<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission file number: 001-13003
SILVERLEAF RESORTS, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2259890
(State of Incorporation) (I.R.S. Employer Identification No.)
1221 Riverbend Drive, Suite 120
Dallas, Texas 75247
(Address of principal executive offices, including zip code)
214-631-1166
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Number of shares of common stock outstanding of the issuer's Common Stock,
par value $0.01 per share as of August 11, 1997: 11,311,517
<PAGE> 2
SILVERLEAF RESORTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Condensed consolidated statements of income for the three months ended June 30, 1997
and 1996...................................................................................... 1
Condensed consolidated statements of income for the six months ended June 30, 1997
and 1996...................................................................................... 2
Condensed consolidated balance sheets as of June 30, 1997 and
December 31, 1996............................................................................. 3
Condensed consolidated statement of shareholders' equity for the six months ended
June 30, 1997................................................................................. 4
Condensed consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996........................................................... 5
Notes to the condensed consolidated financial statements...................................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8-12
PART II. OTHER INFORMATION
Item 5. Other Information............................................................................. 13
Item 6. Exhibits and reports on Form 8-K.............................................................. 13
Signatures.................................................................................... 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION (UNAUDITED)
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,
1997 and 1996
(dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------
June 30, 1997 June 30, 1996
-------------------------------- ---------------------------------
Actual Pro forma (a) Actual Pro forma (a)
------------ ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Vacation Interval sales $ 19,632 $ 19,632 $ 13,767 $ 13,767
Provision for uncollectible notes (4,069) (4,069) (3,544) (3,544)
----------- ------------ ----------- ------------
Net Vacation Interval sales 15,563 15,563 10,223 10,223
Interest income 2,095 2,095 1,500 1,500
Interest income from affiliates 96 -- 93 --
Management fee income 502 502 556 556
Lease income 389 389 432 432
Other income 837 837 336 336
----------- ------------ ----------- ------------
Total revenues 19,482 19,386 13,140 13,047
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 1,993 1,993 964 964
Sales and marketing 7,552 7,552 6,045 6,045
Operating, general and administrative 2,543 2,543 2,369 2,557
Depreciation and amortization 454 454 285 285
Interest expense to affiliates 196 -- 216 --
Interest expense to unaffiliated entities 1,498 146 896 22
----------- ------------ ----------- ------------
Total costs and operating expenses 14,236 12,688 10,775 9,873
----------- ------------ ----------- ------------
Income from continuing operations before --
income taxes 5,246 6,698 2,365 3,174
Income tax expense 1,942 2,479 884 1,186
----------- ------------ ----------- ------------
INCOME FROM CONTINUING OPERATIONS 3,304 4,219 1,481 1,988
DISCONTINUED OPERATIONS:
Loss from operations (less applicable income taxes
of $4 for the quarter ended June 30, 1996) -- -- (13) --
----------- ------------ ----------- ------------
NET INCOME $ 3,304 $ 4,219 $ 1,468 $ 1,988
=========== ============ =========== ============
INCOME (LOSS) PER COMMON SHARE FROM:
Continuing Operations $ 0.38 $ 0.37 $ 0.19 $ 0.20
Discontinued Operations -- -- -- --
----------- ------------ ----------- ------------
NET INCOME PER SHARE $ 0.38 $ 0.37 $ 0.19 $ 0.20
=========== ============ =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 8,678,550 11,311,517(b) 7,711,517 10,157,398(b)
=========== ============ =========== ============
</TABLE>
- -----------------------
(a) The unaudited condensed consolidated pro forma statements of income give
effect to (i) the sale of 3,600,000 shares of stock at the offering price
of $16 per share, in the aggregate $51.2 million, net of underwriting
discounts, commissions and offering expenses; (ii) payment of all amounts
due to affiliates net of amounts due from affiliates and elimination of the
related interest; (iii) payment of $35.9 million of notes payable to third
parties and elimination of the related interest expense; (iv) estimate of
additional cost to be incurred as a public company of $750 thousand; (v)
adjustment of the provision for income taxes for the effect of the pro
forma adjustments; and (vi) excludes discontinued operations. The unaudited
condensed consolidated pro forma statements of income are not necessarily
indicative of what the actual results of operations of the Company would
have been, nor do they purport to represent the Company's results of
operations for future periods.
(b) As required by Staff Accounting Bulletin No. 55, the weighted average
number of shares outstanding utilized in the pro forma earnings per share
computations assumes (i) the historical shares, as adjusted for the stock
split were outstanding for all periods presented, and (ii) an additional
number of shares were outstanding only in an amount sufficient to retire
the outstanding debt balances during the periods presented.
See accompanying notes to the condensed consolidated financial statements.
1
<PAGE> 4
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1997 and 1996
(dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------
June 30, 1997 June 30, 1996
------------------------------ ------------------------------
Actual Pro forma (a) Actual Pro forma (a)
-------------- -------------- ------------- ---------------
REVENUES:
<S> <C> <C> <C> <C>
Vacation Interval sales $ 35,402 $ 35,402 $ 26,357 $ 26,357
Provision for uncollectible notes (7,918) (7,918) (6,787) (6,787)
------------ ------------ ----------- ------------
Net Vacation Interval sales 27,484 27,484 19,570 19,570
Interest income 4,028 4,028 2,812 2,812
Interest income from affiliates 204 - 221 -
Management fee income 1,001 1,001 1,108 1,108
Lease income 875 875 888 888
Other income 1,235 1,235 581 581
------------ ------------ ----------- ------------
Total revenues 34,827 34,623 25,180 24,959
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales 3,215 3,215 1,188 1,188
Sales and marketing 13,501 13,501 11,085 11,085
Operating, general and administrative 4,488 4,676 4,712 5,087
Depreciation and amortization 784 784 562 562
Interest expense to affiliates 422 - 444 -
Interest expense to unaffiliated entities 2,958 180 1,724 44
------------ ------------ ----------- ------------
Total costs and operating expenses 25,368 22,356 19,715 17,966
------------ ------------ ----------- ------------
Income from continuing operations before
income taxes 9,459 12,267 5,465 6,993
Income tax expense 3,501 4,540 2,040 2,610
------------ ------------ ----------- ------------
INCOME FROM CONTINUING OPERATIONS 5,958 7,727 3,425 4,383
DISCONTINUED OPERATIONS:
Loss from operations (less applicable income taxes
of $39 for the six months ended June 30, 1996) - - (107) -
------------ ------------ ----------- ------------
NET INCOME $ 5,958 $ 7,727 $ 3,318 $ 4,383
============ ============ =========== ============
INCOME (LOSS) PER COMMON SHARE FROM:
Continuing Operations $ 0.73 $ 0.69 $ 0.44 $ 0.44
Discontinued Operations - - (0.01) -
------------ ------------ ----------- ------------
NET INCOME PER SHARE $ 0.73 $ 0.69 $ 0.43 $ 0.44
============ ============ =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 8,197,705 11,271,680(b) 7,711,517 10,015,910(b)
============ ============ =========== ============
</TABLE>
- -----------------------
(a) The unaudited condensed consolidated pro forma statements of income give
effect to (i) the sale of 3,600,000 shares of stock at the offering price
of $16 per share, in the aggregate $51.2 million, net of underwriting
discounts, commissions and offering expenses; (ii) payment of all amounts
due to affiliates net of amounts due from affiliates and elimination of the
related interest; (iii) payment of $35.9 million of notes payable to third
parties and elimination of the related interest expense; (iv) estimate of
additional cost to be incurred as a public company of $750 thousand; (v)
adjustment of the provision for income taxes for the effect of the pro
forma adjustments; and (vi) excludes discontinued operations. The unaudited
condensed consolidated pro forma statements of income are not necessarily
indicative of what the actual results of operations of the Company would
have been, nor do they purport to represent the Company's results of
operations for future periods.
(b) As required by Staff Accounting Bulletin No. 55, the weighted average
number of shares outstanding utilized in the pro forma earnings per share
computations assumes (i) the historical shares, as adjusted for the stock
split were outstanding for all periods presented, and (ii) an additional
number of shares were outstanding only in an amount sufficient to retire
the outstanding debt balances during the periods presented.
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 5
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Cash and equivalents $ 6,200 $ 973
Notes receivable, net of allowance for uncollectible notes of
$15,487 and $11,894 at June 30, 1997 and December 31,
1996, respectively 71,488 55,794
Amounts due from affiliates 1,905 6,237
Inventory 11,657 10,300
Land, equipment and utilities, net 14,390 12,633
Land held for sale 466 466
Prepaid and other assets 3,485 2,860
Net assets of discontinued operations 1,145 1,589
-------- -------
Total Assets $110,736 $90,852
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,505 $ 3,156
Amounts due to affiliates -- 14,765
Unearned revenues 1,598 1,790
Income taxes payable 4,508 3,650
Deferred income taxes, net 7,506 4,843
Notes payable and capital lease obligations 15,856 41,986
-------- -------
Total Liabilities 32,973 70,190
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share,
100,000,000 shares authorized, 11,311,517 and 7,711,517 shares
issued and outstanding at June 30, 1997 and December 31,
1996, respectively 113 77
Additional paid-in capital 64,577 13,470
Retained earnings 13,073 7,115
-------- -------
Total Shareholders' Equity 77,763 20,662
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $110,736 $90,852
======== =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 6
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------
Number of $0.01 Additional
Shares Par Paid-in Retained
Issued Value Capital Earnings Total
-------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
January 1, 1997 7,711,517 $ 77 $ 13,470 $ 7,115 $ 20,662
Issuance of common stock 3,600,000 36 51,107 - 51,143
Net income - - - 5,958 5,958
-------------- ------------ ------------- ------------ ------------
June 30, 1997 11,311,517 $ 113 $ 64,577 $ 13,073 $ 77,763
============== ============ ============= ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 7
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1997 1996
-------------- --------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 5,958 $ 3,318
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 784 562
Discontinued operations 506 970
Deferred tax provision 2,663 1,384
Increase (decrease) in cash and equivalents from changes in assets and liabilities:
Amounts due from affiliates 4,332 (272)
Inventory (1,357) (2,569)
Prepaid and other assets (625) (119)
Accounts payable and accrued expenses 349 312
Amounts due to affiliates 24 301
Unearned revenues (192) 511
Income taxes payable 858 656
-------- --------
Net cash provided by operating activities 13,300 5,054
-------- --------
INVESTING ACTIVITIES:
Purchase of land, equipment and utilities (1,841) (447)
Notes receivable, net (15,694) (11,828)
-------- --------
Net cash used in investing activities (17,535) (12,275)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities 15,187 10,150
Payments on borrowings to unaffiliated entities (42,017) (3,544)
Proceeds from borrowings from affiliates 100
Payments on borrowings to affiliates (14,789) (664)
Proceeds from public offering 51,143 --
Discontinued operations (62) (1,208)
-------- --------
Net cash provided by financing activities 9,462 4,834
-------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,227 (2,387)
CASH AND EQUIVALENTS
BEGINNING OF PERIOD 973 3,712
-------- --------
END OF PERIOD $ 6,200 $ 1,325
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 2,471 $ 1,681
Income taxes paid $ -- $ --
Equipment acquired under capital leases $ 700 $ 320
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 8
SILVERLEAF RESORTS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND
These condensed consolidated financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature. Operating results for three months and six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 1997.
These statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in Amendment No. 3 of the Company's
Registration Statement on Form S-1 (File No. 333-24273) filed with the
Securities and Exchange Commission on June 6, 1997. The accounting policies
used in preparing these consolidated financial statements are the same as those
described in such Registration Statement on Form S-1.
NOTE 2 - EARNINGS PER SHARE
Pro forma earnings per share is calculated based on the weighted average number
of shares of common stock outstanding and, if dilutive, common stock
equivalents, as if the Offering (which was consummated on June 6, 1997) had
occurred at the beginning of each period. The dilutive effect of common stock
equivalents was immaterial for each period presented. Options were not granted
or outstanding during the year ended December 31, 1996. During the three months
and six months ended June 30, 1997, options to purchase approximately 302,000
shares of the Company's common stock was granted to employees and directors of
the Company, none of which was exercised during the period.
In May 1997, the Board of Directors of the Company declared a stock dividend to
existing shareholders, which resulted in an increase in the number of shares of
common stock outstanding. The weighted average shares outstanding for all
periods presented give retroactive effect to the split of common shares.
Statement of Financial Standards ("SFAS") No. 128, "Earnings Per Share"
specifies new computation, presentation and disclosure requirements. The
statement will be effective for both interim and annual periods ending after
December 15, 1997. Management believes that the adoption of this statement will
not have a material impact on the earnings per share presented.
NOTE 3 - CAPITAL TRANSACTIONS AND PUBLIC OFFERING
During the three months ended June 30, 1997, the Company consummated the
offering of 3,600,000 shares of the Company's common stock (the "Offering").
The 3,600,000 shares of the Company's common stock were sold at the Offering at
a price of $16 per share. The net proceeds from the Offering, after the
deduction of the related issuance costs, amounted to approximately $51.2
million.
