The Companys notes receivable are primarily
originated in Texas (where approximately 57.2% of Vacation Interval sales took
place in 2003), 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, 2003 was
approximately 14.9%. In connection with the sampler program, the Company
routinely enters into notes receivable with terms of 10 months. Notes
receivable from sampler sales were $1.2 million and $1.5 million at December
31, 2002 and 2003, respectively, and are non-interest bearing. The Company had a remaining note discount of $326,000 and $138,000 in
aggregate for the years ended December 31, 2002 and 2003, 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 $36.7 million and $32.8 million as of December 31, 2002 and 2003,
respectively, as collection of interest on such notes was deemed improbable. Notes receivable are scheduled to mature as follows at December 31, 2003
(in thousands): 2004
    
    $
    29,8642005
    
    
    31,9592006
    
    
    35,5932007
    
    
    37,1242008
    
    
    34,4662009
    
    
    29,085Thereafter
    
    
    43,799241,889Less discounts on notes
    
    
    (138
    )Less allowance for uncollectible notes
    
    
    (48,372
    )Notes receivable, net
    
    $
    193,379
 There were no notes sold with recourse during the years ended December 31,
2001, 2002, and 2003. Outstanding principal maturities of notes receivable sold
with recourse as of December 31, 2002 and 2003 were $123,000 and $17,000,
respectively. The Company carries an allowance for doubtful accounts related to
these notes of $13,000 and $0 at December 31, 2002 and 2003, respectively. F-12




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##### Table of Contents



During 2002, the Company sold $83.4 million of notes receivable to the SPE
and recognized pre-tax gains of $6.8 million. In conjunction with these sales,
the Company received cash consideration of $68.9 million, which was used to pay
down borrowings under its revolving loan facilities. 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. 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, 2003
and 2002, the Company received $7.9 million and $6.5 million, respectively, in
cash distributions from the SPE. At December 31, 2003, the SPE held notes receivable totaling $101.4
million, with related borrowings of $81.3 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 $613,000,
$547,000, and $904,000 for the years ended December 31, 2001, 2002, and 2003,
respectively. Such fees received approximate the Companys internal cost of
servicing such notes. As a result, the related servicing asset or liability was
estimated to be insignificant. 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 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, 2003 and 2002, the
Registrant paid approximately $3.5 million and $171,000, 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, 2003, $3.9 million of notes receivable, net of accounts charged
off, were considered delinquent. An additional $46.3 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, 2002 and 2003 (in thousands): December 31,2002
    
    2003Balance, beginning of period
    
    $
    333,336
    
    
    $
    261,784Sales
    
    
    107,517
    
    
    
    105,123Collections
    
    
    (59,157
    )
    
    
    (57,420
    )Receivables charged off
    
    
    (36,486
    )
    
    
    (27,342
    )Sold notes receivable
    
    
    (83,426
    )
    
    
    (40,394
    )Balance, end of period
    
    $
    261,784
    
    
    $
    241,751
 The activity in the allowance for uncollectible notes is as follows for
the years ended December 31, 2001, 2002, and 2003 (in thousands): December 31,2001
    
    2002
    
    2003Balance, beginning of period
    
    $
    74,778
    
    
    $
    54,744
    
    
    $
    28,547Provision for credit losses
    
    
    30,311
    
    
    
    24,562
    
    
    
    53,673Receivables charged off
    
    
    (50,345
    )
    
    
    (36,486
    )
    
    
    (27,342
    )Allowance related to notes sold
    
    
    
    
    
    
    (14,273
    )
    
    
    (6,506
    )Balance, end of period
    
    $
    54,744
    
    
    $
    28,547
    
    
    $
    48,372
 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, 2001,
2002, and 2003, the provision for customer returns was $9.1 million, $4.0
million, and $4.0 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: F-13




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##### Table of Contents




    
    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. 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. 5. INVENTORIES Inventories consist of the following at December 31, 2002 and 2003 (in
thousands): December 31,2002
    
    2003Timeshare units
    
    $
    41,951
    
    
    $
    46,165Amenities
    
    
    37,588
    
    
    
