<PAGE> 1
Filed pursuant to Rule 424(b)(1)
File No. 333-47427
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<S> <C> <C>
[SILVERLEAF RESORTS LOGO] $75,000,000
SILVERLEAF RESORTS, INC.
10 1/2% SENIOR SUBORDINATED NOTES DUE 2008
</TABLE>
Interest payable April 1 and October 1 Due April 1, 2008
--------------------
The 10 1/2% Senior Subordinated Notes due 2008 (the "Notes") are being offered
(the "Note Offering") by Silverleaf Resorts, Inc., a Texas corporation
("Silverleaf" or the "Company"). Silverleaf will use the net proceeds of the
Note Offering and an equity offering (the "Equity Offering") to repay existing
indebtedness, to finance development at its resorts, and for acquisitions,
working capital, and general corporate purposes. See "Sources and Uses of
Proceeds". The Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after April 1, 2003 in cash at the redemption
prices set forth herein, plus accrued and unpaid interest thereon to the date of
redemption. In addition, at any time prior to April 1, 2001, the Company, at its
option, may redeem up to 33 1/3% of the aggregate principal amount of Notes
originally issued at a redemption price equal to 110.5% of the principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date, with
the net proceeds of one or more public equity offerings; provided that, in each
case, at least 66 2/3% of the initially outstanding aggregate principal amount
of Notes remains outstanding immediately following such redemption. See
"Description of Notes -- Optional Redemption". In addition, upon the occurrence
of a Change of Control (as defined), each holder of Notes will have the right to
require the Company to repurchase all or any part of such holder's Notes at a
price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase. See "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control". There can be
no assurance that, in the event of a Change of Control, the Company would have
sufficient funds to purchase all Notes tendered. See "Risk Factors -- Payment
Upon a Change of Control and Certain Asset Sales".
The Company is also offering 2,000,000 shares of its common stock, $.01 par
value (the "Common Stock"), for estimated net proceeds to the Company of $44.8
million. The closing of the Note Offering is conditioned upon the closing of the
Equity Offering, but the closing of the Equity Offering is not conditioned upon
the closing of the Note Offering. The Company will use approximately $13.0
million of the proceeds of the Equity Offering to repay indebtedness owed to an
affiliate of the lead managing underwriter.
The Notes will be general unsecured obligations of the Company, ranking
subordinate in right of payment to all existing and future Senior Debt (as
defined) of the Company, including indebtedness under the Company's credit
facilities. The Notes will rank pari passu with any future senior subordinated
indebtedness of the Company and will rank senior to all subordinated
indebtedness of the Company. The Notes will be unconditionally guaranteed (the
"Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis
by all existing and future domestic Restricted Subsidiaries (as defined) of the
Company (collectively, the "Guarantors"). The Subsidiary Guarantees will be
general unsecured obligations of the Guarantors, ranking subordinate in right of
payment to all existing and future Senior Debt of the Guarantors. As of December
31, 1997, on a pro forma basis after giving effect to the consummation of the
Note Offering and the Equity Offering and the application of the estimated net
proceeds thereof, the Company would have had no Senior Debt. In addition,
subject to the Subsidiary Guarantees, the Notes will be structurally
subordinated to all existing and future liabilities of the Guarantors. At
December 31, 1997, on a pro forma basis after giving effect to the consummation
of the Note Offering and the Equity Offering, the Company's subsidiaries would
have had no material liabilities (other than intercompany obligations).
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 19.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS COMPANY(1)(2)
---------------------- ---------------------- ----------------------
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Per Note........................................... 100% 3% 97%
Total.............................................. $75,000,000 $2,250,000 $72,750,000
</TABLE>
(1) Plus accrued interest, if any, from April 8, 1998.
(2) Before deduction of expenses payable by the Company estimated at $740,625.
The Notes are offered by the several Underwriters when, as and if delivered
to and accepted by the Underwriters and subject to their right to reject orders,
in whole or in part. It is expected that delivery of the Notes in book-entry
form will be made through the facilities of The Depository Trust Company on or
about April 8, 1998, against payment therefor in immediately available funds.
CREDIT SUISSE FIRST BOSTON DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Prospectus dated April 2, 1998.
<PAGE> 2
CAPTION: "SILVERLEAF RESORTS, INC. LODGE GETAWAY(TM)"
PORTIONS OF A MAP OF U.S. DEPICTING LOCATIONS OF EXISTING RESORTS AND NEW
RESORTS,
AND THEIR RESPECTIVE PROXIMITIES
TO EACH OTHER AND TO AREA ATTRACTIONS AND MAJOR METROPOLITAN AREAS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING".
2
<PAGE> 3
CAPTION: "SILVERLEAF RESORTS, INC. THE ONLY MAJOR VACATION OWNERSHIP OPERATOR
FOCUSED ON THE VALUE SEGMENT IN "DRIVE-TO" LOCATIONS."
1. First Picture -- photo of exterior of swimming pool at Oak N' Spruce Resort.
Caption: "Lodge Getaway(TM) -- Olympic-sized pool at Oak N' Spruce Resort and
the registration/activity center (inset) -- Lee, Massachusetts".
2. Second Picture (inset) -- photo of exterior of registration/activity center
at Oak N' Spruce Resort.
3. Third Picture -- photo of exterior of timeshare units at Piney Shores Resort.
Caption: "Lodge Getaway(TM) Piney Shores Resort -- Houston Market".
4. Fourth Picture (inset) -- photo of interior of new "lodge-style" unit at
Piney Shores Resort.
5. Fifth Picture (inset) -- Photo of horseback riding available at Piney Shores
Resort.
CAPTION: "SILVERLEAF RESORTS GROWTH STRATEGY"
- -- Focus on Lodge Getaway(TM) Resorts in "Drive-to" Locations.
- -- Increase New Sales and Upgrade Sales.
- -- Add New Lodge Getaway(TM) and Club Destination(TM) Resorts.
3
<PAGE> 4
CAPTION: "SILVERLEAF RESORTS, INC."
1. First Picture -- photo of woman playing golf at golf course at Holiday
Hills Resort. Caption: "Club Destination(TM) Holiday Hills Resort --
Branson, Missouri 18-hole Golf Course."
2. Second Picture (inset) -- Man with two small children fishing off dock.
3. Third Picture -- photo of spa facility at Ozark Mountain Resort.
Caption: "Club Destination(TM) Ozark Mountain Resort -- Branson,
Missouri Wellness Center amenities."
4. Fourth Picture (inset) -- photo of man with tennis racquet.
5. Fifth Picture -- photo of woman jet skiing on lake. Caption: "Activities
and vacation life-style at various resorts."
6. Sixth Picture (inset) -- photo of a man, a woman and a child, all
smiling.
7. Seventh Picture -- photo of interior of timeshare unit. Caption: "Club
Destination (TM) President's View Interior, Ozark Mountain Resort,
Branson, Missouri."
<TABLE>
<CAPTION>
GRAPH: INDUSTRY REVENUES GRAPH: SILVERLEAF REVENUES
- ------------------------ ---------------------------
$ BILLIONS $ MILLIONS
<S> <C> <C> <C>
1985 1.6 1994 31.9
1990 3.2 1995 44.1
1995 5.0 1996 57.9
1996E 5.7 1997 85.1
</TABLE>
---------------------
4
<PAGE> 5
IT IS EXPECTED THAT DELIVERY OF THE NOTES WILL BE MADE AGAINST PAYMENT
THEREFOR ON OR ABOUT THAT DATE SPECIFIED IN THE LAST PARAGRAPH OF THE COVER PAGE
OF THIS PROSPECTUS, WHICH IS THE FOURTH BUSINESS DAY FOLLOWING THE DATE HEREOF
(SUCH SETTLEMENT CYCLE BEING HEREIN REFERRED TO AS "T+4"). PURCHASERS OF NOTES
SHOULD NOTE THAT TRADING OF THE NOTES ON THE DATE HEREOF MAY BE AFFECTED BY THE
T+4 SETTLEMENT. SEE "UNDERWRITING".
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data included
elsewhere in this Prospectus, including the Consolidated Financial Statements
and the notes thereto. Unless otherwise indicated, all timeshare industry data
contained herein is derived from information prepared by the American Resort
Development Association ("ARDA"). This Prospectus contains certain statements of
a forward-looking nature relating to future events or the future financial
performance of the Company. In evaluating such statements, prospective investors
should specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors", which could
cause actual results to differ materially from those indicated in such
forward-looking statements. Unless the context otherwise indicates, the
"Company" or "Silverleaf" means Silverleaf Resorts, Inc. and its subsidiaries.
"Pro forma" financial information appearing herein is prepared on the assumption
that the Company's June 1997 initial public offering of 3,600,000 shares of
Common Stock (the "IPO"), the Equity Offering and the Note Offering occurred at
the beginning of 1997 for statement of operations data and that the Equity
Offering and the Note Offering occurred on December 31, 1997 for balance sheet
data.
THE COMPANY
Silverleaf is a leading developer, marketer, and operator of "drive-to"
timeshare resorts. The Company currently owns and operates eight "drive-to"
resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts")
and two "destination" resorts in Missouri (the "Destination Resorts", and
together with the Drive-to Resorts, the "Existing Resorts"). The Company has
recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be
developed as new Destination Resorts (the "New Resorts"). The number of annual
one-week vacations ("Vacation Intervals") sold by the Company increased at an
annual compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997,
the Company had an inventory of 10,931 Vacation Intervals, was constructing 120
new units (6,192 new Vacation Intervals), and had plans to construct 2,670
additional units (137,728 new Vacation Intervals) at the Existing Resorts. The
Company plans to construct 557 new units (28,964 Vacation Intervals) at the New
Resorts. Due to standardized architectural designs and procedures, new units can
typically be constructed at the Existing Resorts within 150 days, weather
permitting. Silverleaf generally starts construction of new units after sales of
Vacation Intervals for those units have occurred.
The Company markets Vacation Intervals to value-conscious customers and has
advanced proprietary computer systems to track and identify potential timeshare
owners. Through exclusive marketing arrangements with race tracks, amusement
parks, and other event sponsors, the Company identifies a substantial number of
prospects in its target markets. As a result of these and other activities, more
than 1,500 potential customers currently tour the resorts each week. Management
anticipates the pool of potential customers will remain strong due to expansion
into new geographic regions and growth in major Texas metropolitan areas,
population turnover in such metropolitan areas, and further penetration of the
target markets.
The Drive-to Resorts are designed to appeal to value-conscious vacationers
seeking comfortable and affordable accommodations in locations convenient to
their residences. These resorts are located proximate to major metropolitan
areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis,
Chicago, Boston and the greater New York City area), facilitating more frequent
"short stay" getaways, which the Company believes is a growing vacation trend.
The Destination Resorts, which are located in the popular country and western
music entertainment resort area of Branson, Missouri, offer Silverleaf customers
the opportunity to upgrade into higher quality resorts as their lifestyles and
travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are
in rustic areas which provide a quiet, relaxing vacation environment and offer
an
5
<PAGE> 6
economical alternative to commercial vacation lodging. Consistent with
Silverleaf's strategy of targeting value-conscious customers, the average price
of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834
for 1997 and $6,922 for 1996, as compared to the industry average price of
$10,790 for 1996.
The Company offers benefits to owners of Silverleaf Vacation Intervals
("Silverleaf Owners") which are uncommon in the timeshare industry. These
benefits include (i) use of vacant lodging facilities at no extra cost through
Silverleaf's "Endless Escape" program; (ii) year-round access to non-lodging
amenities such as fishing, boating, horseback riding, tennis or golf on a
"country-club" basis for little or no additional charge; and (iii) the right to
exchange a Vacation Interval for a different time period or different Existing
Resort through Silverleaf's internal exchange program. These benefits are
subject to availability and other limitations. Most Silverleaf Owners may also
enroll in the world's largest Vacation Interval exchange network operated by
Resort Condominiums International ("RCI").
The Company's 1997 pro forma revenues and EBITDA were $84.9 million and
$24.8 million, respectively. The Company's Common Stock is listed on the New
York Stock Exchange ("NYSE") under the symbol "SVR", and based on a closing
price of $24.375 per share on April 2, 1998, the Company had a market
capitalization of approximately $324.5 million after giving pro forma effect to
the Equity Offering.
TIMESHARE INDUSTRY
The timeshare industry has experienced substantial growth since 1980.
Annual worldwide timeshare sales have increased from approximately $490 million
in 1980 to approximately $5 billion in 1995. The U.S. market has also grown
considerably -- from $1.3 billion of timeshare sales in 1992 to $2.2 billion of
timeshare sales in 1996. The growth in the U.S. timeshare industry is due to (i)
higher quality accommodations and services; (ii) involvement of well-recognized
hotel companies in the upscale segment of the industry such as Marriott
Ownership Resorts ("Marriott"), The Walt Disney Company ("Disney"), and Hilton
Hotels Corporation ("Hilton"); (iii) improved availability of financing for
purchasers of Vacation Intervals; (iv) increased flexibility of timeshare use;
(v) increased governmental regulation; and (vi) improved overall image of the
industry. Since timeshare units typically include two bedrooms and kitchen
facilities, Vacation Interval ownership is often more economical for a family
than an extended vacation at a commercial lodging establishment.
OPERATIONS
Silverleaf's operations include (i) developing and acquiring timeshare
resorts; (ii) marketing and selling Vacation Intervals to prospective first-time
owners; (iii) marketing and selling upgraded Vacation Intervals to existing
Silverleaf Owners; (iv) providing financing for the purchase of Vacation
Intervals; and (v) operating timeshare resorts. The Company has substantial
in-house capabilities which enable it to coordinate all aspects of development
and expansion of the Existing Resorts and the development of the New Resorts,
including site selection, design, and construction pursuant to standardized
plans and specifications. The Company also performs substantially all marketing
and sales functions internally and has made a significant investment in
operating technology, including sophisticated telemarketing and computer systems
and proprietary software applications. The Company identifies potential
purchasers through internally developed marketing techniques, and sells Vacation
Intervals through on-site sales offices located at certain Drive-to Resorts.
This practice allows the Company to avoid the more expensive marketing costs of
subsidized airfare and lodging which are typically associated with the timeshare
industry. The Company believes its marketing program and operating and computer
systems enable it to market and sell Vacation Intervals at a lower cost than its
competitors in the timeshare industry. The costs of maintaining and operating
the Existing Resorts are paid from Silverleaf Owners' monthly ownership dues.
As part of the Vacation Interval sales process, the Company offers customer
financing of up to 90% of the purchase price to be paid over a seven year
period. At December 31, 1997, the Company had a portfolio of approximately
21,320 Vacation Interval customer notes receivable totalling approximately
$104.4 million with an average yield of 14.5% per annum. The Company has
typically financed its operations by pledging eligible customer notes to lending
institutions who make loans secured by such notes. The Company has three
revolving
6
<PAGE> 7
credit facilities providing for loans up to an aggregate of $115.0 million to
finance customer notes receivable. See "Description of Certain Indebtedness".
COMPETITIVE ADVANTAGES
Silverleaf believes the following characteristics afford it certain
competitive advantages:
LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site
sales offices within a two-hour drive of its targeted customers, Silverleaf can
invite potential customers to tour the Drive-to Resorts without offering
subsidized airline tickets and lodging, a significant marketing expense
typically incurred by competitors in the industry. Silverleaf has also reduced
marketing, operating, and administrative costs through centralization and
automation of many functions. While marketing and sales costs as a percentage of
revenue will increase for newly acquired resorts, the Company believes that
these costs will, over time, return to historical levels.
CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located
within a two-hour drive of a majority of the target customers' residences, which
accommodates the growing demand for shorter, more frequent, close to home
vacations. This proximity facilitates use of Silverleaf's Endless Escape
program, which allows Silverleaf Owners to use vacant units for no additional
charge, subject to availability and certain limitations. Silverleaf believes it
is the only timeshare operator in the industry which offers its customers these
benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort
amenities year-round on a "country-club" basis.
SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had
an inventory of 10,931 Vacation Intervals, and a master plan to construct new
units which will result in up to 143,920 additional Vacation Intervals at the
Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's
master plan for construction of new units is contingent upon future sales at the
Existing Resorts and New Resorts and the availability of financing, grant of
government permits, and future land-planning and site-layout considerations. See
"Risk Factors -- Development, Construction and Property Acquisition Activities".
IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing,
development, and property management capabilities. While Silverleaf utilizes
outside contractors to supplement internal resources, when appropriate, the
breadth of Silverleaf's internal capabilities allows greater control over all
phases of its operations and helps maintain operating standards and reduce
overall costs.
LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and
generally employs standard architectural designs and operating procedures which
it believes significantly reduce construction and operating expenses.
Standardization and integration also allow Silverleaf to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing
Resorts can normally be constructed on an "as needed" basis within 150 days.
CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing
Resorts on a centralized and collective basis, with operating and maintenance
costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that
consolidation of resort operations benefits Silverleaf Owners by providing them
with a uniform level of service, accommodations and amenities on a standardized,
cost-effective basis. Such standardization also facilitates Silverleaf's
internal exchange program, the Endless Escape program, and external Vacation
Interval exchange programs.
EXPERIENCED MANAGEMENT. The Company's senior management has extensive
experience in the acquisition, development, and operation of timeshare resorts.
Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than
18 years of experience in the timeshare industry and since 1995 has served as a
director of ARDA, the primary trade association for the timeshare industry. Pro
forma for the Equity Offering (assuming no exercise of the Underwriters'
over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the
Common Stock of the Company. The Company's senior officers have an average of
ten years of experience in the timeshare industry.
7
<PAGE> 8
GROWTH STRATEGY
Silverleaf intends to grow through the following strategies:
INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends
to capitalize on its significant expansion capacity at the Existing Resorts and
the New Resorts by increasing marketing, sales and development activities. At
December 31, 1997, Silverleaf owned approximately 930 acres of land that were
available for further development of timeshare units and amenities under
Silverleaf's master plan. The master plan forecasts development of 3,347
additional units, which would result in 172,884 additional Vacation Intervals.
During 1997, Silverleaf enhanced its marketing efforts, including increased
telemarketing capacity arising from investments in computer and automated
dialing technology, increased its sales force, enhanced its lead generation
methods, completed the construction of new sales offices and other amenities,
and commenced the development of new lodging facilities. Furthermore, Silverleaf
continues to emphasize its Endless Escape program designed to accommodate
shorter, "getaway" vacations and has broadened its product offerings to include
biennial (alternate year) intervals and short-term leasing packages ("Samplers")
which are designed to accommodate more cost-conscious customers.
INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue
to improve operating margins by increasing sales of upgraded Vacation Intervals
to existing Silverleaf Owners since these sales have significantly lower sales
and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i)
an interval in a newly designed and constructed standard unit; (ii) an interval
in a larger or higher quality unit; (iii) an interval during a more desirable
time period; (iv) an interval at a different Drive-to Resort; or (v) an interval
at a Destination Resort. Silverleaf has designed specific marketing and sales
programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf
continues to construct higher quality, larger units for sale as upgraded
intervals, as well as developing sites at Las Vegas and Galveston as new upgrade
locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury
"President's View" units are offered for sale at prices ranging from $8,000 to
$17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are
added back to inventory at historical cost for resale at the current offering
price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million
in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales
in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales
commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by
purchasers of upgraded intervals, and such sales absorb their proportionate
share of marketing costs to the extent they displace the sale of another
interval, although they do not directly result in incremental marketing costs.
DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf
purchased four sites for development as Drive-to and Destination Resorts and
acquired an existing timeshare resort which it markets as a Drive-to Resort.
Additionally, in 1998, Silverleaf entered into agreements to acquire property
with a golf course near Atlanta, undeveloped land near Kansas City, and the
right to manage eight timeshare resorts in seven states. Silverleaf continues to
seek new properties for Drive-to Resorts in scenic wooded areas on lakes or
waterways that are near major metropolitan areas that have favorable demographic
characteristics. For Destination Resorts, Silverleaf seeks popular destination
resort areas that are easily accessible to Silverleaf Owners. Silverleaf is
currently exploring a number of other property acquisition opportunities, and
intends to continue acquiring and/or developing additional resorts.
RECENT DEVELOPMENTS
Since the IPO, Silverleaf has taken actions which it believes will enhance
its growth and competitive position within the U.S. timeshare industry. These
actions are summarized below and discussed elsewhere in this Prospectus.
- DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf
purchased the Timber Creek Resort for $1.2 million for development as a
Drive-to Resort. Timber Creek is located approximately 50 miles south of
St. Louis, Missouri. Silverleaf intends to develop approximately 600 units
(31,200 Vacation Intervals) at the Timber Creek Resort and has begun
construction of 24 units to be completed in May 1998. Sales of Vacation
Intervals at Timber Creek began in October 1997.
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<PAGE> 9
- DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased
the Fox River Resort for $1.7 million for development as a Drive-to Resort.
Fox River is located approximately 70 miles southwest of Chicago.
Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals)
units on this property, and has begun construction on 36 units to be
completed in May 1998. Sales of Vacation Intervals at Fox River began in
November 1997.
- ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf
acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit
timeshare resort, in the Berkshire Mountains of western Massachusetts for
$5.1 million. This new Drive-to Resort serves Boston and the greater New
York City market and Silverleaf plans to develop approximately 420 new
units (21,840 Vacation Intervals) at this resort. At December 31, 1997,
there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's
sales of Vacation Intervals at Oak N' Spruce began in January 1998.
- PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two
acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million.
Silverleaf intends to develop this property as a new Destination Resort
which will contain approximately 157 units (8,164 Vacation Intervals).
- PURCHASE OF GULF COAST SITE. In December 1997 and February 1998,
Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for
approximately $1.7 million, to be developed as a new beach-front Gulf Coast
Destination Resort. Silverleaf intends to develop approximately 400 units
(20,800 Vacation Intervals) at this resort.
- INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to
the acquisitions described above, Silverleaf has also worked since the IPO
to improve internal sales growth at the Existing Resorts. During 1997,
Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to
5,634 and 4,464 during 1996 and 1995, respectively. Total revenues
increased to $85.1 million in 1997 from $57.9 million and $44.1 million in
1996 and 1995, respectively.
- ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing
capacity by increasing its revolving credit facilities from $80.0 million
to $115.0 million and by acquiring a construction line of credit in the
amount of $15.0 million. Additionally, Silverleaf has been able to
negotiate lower interest rates and extensions of maturity of certain loan
facilities.
- INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has
invested approximately $2.1 million in a new automated dialer, telephone
system, and central marketing facility to improve Silverleaf's operating
and telemarketing systems.
- ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition
subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G.
Franks as President of the new subsidiary. Mr. Franks is a former President
of ARDA, the primary trade association for the timeshare industry, and has
more than 15 years of experience in the timeshare industry. Silverleaf has
also added marketing and operational personnel to its management team.
- PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf
entered into an agreement with Crown Resort Co., LLC ("Crown") to acquire
management rights to eight timeshare resorts in Alabama, Mississippi, North
Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8
million. At December 31, 1997 these eight resorts had approximately 21,500
timeshare owners. As part of this agreement, Silverleaf will also receive
approximately 1,800 unsold Vacation Intervals and certain equipment at the
eight resorts. This proposed acquisition is subject to completion of
customary due diligence investigations and there is no assurance that it
will be consummated.
- PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998,
Silverleaf entered into two agreements, one to acquire a 220 acre property,
including a 160 acre golf course, 72 miles north of Atlanta, Georgia for
$3.5 million, and another to acquire 260 acres of undeveloped land near
Kansas City, Missouri for $1.6 million. If acquired, each property will be
developed as a Drive-to Resort. Each contract may be cancelled by
Silverleaf if it is not satisfied with each property after conducting its
due diligence investigation. Accordingly, there is no assurance that either
of these contracts will be closed.
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<PAGE> 10
RESORTS SUMMARY
The following tables set forth certain information regarding each of the
Existing Resorts and New Resorts at December 31, 1997, unless otherwise
indicated.