NOTE 4 - RELATED PARTY TRANSACTIONS
During the three months ended June 30, 1997, the Company paid off affiliate
debt and accrued interest totaling $14.6 million and received payment of $4.7
million of affiliate notes receivable and accrued interest. The payment to
affiliates was made with funds from the Offering. On the condensed consolidated
balance sheet dated June 30, 1997, the remaining due from affiliates relates to
the Master Club and the various homeowners' associations.
NOTE 5 - STOCK PLAN ADOPTED
The Company has established a stock option plan (the "1997 Stock Option Plan").
The 1997 Stock Option Plan provides for the award to directors, officers, and
key employees of nonqualified stock options and provides for the grant to
salaried key employees of incentive stock options. Nonqualified options will
provide for the right to purchase Common Stock at a specified price which may
be less than fair market value on the date of grant (but not less than par
value). Nonqualified stock options may be granted for any term
6
<PAGE> 9
and upon such conditions determined by the board of directors of the Company.
The Company has reserved 1,100,000 shares of common stock for issuance pursuant
to the Company's 1997 Stock Option Plan. During the three months ended June 30,
1997, 302,000 options were granted as part of the 1997 Stock Option Plan. The
options are exercisable over a four year period at $16.00 per share.
NOTE 6 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations related to continuing operations at
June 30, 1997, and December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- -----------------
<S> <C> <C>
$25 million revolving loan agreement, which contains certain financial
covenants, due January 2, 2001, principal and interest payable from the
proceeds obtained from timeshare notes receivable which are pledged as
collateral for the note, at an interest rate as defined in the agreement
(10.53% at June 30, 1997 ...................................................... $3,155 $20,139
$12 million revolving loan agreement which contains certain financial
covenants, due May 8, 2003, principal and interest payable from the proceeds
obtained from timeshare notes receivable which are pledged as collateral for
the note, at an interest rate of Base plus 2.75% (11.25% at June 30, 1997)..... 4,958 6,004
$7.5 million revolving line of credit, which contains certain financial
covenants, due December 31, 1999, secured by certain assets of the Company,
with monthly interest payments at Base plus 2.75% (11.25% at June 30, 1997).... 714 4,000
$40 million revolving loan agreement, which contains certain financial
covenants, due October 9, 1998, principal and interest payable from the
proceeds obtained from timeshare notes receivable pledged as collateral for the
note, at an interest rate of LIBOR plus 4% (9.72% at June 30, 1997)............ 1,706 278
$15 million revolving loan agreement which contains certain financial
covenants, due November 30, 2002, principal and interest payable from the
proceeds obtained from timeshare notes receivable which are pledged as
collateral for the note, at an interest rate of Prime plus 2%.................. 2,794 4,279
$5.4 million note payable, which contains certain financial covenants, due
October 9, 1999, secured by certain assets of the Company, interest only
payments due through April 1, 1998, with payments of principal and interest due
monthly thereafter until maturity, at an interest rate of Prime plus 2%........ -- 5,201
Various notes, due from November, 1997, through October, 2002, collateralized
by various assets with interest rates ranging from 6% to 11 %.................. 874 1,022
---------------- -----------------
Total notes payable 14,201 40,923
Capital lease obligations 1,655 1,063
---------------- -----------------
Total Notes payable and capital lease obligations $15,856 $41,986
================ =================
</TABLE>
Prime rate at June 30, 1997 was 8.5%. Substantially all assets of the Company
are pledged as collateral.
7
<PAGE> 10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed throughout this Form 10-Q filing are forward looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, those discussed under "Risk Factors" in the
final prospectus which is a part of the Company's Registration Statement on
Form S-1 (No. 333-24273) which is incorporated herein by reference.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1997 1996 1997 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
As a percentage of Total Revenues:
Vacation Interval sales 100.8% 104.8% 101.7% 104.7%
Less provision for uncollectible notes -20.9% -27.0% -22.8% -26.9%
Net Vacation Interval sales 79.9% 77.8% 78.9% 77.8%
Interest income 11.2% 12.1% 12.2% 12.0%
Management fee income 2.6% 4.2% 2.9% 4.4%
Lease income 2.0% 3.3% 2.5% 3.5%
Other income 4.3% 2.6% 3.5% 2.3%
Total revenues 100.0% 100.0% 100.0% 100.0%
As a percentage of Vacation Interval sales:
Provision for uncollectible notes -20.7% -25.7% -22.4% -25.8%
Cost of Vacation Interval sales 10.2% 7.0% 9.1% 4.5%
Sales and marketing 38.5% 43.9% 38.1% 42.1%
As a percentage of Interest Income
Interest expense 77.3% 69.8% 79.9% 71.5%
As a percentage of Total Revenues:
Operating, general and administrative 13.1% 18.0% 12.9% 18.7%
Depreciation and amortization 2.3% 2.2% 2.3% 2.2%
Total costs and expenses 73.1% 82.0% 72.8% 78.3%
</TABLE>
8
<PAGE> 11
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS ENDED
JUNE 30, 1996. Revenues in the second quarter 1997 were $19.5 million,
representing a $6.4 million or 48.3% increase over revenues of $13.1 million in
the second quarter of 1996. The increase was primarily due to a $5.3 million
increase in net sales of Vacation Intervals, a $0.6 million increase in
interest income and a $0.5 million increase in other income. The strong
increase in Vacation Interval revenues resulted from the Company's increased
telemarketing capacity and sales force and enhanced lead generation methods.
In the second quarter of 1997, the number of vacation intervals sold, exclusive
of upgraded Vacation Intervals, increased 18.9% to 2,116 from 1,779 in the same
period of 1996, and the average price per interval increased 21.1% to $9,278
from $7,663. Total interval sales in the second quarter of 1997 included 552
biennial intervals (counted as 276 Vacation Intervals) compared to none in the
same period of 1996. The increase in average price per interval resulted from
the Company's increased sales of higher value rated intervals and biennial
intervals (whose sales price is more than half of an annual interval). In
addition the Company has increased revenues generated from sales of upgraded
intervals at the Existing Resorts through the continued implementation of
marketing and sales programs focused on selling upgraded intervals to
Silverleaf Owners. Upgrade sales accounted for 21.0% of Vacation Interval sales
for the second quarter of 1997 compared to 14.5% of the second quarter 1996.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 20.7% for the second quarter of 1997 from 25.7% during the
same time period of 1996, reflecting an increased focus on collection efforts
for notes receivable. The improvement can also be attributed to an increase in
receivables relating to upgrade sales which typically represent better
performing accounts resulting in fewer delinquencies.
Interest income increased 37.6% to $2.2 million for the quarter ended June 30,
1997, from $1.6 million for the quarter ended June 30, 1996. This increase is
due to a higher average receivable balance during the three months ended June
30, 1997 compared to June 30, 1996.
Management fee income decreased 9.7% to $502 thousand in the second quarter of
1997 from $556 thousand for the same period in the prior year. The Company
receives a management fee from Master Club, the entity which has contracted to
manage the Company's existing resorts. The decrease in management fee income
was primarily the result of the Master Club's net income being reduced by on
going maintenance and refurbishment expenditures incurred as part of the Master
Club's continuing facility improvement program and increased operating costs.
Lease income, which relates to the Company's starter program, decreased 9.8% to
$389 thousand for the second quarter of 1997 compared to $432 thousand for the
second quarter of 1996. The decrease resulted from the Company's efforts to
market a lower cost biennial usage vacation interval product as an alternative
to its starter program.
Other income increased 149% to $837 thousand for the quarter ended June 30,
1997, from $336 thousand for the quarter ended June 30, 1996. This increase was
due primarily to a higher usage fee and higher water and sewer income from
resort utility operations, as well as receipt of $216 thousand relating to a
claim filed with the FDIC.
Cost of sales as a percentage of gross Vacation Interval sales increased to
10.2% in the second quarter of 1997 from 7.0% in the same period of 1996. The
increase is due to a decline in the volume of sales of Vacation Intervals with
a low cost basis. Cost of sales for the second quarter of 1996 was lower
primarily as a result of the sale of low cost inventory acquired by the Company
in 1995 and 1996 through its program to reacquire Vacation Intervals owned but
not actively used by Silverleaf owners. The Company anticipates that the number
of intervals acquired form Silverleaf owners in 1997 will be lower than the
number in 1996. Additionally, the Company continues to deplete its inventory of
other low cost intervals. As a result of these factors and the Company's
extensive construction program to build new inventory, the cost of sales
average is expected to increase in the future.
Sales and marketing costs as a percentage of gross Vacation Interval sales
declined to 38.5% for the second quarter of 1997 from 43.9% for the second
quarter of 1996. This decline is due mainly to the efficiencies resulting form
the Company's telemarketing and sales force areas and economies of scale
realized from
9
<PAGE> 12
higher sales volumes. The reduction can also be attributed to an increase in
upgrade sales which typically require less sales effort and cost.
Operating, general and administrative expenses as a percentage of total
revenues declined to 13.1% during the second quarter of 1997 from 18.0% for the
same quarter of 1996. The decrease was due to efficiencies realized from higher
sales volumes. Overall, operating, general and administrative expenses
increased $174,000 for the three months ended June 30, 1997 compared to the
same period in the prior year. The increase occurred primarily in payroll and
related expenses.
Interest expense as a percentage of interest income increased to 77.3% for the
quarter ended June 30, 1997 from 69.8% for the quarter ended June 30, 1996.
This increase was due to higher borrowing costs during the second quarter,
mostly attributable to an increase in outstanding indebtedness during the
second quarter of 1997 compared to the second quarter of 1996. As a result of
the funds received from the Company's initial public offering completed during
the second quarter of 1997 being used to pay down debt balances, lower interest
expense is expected in the third quarter of 1997.
Depreciation and amortization expense as a percentage of total revenue remained
relatively unchanged at 2.3% for the second quarter of 1997 versus 2.2% for the
second quarter of 1996.
Income from continuing operations before income taxes increased 122% to $5.2
million for the quarter ended June 30, 1997 from $2.4 million for the quarter
ended June 30, 1996 as a result of the above mentioned operating results.
Income tax expense as a percentage of income from continuing operations before
income taxes remained relatively unchanged at 37.0% for the second quarter of
1997 versus 37.4% for the second quarter of 1996.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS ENDED JUNE
30, 1996. Revenues for the first six months of 1997 were $34.8 million,
representing a $9.6 million or 38.3% increase over revenues of $25.2 million
for the first six months of 1996. The increase was primarily due to a $7.9
million increase in net sales of Vacation Intervals, a $1.2 million increase in
interest income and a $0.7 million increase in other income. The strong
increase in Vacation Interval revenues resulted from the Company's increased
telemarketing capacity and sales force and enhanced lead generation methods, as
well as an increase in upgrade sales.
In the first half of 1997, the number of vacation intervals sold, exclusive of
upgraded Vacation Intervals, increased 10.7% to 3,679 from 3,323 in the same
period of 1996, and the average price per interval increased 21.9% to $9,623
from $7,891. Total interval sales for the first six months of 1997 included 904
biennial intervals (counted as 452 Vacation Intervals) compared to none in the
same period of 1996. The increase in average price per interval resulted from
the Company's increased sales of higher value rated intervals and biennial
intervals (whose sales price is more than half of an annual interval). In
addition the Company has increased revenues generated from sales of upgraded
intervals at the Existing Resorts through the continued implementation of
marketing and sales programs focused on selling upgraded intervals to
Silverleaf Owners.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 22.4% for the first six months of 1997 from 25.8% during the
same time period of 1996, reflecting an increased focus on collection efforts
for notes receivable. The improvement can also be attributed to an increase in
receivables relating to upgrade sales which typically represent better
performing accounts resulting in fewer delinquencies.
Interest income increased 39.5% to $4.2 million for the six months ended June
30, 1997, from $3.0 million for the six months ended June 30, 1996. This
increase resulted from a $24.1 million increase in notes receivable, net of
allowance for uncollectible notes, due to increased sales.
Management fee income decreased 9.6% to $1.0 million in the first half of 1997
from $1.1 million for the same period in the prior year. This decrease was
primarily the result of the Master Club's net income being reduced by on going
maintenance and refurbishment expenditures incurred as part of the Master
Club's continuing facility improvement program and increased operating costs.
10
<PAGE> 13
Lease income, which relates to the Company's starter program, remained stable
at $875 thousand for the first six months of 1997 compared to $888 thousand for
the first six months of 1996.
Other income increased 113% to $1.2 million for the six months ended June 30,
1997, from $581 thousand for the six months ended June 30, 1996. This increase
was due primarily to a higher usage fee and higher water and sewer income from
resort utility operations, as well as receipt of $216 thousand relating to a
claim filed with the FDIC.
Cost of sales as a percentage of gross Vacation Interval sales increased to
9.1% in the first six months of 1997 from 4.5% in the same period of 1996. The
increase is due to a decline in the volume of sales of Vacation Intervals with
a low cost basis. Cost of sales for the first six months of 1996 was lower
primarily as a result of the sale of low cost inventory acquired by the Company
in 1995 and 1996 through its program to reacquire Vacation Intervals owned but
not actively used by Silverleaf owners. The Company anticipates that the number
of intervals acquired form Silverleaf owners in 1997 will be significantly
lower than the number in 1996. Additionally, the Company continues to deplete
its inventory of other low cost intervals. As a result of these factors and the
Company's extensive construction program to build new inventory, the cost of
sales average is expected to increase.