    38,007Land
    
    
    8,072
    
    
    
    7,805Recovery of canceled and traded intervals
    
    
    14,825
    
    
    
    9,411Other
    
    
    69
    
    
    
    11Total
    
    $
    102,505
    
    
    $
    101,399
 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, 2002 and 2003 (in thousands): December 31,2002
    
    2003Land
    
    $
    4,776
    
    
    $
    2,276Vehicles and equipment
    
    
    4,188
    
    
    
    4,278Utility plant, buildings, and facilities
    
    
    13,805
    
    
    
    15,187Office equipment and furniture
    
    
    28,597
    
    
    
    28,482Improvements
    
    
    11,510
    
    
    
    10,37862,876
    
    
    
    60,601Less accumulated depreciation
    
    
    (29,098
    )
    
    
    (33,113
    )Land, equipment, buildings, and utilities, net
    
    $
    33,778
    
    
    $
    27,488
 Depreciation and amortization expense for the years ended December 31,
2001, 2002, and 2003 was $6.5 million, $5.2 million, and $4.6 million,
respectively. In 2001, the Company recorded an impairment loss of $5.4 million, which
primarily represents a $1.3 million write-off of fixed assets related to the
closure of three sales offices and three telemarketing centers, a $1.4 million
write-off of prepaid booth rentals and marketing supplies, $2.3 million related
to the write-down of two Company airplanes to their estimated sales prices less
costs to sell, and a $230,000 loss related to a lease termination. F-14




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##### Table of Contents



7. INCOME TAXES Income tax benefit consists of the following components for the years
ended December 31, 2001, 2002, and 2003 (in thousands): 2001
    
    2002
    
    2003Current income tax expense (benefit)
    
    $
    69
    
    
    $
    (1,523
    )
    
    $
    86Deferred income tax expense (benefit)
    
    
    (168
    )
    
    
    
    
    
    
    Total income tax (benefit)
    
    $
    (99
    )
    
    $
    (1,523
    )
    
    $
    86
 A reconciliation of income tax benefit on reported pre-tax income (loss)
at statutory rates to actual income tax benefit for the years ended December
31, 2001, 2002, and 2003 is as follows (in thousands): 2001
    
    2002
    
    2003Dollars
    
    Rate
    
    Dollars
    
    Rate
    
    Dollars
    
    RateIncome tax expense (benefit) at statutory rates
    
    $
    (9,558
    )
    
    
    (35.0
    )%
    
    $
    7,445
    
    
    
    35.0
    %
    
    $
    (4,842
    )
    
    
    (35.0
    )%State income taxes, net of Federal
income tax benefit
    
    
    (846
    )
    
    
    (3.1
    )%
    
    
    659
    
    
    
    3.1
    %
    
    
    (429
    )
    
    
    (3.1
    )%Deferred tax asset allowance
    
    
    16,533
    
    
    
    60.5
    %
    
    
    (9,798
    )
    
    
    (46.1
    )%
    
    
    3,744
    
    
    
    27.0
    %Reconciliation to prior year tax return
    
    
    (6,192
    )
    
    
    (22.7
    )%
    
    
    
    
    
    
    
    
    
    
    811
    
    
    
    5.9
    %Other, primarily permanent differences
    
    
    (36
    )
    
    
    (0.1
    )%
    
    
    171
    
    
    
    0.8
    %
    
    
    802
    
    
    
    5.8
    %Total income tax expense (benefit)
    
    $
    (99
    )
    
    
    (0.4
    )%
    
    $
    (1,523
    )
    
    
    (7.2
    )%
    
    $
    86
    
    
    
    0.6
    %
 Deferred income tax assets and liabilities as of December 31, 2002 and
2003 are as follows (in thousands): 2002
    
    2003Deferred tax liabilities:Depreciation
    
    $
    4,085
    
    
    $
    4,809Installment sales income
    
    
    94,518
    
    
    
    79,588Total deferred tax liabilities
    
    
    98,603
    
    
    
    84,397Deferred tax assets:Net operating loss carryforward  pre Exchange Offer.
    