EXISTING RESORTS
<TABLE>
<CAPTION>
VACATION
VACATION INTERVALS INTERVALS
UNITS AT RESORTS AT RESORTS SOLD(A)
------------------------ ------------------------ ---------
PRIMARY INVENTORY INVENTORY DATE IN
MARKET AT PLANNED AT PLANNED SALES THROUGH 1997
RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY
--------------- --------------- --------- ------------ --------- ------------ --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DRIVE-TO RESORTS
Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539
Hawkins, TX Ft. Worth, TX
The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679
Flint, TX Ft. Worth, TX
Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332
Flint, TX Ft. Worth, TX
Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359
Conroe, TX
Hill Country Austin-San 153(g) 254 1,887 12,700(d) 1984 5,763 1,391
Canyon Lake, TX Antonio, TX
Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32
DeSoto, MO MO
Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49
Sheridan, IL
Oak N' Spruce Boston, MA 132 420 1,629 21,840(e)(h) 1998 -- --
South Lee, MA New York, NY(i)
DESTINATION RESORTS
Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,441 994
Kimberling City, MO MO
Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217
Branson, MO MO
--- ----- ------ ------- ------ -----
Total 999 2,790 10,931 143,920 34,897 6,592
=== ===== ====== ======= ====== =====
<CAPTION>
AVERAGE
SALES
PRICE AMENITIES/
RESORT/LOCATION IN 1997 ACTIVITIES(C)
--------------- ------- -------------
<S> <C> <C>
DRIVE-TO RESORTS
Holly Lake $7,062 B,F,G,H,
Hawkins, TX M,S,T
The Villages 7,640 B,F,H,
Flint, TX M,S,T
Lake O' The Woods 6,743 F,M,S,T(f)
Flint, TX
Piney Shores 8,518 B,F,H,
Conroe, TX M,S,T
Hill Country 8,552 B,M,S,T(f)
Canyon Lake, TX
Timber Creek 5,599 B,F,G,M,S,T
DeSoto, MO
Fox River 5,465 G,M,S,T
Sheridan, IL
Oak N' Spruce -- F,G,S,T
South Lee, MA
DESTINATION RESORTS
Ozark Mountain 7,282 B,F,H,
Kimberling City, MO M,S,T
Holiday Hills 8,046 G,M,S,T(f)
Branson, MO
------
Total $7,854
======
</TABLE>
NEW RESORTS
<TABLE>
<CAPTION>
PRIMARY
MARKET DATE PLANNED PLANNED EXISTING AND PLANNED
RESORT/LOCATION SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES
--------------- ------------- -------- -------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Galveston, TX......................... Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T
Las Vegas, NV......................... Las Vegas, NV 1997 157(l) 8,164(e)(l) S
----- ------
Total......................... 557 28,964
===== ======
</TABLE>
(See notes commencing on following page)
10
<PAGE> 11
- ---------------
(a) These totals do not reflect sales of upgraded Vacation Intervals to
Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at
the Existing Resorts were as follows:
<TABLE>
<CAPTION>
AVERAGE SALES PRICE
FOR THE YEAR
ENDED 12/31/97
UPGRADED VACATION -- NET OF
RESORT INTERVALS SOLD EXCHANGED INTERVAL
------ ----------------- ----------------------
<S> <C> <C>
Holly Lake..................................... 187 $3,809
The Villages................................... 642 4,871
Lake O' The Woods.............................. 79 3,630
Piney Shores................................... 671 3,850
Hill Country................................... 648 3,928
Timber Creek................................... 2 945
Fox River...................................... 1 2,780
Ozark Mountain................................. 1,468 4,645
Holiday Hills.................................. 210 3,938
----- ------
3,908 $4,326
===== ======
</TABLE>
(b) Represents units included in the Company's master plan. This plan is
subject to change based upon various factors, including consumer demand,
the availability of financing, grant of governmental permits, and future
land-planning and site layout considerations. The following chart reflects
the status of certain planned units at December 31, 1997:
<TABLE>
<CAPTION>
LAND- LAND- LAND-
USE USE USE
PROCESS PROCESS PROCESS CURRENTLY IN SHELL
NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL
----------- -------- -------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Holly Lake................ 54 -- 50 -- 4 108
The Villages.............. 110 152 78 12 -- 352
Lake O' The Woods......... -- -- 16 -- -- 16
Piney Shores.............. 108 120 16 24 -- 268
Hill Country.............. 153 47 54 -- -- 254
Timber Creek.............. 576 -- -- 24 -- 600
Fox River................. 456 -- -- 36 -- 492
Oak 'N Spruce............. 420 -- -- -- -- 420
Ozark Mountain............ 36 -- 30 -- 12 78
Holiday Hills............. 70 -- 94 24 14 202
----- --- --- --- -- -----
1,983 319 338 120 30 2,790
===== === === === == =====
</TABLE>
"Land-Use Process Pending" means that the Company has commenced the
process which the Company believes is required under current law in order
to obtain the necessary land-use authorizations from the applicable local
governmental authority with jurisdiction, including submitting for approval
any architectural drawings, preliminary plats or other attendant items as
may be required.
"Land-Use Process Complete" means either that (i) the Company believes
that it has obtained all necessary land-use authorizations under current
law from the applicable local governmental authority with jurisdiction,
including the approval and filing of any required preliminary or final plat
and the issuance of building permit(s), in each case to the extent
applicable, or (ii) upon payment of any required filing or other fees, the
Company believes that it will under current law obtain such necessary
authorizations without further process. See "Risk Factors -- Development,
Construction and Property Acquisition Activities".
Some of the 30 "Shell Complete" units are currently devoted to such
uses as a general store, registration office, sales office, activity
center, construction office, or pro shop. The Company anticipates that
these units will continue to be used for such purposes during 1998.
(c) Principal amenities available to Silverleaf Owners at each resort are
indicated by the following symbols: B -- boating; F -- fishing; G -- golf
course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and
T -- tennis.
11
<PAGE> 12
(d) These figures are based on 50 one-week intervals per unit.
(e) These figures are based on 52 one-week intervals per unit.
(f) Boating is available near the resort.
(g) Includes three units which have not been finished-out for accommodations
and which are currently used for other purposes.
(h) Engineering, architectural and construction estimates have not been
completed by the Company, and there can be no assurance that the Company
will develop these properties at the unit numbers currently projected.
(i) The Company has commenced the timeshare permit process in New York, but has
not yet received a permit. (The Company has a timeshare permit in
Massachusetts.)
(j) One portion of this tract was acquired in February 1998.
(k) The Company has not commenced the timeshare permit process. The Company has
commenced the land use permit process. See "Risk Factors -- Development,
Construction and Property Acquisition Activities", "Business -- Description
of New Resorts -- Gulf Coast Resort".
(l) The Company has commenced the timeshare permit application process, but has
not yet received a permit. The Company has not commenced the land use
permit process. See "Risk Factors -- Regulation of Marketing and Sales of
Vacation Intervals and Related Laws".
CORPORATE BACKGROUND
The Company was incorporated in Texas in 1989 and has been owned by and
operated primarily under the direction of Robert E. Mead. Through the Company,
Mr. Mead consolidated in one entity all of the timeshare assets and operations
he previously owned through various partnerships and corporations affiliated
with Mr. Mead. In May 1989, a partnership, of which the Company was the general
partner, acquired seven of the Existing Resorts from a now dissolved corporation
which was also owned and controlled by Mr. Mead. In December 1995 (i) through a
merger of the partnership into the Company, such Existing Resorts were
transferred to the Company, (ii) the Company acquired additional assets of the
now dissolved corporation subject to certain indebtedness owing by such
corporation to Mr. Mead and his affiliates; and (iii) the Company acquired
Condominium Builders, Inc. ("CBI") and certain assets from Mr. Mead (all of the
acquisition and merger transactions in (i), (ii) and (iii) are collectively
referred to herein as the "Consolidation Transactions"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Relationships and Related Transactions". The affiliated corporations
and partnership whose assets were acquired by the Company through the
Consolidation Transactions are sometimes collectively referred to herein as the
"Affiliated Companies" or individually as an "Affiliated Company".
The Company's principal executive offices are located at 1221 Riverbend
Drive, Suite 120, Dallas, Texas 75247. The Company's telephone number is (214)
631-1166.
THE EQUITY OFFERING
The Company is also offering 2,000,000 shares of Common Stock and Mr. Mead
is offering an additional 500,000 shares of Common Stock. The Equity Offering is
being made by separate prospectus. Giving effect to the Equity Offering, the
Company will have 13,311,517 shares of Common Stock outstanding. Silverleaf has
not historically paid dividends on its Common Stock and does not expect to pay
any dividends in the foreseeable future.
12
<PAGE> 13
SOURCES AND USES OF PROCEEDS
The net proceeds from the Note Offering are estimated to be $72.0 million.
The net proceeds from the Equity Offering are estimated to be $44.8 million. The
following table sets forth the estimated sources and uses of funds at December
31, 1997:
<TABLE>
<CAPTION>
AMOUNT
------------
(DOLLARS IN
MILLIONS)
<S> <C>
Sources of Funds:
Senior Subordinated Notes due
2008......................... $ 75.0
Common Stock(a)................. 48.8
------
Total sources..................... $123.8
======
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
------------
(DOLLARS IN
MILLIONS)
<S> <C>
Uses of Funds:
Pay existing
indebtedness(b)(c)(d)........ $ 48.9
Develop units, amenities, and
infrastructure at Existing
Resorts(e)................... 28.5
Develop units, amenities, and
infrastructure at New
Resorts(e)................... 6.0
Acquisitions, working capital
and general corporate
purposes(b)(e)............... 33.0
Fees, expenses, and other
costs........................ 7.4
------
Total uses........................ $123.8
======
</TABLE>
- ---------------
(a) The Company is offering 2,000,000 primary shares of Common Stock in the
Equity Offering at an offering price of $24.375 per share. The Company will
not receive any of the proceeds from the sale of the shares of Common Stock
offered by Silverleaf's Chief Executive Officer, Robert E. Mead.
(b) Indebtedness is projected to increase from $48.9 million at December 31,
1997, to approximately $69.8 million immediately prior to the closing of the
Equity Offering and the Note Offering, substantially all of which will be
paid from the proceeds of the Equity Offering and the Note Offering. As a
result, cash available at closing for acquisitions, working capital, and
general corporate purposes will be reduced to approximately $12.1 million.
Additionally, after repayment of existing indebtedness, there will be $130.0
million of borrowing capacity available under the Company's credit
facilities. See "Description of Certain Indebtedness".
(c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage
Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the
lead managing underwriter for the Equity Offering and the Note Offering.
This indebtedness is projected to increase to $13.0 million by the closing
of the Equity Offering and the Note Offering. See "Underwriting".
(d) Indebtedness to be repaid from the net proceeds of the Equity Offering and
Note Offering bears interest at variable rates ranging from 4.2% to 14.0%
per annum at December 31, 1997, and matures April 1998 through October 2005.
See "Description of Certain Indebtedness". Indebtedness is projected to
increase from $48.9 million to approximately $69.8 million immediately prior
to the closing of the Equity Offering and the Note Offering. Approximately
$59.2 million of this indebtedness will have been incurred within one year
prior to the date of this Prospectus. Of this indebtedness, $2.9 million was
incurred to purchase the Fox River and Timber Creek resorts in St. Louis and
Chicago, respectively, $2.7 million was incurred to purchase the New Resort
site in Las Vegas, $1.7 million was incurred to purchase the New Resort site
in Galveston, $5.1 million was incurred to purchase the Oak N' Spruce Resort
in the Berkshires, $2.9 million was incurred for capital leases of
equipment, and the balance was used for working capital and general
corporate purposes.
(e) The Company currently anticipates investing these proceeds during 1998.
Pending the final application of these proceeds, the Company will invest
them in commercial paper, bankers' acceptances, other short-term
investment-grade securities, or money-market accounts, and may utilize them
for working capital purposes.
13
<PAGE> 14
THE NOTE OFFERING
Securities Offered......... $75.0 million aggregate principal amount of 10 1/2%
Senior Subordinated Notes due 2008.
Maturity Date.............. April 1, 2008.
Interest Payment Dates..... April 1 and October 1, commencing October 1, 1998.
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company on or after April 1,
2003, at the redemption prices (expressed as a
percentage of principal amount) set forth herein,
plus accrued and unpaid interest, if any, to the
date of redemption. In addition, prior to April 1,
2001, the Company may redeem up to 33 1/3% of the
aggregate principal amount of the Notes with the
net cash proceeds of one or more public offerings
of its Common Stock, at a redemption price equal to
110.5% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the
redemption date (subject to the right of holders of
record on the relevant record date to receive
interest due on the relevant interest payment
date); provided, however, that at least 66 2/3% of
the aggregate principal amount of the Notes
originally issued remains outstanding after any
such redemption. See "Description of
Notes -- Optional Redemption".
Change of Control.......... Upon a Change of Control (as defined), each holder
of Notes will have the right to require the Company
to repurchase all or a portion of such holder's
Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of
repurchase. See "Description of Notes -- Repurchase
at the Option of Holders -- Change of Control" and
"Risk Factors -- Payment Upon a Change of Control
and Certain Asset Sales".
Ranking.................... The Notes will be general unsecured obligations of
the Company and will be subordinated in right of
payment to all existing and future Senior Debt of
the Company. The Notes will rank pari passu with
any future senior subordinated indebtedness of the
Company and will rank senior to all subordinated
indebtedness of the Company. At December 31, 1997,
as adjusted to give effect to the consummation of
the Equity Offering, the Note Offering and the
application of the estimated net proceeds thereof,
the Company would have had no Senior Debt
(exclusive of unused commitments under the credit
facilities). The Notes, subject to the Subsidiary
Guarantees, will be structurally subordinated to
all existing and future liabilities of the
Guarantors. At December 31, 1997, as adjusted to
give effect to the consummation of the Equity
Offering and the Note Offering, such subsidiaries
would have had no material liabilities (other than
intercompany obligations).
Subsidiary Guarantees...... The payment of the principal, interest, and premium
(if any) on the Notes is fully and unconditionally
guaranteed, jointly and severally, on a senior
subordinated basis by all existing and future
domestic Restricted Subsidiaries (as defined) of
the Company. Each Subsidiary Guarantee will be
subordinated to all existing and future Senior Debt
of the respective Guarantor. See "Description of
Notes -- Subsidiary Guarantees". The Company will
be able to designate other current or future
subsidiaries as Unrestricted Subsidiaries (as
defined) under certain circumstances. Unrestricted
Subsidiaries will not be required to issue a
Subsidiary Guarantee
14
<PAGE> 15
with respect to the Notes and will not be subject
to many of the restrictive covenants set forth in
the Indenture pursuant to which the Notes will be
issued (the "Indenture").
Covenants.................. The Indenture will contain certain covenants that,
among other things, limit the ability of the
Company and certain of its subsidiaries to incur
additional Indebtedness and issue preferred stock,
make certain investments, pay dividends or make
other distributions, repurchase Equity Interests
(as defined) or subordinated indebtedness, enter
into certain transactions with affiliates, sell
assets of the Company or certain of its
subsidiaries, issue or sell Equity Interests of the
Company's subsidiaries or enter into certain
mergers and consolidations. In addition, under
certain circumstances, the Company will be required
to offer to purchase the Notes at a price equal to
100% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of
purchase, with the proceeds of certain Assets Sales
(as defined). See "Description of
Notes -- Repurchase at the Option of
Holders -- Asset Sales" and "-- Certain Covenants".
Conditions................. The closing of the Note Offering will be
conditioned upon, among other things, the closing
of the Equity Offering.
15
<PAGE> 16
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL, OPERATING AND
PRO FORMA INFORMATION
The Summary Consolidated Historical Financial and Operating Information set
forth below has been derived from the consolidated financial statements of the
Company which have been restated giving effect to the Consolidation Transactions
utilizing the historical cost basis of the combined entities since these
entities were under common ownership and control. The consolidated financial
statements of the Company for 1995, 1996 and 1997 included herein were audited
by Deloitte & Touche LLP. The data presented as of and for the year ended
December 31, 1994 has been derived from the Company's audited consolidated
financial statements which have not been included herein. Data presented as of
and for the year ended December 31, 1993 has been derived from the Company's
unaudited consolidated financial statements which in the opinion of management
of the Company reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position at such
dates and results of operation for such periods.
The Summary Pro Forma Financial Information set forth below has been
derived from the Unaudited Pro Forma Condensed Consolidated Financial
Information and related notes included elsewhere in this Prospectus. The pro
forma statement of income data for the years ended December 31, 1997 gives
effect, at the beginning of the period, to the IPO, the Equity Offering, the
Note Offering, and the application of the proceeds thereof, and to the other
adjustments set forth in the Unaudited Pro Forma Condensed Consolidated
Financial Information and related notes (collectively the "Pro Forma
Adjustments"). The pro forma balance sheet data at December 31, 1997 gives
effect to the Equity Offering, the Note Offering, and the application of the
proceeds thereof to pay indebtedness and offering expenses, on the basis of and
subject to the assumptions stated in the notes thereto. The pro forma financial
information does not purport to present the actual financial position or results
of operations of the Company had the IPO, the Equity Offering, the Note Offering
and events associated therewith occurred on the dates specified, nor are they
necessarily indicative of the Company's future results of operations or
financial position.
During 1997 the Company began classifying the components of the previously
reported provision for uncollectible notes into three categories based on the
nature of the item -- credit losses, customer returns, and customer releases.
The Company has reclassified these amounts within the previously reported
financial information to conform to the classification for the year ended
December 31, 1997. This reclassification has no balance sheet effect and has no
effect on previously reported net income. See Note 2 of Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview".
The Summary Consolidated Historical Financial, Operating and Pro Forma
Information should be read in conjunction with the Consolidated Financial
Statements and notes thereto, "Unaudited Pro Forma Condensed Consolidated
Financial Information" and notes thereto, "Selected Consolidated Historical
Financial and Operating Information" and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
16
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE OF
VACATION INTERVALS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Vacation Interval sales................................. $18,627 $24,551 $34,091 $45,907 $68,682
Other income............................................ 7,188 7,348 9,981 12,018 16,376
------- ------- ------- ------- -------
Total revenues..................................... 25,815 31,899 44,072 57,925 85,058
Costs and Operating Expenses:
Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600
Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559
Provision for uncollectible notes....................... 1,877 4,205 6,632 8,733 10,524
Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230
Depreciation and amortization........................... 477 590 863 1,264 1,497
Interest expense........................................ 1,426 1,642 3,609 4,759 4,664
------- ------- ------- ------- -------
Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074
------- ------- ------- ------- -------
Income from continuing operations before income taxes..... $ 3,221 $ 4,032 $ 3,058 $ 8,409 $18,984
======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA(a)................................................. $ 5,124 $ 6,264 $ 7,530 $14,432 $25,145
Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692
Ratio of earnings to fixed charges(b)..................... 3.2x 3.4x 1.6x 2.5x 4.3x
SUPPLEMENTAL PRO FORMA DATA:
EBITDA(c)........................................................................................ $24,785
Total interest expense(d)........................................................................ $ 8,174
Ratio of EBITDA to total interest expense(c)(d)(e)............................................... 3.0x
Ratio of net debt to EBITDA(e)(f)................................................................ NM
Ratio of debt to EBITDA(e)....................................................................... 3.0x
Ratio of earnings to fixed charges............................................................... 2.9x
OTHER OPERATING DATA:
Number of Existing Resorts at period end.................. 7 7 7 7 10
Number of Vacation Intervals sold (excluding
upgrades)(g)............................................ 2,386 3,423 4,464 5,634 6,592
Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908
Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,931
Average price of Vacation Intervals sold (excluding
upgrades)(g)(h)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854
Average price of upgraded Vacation Intervals sold (net of
exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
HISTORICAL PRO FORMA(E)
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents...................................... $ 4,970 $ 72,438
Notes receivable, net..................................... 92,036 92,036
Total assets.............................................. 156,401 226,859
Senior Subordinated Notes, notes payable and capital lease
obligations............................................. 48,871 75,000
Total liabilities......................................... 72,636 98,598
Shareholders' equity...................................... 83,765 128,261
</TABLE>
- ---------------
(a) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation and amortization. EBITDA is
presented because it is a widely accepted indicator of a company's
financial performance. However, EBITDA should not be construed as an
alternative to net income as a measure of the Company's operating results
or to cash flows from operating activities (determined in accordance with
generally accepted accounting principles) as a measure of liquidity. Since
revenues from Vacation Interval sales include promissory notes received by
the Company, EBITDA does not reflect cash flow available to the Company.
Additionally, due to varying methods of reporting EBITDA within the
timeshare industry, the computation of EBITDA for the Company may not be
comparable to other companies in the timeshare industry which compute
EBITDA in a different manner. The Company's management interprets trends in
EBITDA to be an indicator of the Company's financial performance, in
addition to net income and cash flows from operating activities (determined
in accordance with generally accepted accounting principles).
17
<PAGE> 18
(b) For purposes of determining the ratio of earnings to fixed charges,
earnings is defined as income from continuing operations before provision
for income taxes, plus interest on indebtedness, imputed interest on the
portion of rent expense (one-third) deemed to represent interest expense,
and amortization of previously capitalized interest. Fixed charges consist
of interest on indebtedness whether expensed or capitalized, imputed
interest on the portion of rent expense (one-third) deemed to represent
interest expense, amortization of debt expense, and discount or premium
relating to any indebtedness whether expensed or capitalized.
(c) Pro forma EBITDA is adjusted for the Pro Forma Adjustments. Pro Forma
EBITDA is lower than historical EBITDA in 1997 due to two adjustments
relating to the IPO in June 1997. The difference is due to (i) lower
interest income associated with amounts due from affiliates that was repaid
indirectly from the IPO proceeds and (ii) expenses associated with being a
public company. See "Unaudited Pro Forma Condensed Consolidated Financial
Information".
(d) Pro forma total interest expense is defined as pro forma interest expense
plus pro forma capitalized interest, as adjusted for the Pro Forma
Adjustments. No interest income has been assumed on proceeds of the IPO,
the Equity Offering and Note Offering. Assuming interest income of 5.5%
(current market rate) on such proceeds, and netting such interest income
against interest expense, the ratio of pro forma EBITDA to pro forma net
interest expense for 1997 would have been 5.6x. The ratio of pro forma
EBITDA to pro forma net interest expense differs from the Consolidated
Coverage Ratio (as defined herein) as set forth in the Indenture. See
"Description of Notes".
(e) After December 31, 1997 and prior to the closing of the Equity Offering and
the Note Offering, the Company expects to borrow an additional amount of
approximately $20.9 million which will be repaid with proceeds of the
Equity Offering and the Note Offering and will reduce the pro forma cash
balance and alter the pro forma ratios accordingly.
(f) Represents the ratio of pro forma indebtedness less pro forma cash, to pro
forma EBITDA as adjusted for the Pro Forma Adjustments. (NM = Not
Meaningful.)
(g) The Vacation Intervals sold in 1997 include 1,517 biennial intervals
(counted as 759 annual Vacation Intervals). The Company did not begin
selling biennial intervals until January 1997.
(h) Includes annual and biennial Vacation Interval sales for one and two
bedroom units.
18
<PAGE> 19
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Notes offered hereby. The Company
cautions the reader that this list of material risk factors may not be
exhaustive.
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Certain statements in this
Prospectus that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing such forward-looking statements may be found in the
material set forth under "Summary," "Sources and Uses of Proceeds",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business", as well as within this Prospectus generally. In
addition, when used in this Prospectus the words "believes", "anticipates",
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
the matters set forth in this Prospectus generally. The forward-looking
statements are made as of the date of this Prospectus and the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from the projections in the forward-looking
statements.
INCREASED LEVERAGE
After the sale of the Notes, the Company will have an increased amount of
indebtedness. As of December 31, 1997 after giving effect to the Equity Offering
and the Note Offering and the application of the proceeds thereof, the aggregate
outstanding principal amount of the Company's indebtedness would have been $75.0
million, versus indebtedness at December 31, 1997 of $48.9 million. Upon
consummation of the Note Offering, the Company also will have available to it up
to $130.0 million in borrowing capacity under its credit facilities.
The Indenture permits the Company to incur certain additional indebtedness,
including indebtedness in an amount up to 70% of Mortgages Receivable (as
defined) of the Company. Accordingly, to the extent the Mortgages Receivable of
the Company increase, the Indenture will permit the Company to borrow additional
amounts under its credit facilities. The Indenture also permits the Company to
borrow additional funds to finance development of the Existing Resorts and New
Resorts. Future construction loans will likely result in liens against the
respective properties. See "Description of Notes -- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock". In the
event of default by the Company on such secured indebtedness or the insolvency
of the Company, such lenders will have prior secured claims, and the Notes will
be subordinated to such loans. See "-- Subordination".
The level of the Company's indebtedness could have important consequences
to Holders of the Notes, including, but not limited to, (i) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on the Notes and other indebtedness; (ii) the
Company's ability to obtain additional debt financing in the future for working
capital, capital expenditures or acquisitions may be limited; (iii) the
Company's level of indebtedness could limit its flexibility in reacting to
changes in the industry and economic conditions generally; (iv) certain of the
Company's borrowings are at variable rates of interest, and a substantial
increase in interest rates could adversely affect the Company's ability to meet
debt service obligations; and (v) borrowings under the credit facilities will
become due prior to the time the Notes become due, which may adversely affect
the ability of the Company to pay principal and interest when due on the Notes.
In addition, the Indenture and the credit facilities will contain financial and
other restrictive covenants that will limit the ability of the Company to, among
other things, borrow additional funds. Failure by the Company to comply with
such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company's results of
operations, liquidity and financial position. In addition, the degree to which
the Company is leveraged and the terms of agreements governing Senior Debt could
prevent the Company from repurchasing the Notes upon the occurrence of a Change
of Control or an Asset Sale. See "Description of Notes -- Repurchase at the
Option of Holders -- Change of Control" and "Description of Certain
Indebtedness".
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The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Notes), or to
fund planned capital expenditures, will depend on its future performance, which,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. The
Company may, however, need to refinance all or a portion of the principal of the
Notes on or prior to maturity. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available under the credit facilities in an amount sufficient
to enable the Company to conduct its operations, service its indebtedness
(including the Notes), or make anticipated capital expenditures or acquisitions.
In addition, there can be no assurance that the Company will be able to effect
any such refinancing on commercially reasonable terms, or at all.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will restrict, among other things, the Company's ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, enter into certain transactions with affiliates, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company. In addition, the credit facilities contain other
and more restrictive covenants and prohibit the Company from prepaying certain
other indebtedness (including the Notes). See "Description of Notes -- Certain
Covenants" and "Description of Certain Indebtedness". The credit facilities
require the Company to maintain specified financial collateral ratios and
satisfy certain financial condition tests. The Company's ability to meet those
ratios and tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. A breach of any of these
covenants could result in a default under the credit facilities and/or the
Indenture. Upon the occurrence of an event of default under the credit
facilities, the lenders could elect to declare all amounts outstanding under
such credit facility, together with accrued interest, to be immediately due and
payable. If the Company were unable to repay those amounts, the lenders could
proceed against the collateral granted to them to secure that indebtedness. If
the lenders under any of the credit facilities accelerate the payment of the
indebtedness, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company, including the Notes. See "Description of Certain Indebtedness".