Sales and marketing costs as a percentage of gross Vacation Interval sales
declined to 38.1% for the six months ended June 30, 1997 from 42.1% for the six
months ended June 30, 1996. This decline is due mainly to the efficiencies
resulting form the Company's telemarketing and sales force areas and economies
of scale.
Operating, general and administrative expenses as a percentage of total
revenues declined to 12.9% during the first six months of 1997 from 18.7% for
the same period of 1996. The decrease was due to efficiencies realized from
higher sales volumes. Overall, operating, general and administrative expenses
decreased $224 thousand for the six months ended June 30, 1997 compared to the
same period in the prior year. The decrease occurred primarily in legal and
professional fees.
Interest expense as a percentage of interest income increased to 79.9% for the
six months ended June 30, 1997 from 71.5% for the six months ended June 30,
1996. This increase was due to higher borrowing costs during the second
quarter, mostly attributable to an increase in outstanding indebtedness during
the first six months of 1997 compared to the first six months quarter of 1996.
Depreciation and amortization expense as a percentage of total revenue remained
relatively unchanged at 2.3% for the first six months of 1997 versus 2.2% for
the same period of 1996.
Income from continuing operations before income taxes increased 73.1% to $9.5
million for the six months ended June 30, 1997 from $5.5 million for the six
months ended June 30, 1996 as a result of the above mentioned operating
results.
Income tax expense as a percentage of income from continuing operations before
income taxes remained relatively unchanged at 37.0% for the first half of 1997
versus 37.3% for the first half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash. The Company generates cash primarily from the sale of Vacation
Intervals, the payments on borrowings of promissory notes from Silverleaf
owners, management fees, Sampler sales, and resort and utility operations.
During the six months ended June 30, 1997, cash provided by operations was
$13.3 million. The Company generates cash from financing sales not only by
borrowing against customer notes receivable but also from the spread between
interest paid on borrowings and interest received on the related customer notes
receivable. Because the Company uses significant amounts of cash in the
development and marketing of Vacation Intervals, but collects cash on the
customer notes receivable over a long period of time, borrowing against
receivables is a necessary part of normal operations.
For regular Federal income tax purposes, the Company reports substantially all
of the Vacation Interval sales it finances under the installment method. Under
the installment method, the Company does not recognize income on sales of
Vacation Intervals until cash is received in the form of a down payment and as
installment
11
<PAGE> 14
payments on customer receivables are received by the Company. The deferral of
income tax liability conserves cash resources on a current basis. Interest will
be imposed, however, on the amount of tax attributable to the installment
payments for the period beginning on the date of sale and ending on the date
the related tax is paid. If the Company is otherwise not subject to tax in a
particular year, no interest is imposed since the interest is based on the
amount of tax paid in that year. The consolidated financial statements do not
contain an accrual for any interest expense that would be paid on the deferred
taxes related to the installment method, as the interest expense is not
estimable as of June 30, 1997. In addition, the Company is subject to current
alternative minimum tax ("AMT") as a result of the deferred income that results
from the installment sales treatment. Payment of AMT reduces future regular tax
liability in respect of installment sales, and creates a deferred tax asset. As
of June 30, 1997, the Company estimates its total liability for AMT to be
approximately $4.5 million which is included in Income Taxes Payable. The
Company's net operating losses, which also may be used to offset installment
sale income, expire beginning 2007 through 2011. Realization of the deferred
tax assets arising from net operating losses is dependent on generating
sufficient taxable income prior to the expiration of the loss carryforwards and
other factors.
For the six months ended June 30, 1997 and 1996, net cash provided by financing
activities was $9.5 million and $4.8 million, respectively. During the quarter
ended June 30, 1997, the Company issued 3,600,000 shares of common stock in the
Offering resulting in approximately $51.2 million of net proceeds. The Company
has five revolving credit facilities with four lenders providing for loans of
up to $96 million. Approximately $14.2 million of principal and interest
related to advances under these credit facilities was outstanding at June 30,
1997. Through the six months ended June 30, 1997, the weighted average cost of
funds for these borrowings was approximately 10.8%.
Uses of Cash. Investing activities typically reflect a net use of cash because
of capital additions and loans to customers in connection with the Company's
Vacation Interval sales. Net cash used in investing activities for the six
months ended June 30, 1997, and June 30, 1996, was $17.5 million and
$12.3 million, respectively. The increase primarily relates to an increase in
net notes receivable of $15.7 million and $11.8 million for the six month
periods ended June 30, 1997 and 1996, respectively.
The Company requires funds to finance the acquisitions of property for future
development and to further develop the existing resorts, as well as to make
capital improvements and support current operations. During the first six
months of 1997, the Company has spent $1.8 million for the development of
additional roads, utilities and amenities at the existing resorts and the
acquisition of telemarketing equipment. The Company is also actively seeking
sites for new resorts. The Company completed a transaction on August 7, 1997,
to acquire two tracts of land in Missouri and Illinois for an aggregate
purchase price of approximately $2.8 million. The acquisition of the tracts of
land was completed with funds generated from operations and proceeds from
borrowings under the existing lines of credit. Future capital expenditures and
acquisition costs will be financed through a combination of cash flow from
operations and proceeds from anticipated borrowings.
Credit Facilities. At June 30, 1997, the Company had available certain
revolving credit facilities for financing customer notes receivable and for
construction and development activities. The net proceeds of the public
offering were used to pay down a substantial amount of the outstanding
indebtedness under these credit facilities. The Company intends to maintain
each of the credit facilities and to utilize such facilities to finance its
operations.
In accordance with its growth strategy, the Company intends to accelerate the
development of the existing resorts and to acquire new properties for
development. The Company intends to finance such development in part with
existing credit facilities. Additional financing will be required. Any failure
to renew existing credit facilities or obtain adequate financing under new
facilities would have a material adverse effect on the Company's financial
position, results of operations or liquidity, and could significantly reduce
the Company's plans to acquire new properties and expand the existing resorts.
In the future, the Company may negotiate additional credit facilities, issue
corporate debt, issue equity securities, or any combination of the above. Any
debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. There is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels. The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for the next 12 months.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 7, 1997, the Company completed a transaction to acquire certain land
and amenities located near St. Louis, Missouri, and Chicago, Illinois. The
acquisition price for the two properties totaled approximately $2.8 million.
Property previously under contract located near Memphis, Tennessee, the
acquisition of which was contemplated as part of this transaction was
determined to not meet the criteria set by the Company as part of its due
diligence procedures, and as such, it was not included in the purchase
transaction.
The acquisition of these properties is part of the Company's strategy to
identify and acquire properties that meet its investment criteria for
development as drive-to resorts. The company believes the location of the
acquired property near St. Louis, Missouri, and Chicago, Illinois, are
consistent with this strategy. The Company intends to begin development and
construction activities at these two locations during the fourth quarter of
1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
The Company has not filed any Form 8-K reports for the quarter ended June 30,
1997.
(b) Exhibits
10.1 Nonqualified Stock Option Agreement (David T. O'Connor)
10.2 Incentive Stock Option Agreement (Joe W. Conner)
10.3 Incentive Stock Option Agreement (Larry H. Fritz)
27.1 Financial Data Schedule
99 "Risk Factors" section excerpted from final Prospectus dated
June 5, 1997 for Silverleaf Resorts, Inc. [incorporated by
reference from Registrant's Form S-1 Registration Statement (No.
333-24273) and included as an Exhibit to Form 10-Q for quarter
ended June 30, 1997 pursuant to Rule 12b-23(a)(3)]
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1997 By: /s/ ROBERT E. MEAD
--------------------------------
Robert E. Mead
Chairman of the Board and
Chief Executive Officer
Dated: August 12, 1997 By: /s/ JOE W. CONNER
--------------------------------
Joe W. Conner
Chief Financial Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.1 Nonqualified Stock Option Agreement (David T. O'Connor)
10.2 Incentive Stock Option Agreement (Joe W. Conner)
10.3 Incentive Stock Option Agreement (Larry H. Fritz)
27.1 Financial Data Schedule
99 "Risk Factors" section excerpted from Final Prospectus dated
June 5, 1997 for Silverleaf Resorts, Inc. [Incorporated by
reference from Registrant's Form S-1 Registration Statement
(No. 333-24273) and included as an Exhibit to Form 10-Q for
quarter ended June 30, 1997 pursuant to Rule 12b-23(a)(3)]
</TABLE>
<PAGE> 1
EXHIBIT 10.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NONQUALIFIED STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
DAVID T. O'CONNOR
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I.
GRANT OF OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Grant of Option . . . . . . . . . . . . . . . . . 1
Section 1.2. Fair Market Value . . . . . . . . . . . . . . . . 1
Section 1.3. Purchase Price . . . . . . . . . . . . . . . . . 1
Section 1.4. Time for Exercise . . . . . . . . . . . . . . . . 2
Section 1.5. Partial Exercise . . . . . . . . . . . . . . . . 2
Section 1.6. Fractional Shares . . . . . . . . . . . . . . . . 2
Section 1.7. Method of Exercise . . . . . . . . . . . . . . . 2
Section 1.8. Termination of Option . . . . . . . . . . . . . . 2
ARTICLE II
RESTRICTIONS AND LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Outstanding Options . . . . . . . . . . . . . . . 3
Section 2.2. Effect on Other Agreements . . . . . . . . . . . 3
Section 2.3. Shares as Investment . . . . . . . . . . . . . . 3
Section 2.4. Reclassification, Consolidation, or Merger . . . 3
Section 2.5. Limitations Upon Transfer of Option . . . . . . . 4
Section 2.6. Limitations Upon Transfer of Shares . . . . . . . 4
Section 2.7. Rights as Shareholder . . . . . . . . . . . . . . 4
ARTICLE III
ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.1. Notices . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2. Binding Effect . . . . . . . . . . . . . . . . . 5
Section 3.3. Nonqualified Options . . . . . . . . . . . . . . 5
Section 3.4. Incorporation of the Plan . . . . . . . . . . . . 5
</TABLE>
(i)
<PAGE> 3
NONQUALIFIED STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
DAVID T. O'CONNOR
This Nonqualified Stock Option Agreement (the "Option Agreement") is
made between SILVERLEAF RESORTS, INC., a Texas Corporation (the "Company"), and
DAVID T. O'CONNOR ("Optionee") effective as of the date specified below.
RECITALS:
A. Optionee is an important and valuable Officer or Director of
the Company with recognized leadership and experience in the business of the
Company, the Company deems it to be in its interest and in the interest of its
shareholders to provide an incentive to Optionee by granting Optionee a
proprietary interest in the Company, and the Company desires to enter into this
Option Agreement with Optionee under the terms and conditions hereinafter set
forth and to grant Optionee an option to purchase common shares of the
Corporation; and
B. The stock options granted hereunder are granted pursuant to
the terms of the 1997 Stock Option Plan for Silverleaf Resorts, Inc., which was
adopted by the Company and approved by the shareholders effective as of May 15,
1997, (the "Plan") and are intended to be Nonqualified Options as defined in
the Plan and not Incentive Options as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"),
AGREEMENT:
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, and for other good and valuable
consideration, the Parties agree as follows:
ARTICLE I.
GRANT OF OPTION
SECTION 1.1. GRANT OF OPTION. The Company hereby grants to
Optionee the right and option to purchase from it, on the terms and conditions
following, all or any part of an aggregate of TWO HUNDRED THOUSAND (200,000)
shares of the authorized $0.01 par value common shares of the Company.
SECTION 1.2. FAIR MARKET VALUE. The fair market value of the
Company's $0.01 par value common shares on the date of this Option Agreement is
SIXTEEN and NO/100 ($16.00) per share, as determined by the Company's Board of
Directors pursuant to Section 7.3 of the Plan.
SECTION 1.3. PURCHASE PRICE. The purchase price for each share
purchasable hereunder shall be one hundred percent (100%) of the fair market
value per share as defined in Section 1.2 hereof.
<PAGE> 4
SECTION 1.4. TIME FOR EXERCISE. Optionee may elect to exercise
the options at the times and for the number of shares indicated as follows:
(a) On or after June 5, 1998, to and including June 4, 1999,
50,000 shares;
(b) On or after June 5, 1999, to and including June 4, 2000,
50,000 shares;
(c) On or after June 5, 2000, to and including June 4, 2001,
50,000 shares; and
(d) On or after June 5, 2001, to and including June 4, 2007 (the
"Option Termination Date"), 50,000 shares.
However, if Optionee does not purchase the full number of shares to
which Optionee is entitled in either period (a), (b) or (c) above, Optionee is
permitted to purchase those remaining shares in a later period through and
including the Option Termination Date in addition to those shares which
Optionee may otherwise be entitled to purchase.
SECTION 1.5. PARTIAL EXERCISE. No partial exercise of such option
may be for less than 100 full shares.
SECTION 1.6. FRACTIONAL SHARES. In no event shall the Company be
required to transfer fractional shares to the Optionee.
SECTION 1.7. METHOD OF EXERCISE. The option shall be exercised by
Optionee as to all or part of the shares covered by the option by giving
written notice of such exercise to the Company, specifying the number of shares
to be purchased and specifying a business day not more than fifteen (15) days
from the date such notice is given, for the payment of the purchase price
against delivery of the shares being purchased. Such notice shall set forth a
statement, pursuant to Section 8.8 of the Plan and Section 2.4 of this Option
Agreement, that the shares are being acquired for investment.