    
    75,876
    
    
    
    60,672Net operating loss carryforward  post Exchange Offer
    
    
    23,708
    
    
    
    28,676Impairment of long-lived assets
    
    
    5,307
    
    
    
    5,081Other
    
    
    406
    
    
    
    406Total deferred tax assets
    
    
    105,297
    
    
    
    94,835Net deferred tax liability (asset)
    
    
    (6,694
    )
    
    
    (10,438
    )Deferred tax asset allowance
    
    
    6,694
    
    
    
    10,438Net deferred tax liability
    
    $
    
    
    
    $
    
 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, 2003. 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 net operating losses (NOL) expire between 2013 through 2016.
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 F-15




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##### Table of Contents



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, 2003 (in thousands): Expiration Dates2018
    
    $
    14,5892019
    
    
    57,8542020
    
    
    132,2412021
    
    
    27,390$
    232,074
 8. DEBT Notes payable, capital lease obligations, and senior subordinated notes as
of December 31, 2002 and 2003 are as follows (in thousands): December 31,2002
    
    2003$55.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.6 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.3
million term loan with an interest rate of 8%)
    
    $
    46,078
    
    
    $
    25,095$11.3 million term loan with an interest rate of 8%, due in March 2007
    
    
    14,665
    
    
    
    10,998$55.1 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $44.1 million revolver
with an interest rate of LIBOR plus 3% with a 6% floor and a $11.0
million term loan with an interest rate of 8%)
    
    
    44,288
    
    
    
    28,325$11.0 million term loan with an interest rate of 8%, due in March 2007
    
    
    14,461
    
    
    
    10,845$7.9 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $6.2 million revolver
with an interest rate of Prime plus 3% with a 6% floor and a $1.7
million term loan with an interest rate of 8%)
    
    
    6,493
    
    
    
    3,734$1.7 million term loan with an interest rate of 8%, due in March 2007
    
    
    2,078
    
    
    
    1,558$66.4 million conduit loan, due December 2014, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of 7.035%
    
    
    
    
    
    
    66,381$40.4 million loan agreement, which contains certain financial
covenants, due March 2007, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note (the loan agreement is limited to a $35 million revolver
with an interest rate of Federal Funds plus 2.75% with a 6% floor and a
$5.4 million term loan with an interest rate of 8%)
    
    
    31,128
    
    
    
    16,897$5.4 million term loan with an interest rate of 8%, due in March 2007
    
    
    9,465
    
    
    
    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 August 2004, principal and interest payable from the
proceeds obtained on customer notes receivable pledged as collateral
for the note, at an interest rate of LIBOR plus 2.65% with a 6.0% floor
(additional draws are no longer available under this facility)
(Subsequent to December 31, 2003, the due date of this facility was
extended to February 2006)
    
    
    25,549
    
    
    
    17,009$9 million supplemental revolving loan agreement, which contains
certain financial covenants, due March 2007, principal and interest
payable from the proceeds obtained on customer notes receivable pledged
as collateral for the note, at an interest rate of LIBOR plus 2.67%
with a 6% floor
    
    
    8,536
    
    
    
    8,345$60 million loan agreement, which contains certain financial covenants,
due August 2003, principal and interest payable from the proceeds
obtained on customer notes receivable pledged as collateral for the
note, at an interest rate of LIBOR plus 3.55%. (This loan was paid off
in March 2003. Additional draws are no longer available under this
facility)
    
    
    9,836
    
    
    
    $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% (Subsequent to December 31, 2003, this
facility was increased to accommodate all of the inventory loans of the
Company. See Footnote 16. Subsequent Events)
    
    
    9,375
    
    
    
    10,000
 F-16




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##### Table of Contents



December 31,2002
    
    2003$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 (Subsequent to December 31,
2003, this facility was paid off. See Footnote 16. Subsequent Events)
    
    
    9,936
    
    
    
    7,733Various notes, due from April 2004 through February 2009, collateralized
by various assets with interest rates ranging from 0.9% to 10.5%
    
    
    2,035
    
    
    
    1,676Total notes payable
    
    
    233,923
    
    
    