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Debt, including the principal of (and premium, if any) and
interest on and all other amounts due on or payable in connection with Senior
Debt. As of December 31, 1997, on a pro forma basis after giving effect to the
Equity Offering, the Note Offering and the application of the proceeds thereof,
the Company would have had no Senior Debt. However, the Company would have had
$130.0 million of available capacity under the credit facilities, all of which
would be secured Senior Debt. By reason of such subordination, in the event of
the insolvency, liquidation, reorganization, dissolution or other winding-up of
the Company or upon a default in payment with respect to, or the acceleration
of, any Senior Debt, the holders of such Senior Debt (including any Senior Debt
held by creditors of the Guarantors and creditors of any future subsidiaries
that are not Guarantors) must be paid in full before the holders of the Notes
may be paid. As of December 31, 1997, the Guarantors had no indebtedness which
would be Senior Debt. If the Company incurs any additional pari passu debt, the
holders of such debt would be entitled to share ratably with the holders of the
Notes in any proceeds distributed in connection with any insolvency,
liquidation, reorganization, dissolution or other winding-up of the Company.
This may have the effect of reducing the amount of proceeds paid to holders of
the Notes. In addition, certain holders of Senior Debt may prevent cash payments
with respect to the principal of (and premium if any) or interest on the Notes
for a period of up to 179 days following a non-payment default with respect to
Senior Debt. In addition, the Indenture permits the subsidiaries of the Company
to incur debt under certain circumstances. Any such debt incurred by a
subsidiary of the Company that is not a Guarantor could be structurally senior
to the Notes. To the extent the Subsidiary Guarantees are not enforceable, the
Notes and Subsidiary Guarantees would be effectively subordinated to all
liabilities of the Guarantors, including trade payables of such Guarantors,
whether or not such liabilities otherwise constitute Senior Debt of the
Guarantor under the Indenture. See "-- Fraudulent Transfer Statutes" and
"Description of Notes".
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SENSITIVITY OF CUSTOMERS TO GENERAL ECONOMIC CONDITIONS
The Company targets value-conscious customers and approximately two-thirds
of the Company's customers have annual household incomes of less than $50,000.
These 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.
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 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 allocated 15.3% of
the purchase price of Vacation Intervals to its provision for uncollectible
notes. In addition, in 1997 the Company decreased sales by $2.8 million for
customer returns and increased operating, general and administrative expenses by
$1.2 million for customer releases. See Note 2 of Notes to Consolidated
Financial Statements. 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 generally 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, Texas, Illinois, and
certain other states have laws which limit or hinder 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 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, 1997, the Company had Vacation Interval customer notes
receivable in the principal amount of $104.4 million and notes unrelated to
Vacation Intervals in the principal amount of $3.1 million, was contingently
liable with respect to approximately $7.4 million principal amount of customer
notes sold with recourse, and had an allowance for uncollectible notes of
approximately $12.6 million and an allowance for future customer returns of
approximately $2.8 million. There can be no assurance that such allowances are
adequate. See Note 4 of Notes to Consolidated Financial Statements.
FINANCING CUSTOMER BORROWINGS
While the Company intends to use the proceeds of the Equity Offering and
Note Offering to pay indebtedness under its existing credit facilities, it may
borrow additional funds under existing or future credit arrangements and is
dependent on the ability to finance customer notes receivable through third
party lenders to conduct its business.
BORROWING BASE. To finance Vacation Interval customer notes receivable, the
Company has entered into agreements with lenders to borrow up to approximately
$115.0 million collateralized by customer promissory
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notes and mortgages. At December 31, 1997, the Company had such borrowings from
lenders in the approximate principal amount of $40.4 million. The Company's
lenders typically lend the Company 70% of the principal amount of performing
notes, and payments from Silverleaf Owners on such notes are credited directly
to the lender and applied against the Company's loan balance. At December 31,
1997, the Company had a portfolio of approximately 21,320 Vacation Interval
customer notes receivable in the approximate principal amount of $104.4 million,
of which approximately $14.4 million in principal amount were 61 days or more
past due and therefore ineligible as collateral.
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 credit facilities may not be sufficient to cover
these costs, thereby straining the Company's capital resources, liquidity, and
capacity to grow.
INTEREST RATE MISMATCH. At December 31, 1997, the Company's portfolio of
customer loans had a weighted average fixed interest rate of 14.5%. At such
date, the Company's borrowings (which bear interest at variable rates) against
the portfolio had a weighted average cost of funds of 10.1%. 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 existing indebtedness currently bears interest at variable
rates and the Company's customer notes receivable bear interest at fixed rates,
increases in interest rates would 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
notes receivable. The Company has not engaged in interest rate hedging
transactions. Therefore, any increase in interest rates, particularly if
sustained, could have a material adverse effect on the Company's results of
operations, liquidity and financial position. If the Note Offering is
consummated, the Notes will bear interest at a fixed rate for a ten year period,
which would lessen this risk initially.
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 5.5
years at December 31, 1997. The credit facilities mature between December 1999
and October 2005 with $60.0 million of such credit facilities maturing in
December 1999. Accordingly, there could be a mismatch between the Company's
anticipated cash receipts and cash disbursements in December 1999 and subsequent
periods. 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 notes
receivable, probably at a substantial discount, or to seek other alternatives to
enable it to continue in business. Such a sale of customer notes receivable,
however, may be limited under the Indenture if it is deemed to be an "Asset
Sale". See "Description of Notes -- Repurchase at Option of Holders -- Asset
Sales". 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". However,
if the Equity Offering and the Note Offering are consummated, substantially all
of the Company's indebtedness would be repaid, which would lessen this risk
initially.
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.
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 and New
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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 certain fraudulent marketing practices in the timeshare
industry in the 1980's, various states enacted legislation aimed at curbing such
abuses. Texas, Missouri, Illinois, Massachusetts, and Nevada, the states in
which the Company currently owns Existing Resorts or New Resorts, as well as
other states in which the Company markets its Vacation Intervals, have adopted
specific laws and regulations regarding the marketing and sale of Vacation
Intervals. The laws of most states, including Texas, Illinois, and Nevada,
require the Company to file a detailed offering statement and supporting
documents with a designated state authority, which describe the Company, the
project, and the promotion and sale of Vacation Intervals. The offering
statement must be approved by the appropriate state agency before the Company
may solicit residents of such state. The laws of Texas, Illinois, Massachusetts,
and Nevada, respectively, require the Company to deliver an offering statement
(or public report), together with certain additional information concerning the
terms of the purchase, to prospective purchasers of Vacation Intervals who are
residents of such state, even if the resort is not located in such state. The
laws of Missouri generally only require certain disclosures in sales documents
for prospective purchasers. There are also laws in each state where the Company
currently sells Vacation Intervals which grant the purchaser of a Vacation
Interval the right to cancel a contract of purchase at any time within three to
five calendar days following the date the contract was signed by the purchaser.
The Company qualifies each resort under the timeshare laws of the state
where it is located. The Company has recently filed a timeshare application in
Nevada with respect to the New Resort in Las Vegas. There can be no assurance
that the Company will obtain the requisite approval to sell Vacation Intervals
for this resort, and the Company has not commenced marketing or sales activities
for this resort.
The Company also markets and sells its Vacation Intervals to residents of
certain states which are near the states where the Company's resorts are
located. Many of these neighboring states also regulate the marketing and sale
of Vacation Intervals to their residents. The Company is currently in various
stages of obtaining permits to sell Vacation Intervals to residents of New York
and certain other states proximate to the Oak 'N Spruce Resort in Massachusetts.
There can be no assurance that the Company will obtain the requisite approvals
to sell Vacation Intervals to residents of such states. The Company does not
register all of its resorts in each of the states where it registers any
resorts.
Most states have additional 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,
Missouri, Illinois and Massachusetts laws and regulations to which it is
currently subject relating to the sale and marketing of Vacation Intervals.
However, the Company is 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 aggressively markets and sells
Vacation Intervals in the value segment of the timeshare industry, which may
include individuals who are less financially sophisticated 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, Illinois, Massachusetts, 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
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effect on the Company's results of operations, liquidity, and financial
position. Further, there can be no assurance that either the federal government
or states having jurisdiction over the Company's business will not adopt
additional regulations or take other actions which would adversely affect the
Company's results of operations, liquidity, and 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 regulations 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.
In early 1997, the Company was the subject of some consumer complaints
which 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 acknowledged that Silverleaf
independently resolved ten consumer complaints referenced in the Agreed Order,
discontinued the practices complained of, and 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 directed
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 has encountered and expects to encounter
some level of additional consumer complaints in the ordinary course of its
business. See "Business -- Governmental Regulation".
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EXPANSION INTO NEW GEOGRAPHIC AREAS
Prior to August 1997, all of the Company's operating resorts and
substantially all of its customers and borrowers were located in Texas and
Missouri. Since August 1997, the Company has acquired the Fox River Resort in
Illinois, the Timber Creek Resort near St. Louis, Missouri, the Oak N' Spruce
Resort in Massachusetts, undeveloped beachfront property in Galveston, Texas,
and an undeveloped parcel in Las Vegas, Nevada. The recent expansion into new
geographic areas, particularly Illinois, Massachusetts, and Nevada, poses new
risks because the Company does not possess the same level of familiarity with
and experience in these markets as it possesses with respect to its historical
markets in Missouri and Texas, which could adversely affect the Company's
ability to develop and operate timeshare resorts and sell Vacation Intervals in
these new markets. Such expansion also requires the Company to comply with the
laws and regulations of additional jurisdictions, including Illinois,
Massachusetts, Nevada, New York, New Jersey, and Connecticut, where the Company
currently markets or will market its Vacation Intervals. Additionally, the
Company is subject to and will become subject to zoning and land use laws of
additional municipalities in Texas, Illinois, Massachusetts, and Nevada. There
is no assurance the Company can comply with all of these requirements
economically or at all. The New Resorts will also require new architectural
plans and construction techniques with which the Company is less familiar. For
example, Silverleaf will utilize five-story and nine-story, high density
buildings for the proposed resort in Las Vegas, Nevada, whereas the Company has
historically utilized low-rise, lower density building structures. The Oak N'
Spruce Resort in Massachusetts and the Fox River Resort in Illinois are subject
to a longer and harsher winter climate than the resorts in Missouri and Texas.
Accordingly, construction costs at these new resorts may be higher and the
construction cycle may be longer. Expansion of the Company's sales and marketing
activities to Illinois, Massachusetts, Nevada, New Jersey, New York, and
Connecticut is expected to result in higher marketing expenses to gain entrance
to these new markets. Cultural differences between customers in these new
markets and the Company's historical markets may result in additional marketing
costs or lower sales. All of the above risks associated with the Company's
entrance into the new geographic areas could have a material adverse effect on
the Company's results of operations, liquidity, and financial position.
RAPID GROWTH
The Company has experienced rapid growth which could place a strain on the
Company's management, employees and systems. Prior to August 1997, the Company
owned and operated seven resorts. Since then, the Company has acquired three
resorts and sites for two additional Destination Resorts and has entered into
agreements to acquire two sites for the development of Drive-to Resorts and
management rights with respect to eight timeshare resorts. As the Company's
business develops and expands, the Company will require additional management
and employees and will need to implement enhanced operational and financial
systems. There can be no assurance that the Company will successfully hire,
retain, integrate and utilize management and employees and implement and
maintain such operational and financial systems. Failure to hire, retain and
integrate management and employees or implement such systems successfully could
have a material adverse effect on the Company's results of operations,
liquidity, and financial position.
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, a decrease in popularity of any of the
Company's resorts with consumers, 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, and 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, Disney, Hilton, Hyatt Corporation ("Hyatt"), and Four Seasons Resorts
("Four
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Seasons"), have 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"), Ramada Vacation Suites ("Ramada"), and TrendWest Resorts, Inc.
("TrendWest"), are, or are subsidiaries of, 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 to
a lesser extent with the Company's newly-acquired Timber Creek Resort. Signature
also 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 Illinois, Missouri or Texas.
The Company believes that many of the companies named in the preceding paragraph
operate timeshare resorts in Las Vegas, Nevada. Additionally, the Company
believes there are a number of privately-owned and operated timeshare resorts in
most states in which the Company owns resorts which will compete with the
Company's Existing Resorts and New Resorts. Finally, the proposed resort in Las
Vegas will compete with a large number and variety of hotels and other lodging
facilities in Las Vegas.
The Company believes Marriott, Disney, Hilton, Hyatt, and Four Seasons
generally target consumers with higher annual incomes than the Company's target
market. The Company believes the other competitors named above target consumers
with similar, but slightly higher, income levels than the Company's target
market. The Company's 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 compete with the
Company in seeking properties for development and acquisition of resorts. Some
of these competitors are larger and have greater financial and other 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 develop and continue the expansion of the Existing
Resorts, to develop the New Resorts, and to selectively acquire and develop
other resorts. Acquiring and developing resorts places 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; the
Company has expanded and will continue to expand into new geographic areas in
which it has no operating history and there is no assurance the Company will be
successful in such locations; 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. There can be no assurance the Company will
develop and expand the Existing Resorts, develop the New Resorts, or acquire and
develop other resorts. The Company does not and upon the consummation of the
Equity Offering and the Note Offering will not have the financing available to
complete all of its planned expansion as set forth in "Business -- Resorts
Summary" and "-- 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
26
<PAGE> 27
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 of Vacation Intervals and Related Laws". For instance,
Silverleaf's land use plan at its New Resort site in Galveston is currently
being challenged in court. A neighboring landowner has sued the city of
Galveston and its zoning board to set aside the Galveston planning commission's
approval of Silverleaf's land use plan. Silverleaf believes the suit is without
merit and has filed a petition to intervene in the litigation to protect its
interests. The Company does not believe that this suit will materially affect
its timetable for development of its New Resort at Galveston; however, there can
be no assurance that Silverleaf's land use plan will withstand this challenge.
Furthermore, the litigation may delay development of this property. 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 and New Resorts or the development of
other resorts.
Most of the Company's resorts are located in rustic 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" and "-- Development and Acquisition
Process", and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
PAYMENT UPON A CHANGE OF CONTROL AND CERTAIN ASSET SALES
Upon the occurrence of a Change of Control, each holder of Notes may
require the Company to repurchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes together with accrued and unpaid
interest to the date of repurchase. See "Description of Notes -- Repurchase at
the Option of Holders -- Change of Control" for the definition of "Change of
Control". The Indenture also places certain limitations on an Asset Sale (as
defined) and the use of the proceeds therefrom. In the event of an Asset Sale,
each holder of Notes may require the Company in certain circumstances to
repurchase a portion of such holder's Notes at 100% of the principal amount of
the Notes together with accrued and unpaid interest to the date of repurchase.
See "Description of Notes -- Repurchase at the Option of Holders -- Asset Sales"
for a definition of "Asset Sale". There can be no assurance that the Company
would have the funds necessary to effect such a purchase if a Change of Control
or Asset Sale were to occur. In addition, certain of the credit facilities
prohibit the Company from prepaying any Notes and also provide that certain
changes in control of the Company or sales of assets would constitute a default
thereunder. Any future credit agreements or other agreement relating to Senior
Debt to which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control or Asset Sale occurs at a time when
the Company is prohibited from purchasing Notes, the Company could seek the
consent of its lenders to purchase the Notes or could attempt to refinance the
borrowings that contain prohibitions against the purchase of Notes. If the
Company does not repay or obtain consent to repay such borrowings, the Company
will remain prohibited from purchasing Notes. In such case, the Company's
failure to purchase tendered Notes would constitute an Event of Default under
the Indenture. See "Description of Notes -- Repurchase at the Option of
Holders -- Change of Control" and "-- Asset Sales".
FRAUDULENT TRANSFER STATUTES
Under applicable provisions of federal bankruptcy law and comparable
provisions of state and federal fraudulent conveyance laws, if it were found
that the Company or any Guarantor (a) had incurred such
27
<PAGE> 28
indebtedness represented by the Notes or any Subsidiary Guarantee with an intent
to hinder, delay or defraud creditors, or (b) had received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and (i)
was insolvent or was rendered insolvent by reason of such transactions, (ii) was
engaged or was about to engage in a business transaction for which its remaining
assets constituted unreasonably small capital to carry on its business, or (iii)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they matured, the obligations of the Company or such Guarantor
under the Notes or any Subsidiary Guarantee could be avoided or claims in
respect of the Notes or any such Subsidiary Guarantee could be subordinated to
all other debts of the Company or of such Guarantor. A legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds could, among other things,
focus on the benefits, if any, realized by a Guarantor as a result of the
issuance by the Company of the Notes. To the extent that a Subsidiary Guarantee
were held to be unenforceable as a fraudulent conveyance for any reason, the
holders of the Notes would cease to have any direct claim in respect of that
Guarantor. In the event a Subsidiary Guarantee were held to be subordinated, the
claims of the holders of the Notes would be subordinated to claims of other
creditors of such Guarantor.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction that is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the fair saleable value of the debtor's assets at
a fair valuation, or if the present fair saleable value of the debtor's assets
were less than the amount required to repay its probable liabilities on its
existing debts, including contingent liabilities, as they become absolute and
matured. There can be no assurance as to what standard a court would apply in
order to make such determination.
The Company believes that the indebtedness of the Company represented by
the Notes is being incurred for proper purposes and in good faith, and the
Company believes that it and each of its Restricted Subsidiaries guaranteeing
the Notes will be solvent, will have sufficient capital for carrying on its
business and will be able to pay its debts as they mature. See, however,
"-- Increased Leverage". These beliefs are based on the Company's operating
history and analysis of internal cash flow projections and estimated values of
assets and liabilities of the Company and the Guarantors at the time of the
offering of the Notes. Since each of the components of the question of whether
the incurrence of the debt represented by the Notes or any Subsidiary Guarantee
constitutes a fraudulent conveyance is inherently fact-based and fact-specific,
there can be no assurance that a court passing on such questions would agree
with the Company. Neither counsel for the Company nor counsel for the
Underwriters will express any opinion as to federal or state laws relating to
fraudulent transfers. Further, the obligations of each Guarantor under its
Subsidiary Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law, which may limit or obviate the effect of the
Subsidiary Guarantees.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of Robert E. 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 retain 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 (other than the Oak N'
Spruce Resort which has not yet been reviewed for ADA compliance) 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
28
<PAGE> 29
federal, state and local legislation may impose further burdens or restrictions
on the Company, the Clubs, or the Master Club at the Existing Resorts, the New
Resorts, or other 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 have a material effect
on the Company's results of operations, liquidity, and financial position, such
costs could be substantial.
VULNERABILITY TO REGIONAL CONDITIONS
Prior to August 1997, all of the Company's operating resorts and
substantially all of the Company's customers and borrowers were located in Texas
and Missouri. Since August 1997, the Company has acquired resorts in Illinois
and Massachusetts as well as a site in Las Vegas, Nevada. 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. Even with the recent acquisitions,
the Company's current geographic concentration 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 several of
the Existing Resorts, and more recent Phase I environmental reports have been
obtained for each of the remaining resorts. The reports 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 Holly Lake Resort's water supply facilities do not comply with certain
state rules regarding minimum water capacity; accordingly, the Company plans to
build an additional water storage facility at Holly Lake, with construction to
begin in the third quarter of 1998. 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 Holly Lake water supply
storage compliance issue 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".
29
<PAGE> 30
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 occupancy
right in another participating network resort. According to ARDA, the ability to
exchange Vacation Intervals was cited by many buyers as an important reason for
purchasing a Vacation Interval. Several companies, including RCI, provide
broad-based Vacation Interval exchange services, and the Existing Resorts,
except Oak N' Spruce, are currently qualified for participation in the RCI
exchange network. The Oak N' Spruce is currently under contract with another
exchange network provider, Interval International. However, no assurance can be
given that the Company will continue to be able to qualify such resorts or any
other future resorts for participation in these networks 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, the Clubs, nor
the Master Club has insurance coverage. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could be required to repair damage
at its expense or lose its capital invested in a resort, as well as the
anticipated future revenues from such resort; moreover, the Company 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, and financial position. See
"Business -- Insurance".
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, 1997
liability for deferred taxes (i.e., taxes owed to taxing authorities in the
future in consequence of income previously reported in the financial statements)
was $30.2 million, primarily attributable to this method of reporting Vacation
Interval sales, before utilization of any available deferred tax benefits (up to
$16.2 million at December 31, 1997),
30
<PAGE> 31
including net operating loss carryforwards. See Note 6 of Notes to Consolidated
Financial Statements. 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 either sufficient tax losses to offset taxable income or funds to
pay the deferred tax liability from prior periods. See "-- Limitations on Use of
Carryovers from Ownership Change".
ALTERNATIVE MINIMUM TAXES
Prior to 1997 the Company 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. During 1997, the Company
submitted a request to the Internal Revenue Service for permission to change to
the accrual method for this computation. In January 1998, the Company received a
proposed ruling from the Internal Revenue Service granting the request effective
January 1, 1997. The Company plans to file a request with the Internal Revenue
Service to modify the proposed ruling to correct the amount of the proposed
accounting adjustment and to make the ruling effective January 1, 1998. The
Company believes the Internal Revenue Service will approve the correction of the
amount of the proposed accounting adjustment, but may refuse to change the
effective date of the ruling. If the Internal Revenue Service refuses to change
the effective date, estimated taxes of $1.5 million, which are included as
current liabilities on the Company's December 31, 1997 balance sheet, plus
interest and any applicable penalties, will be payable in 1998, and the
Company's alternative minimum taxable income for 1998 through 2000 will be
increased each year by an estimated amount of approximately $9.6 million per
year for the pre-1997 adjustment, which will result in the Company paying
substantial additional federal and state taxes in those years. If the Internal
Revenue Service agrees to change the effective date, then the preceding effects
of the accounting method change will be delayed by one year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
LIMITATIONS ON USE OF CARRYOVERS FROM OWNERSHIP CHANGE
The Company estimates that it had net operating loss carryforwards of
approximately $39.2 million at December 31, 1997, for regular federal income tax
purposes related primarily to 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% and Ms.
Brayfield acquired 1%. As a result of the IPO in June 1997, Mr. Mead's ownership
of the Company further decreased to approximately 67%. After the closing of the
Equity Offering and taking into account shares owned by his family, Mr. Mead
will own between 50.7% and 53.5% of the outstanding shares of Common Stock of
the Company, depending on the extent, if any, to which the underwriters exercise
their over-allotment option in the Equity Offering. Concurrently with this
offering or in the future, Mr. Mead, his family, or Ms. Brayfield, could
transfer their shares and/or the Company could issue additional shares,
including shares which it is required to issue under its 1997 Stock Option Plan,
which could result in more than a 50 percentage point change in ownership of the
Company. If such a change occurs within a three year period, the limitations of
Section 382 would apply. Although the Company does not believe that those
limitations would currently adversely affect the Company, there can be no
assurance that the limitations will not 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".
When such a change in ownership occurs, Section 383 of the Code also limits or
denies the future utilization of certain carryover excess credits, including any
unused minimum tax credit attributable to payment of alternative
31
<PAGE> 32
minimum taxes. Although the Company does not believe that these additional
limitations would currently adversely affect the Company, there can be no
assurance that these additional limitations will not limit or deny the future
utilization of any excess tax credits of the Company, resulting in the Company
paying substantial additional federal and state taxes and interest for any
periods following such change in ownership. See "--Alternative Minimum Taxes".
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, and
financial position.
VOTING CONTROL BY EXISTING SHAREHOLDER
After the closing of the Equity Offering, Mr. Mead will own between 50.7%
and 53.5% of the outstanding shares of Common Stock of the Company, depending on
the extent, if any, to which the underwriters exercise their over-allotment
option. By holding a majority of shares of Common Stock, Mr. Mead can elect all
of the Company's directors and control the management and affairs of the
Company. See "Principal Shareholders". Such control may result in decisions
which are not in the best interests of the Company.
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 Equity
Offering and the Note Offering, will receive approximately $13.0 million of the
net proceeds of the Equity Offering as repayment of indebtedness and related
interest expected to be outstanding upon consummation of the Equity Offering.
See "Underwriting".
YEAR 2000 COMPLIANCE
Because of two-digit year formats, computer systems may not properly
categorize and process date information for the year 2000 and subsequent years.
Systems that do not properly classify dates could generate erroneous data or
cause a system to fail. The Company is in the process of implementing an upgrade
to its accounting systems that the Company believes will be year 2000 compliant.
The Company continues to update its other computer systems to prepare for the
year 2000. Management anticipates that it will incur $250,000 of expenses to be
year 2000 compliant. However, significant uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance. Any year
2000 compliance problem could materially adversely affect the Company's results
of operations, liquidity, and financial position.
ABSENCE OF A PUBLIC MARKET
There is no existing trading market for the Notes and there can be no
assurance as to the liquidity of any markets that may develop for the Notes, the
ability of holders of the Notes to sell their Notes, or the prices at which
holders would be able to sell their Notes. Future trading prices of the Notes
will depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
Credit Suisse First Boston Corporation has advised the Company that it currently
intends to make a market in the Notes offered hereby. However, Credit Suisse
First Boston Corporation is not obligated to do so and any market making may be
discontinued at any time without notice. The Company does not intend to apply
for listing or quotation of the Notes on any securities exchange or stock
market. Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of
securities and greatly reduced liquidity. There can be no assurance that any
market for the Notes will not be subject to similar disruptions.
32
<PAGE> 33
SOURCES AND USES OF PROCEEDS
The net proceeds from the Note Offering are estimated to be $72.0 million.