Subject to any applicable laws or regulations and to the terms of
Sections 8.8, 11.5, and 12.1 of the Plan, the Company shall cause certificates
for the Shares so purchased to be delivered to Optionee at the principal
business office of the Company, against payment of the full purchase price, on
the date specified in the notice of exercise, such payment to be made in cash
or by certified check or by transfer and delivery of shares of the common stock
of the Company as provided in Section 7.4 of the Plan.
SECTION 1.8. TERMINATION OF OPTION. The option and all rights
granted by this Option Agreement, to the extent those rights have not been
exercised, will terminate and become null and void on the sooner of:
(a) Such date as is ten (10) years from the date of this Option
Agreement;
(b) The Option Termination Date as defined in Section 1.4 hereof;
2
<PAGE> 5
(c) The date which is three months after the date Optionee ceases
to continually serve as an Officer or Director of the Company,
if such cessation is by disability, retirement, or dismissal
other than for cause, as defined in Section 9.4 of the Plan,
provided that in the event of Optionee's cessation of office
or directorship under such terms, Optionee may exercise such
option only to the extent that Optionee was entitled to
exercise it on the date of Optionee's cessation of office or
directorship;
(d) The date Optionee ceases to continually serve as an Officer or
Director of the Company if such cessation is by voluntary
termination or dismissal for cause as defined in Sections 9.3
and 9.4 of the Plan; or
(e) The date which is one year following the death of Optionee if
Optionee dies while serving as an Officer or Director of the
Company or within the three-month period following the
termination of such office or directorship if such termination
was by disability, retirement, or dismissal other than for
cause. In the event of Optionee's death under such terms, the
person or persons to whom Optionee's rights under the option
shall pass, whether by will or by the applicable laws of
descent and distribution, may exercise such option pursuant to
Section 8.7 of the Plan only to the extent that Optionee was
entitled to exercise it on the date of Optionee's death.
ARTICLE II
RESTRICTIONS AND LIMITATIONS
SECTION 2.1. OUTSTANDING OPTIONS. The option granted to Optionee
under this Option Agreement shall in no event be exercised while there is
outstanding any option previously granted to Optionee to purchase common shares
of the Company at a price higher than the option price under the option herein
granted to Optionee.
SECTION 2.2. EFFECT ON OTHER AGREEMENTS. Nothing herein contained
shall be deemed to modify the terms of any other agreement between the Company
and Optionee.
SECTION 2.3. SHARES AS INVESTMENT. By accepting this option,
Optionee acknowledges for Optionee, Optionee's heirs, and legatees that any and
all shares purchased under this Option Agreement shall be acquired for
investment and not for or with a view towards distribution, and upon the
transfer of any or all of the shares subject to the option granted hereunder,
Optionee, or Optionee's heirs or legatees receiving such shares, shall deliver
to the Company a representation in writing that such shares are being acquired
in good faith for investment and not for or with a view towards distribution.
SECTION 2.4. RECLASSIFICATION, CONSOLIDATION, OR MERGER.
Adjustments to the number of shares subject to the option and the option price
for them shall be proportionately adjusted, pursuant to Section 10.1 of the
Plan.
3
<PAGE> 6
SECTION 2.5. LIMITATIONS UPON TRANSFER OF OPTION. During the
lifetime of Optionee, the option and all rights granted in this Option
Agreement shall be exercisable only by the Optionee, and except as Section
1.8(e) of this Option Agreement otherwise provides, the option and all rights
granted under this Option Agreement shall not be transferred, assigned,
pledged, or hypothecated in any way (whether by operation of law or otherwise),
and shall not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of such
option or of such rights contrary to the provisions in this Option Agreement,
or upon the levy of any attachment or similar process upon such option or such
rights, such option and such rights shall immediately become null and void.
SECTION 2.6. LIMITATIONS UPON TRANSFER OF SHARES. No shares
acquired by Optionee pursuant to this Option Agreement shall be sold or
disposed of within six (6) months following the date of acquisition of such
shares, unless either the grant of this Non-Qualified Option is approved by the
Board of Directors, or a committee of the Board of Directors that is composed
solely of two or more non-employee directors as defined in Rule 16b-3 of the
Exchange Act, or the grant of this Non-Qualified Option is approved or
ratified, in compliance with section 14 of the Exchange Act, by either: the
affirmative votes of the holders of a majority of the securities of the Company
present, or represented, and entitled to vote at a meeting duly held in
accordance with the applicable laws of the state or other jurisdiction in which
the Company is incorporated, or the written consent of the holders of a
majority of the securities of the Company entitled to vote, provided that such
ratification occurs no later than the date of the next annual meeting of the
shareholders. Any attempted sale, disposal or transfer of such shares shall be
without effect. All shares transferred to Optionee pursuant to the exercise of
the option granted hereby shall be clearly marked with the foregoing
restrictions on transfer.
SECTION 2.7. RIGHTS AS SHAREHOLDER. Neither Optionee nor
Optionee's executor, administrator, heirs, or legatees, shall be or have any
rights or privileges of a shareholder of the Company in respect of the shares
transferable upon exercise of the option granted under this Option Agreement,
unless and until certificates representing such shares shall have been
endorsed, transferred, and delivered and the Optionee, or the Optionee's
executor, administrator, heirs or legatees, as the case may be, has caused his
name to be entered as the shareholder of record on the books of the Company.
ARTICLE III
ADMINISTRATIVE PROVISIONS
SECTION 3.1. NOTICES. Any notice to be given under the terms of
this Option Agreement shall be addressed to the Parties as follows:
4
<PAGE> 7
If to the Company:
Silverleaf Resorts, Inc. Attn: Robert E.
Mead, Chief Executive Officer 1221 Riverbend
Drive, Suite 120 P.O.Box 358 Dallas, Texas
75221
If to Optionee:
DAVID T. O'CONNOR
620 Elmridge Drive
Tyler, Texas 75703
Any Party may change its address by giving notice in writing, stating
its new address, to the other Party as provided in the foregoing manner. Any
notice shall be deemed duly given when enclosed in a properly sealed envelope
or wrapper addressed as herein required certified and deposited (postage and
certification fee prepaid) in a post office or branch post office regularly
maintained by the United States Government.
SECTION 3.2. BINDING EFFECT. This Option Agreement shall be
binding upon the heirs, executors, administrators, and successors of the
parties hereto.
SECTION 3.3. NONQUALIFIED OPTIONS. The options granted hereunder
are intended to be Nonqualified Options as defined in the Plan.
SECTION 3.4. INCORPORATION OF THE PLAN. The terms, conditions and
limitations contained in the Plan are incorporated herein by reference and such
provisions shall control to the extent they are not specifically contrary to a
provision of this Option Agreement.
EXECUTED this 30th day of June, 1997, but EFFECTIVE the
5th day of June, 1997.
SILVERLEAF RESORTS, INC., the Company
By: /s/ ROBERT E. MEAD
----------------------------------
ROBERT E. MEAD,
Chief Executive Officer
/s/ DAVID T. O'CONNOR
----------------------------------
DAVID T. O'CONNOR, Optionee
5
<PAGE> 1
EXHIBIT 10.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCENTIVE STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
JOE W. CONNER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I.
GRANT OF OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Grant of Option . . . . . . . . . . . . . . . . . 1
Section 1.2. Fair Market Value . . . . . . . . . . . . . . . . 1
Section 1.3. Purchase Price . . . . . . . . . . . . . . . . . 1
Section 1.4. Time for Exercise . . . . . . . . . . . . . . . . 2
Section 1.5. Partial Exercise . . . . . . . . . . . . . . . . 2
Section 1.6. Fractional Shares . . . . . . . . . . . . . . . . 2
Section 1.7. Method of Exercise . . . . . . . . . . . . . . . 2
Section 1.8. Termination of Option . . . . . . . . . . . . . . 2
ARTICLE II
RESTRICTIONS AND LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Outstanding Options . . . . . . . . . . . . . . . 3
Section 2.2. Limitations . . . . . . . . . . . . . . . . . . . 3
Section 2.3. Effect on Employment Agreements . . . . . . . . . 3
Section 2.4. Shares as Investment . . . . . . . . . . . . . . 3
Section 2.5. Reclassification, Consolidation, or Merger . . . 4
Section 2.6. Limitations Upon Transfer of Option . . . . . . . 4
Section 2.7. Limitations Upon Transfer of Shares . . . . . . . 4
Section 2.8. Rights as Shareholder . . . . . . . . . . . . . . 4
ARTICLE III
ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.1. Notices . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2. Binding Effect . . . . . . . . . . . . . . . . . 5
Section 3.3. Incentive Options . . . . . . . . . . . . . . . . 5
Section 3.4. Incorporation of the Plan . . . . . . . . . . . . 5
</TABLE>
(i)
<PAGE> 3
INCENTIVE STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
JOE W. CONNER
This Incentive Stock Option Agreement (the "Option Agreement") is made
between SILVERLEAF RESORTS, INC., a Texas Corporation (the "Company"), and JOE
W. CONNER ("Employee") effective as of the date specified below.
RECITALS:
A. The Company has employed Employee and considers it desirable
and in its best interests that Employee be given an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company in the form of options to purchase common shares of
the Company; and
B. The stock options granted hereunder are granted pursuant to
the terms of the 1997 Stock Option Plan for Silverleaf Resorts, Inc., which was
adopted by the Company and approved by the shareholders effective as of May 15,
1997, (the "Plan") and are intended to be Incentive Options as defined in the
Plan and Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"),
AGREEMENT:
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, and for other good and valuable
consideration, the Parties agree as follows:
ARTICLE I.
GRANT OF OPTION
SECTION 1.1. GRANT OF OPTION. The Company hereby grants to
Employee the right and option to purchase from it, on the terms and conditions
following, all or any part of an aggregate of TWENTY-FIVE THOUSAND (25,000)
shares of the authorized $0.01 par value common shares of the Company.
SECTION 1.2. FAIR MARKET VALUE. The fair market value of the
Company's $0.01 par value common shares on the date of this Option Agreement is
SIXTEEN and NO/100 ($16.00) per share, as determined by the Company's Board of
Directors pursuant to Section 7.3 of the Plan.
SECTION 1.3. PURCHASE PRICE. The purchase price for each share
purchasable hereunder shall be one hundred percent (100%) of the fair market
value per share as defined in Section 1.2 hereof.
<PAGE> 4
SECTION 1.4. TIME FOR EXERCISE. Employee may elect to exercise
the options at the times and for the number of shares indicated as follows:
(a) On or after June 5, 1998, to and including June 4, 1999, 6,250
shares;
(b) On or after June 5, 1999, to and including June 4, 2000, 6,250
shares;
(c) On or after June 5, 2000, to and including June 4, 2001, 6,250
shares; and
(d) On or after June 5, 2001, to and including June 4, 2007 (the
"Option Termination Date"), 6,250 shares.
However, if Employee does not purchase the full number of shares to
which Employee is entitled in either period (a), (b) or (c) above, Employee is
permitted to purchase those remaining shares in a later period through and
including the Option Termination Date in addition to those shares which
Employee may otherwise be entitled to purchase.
SECTION 1.5. PARTIAL EXERCISE. No partial exercise of such option
may be for less than 100 full shares.
SECTION 1.6. FRACTIONAL SHARES. In no event shall the Company be
required to transfer fractional shares to the Employee.
SECTION 1.7. METHOD OF EXERCISE. The option shall be exercised by
Employee as to all or part of the shares covered by the option by giving
written notice of such exercise to the Company, specifying the number of shares
to be purchased and specifying a business day not more than fifteen (15) days
from the date such notice is given, for the payment of the purchase price
against delivery of the shares being purchased. Such notice shall set forth a
statement, pursuant to Section 8.8 of the Plan and Section 2.5 of this Option
Agreement, that the shares are being acquired for investment.
Subject to any applicable laws or regulations and to the terms of
Sections 8.8, 11.5, and 12.1 of the Plan, the Company shall cause certificates
for the Shares so purchased to be delivered to Employee at the principal
business office of the Company, against payment of the full purchase price, on
the date specified in the notice of exercise, such payment to be made in cash
or by certified check or by transfer and delivery of shares of common stock of
the Company as provided in Section 7.4 of the Plan.
SECTION 1.8. TERMINATION OF OPTION. The option and all rights
granted by this Option Agreement, to the extent those rights have not been
exercised, will terminate and become null and void on the sooner of:
(a) Such date as is ten (10) years from the date of this Option
Agreement;
(b) The Option Termination Date as defined in Section 1.4 hereof;
2
<PAGE> 5
(c) The date which is three months after the date Employee ceases
to be in the continuous employ of the Company, if such
cessation is by disability, retirement, or dismissal other
than for cause, as defined in Section 9.4 of the Plan,
provided that in the event of Employee's cessation of
employment under such terms, Employee may exercise such option
only to the extent that Employee was entitled to exercise it
on the date of Employee's cessation of employment;
(d) The date Employee ceases to be in the continuous employ of the
Company if such cessation is by voluntary termination or
dismissal for cause as defined in Sections 9.3 and 9.4 of the
Plan; or
(e) The date which is one year following the death of Employee, if
Employee dies while employed by the Company or within the
three-month period following the termination of such
employment if such termination was by disability, retirement,
or dismissal other than for cause. In the event of Employee's
death under such terms, the person or persons to whom
Employee's rights under the option shall pass, whether by will
or by the applicable laws of descent and distribution, may
exercise such option pursuant to Section 8.7 of the Plan only
to the extent that Employee was entitled to exercise it on the
date of Employee's death.