    214,008Capital lease obligations
    
    
    2,490
    
    
    
    1,329Total notes payable and capital lease obligations
    
    
    236,413
    
    
    
    215,3376.0% senior subordinated notes, due 2007, interest payable
semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    28,467
    
    
    
    28,467101⁄2% senior subordinated notes, subordinate to the 6.0% senior
subordinated notes above, due 2008, interest payable semiannually on
April 1 and October 1, guaranteed by all of the Companys present and
future domestic restricted subsidiaries
    
    
    9,766
    
    
    
    2,146Interest on the 6.0% senior subordinated notes, due 2007, interest
payable semiannually on April 1 and October 1, guaranteed by all of the
Companys present and future domestic restricted subsidiaries
    
    
    7,686
    
    
    
    5,978Total senior subordinated notes
    
    
    45,919
    
    
    
    36,591Total
    
    $
    282,332
    
    
    $
    251,928
 At December 31, 2003, LIBOR rates were from 1.15% to 1.18%, and the Prime
rate was 4.00%. In February 2001, the Company disclosed significant liquidity issues,
which resulted in the violation of various financial covenants with the
Companys senior credit facilities. In negotiations with the Companys senior
lenders to restructure the credit facilities and to enable the Company to
continue in business, it was determined that the senior lenders would not
accept the Companys proposals to make necessary amendments to the existing
credit facilities, unless the Company was 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 Company 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 the Companys capital structure in such a manner as to
induce the senior lenders to restructure the credit facilities. The Company
completed the restructuring in May 2002, which reduced the existing debt and
provided liquidity to finance the operations of the Company. 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% for the last three quarters of 2002 and below 52.5% thereafter,
notes receivable delinquency rate below 25%, a minimum interest coverage ratio
of 1.1 to 1 (increasing to 1.25 to 1 in 2003), 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 three of the financial covenants
described above. First, sales and marketing expense for the quarter ended March
31, 2003 was 56.1% of sales, compared to a maximum threshold of 52.5%. Second,
the interest coverage ratio for the twelve months ended March 31, 2003 was 1.02
to 1.0, compared to a minimum requirement of 1.25 to 1.0. And third, net loss
for the two consecutive quarters ended March 31, 2003 was $24.9 million,
compared to a minimum requirement of $1.00 net income. Also, due to the results
for the six months ended June 30, 2003, the Company was in default of two F-17




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of the financial covenants described above. First, 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. Second, 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. In addition, due to the results for the nine
months ended September 30, 2003, the Company was in default of one of the
financial covenants described above. 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,
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 November 2003, the Company entered into agreements with its three
senior lenders to amend its senior credit facilities to modify the above
financial covenants under which the Company had been in default since the first
quarter of 2003. The amended covenants will 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 the Companys
$28.7 million increase in its allowance for uncollectible notes in the quarter
ended March 31, 2003 from the calculation of the Companys minimum required
consolidated net income, and from the calculation of the Companys minimum
required interest coverage ratio of 1.25 to 1.0. In addition to the above
amendments, the Company also received waivers under its senior credit
facilities of covenant defaults which occurred in the first quarter of 2003 due
to the Companys increase in its allowance for uncollectible notes and its
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 the Company is now
in full compliance with all of its credit facilities with its senior lenders. In December 2003, the Company 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 the Companys
existing senior lenders. Under the terms of the new 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 has 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 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, 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, the Company agreed to reduce the principal amount of the
facility from $100 million to $85 million. 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 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. 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, 2002 and 2003, a total of $50.2 million and
$42.8 million of customer notes, respectively, have been considered eligible
for Borrowing Base purposes F-18




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##### Table of Contents



which would have been considered ineligible had payment concessions and
the related reclassification as current not been granted. In addition, as of
December 31, 2002 and 2003, approximately $260,000 and $77,000, 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, 2003 (in thousands): 2004
    