The net proceeds from the Equity Offering are estimated to be $44.8 million. The
following table sets forth the estimated sources and uses of funds at December
31, 1997:
<TABLE>
<CAPTION>
AMOUNT
-------------
(DOLLARS IN
MILLIONS)
<S> <C>
Sources of Funds:
Senior Subordinated Notes due
2008........................ $ 75.0
Common Stock(a)................ 48.8
------
Total sources.................... $123.8
======
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
-------------
(DOLLARS IN
MILLIONS)
<S> <C>
Uses of Funds:
Pay existing
indebtedness(b)(c)(d)....... $ 48.9
Develop units, amenities, and
infrastructure at Existing
Resorts(e).................. 28.5
Develop units, amenities, and
infrastructure at New
Resorts(e).................. 6.0
Acquisitions, working capital
and general corporate
purposes(b)(e).............. 33.0
Fees, expenses, and other
costs....................... 7.4
------
Total uses....................... $123.8
======
</TABLE>
- ---------------
(a) The Company is offering 2,000,000 primary shares of Common Stock in the
Equity Offering at an offering price of $24.375 per share. The Company will
not receive any of the proceeds from the sale of the shares of Common Stock
offered by Silverleaf's Chief Executive Officer, Robert E. Mead.
(b) Indebtedness is projected to increase from $48.9 million at December 31,
1997, to approximately $69.8 million immediately prior to the closing of the
Equity Offering and the Note Offering, substantially all of which will be
paid from the proceeds of the Equity Offering and the Note Offering. As a
result, cash available at closing for acquisitions, working capital, and
general corporate purposes will be reduced to approximately $12.1 million.
Additionally, after repayment of existing indebtedness, there will be $130.0
million of borrowing capacity available under the Company's credit
facilities. See "Description of Certain Indebtedness".
(c) This includes $5.6 million owing to Credit Suisse First Boston Mortgage
Capital, L.L.C., an affiliate of Credit Suisse First Boston Corporation, the
lead managing underwriter for the Equity Offering and the Note Offering.
This indebtedness is projected to increase to $13.0 million by the closing
of the Equity Offering and the Note Offering. See "Underwriting".
(d) Indebtedness to be repaid from the net proceeds of the Equity Offering and
Note Offering bears interest at variable rates ranging from 4.2% to 14.0%
per annum at December 31, 1997, and matures April 1998 through October 2005.
See "Description of Certain Indebtedness". Indebtedness is projected to
increase from $48.9 million to approximately $69.8 million immediately prior
to the closing of the Equity Offering and the Note Offering. Approximately
$59.2 million of this indebtedness will have been incurred within one year
prior to the date of this Prospectus. Of this indebtedness, $2.9 million was
incurred to purchase the Fox River and Timber Creek resorts in St. Louis and
Chicago, respectively, $2.7 million was incurred to purchase the New Resort
site in Las Vegas, $1.7 million was incurred to purchase the New Resort site
in Galveston, $5.1 million was incurred to purchase the Oak N' Spruce Resort
in the Berkshires, $2.9 million was incurred for capital leases of
equipment, and the balance was used for working capital and general
corporate purposes.
(e) The Company currently anticipates investing these proceeds during 1998.
Pending the final application of these proceeds, the Company will invest
them in commercial paper, bankers' acceptances, other short-term
investment-grade securities, or money-market accounts, and may utilize them
for working capital purposes.
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<PAGE> 34
CAPITALIZATION
The following table sets forth the consolidated cash and equivalents and
consolidated capitalization of the Company at December 31, 1997, on a historical
basis, and as adjusted for the Note Offering and the Equity Offering, and in
each case, the anticipated application of the aggregate net proceeds therefrom.
Consummation of the Note Offering is conditioned upon the Equity Offering. This
table should be read in conjunction with "Sources and Uses of Proceeds", the
Consolidated Financial Statements and notes thereto, "Selected Consolidated
Historical Financial and Operating Information" and notes thereto, "Unaudited
Pro Forma Condensed Consolidated Financial Information" and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and equivalents(a)..................................... $ 4,970 $ 72,438
======== ========
Debt:
Credit facilities and other notes payable(a).............. $ 46,239 $ --
Capital lease obligations................................. 2,632 --
Senior Subordinated Notes due 2008........................ -- 75,000
-------- --------
Total indebtedness........................................ 48,871 75,000
-------- --------
Shareholders' equity:
Common Stock, $0.01 par value; 11,311,517 shares issued
and outstanding, 13,311,517 shares as adjusted for the
Equity Offering(b)..................................... 113 133
Additional paid-in capital................................ 64,577 109,338
Retained earnings......................................... 19,075 18,790
-------- --------
Total shareholders' equity................................ 83,765 128,261
-------- --------
Total capitalization.............................. $132,636 $203,261
======== ========
</TABLE>
- ---------------
(a) Indebtedness is projected to increase from $48.9 million at December 31,
1997 to approximately $69.8 million immediately prior to the closing of the
Equity Offering and Note Offering, substantially all of which will be paid
from the proceeds of the Equity Offering and Note Offering. Accordingly, at
the closing of the Note Offering and the Equity Offering, cash and
equivalents would be $51.5 million and indebtedness would be $75.0 million.
After repayment of the indebtedness under certain credit facilities, there
will be $130.0 million of borrowing capacity available under such
facilities.
(b) Does not include an aggregate 1,100,000 shares of Common Stock currently
reserved for issuance pursuant to the Company's 1997 Stock Option Plan. In
February 1998, the Board of Directors approved an amendment to the plan
reserving an additional 500,000 shares of Common Stock for issuance under
the plan; however, this amendment will not become effective unless it is
approved by the shareholders. See "Management -- 1997 Stock Option Plan".
34
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statement of
Income presents results of operations of the Company assuming the IPO, the
Equity Offering and the Note Offering occurred on January 1, 1997. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet presents the financial position
of the Company assuming the Equity Offering and the Note Offering occurred on
December 31, 1997. Adjustments necessary to reflect these assumptions are
presented in the Adjustments column and are further described in the notes to
Unaudited Pro Forma Condensed Consolidated Financial Statements. During June
1997, the Company completed the IPO in which 3,600,000 primary shares of Common
Stock were sold at a price of $16 per share. The net proceeds, after the
deduction of the related issuance costs, amounted to approximately $51.1 million
and were used primarily to reduce indebtedness. The historical financial
information for the Company is derived from the consolidated financial
statements of the Company for the year ended December 31, 1997 which have been
audited by Deloitte & Touche LLP and are included elsewhere herein.
Consummation of the Note Offering is conditioned upon the consummation of
the Equity Offering, but the Equity Offering is not conditioned upon the
consummation of the Note Offering.
The Pro Forma Financial Information does not purport to present the actual
financial position or results of operations of the Company had the IPO, the
Equity Offering, the Note Offering and events associated therewith occurred on
the dates specified, nor are they necessarily indicative of the Company's future
results of operations or financial position. The Pro Forma Financial Information
is based on certain assumptions and adjustments described in the notes and
should be read in conjunction therewith and with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the audited
historical Consolidated Financial Statements and related notes. The adjustments
are based upon preliminary estimates and certain assumptions that management of
the Company believes are reasonable in the circumstances. Final amounts could
differ from those set forth below. In the opinion of management, all adjustments
have been made that are necessary to present fairly the pro forma financial
information.
35
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------------------------------------
PRO FORMA
FOR IPO,
EQUITY OFFERING
AND
HISTORICAL(A) ADJUSTMENTS NOTE OFFERING
------------- ----------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Vacation Interval sales................................... $ 68,682 $ $ 68,682
Interest income........................................... 9,396 (172)(b) 9,224
Other income.............................................. 6,980 6,980
---------- ------- -----------
Total revenues.................................... 85,058 (172) 84,886
---------- ------- -----------
Costs and Operating Expenses:
Cost of Vacation Interval sales........................... 6,600 (125)(c) 6,600
125(d)
Sales and marketing....................................... 30,559 30,559
Provision for uncollectible notes......................... 10,524 10,524
Operating, general and administrative..................... 12,230 188(e) 12,418
Depreciation and amortization............................. 1,497 1,497
Interest expense.......................................... 4,664 (4,664)(c) 7,351
7,351(d)
---------- ------- -----------
Total costs and operating expenses................ 66,074 2,875 68,949
---------- ------- -----------
Income from continuing operations before income taxes....... 18,984 (3,047) 15,937
Income tax expense.......................................... 7,024 (1,127)(f) 5,897
---------- ------- -----------
Income from continuing operations........................... $ 11,960 $(1,920) $ 10,040
========== ======= ===========
Income per share from continuing operations -- Basic........ $ 1.22 $ 0.83
========== ===========
Income per share from continuing operations -- Diluted...... $ 1.22 $ 0.83
========== ===========
Weighted average number of shares Outstanding -- Basic(g)... 9,767,407 12,090,576
========== ===========
Weighted average number of shares
Outstanding -- Diluted(g)................................. 9,816,819 12,139,988
========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
36
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
PRO FORMA
FOR
EQUITY
OFFERING
AND
HISTORICAL(H) ADJUSTMENTS NOTE OFFERING
------------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and equivalents........................................ $ 4,970 $ 67,468(i) $ 72,438
Restricted cash............................................. 200 200
Notes receivable, net....................................... 92,036 92,036
Amounts due from affiliates................................. 1,389 1,389
Inventory................................................... 28,310 28,310
Land, equipment and utilities, net.......................... 21,629 21,629
Land held for sale.......................................... 466 466
Prepaid and other assets.................................... 7,401 2,990(i) 10,391
-------- -------- --------
Total Assets...................................... $156,401 $ 70,458 $226,859
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 5,106 $ 5,106
Amounts due to affiliates................................. -- --
Unearned revenues......................................... 3,122 3,122
Income taxes payable...................................... 1,500 1,500
Deferred income taxes, net................................ 14,037 (167)(j) 13,870
Notes payable and capital lease obligations............... 48,871 (44,329)(j)
(4,542)(i)
Senior Subordinated Notes due 2008........................ -- 75,000(i) 75,000
-------- -------- --------
Total Liabilities................................. 72,636 25,962 98,598
Shareholders' Equity:
Common stock, par value $0.01 per share................... 113 20(j) 133
Additional paid-in capital................................ 64,577 44,761(j) 109,338
Retained earnings......................................... 19,075 (285)(j) 18,790
-------- -------- --------
Total Shareholders' Equity........................ 83,765 44,496 128,261
-------- -------- --------
Total Liabilities and Shareholders' Equity........ $156,401 $ 70,458 $226,859
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
37
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Statement of Income Adjustments
(a) Represents the historical condensed consolidated statement of income of the
Company for 1997.
(b) Represents a reduction of interest income from affiliates (the Company used
IPO proceeds to repay indebtedness to affiliates, and affiliates used such
amounts to repay indebtedness to the Company). Does not include interest
income to the Company which would normally accrue to the Company on cash
balances resulting from the IPO, the Equity Offering and the Note Offering.
(c) Represents the reduction of interest expense and capitalized interest
charged to cost of Vacation Interval sales as a result of the application of
the proceeds of the IPO, the Equity Offering and the Note Offering to the
repayment of indebtedness.
(d) Represents pro forma interest expense from the Note Offering, at an interest
rate of 10.5%, plus $299,000 associated with amortization of capitalized
Note Offering costs, less $823,000 of assumed capitalized interest, and also
represents capitalized interest charged to cost of Vacation Interval sales.
(e) Represents additional costs incurred as a public company as a result of the
IPO.
(f) Represents the adjustment to income tax resulting from the above
adjustments.
(g) Gives retroactive pro forma effect to a 719.97205 for one stock split in May
1997 (the "Stock Split"). 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 period
presented. The difference between pro forma weighted average number of
shares-basic and pro forma weighted average number of shares-diluted
represents the increase in the number of shares resulting from the assumed
exercise of stock options outstanding.
Balance Sheet Adjustments
(h) Represents the historical condensed consolidated balance sheet of the
Company as of December 31, 1997.
(i) Represents the proceeds from the issuance of $75.0 million of Senior
Subordinated Notes, less capitalized offering expenses of $3.0 million, and
repayment of remaining indebtedness with the net proceeds thereof.
(j) Represents the repayment of indebtedness and payment of prepayment penalties
of $452,500 from proceeds of the Equity Offering and the related adjustments
to equity.
38
<PAGE> 39
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING INFORMATION
The Selected Consolidated Historical Financial and Operating Information
set forth below has been derived from the consolidated financial statements of
the Company which have been restated giving effect to the Consolidation
Transactions utilizing the historical cost basis of the combined entities since
these entities were under common ownership and control. The consolidated
financial statements of the Company for 1995, 1996 and 1997 included herein were
audited by Deloitte & Touche LLP. The data presented as of and for the year
ended December 31, 1994 has been derived from the Company's audited consolidated
financial statements which have not been included herein. Data presented as of
and for the year ended December 31, 1993 has been derived from the Company's
unaudited consolidated financial statements which in the opinion of management
of the Company reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position at such
dates and results of operations for such periods.
During 1997, the Company began classifying the components of the previously
reported provision for uncollectible notes into three categories based on the
nature of the item -- credit losses, customer returns and customer releases. The
Company has reclassified these amounts within the previously reported financial
statements to conform to the classification for the year ended December 31,
1997. This reclassification has no balance sheet effect and has no effect on
previously reported net income. See Note 2 of Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview".
The Selected Consolidated Historical Financial and Operating Information
should be read in conjunction with the Consolidated Financial Statements and
notes thereto included herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
39
<PAGE> 40
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Vacation Interval sales................................. $ 18,627 $ 24,551 $ 34,091 $ 45,907 $ 68,682
Other income............................................ 7,188 7,348 9,981 12,018 16,376
--------- --------- --------- --------- ---------
Total revenues..................................... 25,815 31,899 44,072 57,925 85,058
Costs and Operating Expenses:
Cost of Vacation Interval sales......................... 2,094 2,648 3,280 2,805 6,600
Sales and marketing..................................... 10,219 12,929 17,850 21,839 30,559
Provisions for uncollectible notes...................... 1,877 4,205 6,632 8,733 10,524
Operating, general and administrative................... 6,501 5,853 8,780 10,116 12,230
Depreciation and amortization........................... 477 590 863 1,264 1,497
Interest expense........................................ 1,426 1,642 3,609 4,759 4,664
--------- --------- --------- --------- ---------
Total costs and operating expenses................. 22,594 27,867 41,014 49,516 66,074
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes..... 3,221 4,032 3,058 8,409 18,984
Income tax expense........................................ 1,376 1,677 1,512 3,140 7,024
--------- --------- --------- --------- ---------
Income from continuing operations......................... 1,845 2,355 1,546 5,269 11,960
Income (loss) on discontinued operations.................. (286) 568 (1,484) (295) --
--------- --------- --------- --------- ---------
Net income................................................ $ 1,559 $ 2,923 $ 62 $ 4,974 $ 11,960
========= ========= ========= ========= =========
Income per share from continuing operations -- Basic and
Diluted(a)................................................ $ 0.24 $ 0.31 $ 0.20 $ 0.68 $ 1.22
========= ========= ========= ========= =========
Net income per share -- Basic and Diluted................... $ 0.21 $ 0.39 $ 0.01 $ 0.64 $ 1.22
========= ========= ========= ========= =========
Weighted average number of shares outstanding --Basic(b).... 7,588,952 7,588,952 7,590,295 7,711,517 9,767,407
========= ========= ========= ========= =========
Weighted average number of shares
outstanding -- Diluted(b)................................. 7,588,952 7,588,952 7,590,295 7,711,517 9,816,819
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE PRICE
OF VACATION INTERVALS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(c)................................................. $ 5,124 $ 6,264 $ 7,530 $ 14,432 $ 25,145
Cash flows provided by (used in):
Operating activities.................................... $ 5,711 $ 2,496 $ 3,713 $ 6,375 $ (3,392)
Investing activities.................................... (6,121) (12,189) (19,604) (23,996) (39,461)
Financing activities.................................... 378 10,424 18,674 14,882 46,850
Capital expenditures...................................... $ 2,986 $ 1,701 $ 4,497 $ 4,162 $ 8,692
Ratio of earnings to fixed charges(d)..................... 3.2x 3.4x 1.6x 2.5x 4.3x
OTHER OPERATING DATA:
Number of Existing Resorts at period end.................. 7 7 7 7 10
Number of Vacation Intervals sold (excluding
upgrades)(e)............................................ 2,386 3,423 4,464 5,634 6,592
Number of upgraded Vacation Intervals sold................ 1,378 1,290 1,921 1,914 3,908
Number of Vacation Intervals in inventory................. 5,615 5,943 6,580 6,746 10,931
Average price of Vacation Intervals sold (excluding
upgrades)(e)(f)......................................... $ 5,599 $ 5,821 $ 5,965 $ 6,751 $ 7,854
Average price of upgraded Vacation Intervals sold (net of
exchanged interval)..................................... $ 3,822 $ 3,585 $ 3,885 $ 4,113 $ 4,326
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents...................................... $ 197 $ 929 $ 3,712 $ 973 $ 4,970
Amounts due from affiliates............................... 2,391 4,559 4,342 6,237 1,389
Total assets.............................................. 25,301 39,463 62,687 90,852 156,401
Amounts due to affiliates................................. 8,704 14,613 14,263 14,765 --
Notes payable and capital lease obligations............... 2,741 6,061 23,363 41,986 48,871
Total liabilities......................................... 18,063 29,347 46,999 70,190 72,636
Shareholders' equity...................................... 7,238 10,116 15,688 20,662 83,765
</TABLE>
- ---------------
(a) Earnings per share amounts are based on the weighted average number of
shares outstanding.
(b) Gives retroactive effect to the Stock Split.
(c) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation and amortization. EBITDA is
presented because it is a widely accepted indicator of a company's
financial performance. However, EBITDA should not be construed as an
alternative to net income as a measure of the Company's operating results
or to cash flows from operating activities (determined in accordance with
generally accepted accounting principles) as a measure of liquidity. Since
revenues from Vacation Interval sales include promissory notes received by
the Company, EBITDA does not reflect cash flow available to the Company.
Additionally, due to varying methods of reporting EBITDA within the
timeshare industry, the computation of EBITDA for the Company may not be
comparable to other companies in the timeshare industry which compute
EBITDA in a different manner. The Company's management interprets trends in
EBITDA to be an indicator of the Company's financial performance, in
addition to net income and cash flows from operating activities (determined
in accordance with generally accepted accounting principles). The following
table reconciles EBITDA to income from continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income, from continuing operations.................... $1,845 $2,355 $1,546 $ 5,269 $11,960
Interest expense...................................... 1,426 1,642 3,609 4,759 4,664
Income tax expense.................................... 1,376 1,677 1,512 3,140 7,024
Depreciation and amortization......................... 477 590 863 1,264 1,497
------ ------ ------ ------- -------
EBITDA from continuing operations..................... $5,124 $6,264 $7,530 $14,432 $25,145
====== ====== ====== ======= =======
</TABLE>
(d) For purposes of determining the ratio of earnings to fixed charges,
earnings is defined as income from continuing operations before provision
for income taxes, plus interest on indebtedness, imputed interest on the
portion of rent expense (one-third) deemed to represent interest expense,
and amortization of previously capitalized interest. Fixed charges consist
of interest on indebtedness whether expensed or capitalized, imputed
interest on the portion of rent expense (one-third) deemed to represent
interest expense, amortization of debt expense, and discount or premium
relating to any indebtedness whether expensed or capitalized. For
information concerning the ratio of earnings to fixed charges adjusted for
the Pro Forma Adjustments, see "Summary Consolidated Historical Financial,
Operating and Pro Forma Information" and notes thereto.
(e) The Vacation Intervals sold during the year ended December 31, 1997 include
1,517 biennial intervals (counted as 759 annual Vacation Intervals). The
Company did not begin selling biennial intervals until January 1997.
(f) Includes annual and biennial Vacation Interval sales for one and two
bedroom units.
41
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Historical Financial and Operating Information" and Notes thereto,
"Unaudited Pro Forma Condensed Consolidated Financial Information" and notes
thereto, and the Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus.
OVERVIEW
Silverleaf Resorts, Inc. was formed in 1989 to acquire seven of the
Existing Resorts. Certain additional assets and liabilities were subsequently
acquired from the Affiliated Companies in 1995 pursuant to the Consolidation
Transactions. See "Summary -- Corporate Background", "Certain Relationships and
Related Transactions", and Notes 1 and 10 of Notes to Consolidated Financial
Statements. The Consolidated Financial Statements of the Company include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are
wholly-owned. One such subsidiary, CBI, is treated as a discontinued operation.
See Note 12 of Notes to Consolidated Financial Statements. The historical
consolidated financial statements have been restated utilizing the historical
cost basis of the Affiliated Companies since these entities were under common
ownership and control.
The Company generates revenues primarily from the sale and financing of
Vacation Intervals, including upgraded intervals. Additional revenues are
generated from management fees from the Master Club, lease income from Sampler
sales, and utility operations. The Company recognizes management fee income as
the lesser of 15% of revenue or 100% of net income of the Master Club; however,
if the Company does not receive 15% of the Master Club's gross revenues, such
deficiency is deferred for payment in succeeding years, subject again to the net
income limitation. See "Business -- Clubs/Master Club".
The Company recognizes Vacation Interval sales revenues on the accrual
basis. A sale is recognized after a binding sales contract has been executed,
the buyer has made a down payment of at least 10%, and the statutory rescission
period has expired. If all criteria are met except that construction is not
substantially complete, revenues are recognized on the percentage-of-completion
basis. Under this method, the portion of revenue applicable to costs incurred,
as compared to total estimated construction and direct selling costs, is
recognized in the period of sale. The remaining amount is deferred and
recognized as the remaining costs are incurred. If a customer fails to make the
first installment payment, the Company reverses the sale and normally retains
any payments received. During 1997, approximately 2% of the Company's customers
failed to make the first installment payment. For further information concerning
accounting for Vacation Interval sales and accounting policies generally, see
Note 2 of Notes to Consolidated Financial Statements.
The Company accounts for uncollectible notes by recording a provision to
its allowance for uncollectible notes at the time revenue is recognized. During
1997 the Company began classifying the components of the previously reported
provision for uncollectible notes into the following three categories based on
the nature of the item -- credit losses, customer returns and customer releases
(customer releases represent voluntary cancellations of properly recorded sales
transactions which in the opinion of management are consistent with the
maintenance of overall customer goodwill). Provision pertaining to credit
losses, customer returns and customer releases are classified in provision for
uncollectible notes, Vacation Interval sales, and operating, general and
administrative, respectively. The Company has reclassified these amounts within
the previously reported financial statements to conform to the classification
for the year ended December 31, 1997. This reclassification has no balance sheet
effect and has no effect on previously reported net income. See Note 2 of Notes
to Consolidated Financial Statements. The Company sets the provision for
uncollectible notes at an amount sufficient to maintain the Allowance at a level
which management considers adequate to provide for anticipated losses from
customers' failure to fulfill their obligations under the notes. When inventory
is returned to the Company, any unpaid notes receivable balances are charged
against the previously established bad debt reserves net of the amount at which
the Vacation Interval is restored to inventory, which is the lower of the
historical cost basis or market value of the Vacation Interval.
42
<PAGE> 43
Costs associated with the acquisition and development of resorts and the
marketing and sale of Vacation Intervals (including land, construction costs,
furniture, interest, and taxes) are capitalized and included in inventory.
Vacation Interval inventory is segregated into three ratings based on customer
demand (see "Business -- Participation in Vacation Interval Exchange Networks"),
with greater costs apportioned to higher value ratings. As Vacation Intervals
are sold, these costs are deducted from inventory on a specific identification
basis.
Vacation Intervals may be reacquired as a result of (i) foreclosure (or
deed in lieu of foreclosure); (ii) trade-in associated with the purchase of an
upgraded Vacation Interval; or (iii) the Company's ongoing program to reacquire
Vacation Intervals owned but not actively used by Silverleaf Owners. Vacation
Intervals reacquired are recorded in inventory at the lower of their original
cost or market value. Vacation Intervals which have been reacquired are relieved
from inventory on a specific identification basis when resold. Inventory
obtained through the Consolidation Transactions and acquired through the
Company's program to reacquire Vacation Intervals owned but not actively used by
Silverleaf Owners has a significantly lower average cost basis than recently
constructed inventory, contributing significantly to historical operating
margins. New inventory added through the Company's construction and acquisition
programs has a higher average cost than the Company's inventory in prior years.
Accordingly, cost of goods sold has increased and will continue to increase as
sales of new inventory increase.
The Company recognizes interest income as earned. To the extent interest
payments become delinquent the Company ceases recognition of the interest income
until collection is probable.
The Company estimates that it will incur expenses of approximately $250,000
in 1998 and 1999 to make its computer systems "year 2000" compliant. See "Risk
Factors -- Year 2000 Compliance".
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
As a percentage of Total Revenues:
Vacation Interval sales................................... 77.4% 79.3% 80.7%
Interest income........................................... 9.9 11.5 11.1
Management fee income..................................... 5.6 3.8 2.7
Lease income.............................................. 3.0 3.0 1.7
Other income.............................................. 4.1 2.4 3.8
----- ----- -----
Total Revenues.................................... 100.0% 100.0% 100.0%
As a percentage of gross Vacation Interval sales:
Provision for uncollectible notes......................... 19.5% 19.0% 15.3%
Cost of Vacation Interval sales........................... 9.6 6.1 9.6
Sales and marketing....................................... 52.4 47.6 44.5
As a percentage of Interest Income:
Interest expense.......................................... 82.8% 71.3% 49.6%
As a percentage of Total Revenues:
Operating, general and administrative..................... 19.9% 17.5% 14.4%
Depreciation and amortization............................. 2.0 2.2 1.8
Total costs and operating expenses........................ 93.1 85.5 77.7
</TABLE>
1997 VERSUS 1996. Revenues in 1997 were $85.1 million, representing a $27.1
million or 46.8% increase over revenues of $57.9 million for the year ended
December 31, 1996. The increase was primarily due to a $22.8 million increase in
sales of Vacation Intervals, a $2.7 million increase in interest income, and a
$1.8 million increase in other income. The strong increase in Vacation Interval
revenues resulted from sales of more Vacation Intervals at a higher average
price, driven by increased telemarketing capacity, increased sales force,
enhanced lead generation methods, and improved techniques of marketing upgraded
Vacation Intervals.