ARTICLE II
RESTRICTIONS AND LIMITATIONS
SECTION 2.1. OUTSTANDING OPTIONS. The option granted to Employee
under this Option Agreement shall in no event be exercised while there is
outstanding any option previously granted to Employee to purchase common shares
of the Company at a price higher than the option price under the option herein
granted to Employee.
SECTION 2.2. LIMITATIONS. In accordance with the terms of Section
422 of the Code, the option granted under this Option Agreement is limited so
that the aggregate fair market value of the stock which Employee may purchase
hereunder for the first time in any calendar year does not exceed $100,000.
SECTION 2.3. EFFECT ON EMPLOYMENT AGREEMENTS. Nothing herein
contained shall be deemed to modify the terms of any employment agreement
between the Company and Employee.
SECTION 2.4. SHARES AS INVESTMENT. By accepting this option,
Employee acknowledges for Employee, Employee's heirs, and legatees that any and
all shares purchased under this Option Agreement shall be acquired for
investment and not for or with a view towards distribution, and upon the
transfer of any or all of the shares subject to the option granted hereunder,
Employee, or Employee's heirs or legatees receiving such shares, shall deliver
to the Company a representation in writing that such shares are being acquired
in good faith for investment and not for or with a view towards distribution.
3
<PAGE> 6
SECTION 2.5. RECLASSIFICATION, CONSOLIDATION, OR MERGER.
Adjustments to the number of shares subject to this option and the option price
for them shall be proportionately adjusted, pursuant to Section 10.1 of the
Plan.
SECTION 2.6. LIMITATIONS UPON TRANSFER OF OPTION. During the
lifetime of Employee, the option and all rights granted in this Option
Agreement shall be exercisable only by the Employee, and except as Section
1.8(e) of this Option Agreement otherwise provides, the option and all rights
granted under this Option Agreement shall not be transferred, assigned,
pledged, or hypothecated in any way (whether by operation of law or otherwise),
and shall not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of such
option or of such rights contrary to the provisions in this Option Agreement,
or upon the levy of any attachment or similar process upon such option or such
rights, such option and such rights shall immediately become null and void.
SECTION 2.7. LIMITATIONS UPON TRANSFER OF SHARES. No shares
acquired by Employee pursuant to this Option Agreement may be "disposed of",
within the meaning of Section 424(c) of the Code, by Employee within two (2)
years from the date of granting of the option nor within one year after the
transfer of such share(s) to Employee. Any attempted sale, disposal or
transfer of such shares shall be without effect. All shares transferred to
Employee pursuant to the exercise of the option granted hereby shall be clearly
marked with the foregoing restrictions on transfer.
SECTION 2.8. RIGHTS AS SHAREHOLDER. Neither Employee nor
Employee's executor, administrator, heirs, or legatees, shall be or have any
rights or privileges of a shareholder of the Company in respect of the shares
transferable upon exercise of the option granted under this Option Agreement,
unless and until certificates representing such shares shall have been
endorsed, transferred, and delivered and the Employee, or the Employee's
executor, administrator, heirs or legatees, as the case may be, has caused his
name to be entered as the shareholder of record on the books of the Company.
ARTICLE III
ADMINISTRATIVE PROVISIONS
SECTION 3.1. NOTICES. Any notice to be given under the terms of
this Option Agreement shall be addressed to the Parties as follows:
If to the Company:
Silverleaf Resorts, Inc.
Attn: Robert E. Mead, Chief Executive Officer
1221 Riverbend Drive, Suite 120
P.O.Box 358
Dallas, Texas 75221
4
<PAGE> 7
If to Employee:
JOE W. CONNER
751 Pelican Lane
Coppell, TX 75019
Any Party may change its address by giving notice in writing, stating
its new address, to the other Party as provided in the foregoing manner. Any
notice shall be deemed duly given when enclosed in a properly sealed envelope
or wrapper addressed as herein required certified and deposited (postage and
certification fee prepaid) in a post office or branch post office regularly
maintained by the United States Government.
SECTION 3.2. BINDING EFFECT. This Option Agreement shall be
binding upon the heirs, executors, administrators, and successors of the
parties hereto.
SECTION 3.3. INCENTIVE OPTIONS. The options granted hereunder are
intended to be Incentive Options as defined in the Plan and Section 422 of the
Code, but the Company makes no warranty as to the qualification of any option
as an Incentive Option.
SECTION 3.4. INCORPORATION OF THE PLAN. The terms, conditions and
limitations contained in the Plan are incorporated herein by reference and such
provisions shall control to the extent they are not specifically contrary to a
provision of this Option Agreement.
EXECUTED this 30th day of June, 1997, but EFFECTIVE as
of the 5th day of June, 1997.
SILVERLEAF RESORTS, INC., the
Company
By: /s/ ROBERT E. MEAD
---------------------------
ROBERT E. MEAD,
Chief Executive Officer
/s/ JOE W. CONNER
-----------------------------
JOE W. CONNER, Employee
5
<PAGE> 1
EXHIBIT 10.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCENTIVE STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
LARRY H. FRITZ
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I.
GRANT OF OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Grant of Option . . . . . . . . . . . . . . . . . 1
Section 1.2. Fair Market Value . . . . . . . . . . . . . . . . 1
Section 1.3. Purchase Price . . . . . . . . . . . . . . . . . 1
Section 1.4. Time for Exercise . . . . . . . . . . . . . . . . 2
Section 1.5. Partial Exercise . . . . . . . . . . . . . . . . 2
Section 1.6. Fractional Shares . . . . . . . . . . . . . . . . 2
Section 1.7. Method of Exercise . . . . . . . . . . . . . . . 2
Section 1.8. Termination of Option . . . . . . . . . . . . . . 2
ARTICLE II
RESTRICTIONS AND LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Outstanding Options . . . . . . . . . . . . . . . 3
Section 2.2. Limitations . . . . . . . . . . . . . . . . . . . 3
Section 2.3. Effect on Employment Agreements . . . . . . . . . 3
Section 2.4. Shares as Investment . . . . . . . . . . . . . . 3
Section 2.5. Reclassification, Consolidation, or Merger . . . 4
Section 2.6. Limitations Upon Transfer of Option . . . . . . . 4
Section 2.7. Limitations Upon Transfer of Shares . . . . . . . 4
Section 2.8. Rights as Shareholder . . . . . . . . . . . . . . 4
ARTICLE III
ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 3.1. Notices . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2. Binding Effect . . . . . . . . . . . . . . . . . 5
Section 3.3. Incentive Options . . . . . . . . . . . . . . . . 5
Section 3.4. Incorporation of the Plan . . . . . . . . . . . . 5
</TABLE>
(i)
<PAGE> 3
INCENTIVE STOCK OPTION AGREEMENT
BETWEEN
SILVERLEAF RESORTS, INC.
AND
LARRY H. FRITZ
This Incentive Stock Option Agreement (the "Option Agreement") is made
between SILVERLEAF RESORTS, INC., a Texas Corporation (the "Company"), and
LARRY H. FRITZ ("Employee") effective as of the date specified below.
RECITALS:
A. The Company has employed Employee and considers it desirable
and in its best interests that Employee be given an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company in the form of options to purchase common shares of
the Company; and
B. The stock options granted hereunder are granted pursuant to
the terms of the 1997 Stock Option Plan for Silverleaf Resorts, Inc., which was
adopted by the Company and approved by the shareholders effective as of May 15,
1997, (the "Plan") and are intended to be Incentive Options as defined in the
Plan and Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"),
AGREEMENT:
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, and for other good and valuable
consideration, the Parties agree as follows:
ARTICLE I.
GRANT OF OPTION
SECTION 1.1. GRANT OF OPTION. The Company hereby grants to
Employee the right and option to purchase from it, on the terms and conditions
following, all or any part of an aggregate of TWENTY-FIVE THOUSAND (25,000)
shares of the authorized $0.01 par value common shares of the Company.
SECTION 1.2. FAIR MARKET VALUE. The fair market value of the
Company's $0.01 par value common shares on the date of this Option Agreement is
SIXTEEN and NO/100 ($16.00) per share, as determined by the Company's Board of
Directors pursuant to Section 7.3 of the Plan.
SECTION 1.3. PURCHASE PRICE. The purchase price for each share
purchasable hereunder shall be one hundred percent (100%) of the fair market
value per share as defined in Section 1.2 hereof.
<PAGE> 4
SECTION 1.4. TIME FOR EXERCISE. Employee may elect to exercise
the options at the times and for the number of shares indicated as follows:
(a) On or after June 5, 1998, to and including June 4, 1999, 6,250
shares;
(b) On or after June 5, 1999, to and including June 4, 2000, 6,250
shares;
(c) On or after June 5, 2000, to and including June 4, 2001, 6,250
shares; and
(d) On or after June 5, 2001, to and including June 4, 2007 (the
"Option Termination Date"), 6,250 shares.
However, if Employee does not purchase the full number of shares to
which Employee is entitled in either period (a), (b) or (c) above, Employee is
permitted to purchase those remaining shares in a later period through and
including the Option Termination Date in addition to those shares which
Employee may otherwise be entitled to purchase.
SECTION 1.5. PARTIAL EXERCISE. No partial exercise of such option
may be for less than 100 full shares.
SECTION 1.6. FRACTIONAL SHARES. In no event shall the Company be
required to transfer fractional shares to the Employee.
SECTION 1.7. METHOD OF EXERCISE. The option shall be exercised by
Employee as to all or part of the shares covered by the option by giving
written notice of such exercise to the Company, specifying the number of shares
to be purchased and specifying a business day not more than fifteen (15) days
from the date such notice is given, for the payment of the purchase price
against delivery of the shares being purchased. Such notice shall set forth a
statement, pursuant to Section 8.8 of the Plan and Section 2.5 of this Option
Agreement, that the shares are being acquired for investment.
Subject to any applicable laws or regulations and to the terms of
Sections 8.8, 11.5, and 12.1 of the Plan, the Company shall cause certificates
for the Shares so purchased to be delivered to Employee at the principal
business office of the Company, against payment of the full purchase price, on
the date specified in the notice of exercise, such payment to be made in cash
or by certified check or by transfer and delivery of shares of common stock of
the Company as provided in Section 7.4 of the Plan.
SECTION 1.8. TERMINATION OF OPTION. The option and all rights
granted by this Option Agreement, to the extent those rights have not been
exercised, will terminate and become null and void on the sooner of:
(a) Such date as is ten (10) years from the date of this Option
Agreement;
(b) The Option Termination Date as defined in Section 1.4 hereof;
2
<PAGE> 5
(c) The date which is three months after the date Employee ceases
to be in the continuous employ of the Company, if such
cessation is by disability, retirement, or dismissal other
than for cause, as defined in Section 9.4 of the Plan,
provided that in the event of Employee's cessation of
employment under such terms, Employee may exercise such option
only to the extent that Employee was entitled to exercise it
on the date of Employee's cessation of employment;
(d) The date Employee ceases to be in the continuous employ of the
Company if such cessation is by voluntary termination or
dismissal for cause as defined in Sections 9.3 and 9.4 of the
Plan; or
(e) The date which is one year following the death of Employee, if
Employee dies while employed by the Company or within the
three-month period following the termination of such
employment if such termination was by disability, retirement,
or dismissal other than for cause. In the event of Employee's
death under such terms, the person or persons to whom
Employee's rights under the option shall pass, whether by will
or by the applicable laws of descent and distribution, may
exercise such option pursuant to Section 8.7 of the Plan only
to the extent that Employee was entitled to exercise it on the
date of Employee's death.
ARTICLE II
RESTRICTIONS AND LIMITATIONS
SECTION 2.1. OUTSTANDING OPTIONS. The option granted to Employee
under this Option Agreement shall in no event be exercised while there is
outstanding any option previously granted to Employee to purchase common shares
of the Company at a price higher than the option price under the option herein
granted to Employee.
SECTION 2.2. LIMITATIONS. In accordance with the terms of Section
422 of the Code, the option granted under this Option Agreement is limited so
that the aggregate fair market value of the stock which Employee may purchase
hereunder for the first time in any calendar year does not exceed $100,000.
SECTION 2.3. EFFECT ON EMPLOYMENT AGREEMENTS. Nothing herein
contained shall be deemed to modify the terms of any employment agreement
between the Company and Employee.
SECTION 2.4. SHARES AS INVESTMENT. By accepting this option,
Employee acknowledges for Employee, Employee's heirs, and legatees that any and
all shares purchased under this Option Agreement shall be acquired for
investment and not for or with a view towards distribution, and upon the
transfer of any or all of the shares subject to the option granted hereunder,
Employee, or Employee's heirs or legatees receiving such shares, shall deliver
to the Company a representation in writing that such shares are being acquired
in good faith for investment and not for or with a view towards distribution.
3
<PAGE> 6
SECTION 2.5. RECLASSIFICATION, CONSOLIDATION, OR MERGER.