    $
    20,1172005
    
    
    2,2452006
    
    
    2,0282007
    
    
    158,5922008
    
    
    2,503Thereafter
    
    
    66,443Total
    
    $
    251,928
 Total interest expense for the years ended December 31, 2001, 2002, and
2003 was $35.0 million, $22.2 million, and $16.6 million, respectively.
Interest of $1.2 million, $271,000, and $279,000 was capitalized during the
years ended December 31, 2001, 2002, and 2003, respectively. As of December 31, 2003, eligible customer notes receivable with a face
amount of $225.6 million and interval inventory of $17.7 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, and Ozark Mountain
Condominium Association, Inc. et al v. Silverleaf Resorts, Inc., Stone County,
Missouri.The homeowners associations of three condominium projects that a
former subsidiary of the Company constructed in Missouri filed separate actions
of unspecified amounts against the Company alleging construction defects and
breach of management agreements. This litigation has been ongoing for several
years. Discovery continued in the lawsuit during the year but is not yet
complete. Among other things, the plaintiffs have not yet turned over the
reports of their expert witnesses and the Company is unclear as to exactly what
damages are being claimed by the Plaintiffs. At this time, a majority of the
Companys legal fees and costs of litigation are being paid by two insurance
carriers, subject to a reservation of rights by these insurers. Since the
Company does not know what damages are being claimed, and cannot predict the
final outcome of these claims, it cannot estimate the additional costs it could
incur, or whether its insurance carriers will continue to cover its costs in
connection with these claims. The second action is scheduled for trial in June
2004. The Company is currently subject to other litigation arising in the normal
course of its business. From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection matters. Litigation has
been initiated from time to time by persons seeking individual recoveries for
themselves, as well as, in some instances, persons seeking recoveries on behalf
of an alleged class. In the judgment of the Company, none of these lawsuits or
claims against the Company, either individually or in the aggregate, is likely
to have a material adverse effect on the Company, its business, results of
operations, or financial condition. 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, 2001, 2002, and 2003 was $3.6 million, $2.8 million, and $2.4 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, 2003 (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong-term debt
    
    $
    32,908
    
    
    $
    15,205
    
    
    $
    15,188
    
    
    $
    165,586
    
    
    $
    7,309
    
    
    $
    94,483Capital leases
    
    
    1,202
    
    
    
    238
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    1,876
    
    
    
    1,807
    
    
    
    1,667
    
    
    
    1,541
    
    
    
    1,193
    
    
    
    749Litigation settlement
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other purchase obligations:Construction commitments.
    
    
    3,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employment agreements
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    39,829
    
    
    $
    17,250
    
    
    $
    16,858
    
    
    $
    167,127
    
    
    $
    8,502
    
    
    $
    95,232
 Long term debt includes $80.1 million of future interest and capital
leases include $114,000 of future interest, using an approximate interest rate
of 6.3%, which is the Companys weighted average cost of borrowings as of
December 31, 2003. Long-term F-19




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##### Table of Contents



debt of $17.0 million, which is included in the 2004 total, was extended
to February 2006 in March 2004. We also have a $15.7 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. Equipment acquired under capital leases consists of the following at
December 31, 2002 and 2003 (in thousands): 2002
    
    2003Amount of equipment under capital leases
    
    $
    14,487
    
    
    $
    9,168Less accumulated depreciation
    
    
    (9,078
    )
    
    
    (6,793
    )$
    5,409
    
    
    $
    2,375
 During 2001, Silverleaf Club entered into a loan agreement for $1.8
million, whereby the Company guaranteed such debt with certain of its aircraft
or related sales proceeds. As of December 31, 2003, Silverleaf Clubs related
note payable balance was $994,000. At December 31, 2003, we had notes receivable (including notes unrelated
to Vacation Intervals) in the approximate principal amount of $241.8 million
with an allowance for uncollectible notes of approximately $48.4 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. 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 2001, 2002, and 2003 are summarized as
follows: 2001
    
    2002
    
    2003Weighted
    
    
    
    
    
    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
    
    
    1,551,000
    
    
    $
    14.45
    
    
    
    1,078,500
    
    
    $
    14.08
    
    
    
    1,402,000
    
    
    $
    9.76Granted
    
    
    
    
    
    $
    
    
    
    
    460,000
    
    
    $
    0.29
    
    
    