43
<PAGE> 44
In 1997, the number of Vacation Intervals sold, exclusive of upgraded
Vacation Intervals, increased 17% to 6,592 from 5,634 in 1996; the average price
per interval increased 16.3% to $7,854 from $6,751. Total interval sales for
1997 included 1,517 biennial intervals (counted as 759 Vacation Intervals)
compared to none in 1996. The increase in average price per interval resulted
from the Company's increased sales of higher priced, high-season 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.
Interest income increased 40.8% to $9.4 million for the year ended December
31, 1997 from $6.7 million for the same period of 1996. This increase resulted
from a $36.2 million increase in notes receivable, net of allowance for
uncollectible notes, due to increased sales.
Management fee income increased 6.6% to $2.3 million for 1997 from $2.2
million for 1996. The increase in management fee income was primarily the result
of greater Master Club net income due to higher dues income from an increased
membership base.
Lease income, which relates to the Company's Sampler program, decreased to
$1.4 million for 1997 compared to $1.7 million for 1996. The decrease resulted
from the Company's marketing of biennial intervals as an alternative to the
Sampler program.
Other income increased 124.6% to $3.2 million for the year ended December
31, 1997 from $1.4 million for the year ended December 31, 1996. This increase
was due primarily to usage fees from the Company's newly remodeled golf course
at Holiday Hills and higher water and sewer income due to the addition of two
new utility operations. Additionally, the Company recovered $219,000 from a
lawsuit.
Cost of sales as a percentage of gross Vacation Interval sales increased to
9.6% in 1997 from 6.1% in 1996. Cost of sales for 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 number of intervals acquired from Silverleaf
owners in 1997 was 559 as compared to approximately 1,700 in 1996. Additionally,
the Company continues to deplete its inventory of low cost intervals. As a
result of these factors and the Company's construction program to build new
inventory, the cost of sales percentage has increased and will continue to
increase.
Sales and marketing costs as a percentage of gross Vacation Interval sales
declined to 44.5% for the year ended December 31, 1997 from 47.6% for the same
period of 1996. This decline is due mainly to efficiencies in the telemarketing
and sales functions and economies of scale and increased sales of upgraded
intervals.
The provision for uncollectible notes as a percentage of Vacation Interval
sales decreased to 15.3% for 1997 from 19.0% for 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.
Operating, general and administrative expenses as a percentage of total
revenues declined to 14.4% during 1997 from 17.5% in 1996. The decrease was due
to efficiencies realized from higher sales volume. Overall, operating, general
and administrative expenses increased $2.1 million in 1997 as compared to the
prior year, primarily due to an increase in corporate salaries and additional
costs incurred as a public company.
In 1997, depreciation and amortization expense as a percentage of total
revenue declined to 1.8% from 2.2% in 1996. Overall, depreciation and
amortization expense increased $233,000 from 1996, primarily due to investments
in a new automated dialer, telephone system, and central marketing facility.
Interest expense as a percentage of interest income decreased to 49.6% for
the year ended December 31, 1997 from 71.3% for the same period of 1996. This
decrease was due to lower borrowing costs during the second half of 1997, mostly
as a result of payment of indebtedness with proceeds of the IPO in June 1997.
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<PAGE> 45
Income from continuing operations before income taxes increased 125.8% to
$19.0 million for the year ended December 31, 1997 from $8.4 million for the
year ended December 31, 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% in 1997 versus 37.3%
in 1996.
1996 VERSUS 1995. Revenues in 1996 were $57.9 million, representing a $13.8
million or 31.4% increase over revenues of $44.1 million in 1995. The increase
was primarily due to a $11.8 million increase in sales of Vacation Intervals and
a $2.3 million increase in interest income.
In 1996, the number of Vacation Intervals sold, exclusive of sales of
upgraded Vacation Intervals, increased 26.2% to 5,634 from 4,464 in 1995 and the
average price per unit increased 13.2% to $6,751 from $5,965. The increase in
Vacation Interval sales resulted from the Company's modernized electronic
telemarketing programs, increased sales force and enhanced lead generation
methods. The increase in average price per interval resulted from the Company's
increased sales of higher value rated intervals. In addition to increases in
sales of Vacation Intervals, the Company increased revenues generated from sales
of upgraded intervals at its Existing Resorts through the continued
implementation of marketing and sales programs focused on selling such intervals
to Silverleaf Owners. See "Business -- Growth Strategy".
Interest income increased 53.0% to $6.7 million in 1996 from $4.4 million
in 1995. This increase resulted from a $20.2 million increase in notes
receivable, net of allowance for uncollectible notes, due to increased sales.
Management fee income decreased 11.7% to $2.2 million in 1996 from $2.5
million in 1995. This decrease was primarily the result of the Master Club's net
income being reduced by significant non-capital maintenance and refurbishment
costs incurred as a part of the Company's continuing facility improvement
program and increased operating costs.
In 1996, lease income increased 31.1% to $1.7 million in 1996 from $1.3
million in 1995 due to increased sales under the Company's Sampler program. The
Company has generally been successful in converting such customers to purchasers
of Vacation Intervals.
Other income decreased 21.4% to $1.4 million in 1996 from $1.8 million in
1995. This decrease was primarily due to a significant reduction in servicing
fee income due to discontinuation of factoring notes receivables, and, to a
lesser extent, the temporary closing of the Holiday Hills golf course for
remodeling.
Cost of sales as a percentage of gross Vacation Interval sales declined to
6.1% in 1996 from 9.6% in 1995. This decrease was due to a greater volume of
sales of Vacation Intervals with a low cost basis, and to a lesser extent, price
increases of Vacation Intervals sold. The Company obtained a significant amount
of low cost inventory in 1996 (approximately 1,700 intervals) through its
program to reacquire Vacation Intervals owned but not actively used by
Silverleaf Owners. These Vacation Intervals were acquired at a nominal cost to
the Company (typically $200 per interval). The 1,700 intervals acquired in 1996
represented approximately 5.5% of all intervals owned by Silverleaf Owners at
December 31, 1996.
Sales and marketing costs as a percentage of gross Vacation Interval sales
declined to 47.6% in 1996 from 52.4% in 1995. This decline is due primarily to
the efficiencies resulting from the Company's telemarketing and sales force
areas and economies of scale.
The provision for uncollectible notes as a percentage of Vacation Interval
sales remained relatively unchanged at 19.0% in 1996 versus 19.5% in 1995.
Operating, general and administrative expenses as a percentage of total
revenues declined to 17.5% in 1996 from 19.9% in 1995 due to realization of
economies of scale and elimination of non-recurring expenses incurred in 1995.
Depreciation and amortization expense as a percentage of total revenue
increased to 2.2% in 1996 from 2.0% in 1995 primarily due to an increase in
property, plant and equipment in 1996.
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<PAGE> 46
Interest expense as a percentage of interest income declined to 71.3% in
1996 from 82.8% in 1995. This decrease was due to lower borrowing cost during
the period.
Income from continuing operations before income taxes increased 175.0% to
$8.4 million in 1996 from $3.1 million in 1995 as a result of the above
mentioned operating activities.
Income tax expense as a percentage of income from continuing operations
before income taxes declined to 37.3% in 1996 from 49.4% in 1995 due to
recognition of certain losses of CBI for financial statement purposes which were
not deductible by the Company in 1995 for income tax purposes. CBI operated as a
Subchapter S Corporation wholly-owned by the principal shareholder; accordingly,
the cumulative losses of CBI incurred prior to the transfer of the stock of CBI
to the Company were not available for utilization by the Company as an offset to
taxable income. Effective January 1, 1996, the Company converted CBI to a C
corporation and included it in the consolidated income tax return of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
THE EQUITY OFFERING AND THE NOTE OFFERING. After consummation of the Equity
Offering and the Note Offering and the repayment of indebtedness with the
proceeds therefrom, the Company estimates that it will have approximately $51.5
million in cash and equivalents and $130.0 million of borrowing capacity
available under its revolving credit facilities. See "Description of Certain
Indebtedness".
SOURCES OF CASH. The Company generates cash primarily from the sale of
Vacation Intervals, the financing of customer notes receivables from Silverleaf
Owners, management fees, Sampler sales, and resort and utility operations.
During the years ended December 31, 1995 and 1996, net cash provided by
operating activities was $3.7 million and $6.4 million, respectively. During the
year ended December 31, 1997, the Company's operating activities reflected a use
of cash of $3.4 million, reflecting a one-time cash use of approximately $6.2
million for the repayment of accrued but previously unpaid interest payable to
affiliates in connection with the IPO. The Company typically receives a 10% down
payment on sales of Vacation Intervals and finances the remainder by receipt of
a seven year customer promissory note. The Company generates cash from the
financing of customer notes receivable (i) by borrowing at an advance rate of
70% of eligible customer notes receivable and (ii) from the spread between
interest received on customer notes receivable and interest paid on related
borrowings. Because the Company uses significant amounts of cash in the
development and marketing of Vacation Intervals, but collects cash on customer
notes receivable over a seven year period, borrowing against receivables has
historically been a necessary part of normal operations. See "Risk
Factors -- Financing Customer Borrowings" and "Risk Factors -- Borrower
Defaults".
Net cash provided by financing activities for the years ended December 31,
1995, 1996 and 1997 was $18.7 million, $14.9 million and $46.9 million,
respectively. During 1997, compared to 1996, the $32.0 million increase in cash
flow provided by financing activities was due to net proceeds from the IPO of
$51.1 million and increased borrowings, substantially offset by repayment of
$45.7 million of debt from the IPO proceeds. The Company's revolving credit
facilities provide for loans of up to $130.0 million. At December 31, 1997,
approximately $44.4 million of principal and interest related to advances under
the credit facilities was outstanding. Of this amount, $0, $1.5 million, $4.1
million, $0, $12.6 million, and $26.2 million, matures in 1998, 1999, 2000,
2001, 2002, and subsequent years, respectively. For the year ended December 31,
1997, the weighted average cost of funds for these borrowings was 10.1%.
Customer defaults have significant impact on cash available to the Company from
financing customer notes receivable in that notes more than 60 days past due are
not eligible as collateral. As a result, the Company in effect must repay
borrowings against such notes. See "Risk Factors -- Borrower Defaults", "Risk
Factors -- Financing Customer Borrowings" and "Risk Factors -- Development,
Construction and Property Acquisition Activities". The Company intends to pay
substantially all of its indebtedness under its credit facilities with the
proceeds of the Equity Offering and the Note Offering. However, the Company
intends to maintain the facilities and expects to utilize them to finance its
operations after the Equity Offering and the Note Offering. See "Description of
Certain Indebtedness", Note 7 of Notes to Consolidated Financial Statements,
"Capitalization", and "Sources and Uses of Proceeds".
For regular federal income tax purposes, the Company reports substantially
all of the Vacation Interval sales it finances under the installment method.
Under this method, income on sales of Vacation Intervals is not
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<PAGE> 47
recognized until cash is received, either in the form of a down payment, or as
installment payments on customer notes receivable. The deferral of income tax
liability conserves cash resources on a current basis. Interest 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 which would be paid on the deferred taxes related to the
installment method as the interest expense is not estimable. In addition, the
Company is subject to current alternative minimum tax ("AMT") as a result of the
deferred income which results from the installment sales treatment. Payment of
AMT reduces the future regular tax liability attributable to Vacation Interval
sales, and creates a deferred tax asset. In February 1998, the Internal Revenue
Service proposed an AMT accounting adjustment effective as of January 1, 1997.
The Company plans to file a request with the Internal Revenue Service to make
the proposed ruling effective January 1, 1998, but the Internal Revenue Service
may refuse to change the effective date of the ruling. If the Internal Revenue
Service refuses to change the effective date, estimated taxes of $1.5 million,
which are included as current liabilities on the Company's December 31, 1997
balance sheet, plus interest and any applicable penalties, will be payable in
1998, and the Company's alternative minimum taxable income for 1998 through 2000
will be increased each year by an estimated amount of approximately $9.6 million
per year for the pre-1997 adjustment, which will result in the Company paying
substantial additional federal and state taxes in those years. If the Internal
Revenue Service agrees to change the effective date, then the preceding effects
of the accounting method change will be delayed by one year. See "Risk
Factors -- Acceleration of Deferred Taxes", "Risk Factors -- Alternative Minimum
Taxes" and Note 6 of Notes to Consolidated Financial Statements. The Company's
net operating loss carryforwards, which also may be used to offset installment
sales income, expire beginning in 2007 through 2012. Realization of the deferred
tax asset arising from net operating losses is dependent on generating
sufficient taxable income prior to the expiration of the loss carryforwards and
other factors. See "Risk Factors -- Limitations on Use of Net Operating Loss
from Ownership Change" and Note 6 of Notes to Consolidated Financial Statements.
USES OF CASH. Investing activities typically reflect a net use of cash
because of loans to customers in connection with the Company's Vacation Interval
sales, capital additions, and property acquisitions. Net cash used in investing
activities for the years ended December 31, 1995, 1996 and 1997 was $19.6
million, $24.0 million and $39.5 million, respectively. Cash used in investing
activities increased significantly in each period primarily due to significant
increases in customer notes receivable and the acquisition of the Fox River,
Timber Creek, and Oak N' Spruce resorts and the Las Vegas and Galveston sites.
The Company acquired the Fox River and Timber Creek resorts in August 1997 for
$2.9 million, the site in Las Vegas, Nevada in November 1997 for $2.7 million,
one tract of the Galveston property in December 1997 for $485,000, and the Oak
N' Spruce Resort in Massachusetts in December 1997 for $5.1 million. Operating
and investing activities also use cash because the Company requires funds to
construct infrastructure, amenities, and additional units at the Existing
Resorts and New Resorts, to acquire property for future resort development, and
to support current operations.
The Company has budgeted $13.1 million and $3.1 million for 1998 and 1999,
respectively, for the development of additional roads, utilities and amenities
at the Existing Resorts and New Resorts. To construct new units at the Existing
Resorts and the New Resorts, $39.6 million and $36.3 million is budgeted for
1998 and 1999, respectively. Additionally, the Company may purchase management
rights to eight resorts for $3.8 million, a golf course and land for $3.5
million, and other land for $1.6 million. See "Business -- Recent Developments".
Furthermore, the Company is actively seeking sites for additional new resorts or
acquisitions.
The foregoing capital expenditures, development costs, and acquisitions
will be financed through a combination of the proceeds of the Equity Offering
and the Note Offering, cash flow from operations, and proceeds from anticipated
borrowings under existing or future credit facilities. See "Business -- Growth
Strategy", "Description of Certain Indebtedness", and "Sources and Uses of
Proceeds".
CBI, which has historically required funding from the Company, was engaged
in the development and sale of full ownership condominiums, the investment in,
holding and sale of both real and personal properties, principally in Missouri,
and holding land in Mississippi. Subsequent to the acquisition of CBI, the
Company determined that CBI's condominium development and sale line of business
was not fully compatible with the Company's timeshare operations. Consequently,
CBI ceased all development operations and adopted a plan of
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<PAGE> 48
dissolution effective December 31, 1996, to sell its remaining full ownership
condominiums by December 31, 1997. Accordingly, the condominium development and
sales operation of CBI is treated as a discontinued operation for financial
reporting purposes. The income (loss), net of income taxes, from the
discontinued operations was ($1.5) million, ($295,000), and $0 for the years
ended December 31, 1995, 1996, and 1997, respectively. Anticipated future costs
of carrying and selling the remaining inventory of CBI were accrued as of
December 31, 1996, in the amount of $201,000. Based on the formal plan adopted
by the Company, substantially all assets were sold and liabilities repaid by
December 31, 1997 and no additional accrual for the loss was reserved.
Giving effect to the Equity Offering and the application of the proceeds
therefrom, the Company believes the available borrowing capacity under its
credit facilities, together with cash generated by operations, will be
sufficient to fund operations in the ordinary course of business for at least
the next 12 months. With the additional net proceeds from the Note Offering, the
Company believes it will have sufficient cash to fund operations in the ordinary
course of business through December 1998, without drawing upon its existing
credit facilities. If the Equity Offering and the Note Offering are consummated,
the Company will have $130.0 million of borrowing capacity under such credit
facilities, which will offer the Company the additional flexibility to build
more units and acquire new timeshare resorts which are currently in operation,
land upon which new timeshare resorts may be constructed, or other companies
which operate resort-type properties. The Company does not have sufficient
capital to fully implement its master plan for the total development of the
Existing Resorts and New Resorts. See "Risk Factors -- Development, Construction
and Property Acquisition Activities". To completely finance such master plan
development and fund additional acquisitions, the Company will likely be
required to raise additional capital through additional credit facilities, debt
offerings, additional public offerings of its Common Stock, 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. Any failure to renew existing
credit facilities, obtain adequate financing under new facilities, or raise
capital through other debt or equity offerings, could 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,
develop the New Resorts, and expand the Existing Resorts. See "Risk
Factors -- Increased Leverage".
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years. However, to the extent inflationary trends
affect short-term interest rates, a portion of the Company's debt service costs
may be affected as well as the rates the Company charges on its customer notes
receivable.
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THE TIMESHARE INDUSTRY
THE MARKET
The resort component of the leisure industry is serviced primarily by two
alternatives for overnight accommodations: commercial lodging establishments and
timeshare resorts. Commercial lodging consists of (i) hotels and motels in which
a room is rented on a nightly, weekly or monthly basis for the duration of the
visit, and (ii) rentals of privately-owned condominium units or homes. For many
vacationers, particularly those with families, a lengthy stay at a quality
commercial lodging establishment is not economical. In addition, room rates and
availability at such establishments are subject to change periodically.
Timeshare ownership presents an economical alternative to commercial lodging for
vacationers.
WORLDWIDE MARKET
In 1995 (the most recent year for which statistics are available), the
worldwide timeshare industry experienced 206,000 first-time buyers, sales of
600,000 Vacation Intervals, and sales volume of $5 billion. First introduced in
Europe in the mid-1960s, ownership of Vacation Intervals has been one of the
fastest growing segments of the hospitality industry over the past two decades.
As shown in the following charts, the worldwide timeshare industry has expanded
significantly since 1980 both in Vacation Interval sales volume and number of
Vacation Interval owners.
DOLLAR VOLUME OF VACATION INTERVAL SALES
(IN BILLIONS)
[VACATION INTERVAL SALES CHART]
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NUMBER OF VACATION INTERVAL OWNERS
(IN MILLIONS)
[VACATION INTERVAL SALES CHART]
UNITED STATES MARKET
In 1996, 218,000 intervals in U.S. properties were sold at an average price
of $10,000 per interval, resulting in total sales volume of $2.2 billion. By
comparison, total sales volume in 1992 was $1.3 billion. A total of 1,767,000
households owned intervals in U.S. timeshare properties at January 1, 1997.
REASONS FOR GROWTH
The following factors have contributed to increased acceptance of the
timeshare concept among the general public and the substantial growth of the
timeshare industry over the past 15 years:
- higher quality accommodations and services;
- involvement of well-recognized hotel companies in the industry;
- improved availability of financing for purchasers of Vacation Intervals;
- increased flexibility of timeshare use;
- increased regulation of the timeshare industry; and
- improved overall image of the timeshare industry.
Despite the growth in the timeshare industry, Vacation Interval ownership
had achieved only an approximate 1.77% market penetration of all U.S. households
at January 1, 1997 (based on a U.S. Census Bureau estimate of U.S. households in
1995).
The timeshare industry is highly fragmented, engaged in by a large number
of local and regional resort developers and operators. However, there is a trend
towards consolidation of timeshare properties among fewer owners. The Company
believes that one of the most significant factors contributing to the current
awareness of the timeshare industry is the entry into the market of some of the
world's major lodging, hospitality and entertainment companies, including
Marriott, Disney, Hilton, Hyatt, and Ramada.
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THE CONSUMER
The median age of a Vacation Interval owner in the United States who
purchased an interval in 1995 or 1996 was 48 years. The following table shows
the estimated household incomes of (i) all timeshare owners in the United
States, (ii) U.S. timeshare owners who purchased an interval during the period
from October 1996 through February 1997, and (iii) all timeshare owners in the
Central Region of the United States (which consists of 20 states including
Illinois, Missouri, and Texas):
<TABLE>
<CAPTION>
UNITED '96/'97 CENTRAL
STATES BUYERS REGION
------- ------- -------
<S> <C> <C> <C>
HOUSEHOLD INCOME BEFORE TAXES
Under $30,000......................................... 3.7% 2.3% 4.6%
$30,000 to $39,999.................................... 6.9% 6.3% 7.5%
$40,000 to $49,999.................................... 12.2% 13.3% 12.5%
$50,000 to $59,999.................................... 14.3% 16.3% 15.1%
$60,000 to $74,999.................................... 18.0% 15.7% 18.6%
$75,000 to $99,999.................................... 21.2% 22.7% 25.3%
$100,000 to $124,999.................................. 12.1% 13.1% 6.2%
$125,000 to $149,999.................................. 4.2% 2.0% 4.6%
$150,000 or more...................................... 7.4% 8.4% 5.5%
Approximate Median.................................... $71,000 $71,000 $68,000
</TABLE>
The U.S. Census Bureau has estimated that 29.9% of all U.S. households in
1996 had a household income between $25,000 and $50,000, which represents
approximately one-half of the Company's customer base. The U.S. Census Bureau
figures represent household incomes throughout the United States, whereas the
Company's target customers currently live primarily in Texas, Missouri,
Illinois, Massachusetts, New York, and Connecticut; accordingly, the estimates
prepared by the U.S. Census Bureau may not accurately reflect the annual incomes
of the Company's target customers. Based upon a sampling of approximately 7% of
the Company's customers who purchased a Vacation Interval in 1997, approximately
18% of such customers had an annual income less than $25,000, approximately 49%
of such customers had an income of $25,000 to $50,000, and approximately 33% of
such customers had an annual income greater than $50,000.
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BUSINESS
OVERVIEW
Silverleaf is a leading developer, marketer, and operator of "drive-to"
timeshare resorts. The Company currently owns and operates eight "drive-to"
resorts in Texas, Missouri, Illinois, and Massachusetts (the "Drive-to Resorts")
and two "destination" resorts in Missouri (the "Destination Resorts", and
together with the Drive-to Resorts, the "Existing Resorts"). The Company has
recently acquired sites in Las Vegas, Nevada and Galveston, Texas to be
developed as new Destination Resorts (the "New Resorts"). The number of annual
one-week Vacation Intervals sold by the Company increased at an annual
compounded growth rate of 29.2% from 1992 to 1997. At December 31, 1997, the
Company had an inventory of 10,931 Vacation Intervals, was constructing 120 new
units (6,192 new Vacation Intervals), and had plans to construct 2,670
additional units (137,728 new Vacation Intervals) at the Existing Resorts. The
Company plans to construct 557 new units (28,964 Vacation Intervals) at the New
Resorts. Due to standardized architectural designs and procedures, new units can
typically be constructed at the Existing Resorts within 150 days, weather
permitting. Silverleaf generally starts construction of new units after sales of
Vacation Intervals for those units have occurred.
The Company markets Vacation Intervals to value-conscious customers and has
advanced proprietary computer systems to track and identify potential timeshare
owners. Through exclusive marketing arrangements with race tracks, amusement
parks, and other event sponsors, the Company identifies a substantial number of
prospects in its target markets. As a result of these and other activities, more
than 1,500 potential customers currently tour the resorts each week. Management
anticipates the pool of potential customers will remain strong due to expansion
into new geographic regions and growth in major Texas metropolitan areas,
population turnover in such metropolitan areas, and further penetration of the
target markets.
The Drive-to Resorts are designed to appeal to value-conscious vacationers
seeking comfortable and affordable accommodations in locations convenient to
their residences. These resorts are located proximate to major metropolitan
areas (currently Dallas-Ft. Worth, Houston, San Antonio/Austin, St. Louis,
Chicago, Boston and the greater New York City area), facilitating more frequent
"short stay" getaways, which the Company believes is a growing vacation trend.
The Destination Resorts, which are located in the popular country and western
music entertainment resort area of Branson, Missouri, offer Silverleaf customers
the opportunity to upgrade into higher quality resorts as their lifestyles and
travel budgets permit. Both the Drive-to Resorts and the Destination Resorts are
in rustic areas which provide a quiet, relaxing vacation environment and offer
an economical alternative to commercial vacation lodging. Consistent with
Silverleaf's strategy of targeting value-conscious customers, the average price
of a Vacation Interval for a two-bedroom unit at the Existing Resorts was $7,834
for 1997 and $6,922 for 1996, as compared to the industry average price of
$10,790 for 1996.
The Company offers benefits to Silverleaf Owners which are uncommon in the
timeshare industry. These benefits include (i) use of vacant lodging facilities
at no extra cost through Silverleaf's Endless Escape program; (ii) year-round
access to non-lodging amenities such as fishing, boating, horseback riding,
tennis or golf on a "country-club" basis for little or no additional charge; and
(iii) the right to exchange a Vacation Interval for a different time period or
different Existing Resort through Silverleaf's internal exchange program. These
benefits are subject to availability and other limitations. Most Silverleaf
Owners may also enroll in the world's largest Vacation Interval exchange network
operated by RCI.