Adjustments to the number of shares subject to this option and the option price
for them shall be proportionately adjusted, pursuant to Section 10.1 of the
Plan.
SECTION 2.6. LIMITATIONS UPON TRANSFER OF OPTION. During the
lifetime of Employee, the option and all rights granted in this Option
Agreement shall be exercisable only by the Employee, and except as Section
1.8(e) of this Option Agreement otherwise provides, the option and all rights
granted under this Option Agreement shall not be transferred, assigned,
pledged, or hypothecated in any way (whether by operation of law or otherwise),
and shall not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of such
option or of such rights contrary to the provisions in this Option Agreement,
or upon the levy of any attachment or similar process upon such option or such
rights, such option and such rights shall immediately become null and void.
SECTION 2.7. LIMITATIONS UPON TRANSFER OF SHARES. No shares
acquired by Employee pursuant to this Option Agreement may be "disposed of",
within the meaning of Section 424(c) of the Code, by Employee within two (2)
years from the date of granting of the option nor within one year after the
transfer of such share(s) to Employee. Any attempted sale, disposal or
transfer of such shares shall be without effect. All shares transferred to
Employee pursuant to the exercise of the option granted hereby shall be clearly
marked with the foregoing restrictions on transfer.
SECTION 2.8. RIGHTS AS SHAREHOLDER. Neither Employee nor
Employee's executor, administrator, heirs, or legatees, shall be or have any
rights or privileges of a shareholder of the Company in respect of the shares
transferable upon exercise of the option granted under this Option Agreement,
unless and until certificates representing such shares shall have been
endorsed, transferred, and delivered and the Employee, or the Employee's
executor, administrator, heirs or legatees, as the case may be, has caused his
name to be entered as the shareholder of record on the books of the Company.
ARTICLE III
ADMINISTRATIVE PROVISIONS
SECTION 3.1. NOTICES. Any notice to be given under the terms of
this Option Agreement shall be addressed to the Parties as follows:
If to the Company:
Silverleaf Resorts, Inc.
Attn: Robert E. Mead, Chief Executive Officer
1221 Riverbend Drive, Suite 120
P.O.Box 358
Dallas, Texas 75221
4
<PAGE> 7
If to Employee:
LARRY H. FRITZ
6824 Lipan Highway
Granbury, TX 76048
Any Party may change its address by giving notice in writing, stating
its new address, to the other Party as provided in the foregoing manner. Any
notice shall be deemed duly given when enclosed in a properly sealed envelope
or wrapper addressed as herein required certified and deposited (postage and
certification fee prepaid) in a post office or branch post office regularly
maintained by the United States Government.
SECTION 3.2. BINDING EFFECT. This Option Agreement shall be
binding upon the heirs, executors, administrators, and successors of the
parties hereto.
SECTION 3.3. INCENTIVE OPTIONS. The options granted hereunder are
intended to be Incentive Options as defined in the Plan and Section 422 of the
Code, but the Company makes no warranty as to the qualification of any option
as an Incentive Option.
SECTION 3.4. INCORPORATION OF THE PLAN. The terms, conditions and
limitations contained in the Plan are incorporated herein by reference and such
provisions shall control to the extent they are not specifically contrary to a
provision of this Option Agreement.
EXECUTED this 30th day of June, 1997, but EFFECTIVE as of the 5th day
of June, 1997.
SILVERLEAF RESORTS, INC., the Company
By: /s/ ROBERT E. MEAD
-----------------------------
ROBERT E. MEAD, Chief
Executive Officer
/s/ LARRY H. FRITZ
-------------------------------------
LARRY H. FRITZ, Employee
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,200
<SECURITIES> 0
<RECEIVABLES> 71,488
<ALLOWANCES> 0
<INVENTORY> 11,657
<CURRENT-ASSETS> 23,713
<PP&E> 18,820
<DEPRECIATION> 4,430
<TOTAL-ASSETS> 110,736
<CURRENT-LIABILITIES> (9,611)
<BONDS> 0
0
0
<COMMON> 113
<OTHER-SE> 77,763
<TOTAL-LIABILITY-AND-EQUITY> (110,736)
<SALES> (27,484)
<TOTAL-REVENUES> (34,827)
<CGS> 3,215
<TOTAL-COSTS> 21,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,918
<INTEREST-EXPENSE> 3,380
<INCOME-PRETAX> (9,459)
<INCOME-TAX> 3,501
<INCOME-CONTINUING> (5,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,958)
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
<PAGE> 1
EXHIBIT 99
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing any of the shares of Common Stock offered hereby.
SENSITIVITY OF CUSTOMERS TO GENERAL ECONOMIC CONDITIONS
The Company focuses exclusively on the economy segment of the timeshare
industry and markets primarily to households with annual incomes between $25,000
and $50,000. The Company's targeted customers are generally more vulnerable to
deteriorating economic conditions than consumers in the luxury or upscale
markets. Any economic downturn could depress spending for Vacation Intervals,
limit the availability or increase the cost of financing for the Company and its
customers, and adversely affect the collectibility of the Company's loans to
Vacation Interval buyers. During past economic slowdowns and recessions,
Affiliated Companies experienced increased delinquencies in the payment of
Vacation Interval promissory notes and monthly Club dues and consequent
increased foreclosures and loan losses. During any future economic slowdown or
recession, the Company projects that increased delinquencies, foreclosures, and
loan losses are likely to occur. Similar adverse consequences could result from
significant increases in transportation costs. Any or all of the foregoing could
have a material adverse effect on the Company's results of operations, liquidity
and financial position.
LEVERAGE
The Company's future lending and development activities will likely be
financed with indebtedness obtained under the Company's existing credit
facilities or under credit facilities to be obtained by the Company in the
future. Such credit facilities are and would likely be collateralized by Company
assets and contain restrictive covenants. Among other consequences, terms of the
Company's debt instruments could impair the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, significant business opportunities that may arise, general
corporate purposes or other purposes. In addition, if the Company were to incur
additional indebtedness, this could increase its vulnerability to adverse
general economic and timeshare industry conditions and to increased competitive
pressures. Finally, creditors' claims against the Company will be paid in full
before the claims of shareholders in the event of a liquidation, bankruptcy or
winding up of the Company. Historically and at March 31, 1997, after taking into
account the amount of ineligible collateral and the 70% borrowing base, the
Company's borrowings have approached the maximum amount available under its
existing credit facilities. However, to the extent the Company continues to
generate additional customer notes receivable through its sales efforts, such
notes may be pledged to lenders under existing credit facilities for additional
borrowings, subject to the 70% advance rate. See "-- Financing Customer
Borrowings -- Borrowing Base" and "Business -- Existing Credit Facilities".
BORROWER DEFAULTS
The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers make a down payment of at least 10% of the
purchase price and deliver a promissory note to the Company for the balance; the
promissory notes generally bear interest at a fixed rate, are payable over a
seven year period, and are secured by a first mortgage on the Vacation Interval.
The Company bears the risk of defaults on these promissory notes, and this risk
is heightened inasmuch as the Company generally does not verify the credit
history of its customers and will provide financing if the customer is presently
employed and meets certain household income criteria.
The Company's credit experience is such that in 1997 it plans to allocate
22% of the purchase price of each Vacation Interval to a bad debt reserve. 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, the state of Texas and certain other states have laws which
limit the Company's ability to recover personal judgments against customers who
have defaulted on their loans. For example, under Texas law, if the Company were
to pursue a post-foreclosure deficiency claim against a customer, the customer
may file a court
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proceeding to determine the fair market value of the property foreclosed upon.
In such event, the Company may not recover a personal judgment against the
customer for the full amount of the deficiency, but may recover only to the
extent that the indebtedness owed to the Company exceeds the fair market value
of the property. Accordingly, the Company has generally not pursued this remedy.
Prior to 1996, the Company sold customer promissory notes and mortgages to
third parties, generally with recourse, as a means of financing its operations.
As a result, the Company may be required to repurchase customer promissory notes
previously sold which become delinquent. The Company takes these contingent
obligations into account in establishing its allowance for uncollectible notes.
At December 31, 1996, the Company had notes receivable (including notes
unrelated to Vacation Intervals) in the approximate principal amount of $67.7
million, was contingently liable with respect to approximately $11.0 million
principal amount of customer notes sold with recourse and had an allowance for
doubtful notes of approximately $11.9 million. There can be no assurance that
such reserves are adequate. See Note 4 of Notes to Consolidated Financial
Statements.
FINANCING CUSTOMER BORROWINGS
While the Company intends to use the proceeds of the Offering to pay off
approximately $49.9 million of existing indebtedness, it will be required to
continue to borrow to sustain operations.
Borrowing Base. The Company has entered into agreements with lenders to
borrow up to approximately $96 million collateralized by customer promissory
notes and mortgages. The Company's lenders typically lend the Company 70% of the
principal amount of performing notes, and Silverleaf Owners make payments on
their promissory notes directly to the lender's collection center, where
receipts are applied against the Company's loan balance. At December 31, 1996,
the Company had a portfolio of approximately 17,626 customer promissory notes in
the approximate principal amount of $66.8 million, of which approximately $11.6
million in principal amount of customer receivables were 61 days or more past
due and therefore ineligible as collateral. At such date, the Company had
borrowings from lenders in the approximate principal amount of $34.7 million
secured by the customer loans. Historically and currently, after taking into
account the amount of ineligible collateral and the 70% borrowing base, the
Company's borrowings have approached the maximum amount available under its
existing credit facilities. To the extent the Company generates additional
customer notes receivable through its sales efforts, such notes may be pledged
to lenders for additional borrowings, subject to the 70% advance rate.
Negative Cash Flow. The Company ordinarily receives only 10% of the
purchase price on the sale of a Vacation Interval but must pay in full the costs
of development, marketing, and sale of the interval. Maximum borrowings
available under the Company's current credit agreements may not be sufficient to
cover these costs, thereby straining capital resources, liquidity, and capacity
to grow.
Interest Rate Mismatch. At December 31, 1996, the Company's portfolio of
customer loans had a weighted average fixed interest rate of 14.7%. At such
date, the Company's borrowings (which bear interest at variable rates) against
the portfolio had a weighted average cost of funds of 10.8%. 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 enjoyed and could cause the interest expense on the Company's
borrowings to exceed its interest income on its portfolio of customer loans. The
Company does not currently engage in interest rate hedging transactions.
Therefore, any increase in interest rates, particularly if sustained, could have
a material adverse effect on the Company's results of operations, liquidity and
financial position.
To the extent interest rates decrease generally on loans available to the
Company's customers, the Company faces an increased risk that customers will
pre-pay their loans and reduce the Company's income from financing activities.
See "Business -- Customer Financing".
Maturity Mismatch. The Company typically provides financing to customers
over a seven year period which customer notes have an average maturity of 5.6
years. The Company's related revolving credit borrowings, however, mature
between October 1998 and August 2003, with most of such borrowings maturing in
1999. Accordingly, there is a mismatch between the Company's anticipated cash
receipts and cash disbursements.
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Although the Company has historically been able to secure financing sufficient
to fund its operations, it does not presently have agreements with its lenders
to extend the term of its existing funding commitments or to replace such
commitments upon their expiration. Failure to obtain such refinancing facilities
could require the Company to sell its portfolio of customer loans, probably at a
substantial discount, or to seek other alternatives to enable it to continue in
business. While the Company has been successful in obtaining financing to date,
there is no assurance it will be able to do so in the future. See
"-- Acceleration of Deferred Taxes" and "-- Alternative Minimum Taxes".
Impact on Sales. Limitations on the availability of financing would inhibit
sales of Vacation Intervals due to (i) the lack of funds to finance the initial
negative cash flow that results from sales that are financed by the Company, and
(ii) reduced demand if the Company is unable to provide financing to purchasers
of Vacation Intervals.
REPAYMENT OF INDEBTEDNESS OWED TO OFFICER AND AFFILIATES
Mr. Mead will realize benefits from the Offering that will not be received
by other persons participating in the Offering. Such benefits include the
repayment by the Company of indebtedness owed to Mr. Mead and his affiliates.
Thus, Mr. Mead has interests that conflict with the interests of persons
acquiring Common Stock in the Offering. Mr. Mead and his affiliates will receive
approximately $9.9 million of the net proceeds of the Offering for the repayment
of debt owed by the Company to him and his affiliates. See "Certain
Relationships and Related Transactions -- Repayment of Affiliated Debt",
"Principal Shareholders", and "Management -- Employment and Noncompetition
Agreements".
REGULATION OF MARKETING AND SALES OF VACATION INTERVALS AND RELATED LAWS
The Company's marketing and sales of Vacation Intervals and other
operations are subject to extensive regulation by the federal government and the
states and jurisdictions in which the Existing Resorts are located and in which
Vacation Intervals are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-in-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer Credit
Protection Act, the Telephone Consumer Protection Act, the Telemarketing and
Consumer Fraud and Abuse Prevention Act, the Fair Housing Act and the Civil
Rights Acts of 1964 and 1968.
In response to the fraudulent marketing practices which plagued the
timeshare industry in the 1980's, in the late 1980's and early 1990's, various
states enacted legislation aimed at curbing such abuses. Texas and Missouri, the
only states in which the Company currently owns resorts, have adopted specific
laws and regulations regarding the sale of Vacation Interval ownership programs.