    4,550,958
    
    
    $
    0.32Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Expired
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    (2,175,479
    )
    
    $
    0.32Forfeited
    
    
    (472,500
    )
    
    $
    15.29
    
    
    
    (136,500
    )
    
    $
    11.97
    
    
    
    (72,500
    )
    
    $
    13.24Options outstanding, end of year
    
    
    1,078,500
    
    
    $
    14.08
    
    
    
    1,402,000
    
    
    $
    9.76
    
    
    
    3,704,979
    
    
    $
    3.64Exercisable, end of year
    
    
    807,875
    
    
    $
    15.33
    
    
    
    863,500
    
    
    $
    15.17
    
    
    
    990,250
    
    
    $
    12.69
 For stock options outstanding at December 31, 2003: Weighted
    
    Weighted
    
    
    
    
    
    Weighted AverageNumber of
    
    Average
    
    Average
    
    Number of
    
    Exercise Price ofOptions
    
    Exercise Price
    
    Remaining
    
    Options
    
    OptionsRange of Exercise Prices
    
    Outstanding
    
    per Option
    
    Life in Years
    
    Exercisable
    
    Exercisable$16.00 - $25.50
    
    
    668,500
    
    
    $
    16.79
    
    
    
    4.5
    
    
    
    668,500
    
    
    $
    16.79$7.31 - $7.31
    
    
    151,000
    
    
    
    7.31
    
    
    
    6.0
    
    
    
    150,500
    
    
    
    7.31$3.59 - $3.69
    
    
    75,000
    
    
    
    3.64
    
    
    
    7.0
    
    
    
    56,250
    
    
    
    3.64$0.29 - $0.32
    
    
    2,810,479
    
    
    
    0.31
    
    
    
    9.8
    
    
    
    115,000
    
    
    
    0.29Total
    
    
    3,704,979
    
    
    
    
    
    
    
    
    
    
    
    990,250
 F-20




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##### Table of Contents



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 2001, 2002, and 2003 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 31,2001
    
    2002
    
    2003Net income (loss)  as reported
    
    $
    (27,209
    )
    
    $
    22,793
    
    
    $
    (13,920
    )Net income (loss)  pro forma
    
    
    (27,900
    )
    
    
    22,041
    
    
    
    (14,376
    )Net income (loss) per share  as reported: Basic
    
    
    (2.11
    )
    
    
    0.79
    
    
    
    (0.38
    )Net income (loss) per share  as reported: Diluted
    
    
    (2.11
    )
    
    
    0.79
    
    
    
    (0.38
    )Net income (loss) per share  pro forma: Basic
    
    
    (2.16
    )
    
    
    0.76
    
    
    
    (0.39
    )Net income (loss) per share  pro forma: Diluted
    
    
    (2.16
    )
    
    
    0.76
    
    
    
    (0.39
    )
 There were no stock options granted in 2001. 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. 11. 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 and 10% to 20% of dues collected for owners
associations within Crown 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. The Crown Club management agreement was terminated in 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. During the
years ended December 31, 2001, 2002, and 2003, the Company recorded management
fees of $2.5 million, $1.9 million, and $1.5 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, 2001, 2002, and 2003, the
Company incurred $147,000, $183,000, and $247,000, 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, 2001, 2002, and 2003, the Company charged the Clubs $1.7 million,
$2.5 million, and $3.3 million, respectively, under these agreements. The following schedule represents amounts due from and to affiliates at
December 31, 2002 and 2003 (in thousands): December 31,2002
    
    2003Timeshare owners associations and other, net
    
    $
    43
    
    
    $
    145Amount due from Crown Club
    
    
    707
    
    
    
    5Total amounts due from affiliates
    
    $
    750
    
    
    $
    150Amount due to Silverleaf Club
    
    $
    324
    
    
    $
    78Amount due to SPE
    
    
    1,897
    
    
    
    576Amount due to officer
    
    
    
    
    
    
    2Total amounts due to affiliates
    
    $
    2,221
    
    
    $
    656
 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, 2003, Silverleaf Clubs related note payable balance was
$994,000. F-21