The Company's 1997 pro forma revenues and EBITDA were $84.9 million and
$24.8 million, respectively. The Company's Common Stock is listed on the NYSE
under the symbol "SVR", and based on a closing price of $24.375 per share on
April 2, 1998, the Company had a market capitalization of approximately $324.5
million after giving pro forma effect to the Equity Offering.
OPERATIONS
Silverleaf's operations include (i) developing and acquiring timeshare
resorts; (ii) marketing and selling Vacation Intervals to prospective first-time
owners; (iii) marketing and selling upgraded Vacation Intervals to existing
Silverleaf Owners; (iv) providing financing for the purchase of Vacation
Intervals; and (v) operating timeshare resorts. The Company has substantial
in-house capabilities which enable it to coordinate all aspects of
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<PAGE> 53
development and expansion of the Existing Resorts and the development of the New
Resorts, including site selection, design, and construction pursuant to
standardized plans and specifications. The Company also performs substantially
all marketing and sales functions internally and has made a significant
investment in operating technology, including sophisticated telemarketing and
computer systems and proprietary software applications. The Company identifies
potential purchasers through internally developed marketing techniques, and
sells Vacation Intervals through on-site sales offices located at certain
Drive-to Resorts. This practice allows the Company to avoid the more expensive
marketing costs of subsidized airfare and lodging which are typically associated
with the timeshare industry. The Company believes its marketing program and
operating and computer systems enable it to market and sell Vacation Intervals
at a lower cost than its competitors in the timeshare industry. The costs of
maintaining and operating the Existing Resorts are paid from Silverleaf Owners'
monthly ownership dues.
As part of the Vacation Interval sales process, the Company offers customer
financing of up to 90% of the purchase price to be paid over a seven year
period. At December 31, 1997, the Company had a portfolio of approximately
21,320 Vacation Interval customer notes receivable totalling approximately
$104.4 million with an average yield of 14.5% per annum. The Company has
typically financed its operations by pledging eligible customer notes to lending
institutions who make loans secured by such notes. The Company has three
revolving credit facilities providing for loans up to an aggregate of $115.0
million to finance customer notes receivable. See "Description of Certain
Indebtedness".
COMPETITIVE ADVANTAGES
Silverleaf believes the following characteristics afford it certain
competitive advantages:
LOWER MARKETING, SALES, AND ADMINISTRATIVE COSTS. With resorts and on-site
sales offices within a two-hour drive of its targeted customers, Silverleaf can
invite potential customers to tour the Drive-to Resorts without offering
subsidized airline tickets and lodging, a significant marketing expense
typically incurred by competitors in the industry. Silverleaf has also reduced
marketing, operating, and administrative costs through centralization and
automation of many functions. While marketing and sales costs as a percentage of
revenue will increase for newly acquired resorts, the Company believes that
these costs will, over time, return to historical levels.
CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Drive-to Resorts are located
within a two-hour drive of a majority of the target customers' residences, which
accommodates the growing demand for shorter, more frequent, close to home
vacations. This proximity facilitates use of Silverleaf's Endless Escape
program, which allows Silverleaf Owners to use vacant units for no additional
charge, subject to availability and certain limitations. Silverleaf believes it
is the only timeshare operator in the industry which offers its customers these
benefits. Silverleaf Owners can also conveniently enjoy non-lodging resort
amenities year-round on a "country-club" basis.
SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 1997, Silverleaf had
an inventory of 10,931 Vacation Intervals, and a master plan to construct new
units which will result in up to 143,920 additional Vacation Intervals at the
Existing Resorts and 28,964 Vacation Intervals at the New Resorts. Silverleaf's
master plan for construction of new units is contingent upon future sales at the
Existing Resorts and New Resorts and the availability of financing, grant of
government permits, and future land-planning and site-layout considerations. See
"Risk Factors -- Development, Construction and Property Acquisition Activities".
IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing,
development, and property management capabilities. While Silverleaf utilizes
outside contractors to supplement internal resources, when appropriate, the
breadth of Silverleaf's internal capabilities allows greater control over all
phases of its operations and helps maintain operating standards and reduce
overall costs.
LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and
generally employs standard architectural designs and operating procedures which
it believes significantly reduce construction and operating expenses.
Standardization and integration also allow Silverleaf to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing
Resorts can normally be constructed on an "as needed" basis within 150 days.
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<PAGE> 54
CENTRALIZED PROPERTY MANAGEMENT. Silverleaf operates all of the Existing
Resorts on a centralized and collective basis, with operating and maintenance
costs paid from Silverleaf Owners' monthly dues. Silverleaf believes that
consolidation of resort operations benefits Silverleaf Owners by providing them
with a uniform level of service, accommodations and amenities on a standardized,
cost-effective basis. Such standardization also facilitates Silverleaf's
internal exchange program, the Endless Escape program, and external Vacation
Interval exchange programs.
EXPERIENCED MANAGEMENT. The Company's senior management has extensive
experience in the acquisition, development, and operation of timeshare resorts.
Robert E. Mead, Chairman of the Board and Chief Executive Officer, has more than
18 years of experience in the timeshare industry and since 1995 has served as a
director of ARDA, the primary trade association for the timeshare industry. Pro
forma for the Equity Offering (assuming no exercise of the Underwriters'
over-allotment option granted by Mr. Mead), Mr. Mead will own 53.5% of the
Common Stock of the Company. The Company's senior officers have an average of
ten years of experience in the timeshare industry.
GROWTH STRATEGY
Silverleaf intends to grow through the following strategies:
INCREASING DEVELOPMENT AND SALES OF VACATION INTERVALS. Silverleaf intends
to capitalize on its significant expansion capacity at the Existing Resorts and
the New Resorts by increasing marketing, sales and development activities. At
December 31, 1997, Silverleaf owned approximately 930 acres of land that were
available for further development of timeshare units and amenities under
Silverleaf's master plan. The master plan forecasts development of 3,347
additional units, which would result in 172,884 additional Vacation Intervals.
During 1997, Silverleaf enhanced its marketing efforts, including increased
telemarketing capacity arising from investments in computer and automated
dialing technology, increased its sales force, enhanced its lead generation
methods, completed the construction of new sales offices and other amenities,
and commenced the development of new lodging facilities. Furthermore, Silverleaf
continues to emphasize its Endless Escape program designed to accommodate
shorter, "getaway" vacations and has broadened its product offerings to include
biennial (alternate year) intervals and Samplers which are designed to
accommodate more cost-conscious customers.
INCREASING SALES OF UPGRADED INTERVALS. Silverleaf believes it can continue
to improve operating margins by increasing sales of upgraded Vacation Intervals
to existing Silverleaf Owners since these sales have significantly lower sales
and marketing costs. Upgrades by a Silverleaf Owner include the purchase of (i)
an interval in a newly designed and constructed standard unit; (ii) an interval
in a larger or higher quality unit; (iii) an interval during a more desirable
time period; (iv) an interval at a different Drive-to Resort; or (v) an interval
at a Destination Resort. Silverleaf has designed specific marketing and sales
programs to sell upgraded Vacation Intervals to Silverleaf Owners. Silverleaf
continues to construct higher quality, larger units for sale as upgraded
intervals, as well as developing sites at Las Vegas and Galveston as new upgrade
locations. For example, at Ozark Mountain Resort in Branson, Missouri, luxury
"President's View" units are offered for sale at prices ranging from $8,000 to
$17,500 per Vacation Interval. Intervals exchanged for upgraded intervals are
added back to inventory at historical cost for resale at the current offering
price. Sales of upgrades increased to $16.9 million in 1997, from $7.9 million
in 1996 (upgrade sales represented 24.6% of Silverleaf's Vacation Interval sales
in 1997 as compared to 17.1% for 1996). Silverleaf incurs additional sales
commissions upon the resale of Vacation Intervals reconveyed to Silverleaf by
purchasers of upgraded intervals, and such sales absorb their proportionate
share of marketing costs to the extent they displace the sale of another
interval, although they do not directly result in incremental marketing costs.
DEVELOPMENT OF ADDITIONAL RESORTS AND ACQUISITIONS. In 1997, Silverleaf
purchased four sites for development as Drive-to and Destination Resorts and
acquired an existing timeshare resort which it markets as a Drive-to Resort.
Additionally, in 1998, Silverleaf entered into agreements to acquire property
with a golf course near Atlanta, undeveloped land near Kansas City, and the
right to manage eight timeshare resorts in seven states. Silverleaf continues to
seek new properties for Drive-to Resorts in scenic wooded areas on lakes or
waterways that are near major metropolitan areas that have favorable demographic
characteristics. For Destination Resorts, Silverleaf seeks popular destination
resort areas that are easily accessible to Silverleaf Owners. Silverleaf is
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<PAGE> 55
currently exploring a number of other property acquisition opportunities, and
intends to continue acquiring and/or developing additional resorts.
RECENT DEVELOPMENTS
Since the IPO, Silverleaf has taken actions which it believes will enhance
its growth and competitive position within the U.S. timeshare industry. These
actions are summarized below and discussed elsewhere in this Prospectus.
- DEVELOPMENT OF TIMBER CREEK PROPERTY. In August 1997, Silverleaf
purchased the Timber Creek Resort for $1.2 million for development as a
Drive-to Resort. Timber Creek is located approximately 50 miles south of
St. Louis, Missouri. Silverleaf intends to develop approximately 600 units
(31,200 Vacation Intervals) at the Timber Creek Resort and has begun
construction of 24 units to be completed in May 1998. Sales of Vacation
Intervals at Timber Creek began in October 1997.
- DEVELOPMENT OF FOX RIVER PROPERTY. In August 1997, Silverleaf purchased
the Fox River Resort for $1.7 million for development as a Drive-to Resort.
Fox River is located approximately 70 miles southwest of Chicago.
Silverleaf intends to develop approximately 492 (25,584 Vacation Intervals)
units on this property, and has begun construction on 36 units to be
completed in May 1998. Sales of Vacation Intervals at Fox River began in
November 1997.
- ACQUISITION OF OAK N' SPRUCE RESORT. In December 1997, Silverleaf
acquired the Oak N' Spruce Resort, an existing 55 room hotel and 132 unit
timeshare resort, in the Berkshire Mountains of western Massachusetts for
$5.1 million. This new Drive-to Resort serves Boston and the greater New
York City market and Silverleaf plans to develop approximately 420 new
units (21,840 Vacation Intervals) at this resort. At December 31, 1997,
there were 1,629 unsold Vacation Intervals at the resort. Silverleaf's
sales of Vacation Intervals at Oak N' Spruce began in January 1998.
- PURCHASE OF LAS VEGAS SITE. In November 1997, Silverleaf acquired a two
acre parcel near the "strip" in Las Vegas, Nevada, for $2.7 million.
Silverleaf intends to develop this property as a new Destination Resort
which will contain approximately 157 units (8,164 Vacation Intervals).
- PURCHASE OF GULF COAST SITE. In December 1997 and February 1998,
Silverleaf acquired two adjoining tracts of land in Galveston, Texas, for
approximately $1.7 million, to be developed as a new beach-front Gulf Coast
Destination Resort. Silverleaf intends to develop approximately 400 units
(20,800 Vacation Intervals) at this resort.
- INCREASED SALES OF VACATION INTERVALS AT EXISTING RESORTS. In addition to
the acquisitions described above, Silverleaf has also worked since the IPO
to improve internal sales growth at the Existing Resorts. During 1997,
Silverleaf sold 6,592 Vacation Intervals (excluding upgrades), compared to
5,634 and 4,464 during 1996 and 1995, respectively. Total revenues
increased to $85.1 million in 1997 from $57.9 million and $44.1 million in
1996 and 1995, respectively.
- ENHANCED CREDIT FACILITIES. Silverleaf has improved its borrowing
capacity by increasing its revolving credit facilities from $80.0 million
to $115.0 million and by acquiring a construction line of credit in the
amount of $15.0 million. Additionally, Silverleaf has been able to
negotiate lower interest rates and extensions of maturity of certain loan
facilities.
- INVESTMENTS IN OPERATING AND TELEMARKETING SYSTEMS. Silverleaf has
invested approximately $2.1 million in a new automated dialer, telephone
system, and central marketing facility to improve Silverleaf's operating
and telemarketing systems.
- ADDITIONS TO MANAGEMENT TEAM. Silverleaf formed a new acquisition
subsidiary, Silverleaf Resort Acquisitions, Inc., and hired Thomas G.
Franks as President of the new subsidiary. Mr. Franks is a former President
of ARDA, the primary trade association for the timeshare industry, and has
more than 15 years of experience in the timeshare industry. Silverleaf has
also added marketing and operational personnel to its management team.
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<PAGE> 56
- PROPOSED ACQUISITION OF MANAGEMENT RIGHTS. In January 1998, Silverleaf
entered into an agreement with Crown Resort Co., LLC to acquire management
rights to eight timeshare resorts in Alabama, Mississippi, North Carolina,
Pennsylvania, South Carolina, Tennessee, and Texas for $3.8 million. At
December 31, 1997 the eight resorts had approximately 21,500 timeshare
owners. As part of this agreement, Silverleaf will also receive
approximately 1,800 unsold Vacation Intervals and certain equipment at
these eight resorts. This proposed acquisition is subject to completion of
customary due diligence investigations and there is no assurance that it
will be consummated. See "Possible Acquisition of Management Rights to
Crown Resorts".
- PROPOSED PURCHASE OF ATLANTA AND KANSAS CITY SITES. In February 1998,
Silverleaf entered into two agreements, one to acquire a 220 acre property,
including a 160 acre golf course, 72 miles north of Atlanta, Georgia for
$3.5 million, and another to acquire 260 acres of undeveloped land near
Kansas City, Missouri for $1.6 million. If acquired, each property will be
developed as a Drive-to Resort. Each contract may be cancelled by
Silverleaf if it is not satisfied with each property after conducting its
due diligence investigation. Accordingly, there is no assurance that either
of these contracts will be closed.
RESORTS SUMMARY
The following tables set forth certain information regarding each of the
Existing Resorts and New Resorts at December 31, 1997, unless otherwise
indicated.
EXISTING RESORTS
<TABLE>
<CAPTION>
VACATION
VACATION INTERVALS INTERVALS
UNITS AT RESORTS AT RESORTS SOLD(A)
------------------------ ------------------------ ---------
PRIMARY INVENTORY INVENTORY DATE IN
MARKET AT PLANNED AT PLANNED SALES THROUGH 1997
RESORT/LOCATION SERVED 12/31/97 EXPANSION(B) 12/31/97 EXPANSION COMMENCED 12/31/97 ONLY
--------------- ------------- --------- ------------ --------- ------------ --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DRIVE-TO RESORTS
Holly Lake Dallas- 130 108 1,129 5,400(d) 1982 5,371 539
Hawkins, TX Ft. Worth, TX
The Villages Dallas- 240 352 2,440 18,304(e) 1980 10,040 1,679
Flint, TX Ft. Worth, TX
Lake O' The Woods Dallas- 64 16 412 800(d) 1987 2,788 332
Flint, TX Ft. Worth, TX
Piney Shores Houston, TX 132 268 2,516 13,936(e) 1988 4,348 1,359
Conroe, TX
Hill Country Austin-San 153(g) 254 1,887 12,700(d) 1984 5,763 1,391
Canyon Lake, TX Antonio, TX
Timber Creek St. Louis, -- 600(h) -- 31,200(e)(h) 1997 32 32
DeSoto, MO MO
Fox River Chicago, IL -- 492(h) -- 25,584(e)(h) 1997 49 49
Sheridan, IL
Oak N' Spruce Boston, MA 132 420 1,629 21,840(e)(h) 1998 -- --
South Lee, MA New York,
NY(i)
DESTINATION RESORTS
Ozark Mountain Branson, 124 78 783 4,056(e) 1982 5,441 994
Kimberling City, MO MO
Holiday Hills Branson, 24 202 135 10,100(d) 1984 1,065 217
Branson, MO MO
--- ----- ------ ------- ------ -----
Total 999 2,790 10,931 143,920 34,897 6,592
=== ===== ====== ======= ====== =====
<CAPTION>
AVERAGE
SALES
PRICE AMENITIES/
RESORT/LOCATION IN 1997 ACTIVITIES(C)
--------------- ------- -------------
<S> <C> <C>
DRIVE-TO RESORTS
Holly Lake $7,062 B,F,G,H,
Hawkins, TX M,S,T
The Villages 7,640 B,F,H,
Flint, TX M,S,T
Lake O' The Woods 6,743 F,M,S,T(f)
Flint, TX
Piney Shores 8,518 B,F,H,
Conroe, TX M,S,T
Hill Country 8,552 B,M,S,T(f)
Canyon Lake, TX
Timber Creek 5,599 B,F,G,M,S,T
DeSoto, MO
Fox River 5,465 G,M,S,T
Sheridan, IL
Oak N' Spruce -- F,G,S,T
South Lee, MA
DESTINATION RESORTS
Ozark Mountain 7,282 B,F,H,
Kimberling City, MO M,S,T
Holiday Hills 8,046 G,M,S,T(f)
Branson, MO
------
Total $7,854
======
</TABLE>
(Table continued on following page)
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<PAGE> 57
NEW RESORTS
<TABLE>
<CAPTION>
EXISTING AND
PRIMARY DATE PLANNED PLANNED PLANNED
RESORT/LOCATION MARKET SERVED ACQUIRED UNITS(H) INTERVALS(H) AMENITIES/ACTIVITIES
--------------- -------------- -------- -------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Galveston, TX.................................. Houston, TX 1997(j) 400(k) 20,800(e)(k) B,F,S,T
Las Vegas, NV.................................. Las Vegas, NV 1997 157(l) 8,164(e)(l) S
----- ------
Total.................................. 557 28,964
===== ======
</TABLE>
- ---------------
(a) These totals do not reflect sales of upgraded Vacation Intervals to
Silverleaf Owners. For the year ended December 31, 1997, upgrade sales at
the Existing Resorts were as follows:
<TABLE>
<CAPTION>
AVERAGE SALES PRICE
FOR THE YEAR
ENDED 12/31/97
UPGRADED VACATION -- NET OF
RESORT INTERVALS SOLD EXCHANGED INTERVAL
------ ----------------- ----------------------
<S> <C> <C>
Holly Lake................................. 187 $3,809
The Villages............................... 642 4,871
Lake O' The Woods.......................... 79 3,630
Piney Shores............................... 671 3,850
Hill Country............................... 648 3,928
Timber Creek............................... 2 945
Fox River.................................. 1 2,780
Ozark Mountain............................. 1,468 4,645
Holiday Hills.............................. 210 3,938
----- ------
3,908 $4,326
===== ======
</TABLE>
(b) Represents units included in the Company's master plan. This plan is
subject to change based upon various factors, including consumer demand,
the availability of financing, grant of governmental land-use permits, and
future land-planning and site layout considerations. The following chart
reflects the status of certain planned units at December 31, 1997:
<TABLE>
<CAPTION>
LAND-USE LAND-USE LAND-USE
PROCESS PROCESS PROCESS CURRENTLY IN SHELL
NOT STARTED PENDING COMPLETE CONSTRUCTION COMPLETE TOTAL
----------- -------- -------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Holly Lake............ 54 -- 50 -- 4 108
The Villages.......... 110 152 78 12 -- 352
Lake O' The Woods..... -- -- 16 -- -- 16
Piney Shores.......... 108 120 16 24 -- 268
Hill Country.......... 153 47 54 -- -- 254
Timber Creek.......... 576 -- -- 24 -- 600
Fox River............. 456 -- -- 36 -- 492
Oak N' Spruce......... 420 -- -- -- -- 420
Ozark Mountain........ 36 -- 30 -- 12 78
Holiday Hills......... 70 -- 94 24 14 202
----- --- --- --- --- -----
1,983 319 338 120 30 2,790
===== === === === === =====
</TABLE>
"Land-Use Process Pending" means that the Company has commenced the
process which the Company believes is required under current law in order
to obtain the necessary land-use authorizations from the applicable local
governmental authority with jurisdiction, including submitting for approval
any architectural drawings, preliminary plats or other attendant items as
may be required.
"Land-Use Process Complete" means either that (i) the Company believes
that it has obtained all necessary land-use authorizations under current
law from the applicable local governmental authority with jurisdiction,
including the approval and filing of any required preliminary or final plat
and the issuance of building permit(s), in each case to the extent
applicable, or (ii) upon payment of any required filing or other fees, the
Company believes that it will under current law obtain such necessary
authorizations without further process. See "Risk Factors -- Development,
Construction and Property Acquisition Activities".
Some of the 30 "Shell Complete" units are currently devoted to such
uses as a general store, registration office, sales office, activity
center, construction office, or pro shop. The Company anticipates that
these units will continue to be used for such purposes during 1998.
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<PAGE> 58
(c) Principal amenities available to Silverleaf Owners at each resort are
indicated by the following symbols: B -- boating; F -- fishing; G -- golf
course; H -- horseback riding; M -- miniature golf; S -- swimming pool; and
T -- tennis.
(d) These figures are based on 50 one-week intervals per unit.
(e) These figures are based on 52 one-week intervals per unit.
(f) Boating is available near the resort.
(g) Includes three units which have not been finished-out for accommodations
and which are currently used for other purposes.
(h) Engineering, architectural and construction estimates have not been
completed by the Company, and there can be no assurance that the Company
will develop these properties at the unit numbers currently projected.
(i) The Company has commenced the timeshare permit process in New York, but has
not yet received a permit. (The Company has a timeshare permit in
Massachusetts.)
(j) One portion of this tract was acquired in February 1998.
(k) The Company has not commenced the timeshare permit process. The Company has
commenced the land use permit process. See "Risk Factors -- Development,
Construction and Property Acquisition Activities", "-- Description of New
Resorts -- Gulf Coast Resort".
(l) The Company has commenced the timeshare permit application process, but has
not received a permit. The Company has not commenced the land use permit
process. See "Risk Factors -- Regulation of Marketing and Sales of Vacation
Intervals and Related Laws".
FEATURES COMMON TO EXISTING RESORTS
The Existing Resorts are located in rustic areas offering Silverleaf Owners
a quiet, relaxing vacation environment. Furthermore, the resorts offer different
vacation activities, including golf, fishing, boating, swimming, horseback
riding, tennis and archery. Features common to the Existing Resorts include the
following:
ENDLESS ESCAPE PROGRAM. The Company's Endless Escape program offers
Silverleaf Owners a substantial benefit not typically enjoyed by many other
timeshare owners. In addition to the right to use his unit one week per year,
the Endless Escape program allows a Silverleaf Owner to also use vacant units at
any of the Existing Resorts, except Oak N' Spruce, for no additional charge. The
Endless Escape program is limited based on the availability of units which
include unused intervals and unsold inventory. The Company believes this program
is important as many vacationers prefer shorter two to three day vacations.
Silverleaf Owners who have utilized the resort less frequently are given
priority to use the program and may only use an interval with an equal or lower
rating than his Vacation Interval. See "-- Participation in Vacation Interval
Exchange Networks".
Silverleaf Owners who purchase a Vacation Interval at the existing units at
Oak N' Spruce are not entitled to use Silverleaf's Endless Escape program for
other resorts. Furthermore, only those Silverleaf Owners who purchase a Vacation
Interval at the existing units at Oak N' Spruce may use the Endless Escape
program at such Oak N' Spruce units.
The Company is planning to change the Endless Escape program for customers
who purchase a Vacation Interval after approximately June 1998. Customers who
purchase a Vacation Interval at a Drive-to Resort after such date will not be
able to use the Endless Escape program at the Company's Destination Resorts,
including the New Resorts in Galveston and Las Vegas. However, customers who are
or become Silverleaf Owners before such date will be able to use the Endless
Escape program at all Destination Resorts, except the Galveston and Las Vegas
resorts. Silverleaf Owners who purchase a Vacation Interval at any Destination
Resort after such date will be able to use the Endless Escape program at any of
Silverleaf's resorts, including the New Resorts at Galveston and Las Vegas.
YEAR-ROUND USE OF AMENITIES. Even when not using the lodging facilities,
Silverleaf Owners have unlimited year-round use of the amenities located at the
Existing Resorts, such as boating, fishing, miniature golf, tennis, swimming, or
hiking, for little or no additional cost. Certain amenities, however, such as
golf, horseback riding or watercraft rentals, may require a usage fee.
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<PAGE> 59
EXCHANGE PRIVILEGES. Each Silverleaf Owner has certain exchange privileges
which entitle him on an annual basis to (i) exchange his interval for a
different interval (week) at the same resort so long as the different interval
is of an equal or lower rating; and (ii) exchange his interval for the same
interval (week) at any other of the Existing Resorts. These intra-company
exchange rights require an exchange fee, which is currently $50, and are
conditioned upon availability of the desired interval or resort. The Company
executed approximately 884 intra-company exchanges in 1997. In addition, for an
additional annual fee of approximately $74, most Silverleaf Owners may join the
exchange program administered by RCI. See "-- Participation in Vacation Interval
Exchange Networks".
DEEDED OWNERSHIP. The Company typically sells a Vacation Interval which
entitles the owner to use a specific unit for a designated one-week interval
each year. The Vacation Interval purchaser receives a recorded deed which grants
the purchaser a percentage interest in a specific unit for a designated week.
The Company also sells a biennial (alternate year) Vacation Interval which
allows the owner to use a unit for a one-week interval every other year with
reduced dues.