The laws of most states, including Texas, require the Company to file with a
designated state authority for its approval a detailed offering statement
describing the Company and all material aspects of the project and the sale of
Vacation Intervals prior to selling to residents of that state. The laws of
these states require the Company to file numerous documents and supporting
information with the state agency responsible for the regulation of Vacation
Intervals. When the agency determines that a project may be sold, it will issue
a public report for the project. The Company is required to deliver an offering
statement or public report to all prospective purchasers of a Vacation Interval
who are Texas residents, together with certain additional information concerning
the terms of the purchase, regardless of whether the resort is located in Texas.
In Missouri, the Company is required to make certain disclosures in its sales
documents. Laws in each state where the Company currently sells Vacation
Intervals generally grant the purchaser of a Vacation Interval the right to
cancel a contract of purchase at any time within approximately five calendar
days following the date the contract was signed by the purchaser. Most states
have other laws which regulate the Company's activities and protect purchasers,
such as real estate licensure laws; travel sales licensure laws; anti-fraud
laws; consumer protection laws; telemarketing laws; prize, gift and sweepstakes
laws; and other related laws.
The Company believes it is in material compliance with federal, Texas, and
Missouri laws and regulations to which it is currently subject relating to the
sale and marketing of timeshare resorts. However, the Company is
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normally and currently the subject of a number of consumer complaints generally
relating to marketing or sales practices filed with relevant authorities, and
there can be no assurance that all of these complaints can be resolved without
adverse regulatory actions or other consequences. The Company expects some level
of consumer complaints in the ordinary course of its business as the Company
targets audiences which generally are less financially sophisticated and more
susceptible to intensive sales practices than more affluent customers. There can
be no assurance that the costs of resolving consumer complaints or of qualifying
under Vacation Interval ownership regulations in all jurisdictions in which the
Company desires to conduct sales will not be significant, that the Company is in
material compliance with applicable federal, Texas, Missouri, or other laws and
regulations, or that violations of law will not have adverse implications for
the Company, including negative public relations, potential litigation, and
regulatory sanctions. The expense, negative publicity, and potential sanctions
associated with the failure to comply with applicable laws or regulations could
have a material adverse effect on the Company's results of operations,
liquidity, or financial position. See "Business -- Governmental Regulation".
During the 1980's and continuing through the present, the timeshare
industry has been and continues to be afflicted with negative publicity and
prosecutorial attention due, among other things, to marketing practices which
were widely viewed as deceptive or fraudulent. Among the many timeshare
companies which have been the subject of federal, state and local enforcement
actions and investigations in the past were certain of the Affiliated Companies
and their affiliates. Some of the settlements, injunctions and decrees resulting
from litigation and enforcement actions (the "Orders") to which certain of the
Affiliated Companies consented purport to bind all successors and assigns, and
accordingly bind the Company. In addition, at that time the Company was directly
a party to one such Order issued in Missouri. No past or present officers,
directors or employees of the Company or any Affiliated Company were named as
subjects or respondents in any of these Orders; however, each Order purports to
bind generically unnamed "officers, directors and employees" of certain
Affiliated Companies. Therefore, certain of these Orders may be interpreted to
be enforceable against the present officers, directors and employees of the
Company even though they were not individually named as subjects of the
enforcement actions which resulted in these Orders. These Orders require, among
other things, that all parties bound by the Orders, including the Company,
refrain from engaging in deceptive sales practices in connection with the offer
and sale of Vacation Intervals. In one case in 1988, an Affiliated Company pled
guilty to deceptive uses of the mails in connection with promotional sales
literature mailed to prospective timeshare purchasers and agreed to pay a
judicially imposed fine of $1.5 million and restitution of $100,000. The
requirements of the Orders are substantially what applicable state and federal
laws and regulation mandate, but the consequence of violating the Order may be
that sanctions (including possible financial penalties and suspension or loss of
licensure) may be imposed more summarily and may be harsher than would be the
case if the Orders did not bind the 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.
Recently, the Company has been the subject of some consumer complaints
which have triggered governmental investigations into the Company's affairs. In
March 1997, the Company entered into an Assurance of Voluntary Compliance with
the Texas Attorney General, in which the Company agreed to make additional
disclosure to purchasers of Vacation Intervals regarding the limited
availability of its Endless Escape program during certain periods. The Company
paid $15,200 for investigatory costs and attorneys' fees of the Attorney General
in connection with this matter. Also, in March 1997, the Company entered into an
agreed order (the "Agreed Order") with the Texas Real Estate Commission
requiring the Company to comply with certain aspects of the Texas Timeshare Act,
Texas Real Estate License Act and Rules of the Texas Real Estate Commission,
with which it had allegedly been in non-compliance until mid-1995. The
allegations included (i) the Company's admitted failure to register the Missouri
Destination Resorts in Texas (due to its misunderstanding of the reach of the
Texas Timeshare Act); (ii) payment of referral fees for Vacation Interval sales,
the receipt of which was improper on the part of the recipients; and (iii)
miscellaneous other actions alleged to violate the Texas Timeshare Act, which
the Company denied. While the Agreed Order acknowledges that Silverleaf
independently resolved ten consumer complaints referenced in the Agreed Order,
discontinued the practices complained of, and had registered the Destination
Resorts during 1995 and 1996, the Texas Real Estate Commission ordered
Silverleaf to cease its discontinued practices and enhance its disclosure to
purchasers of Vacation Intervals. In the Agreed Order, Silverleaf agreed to make
a voluntary donation of $30,000 to the State of Texas. The Agreed Order also
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directs Silverleaf to revise its training manual for timeshare salespersons and
verification officers. While the Agreed Order resolved all of the alleged
violations contained in complaints received by the Texas Real Estate Commission
through December 31, 1996, the Company expects to encounter some level of
consumer complaints in the ordinary course of its business. See
"Business -- Governmental Regulation".
CONCENTRATION IN TIMESHARE INDUSTRY
Because the Company's operations are conducted solely within the timeshare
industry, any adverse changes affecting the timeshare industry such as an
oversupply of timeshare units, a reduction in demand for timeshare units,
changes in travel and vacation patterns, changes in governmental regulations or
taxation of the timeshare industry, as well as negative publicity about the
timeshare industry, could have a material adverse effect on the Company's
results of operations, liquidity or financial position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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") and Hyatt Corporation ("Hyatt"), have
recently entered the industry. Other companies in the timeshare industry,
including Signature Resorts, Inc. ("Signature"), Fairfield Communities, Inc.
("Fairfield"), Vacation Break USA, Inc. ("Vacation Break"), Vistana, Inc.
("Vistana") and Ramada Vacation Suites ("Ramada"), a subsidiary of Mego
Financial Corporation, are public companies with enhanced access to capital and
other resources.
Fairfield and Signature own timeshare resorts in or near Branson, Missouri,
which compete with the Company's Holiday Hills and Ozark Mountain Resorts, and
Signature owns a resort which is located near and competes with the Company's
Piney Shores Resort. Based on published industry data and reports, except for
Fairfield and Signature, the Company does not believe that any of the
competitors named above own timeshare resorts in Texas or Missouri and believes
that such competitors generally target consumers with higher annual incomes than
the Company. Nonetheless, competitors may possess significantly greater
financial, marketing, personnel and other resources than the Company, and there
can be no assurance that such competitors will not significantly reduce the
price of their Vacation Intervals or offer greater convenience, services or
amenities than the Company.
While the Company's principal competitors are developers of timeshare
resorts, the Company is also subject to competition from other entities engaged
in the commercial lodging business, including condominiums, hotels and motels;
others engaged in the leisure business; and, to a lesser extent, from
campgrounds, recreational vehicles, tour packages and second home sales. A
reduction in the product costs associated with any of these competitors, or an
increase in the Company's costs relative to such competitors' costs, could have
a material adverse effect on the Company's results of operations, liquidity and
financial position.
Numerous businesses, individuals and other entities will compete with the
Company in seeking properties for development and acquisition of resorts. Some
of these competitors will be larger and have greater financial resources than
the Company. Such competition may result in a higher cost for properties the
Company wishes to acquire or may cause the Company to be unable to acquire
suitable properties for the development of new resorts.
DEVELOPMENT, CONSTRUCTION AND PROPERTY ACQUISITION ACTIVITIES
The Company intends to selectively develop and acquire new resorts and
continue the expansion of the Existing Resorts. Acquiring and developing new
resorts will place substantial demands on the Company's liquidity and capital
resources, as well as on its personnel and administrative capabilities. Risks
associated with the Company's development and construction activities include
the following: construction costs or delays at a property may exceed original
estimates, possibly making the expansion or development uneconomical or
unprofitable; sales of Vacation Intervals at a newly completed property may not
be sufficient to make the property profitable; and financing may be unavailable
or may not be available on favorable terms for development of, or the continued
sales of Vacation Intervals at, a property. The Company projects that its
planned expansion at the
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Existing Resorts alone will cost in excess of $100 million. Additionally, the
Company currently projects that it will cost in excess of $47.6 million to
acquire and fully develop its planned new drive-to resorts in Missouri and
Illinois. The Company also has plans to develop a tract of land it currently
owns in Mississippi as a new destination resort at an estimated cost of $4.5
million. There can be no assurance the Company will develop and acquire new
resorts or expand the Existing Resorts. The Company does not and upon the
consummation of the Offering will not have the financing available to complete
all of its planned expansion as set forth in "Business -- The Existing Resorts"
and "Business -- Growth Strategy".
In addition, the Company's development and construction activities, as well
as its ownership and management of real estate, are subject to comprehensive
federal, state and local laws regulating such matters as environmental and
health concerns, protection of endangered species, water supplies, zoning, land
development, land use, building design and construction, marketing and sales,
and other matters. Such laws and difficulties in obtaining, or failing to
obtain, the requisite licenses, permits, allocations, authorizations and other
entitlements pursuant to such laws could impact the development, completion, and
sale of the Company's projects. See "-- Regulation of Marketing and Sales or
Vacation Intervals and Related Laws". The enactment of "slow growth" or
"no-growth" initiatives or changes in labor or other laws in any area where the
Company's projects are located could also delay, affect the cost or feasibility
of, or preclude entirely the expansion planned at each of the Existing Resorts
or the development of other resorts.
The Company's resorts are located in rural areas, often requiring the
Company to provide public utility water and sanitation services in order to
proceed with development. Such activities are subject to permission and
regulation by governmental agencies, the denial or conditioning of which could
limit or preclude development. Operation of the utilities also subjects the
Company to risk of liability in connection with both the quality of fresh water
provided and the treatment and discharge of waste-water. See
"Business -- Governmental Regulation".
While the Company's construction activities typically are performed by
third-party contractors whose performance cannot be assured by the Company,
construction claims may be asserted against the Company for construction defects
and such claims may give rise to liabilities. Certain state and local laws may
impose liability on property developers with respect to construction defects
discovered or repairs made by future owners of such property.
See "Business -- Growth Strategy", "Business -- Development and Acquisition
Process" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of Mr. Mead, Sharon K. Brayfield, and David T. O'Connor, the Company's
Chief Executive Officer, President, and Executive Vice President -- Sales,
respectively. The loss of the services of any one of these key individuals could
have a material adverse effect on the Company's results of operations, liquidity
or financial position. See "Management -- Employment and Noncompetition
Agreements". The Company's success is also dependent upon its ability to attract
and maintain qualified acquisition, development, marketing, management,
administrative and sales personnel. The ability to attract such personnel will
become particularly important as the Company grows and develops additional
resorts, and there can be no assurance that the Company will be successful in
attracting and/or retaining such personnel.
COSTS OF COMPLIANCE WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES TO DISABLED
PERSONS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act (the "ADA"), impose requirements related to
access and use by disabled persons of a variety of public accommodations and
facilities. The ADA requirements did not become effective until after January 1,
1991. Although the Company believes the Existing Resorts are substantially in
compliance with laws governing the accessibility of its facilities to disabled
persons, the Company will incur additional costs of complying with such laws.
Additional federal, state and local legislation may impose further burdens or
restrictions on the Company, the Clubs, or the Master Club at the Existing
Resorts with respect to access by disabled persons. The ultimate cost of
compliance with such legislation is not currently ascertainable, and, while such
costs are not expected to
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have a material effect on the Company's results of operations, liquidity or
capital resources, such costs could be substantial.
GEOGRAPHIC CONCENTRATION WITHIN TEXAS AND MISSOURI
At March 31, 1997, all of the Company's resorts and substantially all of
the Company's customers and borrowers were located in Texas and Missouri. The
Company's performance and the value of its properties is affected by regional
factors, including local economic conditions (which may be adversely impacted by
business layoffs or downsizing, industry slowdowns, changing demographics and
other factors) and the local regulatory climate. The Company's current
concentration in the Texas and Missouri markets could make the Company more
susceptible to adverse events or conditions which affect these areas in
particular.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, as
well as common law, the owner or operator of real property generally is liable
for the costs of removal or remediation of certain hazardous or toxic substances
located on, in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner's ability
to sell or lease a property or to borrow money using such real property as
collateral. Other federal and state laws require the removal or encapsulation of
asbestos-containing material when such material is in poor condition or in the
event of construction, demolition, remodeling or renovation. Other statutes may
require the removal of underground storage tanks. Noncompliance with these and
other environmental, health or safety requirements may result in the need to
cease or alter operations at a property. Further, the owner or operator of a
site may be subject to common law claims by third parties based on damages and
costs resulting from violations of environmental regulations or from
contamination associated with the site. Phase I environmental reports (which
typically involve inspection without soil sampling or ground water analysis)
were prepared in 1994 by independent environmental consultants for each Existing
Resort and did not reveal, nor is the Company aware of, any environmental
liability that would have, a material adverse effect on the Company's results of
operations, liquidity or financial position. No assurance, however, can be given
that these reports reveal all environmental liabilities or that no prior owner
created any material environmental condition not known to the Company.