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At December 31, 2002 and 2003, 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, 2003, the Company
owns approximately 11 acres of land that is subject to this net profits
interest. The Company holds ownership interests and other rights in several tracts
of flood plain land which are unsuitable for residential or commercial
development. 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 for an annual payment equal
to the property taxes attributable to the land. These property taxes were
approximately $7,700 for the year ended December 31, 2003. 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 flood plain tracts 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. In August 1997, subject to an employment agreement with an officer, the
Company purchased a house for $531,000 and leased the house, with an option to
purchase, to the officer for 13 months at a rental rate equal to the Companys
expense for interest, insurance, and taxes, which was approximately $3,000 per
month. In September 1998, the officer exercised his option to purchase the
house at the end of the lease for $531,000. In March 2001, the Company forgave
the remaining $48,000 balance on a note due from the officer. In June 1998, the Company entered an employment agreement, whereby the
Company paid $108,000 for an employees condominium in Branson, Missouri, upon
his relocation to Dallas, Texas, and paid $500,000 over a three-year period as
compensation for and in consideration of the exclusivity of his services. Prior
to becoming an employee in June 1998, the Company paid this employees former
architectural firm $246,000 during 1998 for architectural services rendered to
the Company. 12. 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 $45.9 million and $36.6
million as of December 31, 2002 and 2003, respectively. The estimated fair
value of these senior subordinated notes at December 31, 2002 and 2003 was
approximately $28.8 million and $23.0 million, respectively, based on the
market value of notes exchanged in the Exchange Offer in 2002. However, these
notes were F-22




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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. 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. 13. SUBSIDIARY GUARANTEES All subsidiaries of the Company, except the SPE and SF-II, have guaranteed
the $36.6 million of senior subordinated notes. Separate financial statements
and other disclosures concerning each guaranteeing subsidiary (each, a
Guarantor Subsidiary) are not presented herein because the guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several, and each
Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together
comprise all direct and indirect subsidiaries of the Company. The Guarantor Subsidiaries had no operations for the years ended December
31, 2001, 2002, and 2003. Combined summarized balance sheet information of the
Guarantor Subsidiaries as of December 31, 2002 and 2003, is as follows (in
thousands): December 31,2002
    
    2003Other assets
    
    $
    1
    
    
    $
    1Total assets
    
    $
    1
    
    
    $
    1Investment by parent (includes equity and amounts due to parent)
    
    $
    1
    
    
    $
    1Total liabilities and equity
    
    $
    1
    
    
    $
    1
 14. 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, 2001, 2002, and 2003. 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for 2002 and 2003 is set forth below (in
thousands, except per share amounts): First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterTotal revenues2003
    
    $
    39,488
    
    
    $
    43,470
    
    
    $
    44,877
    
    
    $
    39,3652002
    
    $
    42,083
    
    
    $
    42,268
    
    
    $
    44,135
    
    
    $
    42,054Total costs and operating expenses2003
    
    $
    68,487
    
    
    $
    41,619
    
    
    $
    41,681
    
    
    $
    38,8282002
    
    $
    44,182
    
    
    $
    44,520
    
    
    $
    42,708
    
    
    $
    42,583Net income (loss)2003
    
    $
    (25,821
    )
    
    $
    2,690
    
    
    $
    8,304
    
    
    $
    9072002
    
    $
    (2,100
    )
    
    $
    20,077
    
    
    $
    3,885
    
    
    $
    931Net income (loss) per common share: basic and diluted2003
    
    $
    (0.70
    )
    
    $
    0.07
    
    
    $
    0.23
    
    
    $
    0.022002
    
    $
    (0.16
    )
    
    $
    0.71
    
    
    $
    0.11
    
    
    $
    0.03
 16. SUBSEQUENT EVENTS In March 2004, the Company reached an agreement with one of its senior
lenders to extend the maturity date of one of its loan facilities from August
2004 to February 2006. The Company also replaced a non-revolving inventory loan
with this senior lender maturing in March 2007 with a revolving inventory loan
with one of its other senior lenders, which will also mature in March 2007. F-23