MASTER CLUB. Each of the Existing Resorts has a Club for the benefit of the
Silverleaf Owners. The Clubs have an agreement with the Master Club to manage
the Existing Resorts on a centralized and collective basis. The Master Club has
contracted with the Company to perform the supervisory, management and
maintenance functions granted by the Clubs to the Master Club. Costs of these
operations are covered by monthly dues paid by Silverleaf Owners to their
respective Clubs together with income generated by the operation of certain
amenities at the Existing Resorts. See "-- Clubs/Master Club".
ON-SITE SECURITY. The Existing Resorts are patrolled by security personnel
who are either employees of the Master Club or personnel of independent security
service companies which have contracted with the Clubs.
The new Galveston resort is expected to have the features set forth above.
Due to Nevada timeshare laws, the proposed resort in Las Vegas will not be
managed by the Master Club. See "-- Clubs/Master Club".
DESCRIPTION OF EXISTING RESORTS
HOLLY LAKE RESORT. Holly Lake is a family-oriented golf resort located in
the Piney Woods of East Texas, approximately 105 miles east of Dallas. The
timeshare portion of Holly Lake is part of a 4,300 acre mixed-use development of
single-family lots and timeshare units with other third-party developers. The
Company owns approximately 2,740 acres within Holly Lake, of which approximately
2,667 may not be developed due to deed restrictions. At December 31, 1997,
approximately 27 acres were developed and approximately 45 remaining acres are
currently planned by the Company to be used for future development.
At December 31, 1997, 130 units were completed, and an additional 108 units
are planned for development. Three different types of units are offered at the
resort: (i) two bedroom, two bath, wood siding and stucco fourplexes; (ii) one
bedroom, one bath, one sleeping loft, log construction duplexes; and (iii) two
bedroom, two bath, log construction fourplexes. Each unit has a living room with
sleeper sofa and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and vaulted ceilings. Certain units include
interior ceiling fans, imported ceramic tile, over-sized sliding glass doors,
and rattan and pine furnishings.
Amenities at the resort include an 18-hole golf course with pro shop;
19th-hole private club and restaurant; Holly Lake Restaurant; Country Store;
indoor rodeo arena and stables; six tennis courts (four lighted); four different
lakes (one with sandy swimming beach and swimming dock, one with boat launch for
water skiing); two swimming pools with bathhouses; children's pool and pavilion;
recently completed hiking/nature trail; children's playground area; two
miniature golf courses; three picnic areas; activity center with big screen
television; gameroom with arcade games and pool tables; horseback trails;
activity areas for basketball, horseshoes, volleyball, shuffleboard, and
archery; and camp sites with electrical and water hookups. Silverleaf Owners can
also rent canoes, bicycles, and water trikes. Homeowners in neighboring
subdivisions are entitled to use the amenities at Holly Lake pursuant to
easements or use agreements.
At December 31, 1997, the resort contained 6,500 Vacation Intervals, of
which 1,129 intervals remained available for sale. The Company plans to build an
additional 108 units, which would yield an additional 5,400 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$6,000 to $12,500
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<PAGE> 60
for one-week stays. During 1997, 539 Vacation Intervals were sold. See
"-- Resorts Summary" and "Risk Factors -- Development, Construction and Property
Acquisition Activities".
THE VILLAGES AND LAKE O' THE WOODS RESORTS. The Villages and Lake O' The
Woods are sister resorts located on the shores of Lake Palestine, approximately
100 miles east of Dallas, Texas. The Villages, located approximately five miles
northwest of Lake O' The Woods, is an active sport resort popular for
water-skiing and boating. Lake O' The Woods is a quiet wooded resort where
Silverleaf Owners can enjoy the seclusion of dense pine forests less than two
hours from the Dallas-Fort Worth metroplex. The Villages is a mixed-use
development of single-family lots and timeshare units, while Lake O' The Woods
has been developed solely as a timeshare resort. The two resorts contain
approximately 615 acres, of which approximately 379 may not be developed due to
deed restrictions. At December 31, 1997, approximately 47 acres were developed
such that approximately 189 remaining acres are currently planned by the Company
to be used for future development.
At December 31, 1997, 240 units were completed at The Villages and 64 units
were completed at Lake O' The Woods. An additional 352 units and 16 units are
planned for development at The Villages and Lake O' The Woods, respectively.
There are four different types of units at these resorts: (i) three bedroom, two
and one-half bath, wood siding exterior duplexes and fourplexes (two units);
(ii) two bedroom, two bath, brick and siding exterior fourplexes; (iii) two
bedroom, two bath, siding exterior fourplexes; and (iv) one bedroom, one bath
with two-bed loft sleeping area, log construction duplexes. Amenities within
each unit include full kitchen, whirlpool tub, and color television. Certain
units include interior ceiling fans, ceramic tile, and/or a fireplace.
Both resorts are situated on Lake Palestine, a 27,000 acre public lake.
Recreational facilities and improvements at The Villages include a full service
marina with convenience store, boat launch, water-craft rentals, and covered and
locked rental boat stalls; two swimming pools; lighted tennis court; miniature
golf course; nature trails; camp sites; riding stables; soccer/softball field;
children's playground; RV sites; an activity center with reading room,
wide-screen television and pool table; and competitive sports facilities which
include horseshoe pits, archery range, and shuffleboard, volleyball, and
basketball courts. Silverleaf Owners at The Villages can also rent or use
bicycles, jet skis, motor boats, paddle boats, pontoon boats, and water trikes.
Neighboring homeowners are also entitled to use these amenities pursuant to a
use agreement.
Recreational facilities at Lake O' The Woods include swimming pool,
bathhouse, lighted tennis court, a recreational beach area with picnic areas, a
fishing pier on Lake Palestine, nature trails, soccer/softball field, children's
playground, RV sites, an activity center with wide-screen television and pool
table, horseshoe pits, archery range, putting green, miniature golf course, and
shuffleboard, volleyball, and basketball courts. Guests can also ride horses or
rent bicycles.
At December 31, 1997, the Villages contained 12,480 total Vacation
Intervals, of which 2,440 remained available for sale. The Company plans to
build 352 additional units at the Villages, which would yield an additional
18,304 Vacation Intervals available for sale. At December 31, 1997, Lake O' The
Woods contained 3,200 total Vacation Intervals, of which 412 remained available
for sale. The Company plans to build 16 additional units at Lake O' The Woods,
which would yield 800 additional Vacation Intervals available for sale. Vacation
Intervals at The Villages and Lake O' The Woods are currently priced from $5,500
to $14,500 for one-week stays (and start at $3,500 for biennial intervals).
During 1997, 1,679 Vacation Intervals were sold at The Villages and 332 Vacation
Intervals were sold at Lake O' The Woods. See "-- Resorts Summary" and "Risk
Factors -- Development, Construction and Property Acquisition Activities".
PINEY SHORES RESORT. Piney Shores is a quiet, wooded resort ideally located
for day-trips from metropolitan areas in the southeastern Gulf Coast area of
Texas. Piney Shores is located on the shores of Lake Conroe, approximately 40
miles north of Houston, Texas. At December 31, 1997, the resort contained
approximately 116 acres, of which approximately 73 acres are planned by the
Company for future development.
At December 31, 1997, 132 units were completed, and an additional 268 units
are planned for development. All units are two bedroom, two bath units and will
comfortably accommodate up to six people. Amenities include a living room with
sleeper, full kitchen, whirlpool tub, color television, and interior ceiling
fans. The Company has recently completed 24 new "lodge-style" units which
feature stone fireplaces, white-washed pine wall coverings, "age-worn" paint
finishes, and antique furnishings.
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The primary recreational amenity at the resort is Lake Conroe, a 21,000
acre public lake. Other recreational facilities and improvements available at
the resort include a swimming pool with spa, a new bathhouse complete with
showers and restrooms, lighted tennis court, miniature golf course, stables,
horseback riding trails, children's playground, picnic areas, boat launch, beach
area for swimming, 1,500-square foot activity center with big-screen television,
covered wagon rides, and facilities for horseshoes, archery, shuffleboard, and
basketball. The resort also has a vintage moored paddle-wheeled riverboat which
is available for parties and receptions.
At December 31, 1997, the resort contained 6,864 Vacation Intervals, of
which 2,516 remained available for sale. The Company intends to build 268
additional units, which would yield an additional 13,936 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$6,000 to $14,500 for one-week stays (and start at $3,500 for biennial
intervals). During 1997, 1,359 Vacation Intervals were sold. See "-- Resorts
Summary" and "Risk Factors -- Development, Construction and Property Acquisition
Activities".
HILL COUNTRY RESORT. Hill Country Resort is located near Canyon Lake in the
hill country of central Texas between Austin and San Antonio. At December 31,
1997, Hill Country Resort contained approximately 60 acres, of which
approximately 13 acres are currently planned by the Company to be used for
future development. In February 1998, the Company entered into an agreement to
acquire an additional 46 acres for $218,000. Silverleaf may cancel this
agreement if it is not satisfied with the property after its due diligence
investigation, and there is no assurance that this contract will be consummated.
At December 31, 1997, 153 units were completed, and an additional 254 units
are planned for development. Twenty units are single story, while all other
units are two-story structures in which the bedrooms and baths are located on
the second story. Each unit contains two bedrooms, two bathrooms, living room
with sleeper sofa, and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and interior design details such as vaulted
ceilings. Certain units include interior ceiling fans, imported ceramic tile,
over-sized sliding glass doors, rattan and pine furnishings, and/or a fireplace.
Twelve units feature the Company's new "lodge style".
Amenities at the resort include a registration center; an 1,150-square foot
activity center with electronic games, pool table, and wide-screen television;
miniature golf course; a children's playground area; barbecue and picnic areas;
enclosed swimming pool and heated spa; children's wading pool; newly-constructed
tennis court; archery range; and activity areas for shuffleboard, basketball,
horseshoes, and volleyball. The Company plans to expand the existing clubhouse
at the resort with construction projected to begin in November 1998. The Company
estimates that the addition will cost approximately $680,000 and will take six
months to complete. Area sights and activities include water-tubing on the
nearby Guadalupe River, and visiting the River Walk or the Alamo in San Antonio.
At December 31, 1997, the resort contained 7,650 Vacation Intervals, of
which 1,887 remained available for sale. The Company plans to build 254
additional units, which collectively would yield 12,700 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,000 to $14,500 for one-week stays (and start at $3,500 for
biennial alternate year intervals). During 1997, 1,391 Vacation Intervals were
sold. See "-- Resorts Summary" and "Risk Factors -- Development, Construction
and Property Acquisition Activities".
OZARK MOUNTAIN RESORT. Ozark Mountain Resort is a family-oriented resort
located on the shores of Table Rock Lake which features bass fishing. The resort
is located approximately 15 miles from Branson, Missouri, a country music
entertainment center, 233 miles from Kansas City, and 276 miles from St. Louis.
Ozark Mountain Resort is a mixed-use development of timeshare and condominium
units. At December 31, 1997, the resort contained approximately 116 acres, of
which approximately 82 acres are currently planned by the Company to be used for
future development.
At December 31, 1997, 124 units were completed, and an additional 78
additional units are planned for development. There are two types of units: (i)
two bedroom, two bath, one-story fourplexes; and (ii) two bedroom, two bath,
three-story sixplexes. Each standard unit includes two large bedrooms, two
bathrooms, living room with sleeper sofa, and full kitchen. Other amenities
within each unit include whirlpool tub, color television, and vaulted ceilings.
Certain units contain interior ceiling fans, imported ceramic tile, over-sized
sliding glass doors, rattan or pine furnishings, or fireplace. "President's
View" units feature a panoramic view of Table Rock
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Lake, a larger, more spacious floor plan (1,210 square feet), front and back
screened verandas, washer and dryer, and a more elegant decor.
The primary recreational amenity available at the resort is Table Rock
Lake, a 43,100 acre public lake. Other recreational facilities and improvements
at the resort include a swimming beach with dock, an activities center with pool
table, covered boat dock and launch ramp, olympic-sized swimming pool,
concession area with dressing facilities, lighted tennis court, nature trails,
horseback riding trails, two picnic areas, two playgrounds, miniature golf
course, and a competitive sports area accommodating volleyball, basketball,
tetherball, horseshoes, shuffleboard, and archery. Guests can also rent or use
canoes, paddle boats, or rowboats. Owners of neighboring condominium units
developed by the Company in the past are also entitled to use these amenities
pursuant to use agreements with the Company. Similarly, owners of Vacation
Intervals are entitled to use certain amenities of these condominium
developments, including a wellness center featuring a jacuzzi and exercise
equipment.
At December 31, 1997, the resort contained 6,224 Vacation Intervals, of
which 783 remained available for sale. The Company plans to build 78 additional
units which would yield an additional 4,056 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,000 to
$14,500 for one-week stays, while one-week "President's View" intervals are
priced at $8,000 to $17,500 depending on the value rating of the interval.
During 1997, 994 Vacation Intervals were sold. See "-- Resorts Summary" and
"Risk Factors -- Development, Construction and Property Acquisition Activities".
HOLIDAY HILLS RESORT. Holiday Hills is a resort community located in Taney
County, Missouri, two miles east of Branson, Missouri. The resort is 224 miles
from Kansas City and 267 miles from St. Louis. The resort is heavily wooded by
cedar, pine, and hardwood trees, and is favored by Silverleaf Owners seeking
quality golf and nightly entertainment in nearby Branson. Holiday Hills is a
mixed-use development of single-family lots, condominiums and timeshare units.
At December 31, 1997, the resort contained approximately 338 acres, of which
approximately 177 acres are currently planned by the Company to be used for
future development.
At December 31, 1997, 24 units were completed, and an additional 202 units
are planned for future development. There are two types of timeshare units: (i)
two bedroom, two bath, one-story fourplexes; and (ii) one bedroom, one bath,
with upstairs loft, log construction duplexes. Each unit includes a living room
with sleeper sofa, full kitchen, whirlpool tub, color television, vaulted
ceilings, and interior ceiling fans.
Taneycomo Lake, a popular lake for trout fishing, is three miles away, and
Table Rock Lake is approximately ten miles away. Amenities at the resort include
a newly renovated 18-hole golf course, pro shop, swimming pool, miniature golf
course, tennis court, picnic area, camp sites, archery range, basketball court,
and an activity area which includes shuffleboard and horseshoes. Lot and
condominium unit owners are also entitled to use these amenities pursuant to use
agreements between the Company and certain homeowner associations.
At December 31, 1997, the resort contained 1,200 Vacation Intervals, of
which 135 remained available for sale. The Company plans to build 202 additional
units, which would yield an additional 10,100 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,000 to
$14,500 for one-week stays. During 1997, 217 Vacation Intervals were sold. See
"-- Resorts Summary" and "Risk Factors -- Development, Construction and Property
Acquisition Activities".
TIMBER CREEK RESORT. In August 1997, the Company acquired the Timber Creek
Resort in Desoto, Missouri. The resort is located approximately 50 miles south
of St. Louis. Prior to its acquisition by the Company, the Timber Creek Resort
was operated as a campground by a nationwide campground operator. At December
31, 1997, the resort contained approximately 308 acres, of which approximately
142 acres are currently planned by the Company to be used for future
development.
The Company plans to build 600 new units. The planned units will be two
bedroom, two bath units. Amenities within each new unit will include a living
room with sleeper sofa, full kitchen, whirlpool tub, and color television.
Certain units will include a fireplace, ceiling fans, imported ceramic tile,
oversized sliding glass doors, and rattan or pine furniture.
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The primary recreational amenity available at the resort is a 40-acre
fishing lake. Other amenities include a clubhouse; outdoor pavilion; swimming
pool; two tennis courts; miniature golf course; shuffleboard/multi-use sports
court; and hook-ups for recreational vehicles. The Company plans to construct a
new par three executive golf course; clubhouse; stable and corral; lake
pavilion; and welcome station. Other planned improvements by the Company include
conversion of the existing sales and registration buildings and renovation of
the clubhouse and clubhouse pool. The Company is obligated to maintain and
provide campground facilities for members of the previous owner's campground
system.
At December 31, 1997, construction had begun on 24 units which are expected
to be completed by May 1998. The Company plans to build 576 additional units
which collectively would yield 31,200 Vacation Intervals available for sale.
Vacation Intervals at the resort are currently priced from $6,000 to $12,500 for
one-week stays. Sales efforts commenced in October 1997, and 32 Vacation
Intervals were sold in the last quarter of 1997. See "-- Resorts Summary" and
"Risk Factors -- Development, Construction and Property Acquisition Activities".
FOX RIVER RESORT. In August 1997, the Company acquired the Fox River Resort
in Sheridan, Illinois. The resort is located approximately 70 miles southwest of
Chicago. Prior to its acquisition by the Company, the Fox River Resort was
operated as a campground by a nationwide campground operator . At December 31,
1997, the resort contained approximately 180 acres, of which approximately 87
acres are currently planned by the Company to be used for future development.
The Company plans to build 492 new units. All units will be two bedroom,
two bath units. Amenities within each unit will include a living room with
sleeper sofa, full kitchen, whirlpool tub, and color television. Certain units
will include a fireplace, ceiling fans, imported ceramic tile, oversized sliding
glass doors, and rattan or pine furniture.
Amenities available at the resort include a tennis court; sports court;
shuffleboard courts; outdoor pavilion; swimming pool; miniature golf course; and
hook-ups for recreational vehicles. The Company plans to construct a new par
three executive golf course; sales and registration buildings; clubhouse;
covered pool; playground; children's movie theater; stable and corral; and
welcome station. The Company also plans to offer winter recreational activities
at this resort, including ice-skating, snowmobiling, and cross-country skiing.
The Company is obligated to maintain and provide campground facilities for
members of the previous owner's campground system.
At December 31, 1997, construction had begun on 36 units which are expected
to be completed by May 1998. The Company plans to build 456 additional units
which collectively would yield 25,584 Vacation Intervals available for sale.
Vacation Intervals at the resort are currently priced from $6,000 to $12,500 for
one-week stays. Sales efforts commenced in November 1997, and 49 Vacation
Intervals were sold in the last quarter of 1997. See "-- Resorts Summary" and
"Risk Factors -- Development, Construction and Property Acquisition Activities".
OAK N' SPRUCE RESORT. In December 1997, the Company acquired the Oak N'
Spruce Resort in the Berkshire mountains of western Massachusetts. The resort is
located approximately 134 miles west of Boston and 114 miles north of New York
City. Oak N' Spruce is a mixed-use development which includes a hotel and
timeshare units. At December 31, 1997, the resort contained approximately 240
acres, of which approximately 120 acres are currently planned by the Company to
be used for future development.
At December 31, 1997, the resort had 132 units, and an additional 420 units
are planned for development. There are seven types of existing units: (i) studio
flat; (ii) one-bedroom flat; (iii) one-bedroom townhouse; (iv) two-bedroom flat;
(v) two-bedroom townhouse; (vi) two-bedroom, flex-time; and (vii) two-bedroom,
lockout. There is also a 55-room hotel at the resort which may be converted to
timeshare use. The hotel will initially be used primarily to provide
accommodations for potential timeshare customers who tour the resort. Amenities
within each new unit will include a living room with sleeper sofa, full kitchen,
whirlpool tub, and color television. Certain units will include a fireplace,
ceiling fans, imported ceramic tile, oversized sliding glass doors, and rattan
or pine furniture.
Amenities at the resort include a restaurant and lounge with banquet
facility; two indoor heated swimming pools with hot tubs; one outdoor
olympic-sized, spring fed pool with bar and snack bar; sauna; health club; nine-
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hole golf course; ski rentals; shuffleboard, basketball and tennis courts;
horseshoe pits; hiking and ski trails; and activity areas for sledding and
badminton. The resort is also near Beartown State Forest.
At December 31, 1997, the resort contained 6,864 Vacation Intervals, of
which 1,629 remained available for sale. The Company plans to build 420
additional "lodge-style" units, which would yield an additional 21,840 Vacation
Intervals available for sale. Construction of units is slated to begin in the
second quarter of 1998, and sales efforts began in January 1998. Vacation
Intervals at the resort are currently priced from $6,000 to $12,500 for one-week
stays. Since the Oak N' Spruce Resort was acquired on December 31, 1997, the
Company did not sell any Vacation Intervals at this resort during 1997. See
"-- Resorts Summary" and "Risk Factors -- Development, Construction and Property
Acquisition Activities".
DESCRIPTION OF NEW RESORTS
LAS VEGAS RESORT. In November 1997, the Company acquired a two acre parcel
of land two blocks off the "strip" in Las Vegas, Nevada, for development as a
new Destination Resort.
The Company plans to build a five-story tower and a nine-story tower which
will include approximately 157 units, including 83 one-bedroom and 74
two-bedroom units. Construction of the units is slated to begin in June 1998.
This resort will feature the Company's larger President's View units which offer
1,210 square feet of floor space, front and back balconies, washer and dryer,
whirlpool tubs, living room with sleeper sofa, full kitchen, and color
television.
Amenities at the resort will include a restaurant and lounge on the top
floor. Other planned amenities include a swimming pool, health spa with sauna,
exercise facilities, children's theatre, and video arcade. The resort will also
feature a waterfall cascading down the front of one tower.
The Company plans to build 157 units which would yield 8,164 Vacation
Intervals for sale. The Company anticipates that sales efforts will begin in the
third quarter of 1998. Vacation Intervals at the resort will be priced from
$9,500 to $13,500 for one-week stays. See "-- Resorts Summary" and "Risk
Factors -- Development, Construction and Property Acquisition Activities".
GULF COAST RESORT. In December 1997 and February 1998, the Company acquired
over 83 acres of land, including beachfront, in Galveston, Texas. These tracts
are located approximately 50 miles south of Houston, Texas, and were acquired
for development as a new Destination Resort. Prior to its acquisition by the
Company, one tract was operated by a nationwide campground operator.
The Company plans to build 400 new units situated in three-story 12-plex
buildings, with construction of 12 units slated to begin in June 1998. All units
will be two bedroom, two bath units. Amenities within each unit will include two
large bedrooms, two bathrooms (one with a whirlpool tub), living room with
sleeper sofa, full kitchen, color television, and vaulted ceilings. This resort
will also include the Company's upscale President's View units which will
overlook the Gulf of Mexico and offer 1,210 square feet of floor space, front
and back screened verandas, washer and dryer, and a more elegant decor.
The primary amenity at the resort is the Gulf of Mexico. This site has 635
feet of beachfront. Other currently existing amenities include a lodge with
kitchen, sports court, and swimming pool. The Company is obligated to maintain
and provide campground facilities for members of the previous owner's campground
system.
The Company plans to build 400 units which would yield 20,800 Vacation
Intervals for sale. The Company anticipates that sales efforts will begin in the
third quarter of 1998. Vacation Intervals at the resort will be priced from
$8,000 to $14,500 for one-week stays. Silverleaf's land use plan at Galveston is
currently being challenged in court. A neighboring landowner has sued the city
of Galveston and its zoning board to set aside the Galveston planning
commission's approval of Silverleaf's land use plan. Silverleaf believes the
suit is without merit and has filed a petition to intervene in the litigation to
protect its interests. The Company does not believe that this suit will
materially affect its timetable for development of its New Resort at Galveston;
however, there can be no assurance that Silverleaf's land use plan will
withstand this challenge. Furthermore, this litigation may delay the development
of this property. See "-- Resorts Summary" and "Risk Factors -- Development,
Construction and Property Acquisition Activities".
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MARKETING AND SALES
Marketing is the process by which the Company attracts potential customers
to visit and tour an Existing Resort or attend a sales presentation. Sales is
the process by which the Company seeks to sell a Vacation Interval to a
potential customer once he arrives for a tour at an Existing Resort or attends a
sales presentation. The Company believes it has the marketing and sales systems
necessary to sell Vacation Intervals on a low-cost basis. The Company also
believes it is strategically positioned to enter new markets and develop
marketing programs for additional resorts it may develop in the future at a
lower cost than its competitors.
MARKETING. The Company's in-house marketing staff develops prospects
through a variety of marketing programs specifically designed to attract the
Company's target customers. Databases of new prospects are principally developed
through cooperative arrangements between Database Research, Inc., a subsidiary
of the Company, and other local businesses and special event sponsors. Under
these cooperative marketing programs, basic demographic information of potential
customers is solicited on a voluntary basis from individuals who patronize these
businesses or events. After entering this demographic information into its
permanent database, the Company utilizes its systems to identify prospects who
meet the Company's marketing criteria. Using the Company's automated dialing and
bulk mailing equipment, in-house marketing specialists conduct coordinated
telemarketing and direct mail procedures which invite prospects to tour one of
the Company's resorts and receive an incentive, such as a free gift.
SALES. The Company actively sells its Vacation Intervals primarily through
on-site salespersons at certain Existing Resorts. Upon arrival at an Existing
Resort for a scheduled tour, the prospect is met by a member of the Company's
on-site salesforce who conducts the prospect on a one to two hour tour of the
resort and its related amenities. At the conclusion of the tour, the sales
representative explains the benefits and costs of becoming a Silverleaf Owner.
The presentation also includes a description of the financing alternatives
offered by the Company. Prior to the closing of any sale, a verification officer
(a salaried employee of the Company) interviews each prospect to ensure
compliance with Company sales policies and regulatory agency requirements. No
sale becomes final until a statutory waiting period (which varies from state to
state) of up to five days has passed.
Sales representatives receive commissions ranging from 5-14% of the sales
price depending on established guidelines. Sales managers also receive
commissions of 4% and are subject to commission chargebacks in the event the
purchaser fails to make his first required payment. Sales directors also receive
commissions of 2%, which are also subject to chargebacks.