Certain environmental laws impose liability on a previous owner of property
to the extent hazardous or toxic substances were present during the prior
ownership period. A transfer of the property may not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by it or by its predecessors.
The Company owns its own water supply facilities and waste-water treatment
plant at several of its resorts. The Texas Natural Resources Conservation
Commission ("TNRCC") is the primary state umbrella agency regulating the
utilities at the Drive-to Resorts in Texas, and the Department of Natural
Resources and the Public Service Commission of Missouri are the primary state
umbrella agencies regulating such utilities at the Destination Resorts in
Missouri. As a result of an enforcement proceeding brought against the Company
by TNRCC in connection with a waste-water facility at the Holly Lake Resort, the
Company is in the process of expanding the existing waste-water facility. See
"Business -- Governmental Regulation".
The Company believes that it is in compliance in all material respects with
all federal, state and local ordinances and regulations regarding hazardous or
toxic substances. Other than in connection with the waste-water proceedings
mentioned above, the Company has not been notified by any governmental authority
or third party of any non-compliance, liability or other claim in connection
with any of its present or former properties. See "Business -- Governmental
Regulation -- Environmental Matters".
DEPENDENCE ON VACATION INTERVAL EXCHANGE NETWORKS; POSSIBLE INABILITY TO QUALIFY
RESORTS
The attractiveness of Vacation Interval ownership is enhanced by the
availability of exchange networks that allow Silverleaf Owners to exchange in a
particular year the occupancy right in their Vacation Interval for an
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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 all of the
Company's Existing Resorts are currently qualified for participation in the RCI
exchange network. However, no assurance can be given that the Company will
continue to be able to qualify the Existing Resorts or future resorts for
participation in the RCI network or any other exchange network. If such exchange
networks cease to function effectively, or if the Company's resorts are not
accepted as exchanges for other desirable resorts, the Company's sales of
Vacation Intervals could be materially adversely affected. See
"Business -- Participation in Vacation Interval Exchange Networks".
RESALE MARKET FOR VACATION INTERVALS
Based on its experience at the Existing Resorts, the Company believes the
market for resale of Vacation Intervals by the owners of such intervals is very
limited and that resale prices are substantially below their original purchase
price. This may make ownership of Vacation Intervals less attractive to
prospective buyers. Also, attempts by buyers to resell their Vacation Intervals
compete with sales of Vacation Intervals by the Company. While Vacation Interval
resale clearing houses or brokers do not currently have a material impact, if
the secondary market for Vacation Intervals were to become more organized and
liquid, the availability of resale intervals at lower prices could materially
adversely affect the prices and number of sales of new Vacation Intervals by the
Company.
SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS
Sales of Vacation Intervals have generally been lower in the months of
November and December. Cash flow and earnings may be impacted by the timing of
development, the completion of future resorts, and the potential impact of
weather or other conditions in the regions where the Company operates. The above
may cause significant variations in quarterly operating results. See "-- Natural
Disasters; Uninsured Loss" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
NATURAL DISASTERS; UNINSURED LOSS
There are certain types of losses (such as losses arising from floods and
acts of war) that are not generally insured because they are either uninsurable
or not economically insurable and for which neither the Company nor the Clubs,
nor the Master Club have insurance coverage. Should an uninsured loss or a loss
in excess of insured limits occur, the Company could lose its capital invested
in a resort, as well as the anticipated future revenues from such resort and
would continue to be obligated on any mortgage indebtedness or other obligations
related to the property. Any such loss could have a material adverse effect on
the Company's results of operations, liquidity or financial position. See
"Business -- Insurance; Legal Proceedings".
ACCELERATION OF DEFERRED TAXES
While the Company reports sales of Vacation Intervals as income currently
for financial reporting purposes (see Note 2 of Notes to Consolidated Financial
Statements), for regular federal income tax purposes the Company reports
substantially all Vacation Interval sales on the installment method. Under the
installment method, the Company recognizes income for tax on the sale of the
Vacation Interval when cash is received in the form of a down payment and as
payments on customer loans are received. The Company's December 31, 1996 balance
sheet reflected a liability for deferred taxes (i.e., taxes owed to taxing
authorities in the future in consequence of income previously reported in the
financial statements) of $4.8 million, primarily attributable to this method of
reporting Vacation Interval sales. This amount does not include accrued interest
on such deferred taxes which also will be payable when the taxes are due, the
amount of which is not now reasonably ascertainable. If the Company should sell
the installment notes or be required to factor them or if the notes were
foreclosed on by a lender of the Company or otherwise disposed of, the deferred
gain would be reportable for tax and the deferred taxes, including interest on
the taxes for the period the taxes were deferred, as computed under Section 453
of the Internal Revenue Code of 1986, as amended (the "Code"), would become due.
There can be no assurance that the Company would have sufficient cash resources
to pay those taxes and interest. Furthermore, if the Company's sales of Vacation
Intervals should decrease in the future, the Company's diminished operations may
not generate
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either sufficient tax losses to offset taxable income or funds to pay the
deferred tax liability from prior periods. See "-- Limitations on Use of Net
Operating Loss From Ownership Change".
ALTERNATIVE MINIMUM TAXES
The Company has also used the installment method for the calculation of
adjusted current earnings for federal alternative minimum tax purposes, although
the accrual method is required under the Code. This has resulted in current
income taxes payable of approximately $3.3 million which is included in the
Company's December 31, 1996 balance sheet within Income Taxes Payable. The
Company has submitted a request to the Internal Revenue Service for permission
to change to the accrual method for this computation. If granted, these current
estimated taxes of approximately $3.3 million will become payable during 1997
through 2000. Although the Company believes the Internal Revenue Service will
give its permission, there is no assurance that it will, and if not granted, the
Company will currently owe those taxes plus interest and potential penalties.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
LIMITATIONS ON USE OF NET OPERATING LOSS FROM OWNERSHIP CHANGE
The Company estimates that it had net operating loss carryforwards of
approximately $14 million at December 31, 1996, for regular federal income tax
purposes related primarily to losses associated with the deferral of installment
sale gains. In addition to the general limitations on the carryback and
carryforward of net operating losses under Section 172 of the Code, Section 382
of the Code imposes additional limitations on the utilization of a net operating
loss by a corporation following various types of ownership changes which result
in more than a 50 percentage point change in ownership of a corporation within a
three year period. Mr. Mead owned 100% of the stock of the Company until
December 29, 1995, at which time his ownership decreased to approximately 99%.
As a result of the Offering, Mr. Mead's ownership of the Company will decrease
such that he will own approximately 65% to 68% of the Company after the
Offering. Thereafter, Mr. Mead could transfer his shares and/or the Company
could issue additional shares or grant stock options, which could result in more
than a 50 percentage point change in his ownership of the Company. If such a
subsequent change occurs within a three year period, the limitations of Section
382 would apply and may limit or deny the future utilization of the net
operating loss by the Company, resulting in the Company paying substantial
additional federal and state taxes and interest for any periods following such
change in ownership. See "-- Acceleration of Deferred Taxes" and "Shares
Eligible for Future Sale".
TAX RE-CLASSIFICATION OF INDEPENDENT CONTRACTORS AND RESULTING TAX LIABILITY
Although all on-site sales personnel are treated as employees of the
Company for payroll tax purposes, the Company does have independent contractor
agreements with certain sales, marketing, and architectural persons or entities.
The Company has not treated these independent contractors as employees;
accordingly, the Company does not withhold payroll taxes from the amounts paid
to such persons or entities. In the event the Internal Revenue Service or any
state or local taxing authority were to successfully classify such persons or
entities as employees of the Company, rather than as independent contractors,
and hold the Company liable for back payroll taxes, such action may have a
material adverse effect on the Company's results of operations, liquidity or
financial position.
VOTING CONTROL BY EXISTING SHAREHOLDER
Upon consummation of the Offering, Mr. Mead will hold a majority of the
Common Stock (approximately 65% to 68%), which will allow him to elect all of
the Company's directors and control the management and affairs of the Company.
To the extent Mr. Mead holds more than two-thirds of the Common Stock, he will
have sufficient voting power to determine the outcome of various matters
submitted to the shareholders for approval, including mergers, consolidations,
and the sale of substantially all of the Company's assets. See "Principal
Shareholders" and "Description of Capital Stock". Such control may result in
decisions which are not in the best interest of the Company.
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REPAYMENT OF INDEBTEDNESS OWED TO AFFILIATE OF UNDERWRITER
Credit Suisse First Boston Mortgage Capital, L.L.C., an affiliate of Credit
Suisse First Boston Corporation, the lead managing underwriter for the Offering,
will receive approximately $4.9 million of the net proceeds of the Offering (or
up to $5.7 million if the Underwriters' over-allotment option is exercised in
full) as repayment of indebtedness and related interest expected to be
outstanding upon consummation of the Offering. See "Underwriting".
ANTI-TAKEOVER EFFECT OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's articles of incorporation (the
"Charter") and bylaws (the "Bylaws"), may be deemed to have anti-takeover
effects and may delay, defer or prevent a takeover attempt that a shareholder
might consider to be in the shareholder's best interest. For example, such
provisions may (i) deter tender offers for Common Stock, which offers may be
beneficial to shareholders, or (ii) deter purchases of large blocks of Common
Stock, thereby limiting the opportunity for shareholders to receive a premium
for their Common Stock over then-prevailing market prices. These provisions
include the following:
Preferred Shares. The Charter authorizes the Board of Directors to
issue 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. No
Preferred Stock will be issued or outstanding as of the consummation of the
Offering. See "Description of Capital Stock -- Preferred Stock".
Classified Board. The Board of Directors of the Company will have
three classes of directors, and directors will be elected for three year
terms, with approximately one-third of the directors elected each year. The
terms of the first, second and third classes will expire in 1998, 1999 and
2000, respectively. The affirmative vote of two-thirds of the outstanding
Common Stock is required to remove a director.
IMMEDIATE AND SUBSTANTIAL BOOK VALUE DILUTION; NO ANTICIPATED DIVIDENDS
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value per share of Common Stock of $9.47 from the
initial public offering price per share. See "Dilution". The Company does not
anticipate that it will pay any dividends on its Common Stock in the foreseeable
future. See "Dividend Policy".
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, all the 3,500,000 shares of Common Stock
offered hereby will be eligible for public sale under the Securities Act of
1933, as amended (the "Securities Act"), without restriction, except for shares
acquired in the Offering by "affiliates" of the Company, as that term is defined
in Rule 144 promulgated under the Securities Act. In addition, all shares held
by affiliates will be eligible for public sale under Rule 144, subject to the
Rule's volume, manner of sale and other restrictions. In addition, the Company
has the authority to issue additional shares of Common Stock and shares of one
or more series of Preferred Stock. Pursuant to a Registration Rights Agreement
between the Company and Mr. Mead, upon Mr. Mead's request, the Company shall
register one-half of his Common Stock 180 days following the consummation of the
Offering and any of his remaining unregistered Common Stock one year after the
Offering. See "Shares Eligible for Future Sale". The Company intends to register
1,100,000 shares of Common Stock reserved for issuance pursuant to the Company's
1997 Stock Option Plan as soon as practicable following the consummation of the
Offering. The issuance of such shares could result in the dilution of voting
power of the shares of Common Stock purchased in the Offering and could have a
dilutive effect on earnings per shares. The Company currently has no plans to
designate and/or issue any shares of Preferred Stock. Future sales of
substantial amounts of Common Stock, or the potential for such sales, could
adversely affect prevailing market prices. See "-- Limitations on Use of Net
Operating Loss From Ownership Change".
The Company and its officers, directors and current shareholders each have
agreed that they will not, without the prior written consent of Credit Suisse
First Boston Corporation, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or
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exchangeable for such Common Stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of such
Common Stock for a period of 180 days from the date of this Prospectus.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no prior public market for the Company's Common Stock.
Although the Common Stock has been approved for listing on The New York Stock
Exchange, subject to official notice thereof, there can be no assurance that a
viable public market for the Common Stock will develop or be sustained after the
Offering or that purchasers of the Common Stock will be able to resell their
Common Stock at prices equal to or greater than the initial public offering
price. The initial public offering price will be determined by negotiations
between the Company and the representative of the Underwriters and may not be
indicative of the prices that may prevail in the public market after the
Offering is completed. See "Underwriting". Numerous factors, including
announcements of fluctuations in the Company's or its competitors' operating
results and market conditions for hospitality and timeshare industry stocks in
general, could have a significant impact on the future price of the Common
Stock. In addition, the stock market in recent years has experienced significant
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of companies. These broad fluctuations may
adversely affect the market price of the Common Stock.
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