Prospects who are interested in a lower priced product are offered biennial
(alternate year) intervals or Samplers, which entitle the prospect to sample a
resort for a specified number of nights. The prospect may apply the cost of a
Sampler against the down-payment on a Vacation Interval if purchased at a later
date. In addition, the Company actively markets upgraded Vacation Intervals to
existing Silverleaf Owners. See "-- Growth Strategy". Although most upgrades are
sold by the Company's in-house sales staff, the Company has contracted with a
third party to assist in offsite marketing of upgrades at the Destination
Resorts. These upgrade programs have been well received by Silverleaf Owners and
accounted for approximately 17.1% and 24.6%, respectively, of the Company's
gross revenues from Vacation Interval sales for 1996 and 1997. By offering
Samplers and upgraded Vacation Intervals, the Company believes it offers an
affordable product for all prospects in its target market. Also, by offering
products with a range of prices, the Company attempts to attract younger
purchasers with its lower-priced products and gradually upgrade such purchasers
over time as their earnings increase.
Because the Company's sales representatives are a critical component of the
sales and marketing effort, the Company continually strives to attract, train
and retain a dedicated salesforce. The Company provides intensive sales
instruction and training which, coupled with the representative's valuable local
knowledge, assist the sales representatives in acquainting prospects with the
resort's benefits. Each sales representative is an employee of the Company and
receives some employment benefits. At December 31, 1997, the Company employed
more than 300 sales representatives at its Existing Resorts.
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CUSTOMER FINANCING
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 allocated 15.3% of
the purchase price of Vacation Intervals to its provision for uncollectible
notes. In addition, in 1997 the Company decreased sales by $2.8 million for
customer returns and increased operating, general and administrative expenses by
$1.2 million for customer releases. See Note 2 of Notes to Consolidated
Financial Statements. 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 generally not recovered; and such costs (approximately 40% of sales price)
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, Illinois, Texas, and certain other states have laws which limit or hinder
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 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, 1997, the Company had Vacation Interval customer notes
receivable of $104.4 million and notes unrelated to Vacation Intervals of $3.1
million, was contingently liable with respect to approximately $7.4 million
principal amount of customer notes sold with recourse, and had an allowance for
uncollectible notes of approximately $12.6 million and an allowance for future
customer returns of approximately $2.8 million. See Note 4 of Notes to
Consolidated Financial Statements.
The Company recognizes interest income as earned. If interest payments on
customer notes become delinquent, the Company ceases recognition of the interest
income until collection is assured. When inventory is returned to the Company,
any unpaid note receivable balances are charged against the allowance for
uncollectible notes net of the amount at which the Vacation Interval is being
restored to inventory.
While the Company intends to use the proceeds of the Equity Offering and
the Note Offering to pay indebtedness under its existing revolving credit
facilities, it may borrow additional funds under such facilities in the future
to finance its operations. Under its existing revolving credit facilities, the
Company may borrow up to $115.0 million collateralized by customer promissory
notes and mortgages. At December 31, 1997, the Company had borrowings under such
revolving credit facilities in the approximate principal amount of $40.4
million. These facilities permit borrowings up to 70% of the principal amount of
performing notes, and payments from Silverleaf Owners on such notes are credited
directly to the lender and applied against the Company's loan balance. At
December 31, 1997, the Company had a portfolio of approximately 21,320 Vacation
Interval customer promissory notes in the approximate principal amount of $104.4
million, of which approximately $14.4 million in principal amount were 61 days
or more past due and therefore ineligible as collateral.
At December 31, 1997, the Company's portfolio of customer notes receivable
had an average yield of 14.5%. At such date, the Company's borrowings, which
bear interest at variable rates, had a weighted average cost of 10.1%. 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 existing indebtedness currently bears
interest at variable
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rates and the Company's customer notes receivable bear interest at fixed rates,
increases in interest rates would 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 has not engaged in interest rate hedging transactions.
Therefore, any increase in interest rates, particularly if sustained, could have
a material adverse effect on the Company's results of operations, liquidity and
financial position. If the Note Offering is consummated, the Notes will bear
interest at a fixed rate of interest for a ten year period, which would lessen
this risk initially.
Limitations on availability of financing would inhibit sales of Vacation
Intervals due to (i) the lack of funds to finance the initial negative cash flow
that results from sales that are financed by the Company, and (ii) reduced
demand if the Company is unable to provide financing to purchasers of Vacation
Intervals. 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. In
addition, 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.
The Company typically provides financing to customers over a seven year
period, and customer notes had an average maturity of 5.5 years at December 31,
1997. The Company's revolving credit facilities mature between December 1999 and
October 2005, with up to $60.0 million of borrowings under such facilities
maturing in December 1999. Accordingly, there could be a mismatch between the
Company's cash receipts and the Company's cash disbursement obligations in
December 1999 and subsequent periods. 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 notes receivable, 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 "Risk
Factors -- Acceleration of Deferred Taxes" and "Risk Factors -- Alternative
Minimum Taxes". However, if the Equity Offering is consummated, a substantial
portion of the Company's indebtedness under the credit facilities will be
repaid, which would lessen this risk initially.
DEVELOPMENT AND ACQUISITION PROCESS
The Company believes there is substantial opportunity to develop and
acquire resorts. As part of its current growth strategy, the Company intends to
develop and selectively acquire new resorts with characteristics similar to the
Existing Resorts and New Resorts. See "Risk Factors -- Development,
Construction, and Property Acquisition Activities".
In evaluating a potential site for a Drive-to Resort, the Company generally
seeks locations within 100 miles of large metropolitan areas that have favorable
demographic characteristics. For both Drive-to Resorts and Destination Resorts,
the Company generally seeks wooded rustic settings with amenities such as golf
courses or water frontage. For Destination Resorts, the Company seeks popular
destination resort areas that are easily accessible to Silverleaf Owners. The
Las Vegas, Nevada site was recently acquired in response to a survey in which
Silverleaf Owners expressed a strong interest in a "destination" resort in Las
Vegas. The Company also seeks locations offering an absence of competing
properties near the target location, ease of development with respect to zoning
and land-use issues, and ease of compliance with governmental regulations
concerning timeshare sales and operations.
Before committing capital to a site, the Company tests the market using
certain marketing techniques developed by the Company. The Company also explores
the zoning and land-use laws applicable to the potential site and the regulatory
issues pertaining to licenses and permits for timeshare sales and operations.
The Company will also contact various governmental entities and review
applications for necessary governmental permits and approvals. If the Company is
satisfied with its market and regulatory review, it will prepare a conceptual
layout of the resort, including building site plans and resort amenities. After
the Company applies its standard lodging unit design and amenity package, the
Company prepares a budget which estimates the cost of developing the resort,
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including costs of lodging facilities, infrastructure and amenities, as well as
projected sales, marketing, and general and administrative costs. Purchase
contracts typically provide for additional due diligence by the Company,
including obtaining an environmental report by an environmental consulting firm,
a survey of the property, and a title commitment. The Company employs legal
counsel to review such documents and to also review pertinent legal issues. If
the Company continues to be satisfied with the site after the environmental and
legal review, the Company will complete the purchase of the property.
The Company has a contract with an outside architectural firm which
supervises construction of new units. All construction activities are contracted
out to third parties, subject to completion guarantees. The Company seeks
initial completion of the development of a new resort's basic infrastructure and
models within one year, with additional units to be added within 150 days based
on demand, weather permitting. See "Risk Factors -- Development, Construction
and Property Acquisition Activities". A normal part of the development process
is the establishment of a functional sales office at the new resort.
CLUBS/MASTER CLUB
Upon purchasing a Vacation Interval at a resort, the purchaser
automatically becomes a member of a homeowner's association ("Club") for that
particular resort. The Company has the right to appoint the directors of the
Clubs. The Silverleaf Owners are obligated to pay monthly dues to their
respective Clubs, which obligation is secured by a lien on their Vacation
Interval in favor of the Club. If a Silverleaf Owner fails to pay his monthly
dues, the Club may foreclose on the delinquent Silverleaf Owner's Vacation
Interval. During 1996 and 1997, approximately 396 and 228 foreclosures,
respectively, resulted from Silverleaf Owners' failure to pay monthly dues.
Each Existing Resort has a Club which has entered into a Master Club
Agreement with the Master Club. The Master Club, a non-profit corporation, has
no shareholders or members, and its directors are elected by a majority vote of
the directors of the Clubs. The Master Club Agreement authorizes the Master Club
to manage the Existing Resorts on a centralized and collective basis. The
consolidation of resort operations through the Master Club permits: (i) a
centralized reservation system for all resorts; (ii) substantial cost savings by
purchasing goods and services for all resorts on a group basis, which generally
results in a lower cost of goods and services than if such goods and services
were purchased by each resort on an individual basis; (iii) centralized
management for the entire resort system; (iv) centralized legal, accounting and
administrative services for the entire resort system; and (v) uniform
implementation of various rules and regulations governing all resorts. All
furniture, furnishings, recreational equipment and other personal property used
in connection with the operation of the Existing Resorts are owned by the Master
Club, rather than the Company.
At December 31, 1997, the Master Club had 398 full-time employees and is
solely responsible for their salaries. The Master Club is also responsible for
the direct expenses of operating the Existing Resorts, while the Company is
responsible for the direct expenses of new development and all marketing and
sales activities. To the extent the Master Club provides payroll, administrative
and other services that directly benefit the Company, the Company reimburses the
Master Club for such services. See "Certain Relationships and Related
Transactions -- Transactions with the Master Club" and Note 10 of Notes to
Consolidated Financial Statements.
The Master Club collects dues, currently $49.98 per month ($24.99 for
biennial (alternate year) Vacation Intervals) from Silverleaf Owners, plus
certain other amounts assessed against the Silverleaf Owners from time to time,
together with all income generated by the operation of certain amenities at the
Existing Resorts. Such amounts are placed in a common account and are used by
the Master Club to pay the costs of operating the Existing Resorts and the
management fees owing to the Company pursuant to a Management Agreement between
the Company and the Master Club. This Management Agreement authorizes the
Company to manage and operate the resorts and provides for a management fee
equal to 15% of Master Club gross revenues, but the Company's right to receive
such fee on an annual basis is limited to the amount of the Master Club's net
income; however, if the Company does not receive 15% of the Master Club's gross
revenues, such deficiency is deferred for payment to succeeding year(s), subject
again to the net income limitation. Due to anticipated refurbishment of units at
the Existing Resorts, together with the operational and maintenance expenses
associated with the Company's current expansion and development plans, the
Company believes its 1998 management fee will be subject to the net income
limitation. For financial reporting purposes, management fees from the Master
Club are recognized based
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on the lower of (i) 15% of Master Club's gross revenues, or (ii) Master Club net
income. See Note 10 of Notes to Consolidated Financial Statements. The
Management Agreement was entered into in March 1990, has a ten year term, and
will continue year-to-year thereafter unless cancelled by either party. At
December 31, 1997, there were approximately 34,700 Silverleaf Owners who pay
dues to the Master Club.
As the Company develops new resorts, their respective clubs are expected to
be added to the Master Club Agreement. However, the timeshare laws of some
states, including Nevada, prohibit the collective dues/expense arrangement used
by the Master Club. Accordingly, the Club for the New Resort in Las Vegas will
not be managed by the Master Club and will be managed directly by Silverleaf.
Oak N' Spruce has two Clubs -- one for Silverleaf Owners who purchase an
interval in the new units to be constructed by Silverleaf, and another Club for
timeshare owners who purchase an interval in an existing Oak N' Spruce unit. The
latter Club, which had approximately 5,300 members at December 31, 1997, has no
management agreement with the Master Club.
OTHER OPERATIONS
OPERATION OF AMENITIES. The Company owns, operates, and receives the
revenues from the marina at The Villages and the golf course and pro shop at
Holiday Hills. Although the Company owns the golf course at Holly Lake, a
homeowners association in the development operates the golf course. In general,
the Master Club receives revenues from the various amenities which require a
usage fee, such as watercraft rentals, horseback rides, and restaurants.
UNIT LEASING. The Company also realizes revenues from sales of Samplers
which allow prospective Vacation Interval purchasers to sample a resort for a
specified number of nights. A five night Sampler package currently sells for
$595. For the years ended December 31, 1996 and 1997, the Company realized $1.7
million and $1.4 million, respectively, in revenues from Sampler sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".
UTILITY SERVICES. The Company owns its own water supply facilities at Piney
Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills,
Timber Creek, and Fox River resorts. The Company also currently owns its own
waste-water treatment facilities at Piney Shores, Ozark Mountain, Holly Lake,
Timber Creek, and Fox River resorts. The Company recently transferred the
waste-water treatment facilities at the Holiday Hills Resort to a local public
utility district. The Company is in the process of applying for permits to build
expanded water supply and waste-water facilities at the Timber Creek and Fox
River resorts. The Company has permits to supply and charge third parties for
the water supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark
Mountain, Hill Country, and Piney Shores resorts, and the waste-water facilities
at the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and Villages
resorts. The Company has applied for permits which would allow it to charge
third-parties for water supply and waste-water service at the Timber Creek
resort. The Company is currently building a waste-water facility at The Villages
which should be completed by mid-1998. TNRCC notified the Company that Holly
Lake's water supply facilities do not meet TNRCC rules regarding minimum water
storage capacity. To comply, the Company intends to build a new water supply
facility at Holly Lake, with construction slated to begin in the third quarter
of 1998. The Company also anticipates developing or augmenting utility service
capacity at the Timber Creek and Fox River resorts and the new resort in
Galveston.
OTHER PROPERTY. The Company owns an undeveloped five-acre tract of land in
Pass Christian, Mississippi, which has been listed with a broker for sale. The
Company had planned to develop this property as a Destination Resort. However,
in a recent survey, the Silverleaf Owners expressed a strong interest in a Texas
resort on the Gulf of Mexico. In response, the Company acquired the parcels in
Galveston, Texas, which will supplant development of the Pass Christian
property. At December 31, 1997, the Company also owned 18 lots at Holiday Hills
Resort and 404 lots at The Villages. At December 31, 1997, the Company also
owned eight condominium units which are in the process of being sold. See Note
12 of Notes to Consolidated Financial Statements. Additionally, the Company owns
approximately 45 acres in Mississippi, and the Company is entitled to 85% of any
profits from this land. An affiliate of a director of the Company owns a 10% net
profits interest in this land. See "Certain Relationships and Related
Transactions -- Transactions with Related Individuals".
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OTHER OPERATIONS. The Company provides management services for certain
condominium homeowners' associations at the Existing Resorts. The Company will
receive fees from campground members at the Timber Creek, Fox River, and
Galveston resorts. The Company also receives revenues from room charges at the
hotel at the Oak N' Spruce Resort.
POSSIBLE ACQUISITION OF MANAGEMENT RIGHTS TO CROWN RESORTS
In January 1998, the Company entered into an agreement with Crown to
acquire management rights to eight timeshare resorts in Alabama, Mississippi,
North Carolina, Pennsylvania, South Carolina, Tennessee, and Texas for $3.8
million. Under the agreement, the Company will receive all existing equipment
and furniture and fixtures in place for the management and operation of these
eight resorts which is not owned by the resort homeowners' associations. The
Company will also receive approximately 1,800 unsold Vacation Intervals. At
December 31, 1997, the eight resorts had approximately 21,500 Vacation Interval
owners. These resorts, if acquired, will not be operated under Silverleaf's name
and will not be managed by the Master Club, and their interval owners will not
participate in the Endless Escape program. Silverleaf would receive management
fees from the homeowners' associations of these eight resorts in exchange for
maintenance and cleaning of the units, management of the resorts' reservation
systems, and operation of a proposed Crown Resorts exchange program. This
acquisition would also provide an opportunity to market and sell Vacation
Intervals at the Existing Resorts and the New Resorts as upgrades to interval
owners of Crown Resorts. This acquisition is currently in the due diligence
stage, and there is no assurance that it will be consummated.
The eight Crown Resorts are described as follows:
- The Alpine Bay Resort is located in Talledega County, Alabama, near Lake
Logan Martin and is approximately 50 miles east of Birmingham. The resort
contains 54 units and includes a golf course, pro shop lounge, outdoor
pool and tennis courts. There are no remaining unsold Vacation Intervals
at this resort.
- The Hickory Hill Resort is located in Jackson County, Mississippi, near
the Pascagoula River and is approximately 20 miles east of Biloxi. The
resort contains 80 units and has a golf course, restaurant/lounge,
outdoor pool, clubhouse, fitness center, miniature golf course, tennis
courts, and playground. There are approximately 155 unsold Vacation
Intervals at this resort.
- The Lake Royale Resort is located in Franklin County, North Carolina, and
is approximately 50 miles east of Raleigh/Durham. The resort contains ten
units and has a golf course, pro shop lounge, outdoor pool, clubhouse,
miniature golf course, tennis courts, and playground. There are
approximately 14 unsold Vacation Intervals at this resort.
- The Beech Mountain Lake Resort is located in Butler Township, Luzerne
County, Pennsylvania, and is approximately 30 miles south of Wilkes
Barre-Scranton. The resort contains 54 units and has a restaurant/lounge,
indoor pool/sauna, clubhouse, fitness center, tennis courts, and pontoon
boat. There are approximately 116 unsold Vacation Intervals at this
resort.
- The Treasure Lake Resort is located in Sandy Township, Clearfield County,
Pennsylvania, and is approximately 160 miles northeast of Pittsburgh. The
resort contains 145 units and has two golf courses, a restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, tennis courts, and pontoon
boat. There are approximately 468 unsold Vacation Intervals at this
resort.
- The Foxwood Hills Resort is located in Oconee County, South Carolina,
near Lake Hartwell and is approximately 100 miles northeast of Atlanta.
The resort contains 113 units and has a golf course, restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, miniature golf course, tennis
courts, pontoon boat, and playground. There are approximately 483 unsold
Vacation Intervals at this resort.
- The Lake Tansi Village Resort is located in Cumberland County, Tennessee,
and is approximately 75 miles west of Knoxville. The resort contains 124
units and has a golf course, restaurant/lounge, indoor pool/sauna,
outdoor pool, clubhouse, fitness center, miniature golf course, tennis
courts, and playground. There are approximately 275 unsold Vacation
Intervals at this resort.
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- The Westwind Manor Resort is located in Wise County, Texas, on Lake
Bridgeport and is approximately 65 miles northwest of the Dallas-Ft.
Worth metroplex. The resort contains 37 units and has a golf course,
restaurant/lounge, outdoor pool, clubhouse, miniature golf course, tennis
courts, and playground. There are approximately 333 unsold Vacation
Intervals at this resort.
The Company will not own, operate, or receive revenues from the
above-described recreational amenities, which are generally owned and operated
by various homeowner's associations or unrelated third parties. Neither will the
Company acquire any land or development rights for the construction of
additional timeshare units at these eight resorts, although it may consider such
acquisitions in the future.
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORKS
INTERNAL EXCHANGES. Each purchaser of a Vacation Interval from the Company
has certain exchange privileges which entitle such purchaser to: (i) exchange
his interval for a different interval (week) at the same resort so long as the
different interval is of an equal or lower rating; and (ii) exchange his
interval for the same interval of equal or lower rating at any other Existing
Resort. These intra-company exchange rights require an exchange fee, which is
currently $50, and are conditioned upon availability of the desired interval or
resort. Owners of Vacation Intervals at the Drive-to Resorts will not have
exchange rights to the New Resorts in Galveston and Las Vegas.
RCI EXCHANGES. The Company believes that its Vacation Intervals are made
more attractive by the Company's participation in Vacation Interval exchange
networks operated by RCI. The Existing Resorts, except Oak N' Spruce, are
registered with RCI, and approximately one-third of Silverleaf Owners
participate in RCI's exchange network. The Oak N' Spruce Resort is currently
under contract with a different network exchange company, Interval
International. Membership in RCI allows participating Silverleaf Owners to
exchange their occupancy right in a unit in a particular year for an occupancy
right at the same time or a different time of the same or lower color rating in
another participating resort, based upon availability and the payment of a
variable exchange fee. A member may exchange his Vacation Interval for an
occupancy right in another participating resort by listing his Vacation Interval
as available with the exchange organization and by requesting occupancy at
another participating resort, indicating the particular resort or geographic
area to which the member desires to travel, the size of the unit desired and the
period during which occupancy is desired.
RCI assigns a rating of "red", "white", or "blue" to each Vacation Interval
for participating resorts based upon a number of factors, including the location
and size of the unit, the quality of the resort and the period during which the
Vacation Interval is available, and attempts to satisfy exchange requests by
providing an occupancy right in another Vacation Interval with a similar rating.
An owner of a red Vacation Interval may exchange his interval for a red, white,
or blue interval. An owner of a white Vacation Interval may exchange only for a
white or blue interval, and an owner of a blue interval may exchange only for a
blue interval. If RCI is unable to meet the member's initial request, it
suggests alternative resorts based on availability. RCI has assigned either red
or white ratings to all Vacation Intervals at the Company's Ozark Mountain and
Holiday Hills resorts.
RCI has more than 3,200 participating resort facilities and over 2.3
million members worldwide. During 1997 RCI processed over 1.8 million Vacation
Interval exchanges. The cost of the annual membership fee in RCI, which is at
the option and expense of the owner of the Vacation Interval, is currently $74
per year. Exchange rights require an additional fee of approximately $103 for
domestic exchanges and $133 for foreign exchanges.
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, Disney, Hilton, Hyatt, and Four Seasons have recently entered the
industry. Other companies in the timeshare industry, including Signature,
Fairfield, Vacation Break, Vistana, Ramada, and TrendWest, are, or are
subsidiaries of, public companies, with the enhanced access to capital and other
resources that public ownership implies.
Fairfield and Signature own timeshare resorts in or near Branson, Missouri,
which compete with the Company's Holiday Hills and Ozark Mountain Resorts, and
to a lesser extent with the Company's newly-
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acquired Timber Creek Resort. Signature also 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
Illinois, Missouri, or Texas. The Company believes that many of the companies
named in the preceding paragraph operate timeshare resorts in Las Vegas, Nevada.
Additionally, the Company believes there are a number of privately-owned and
operated timeshare resorts in most states in which the Company owns resorts
which will compete with the Company's Existing Resorts and New Resorts. Finally,
the proposed resort in Las Vegas will compete with a large number and variety of
hotels and other lodging facilities in Las Vegas.
The Company believes Marriott, Disney, Hilton, Hyatt, and Four Seasons
generally target consumers with higher annual incomes than the Company's target
market. The Company believes the other competitors named above target consumers
with similar, but slightly higher, income levels than the Company's target
market. The Company's 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 (or its customers') costs relative to such
competitors' (or their customers') costs, could have a material adverse effect
on the Company's results of operations, liquidity and financial position.
Numerous businesses, individuals and other entities compete with the
Company in seeking properties for acquisition and development and new resorts.
Some of these competitors are larger and have greater financial and other
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.
GOVERNMENTAL REGULATION
GENERAL. 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 and New 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 certain fraudulent marketing practices in the timeshare
industry in the 1980's, various states enacted legislation aimed at curbing such
abuses. Texas, Missouri, Illinois, Massachusetts and Nevada, the states in which
the Company owns Existing Resorts or New Resorts, as well as other states in
which the Company markets its Vacation Intervals, have adopted specific laws and
regulations regarding the marketing and sale of Vacation Intervals. The laws of
most states, including Texas, Illinois, Massachusetts and Nevada, require the
Company to file a detailed offering statement and supporting documents with a
designated state authority, which describe the Company, the project, and the
promotion and sale of Vacation Intervals. The offering statement must be
approved by the appropriate state agency before the Company may solicit
residents of such state. The laws of Texas, Illinois, Massachusetts and Nevada,
respectively, require the Company to deliver an offering statement (or public
report), together with certain additional information concerning the terms of
the purchase, to prospective purchasers of Vacation Intervals who are residents
of such state, even if the resort is not located in such state. The laws of
Missouri generally only require certain disclosures in sales documents for
prospective purchasers. There are also laws in each state where the Company
currently sells Vacation Intervals which grant the purchaser of a
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Vacation Interval the right to cancel a contract of purchase at any time within
three to five calendar days following the date the contract was signed by the
purchaser.
The Company qualifies each resort under the laws of the state where it is
located. The Company has recently filed a timeshare application in Nevada with
respect to the New Resort in Las Vegas. There can be no assurance that the
Company will obtain the requisite approval to sell Vacation Intervals for this
resort, and the Company has not commenced marketing or sales activities for this
report.
The Company also markets and sells its Vacation Intervals to residents of
certain states which are near the states where the Company's resorts are
located. Many of these neighboring states also regulate the marketing and sale
of Vacation Intervals to their residents. The Company is currently in various
stages of obtaining permits to sell Vacation Intervals to residents of New York
and certain other states proximate to the Oak N' Spruce Resort in Massachusetts.
There can be no assurance that the Company will obtain the requisite approvals
to sell Vacation Intervals to residents of such states. The Company does not
register all of its resorts in each of the states where its resorts are located.
Most states have additional 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,
Missouri, Illinois, and Massachusetts laws and regulations to which it is
currently subject relating to the sale and marketing of Vacation Intervals.
However, the Company is 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 aggressively markets and sells
Vacation Intervals in the value segment of the timeshare industry, which may
include individuals who are less financially sophisticated 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, Illinois, Massachusetts, 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.
Further, there can be no assurance that either the federal government or states
having jurisdiction over the Company's business will not adopt additional
regulations or take other actions which would adversely affect the Company's
results of operations, liquidity, and financial position.
During the 1980's and continuing through the present, the timeshare
industry has been and continues to be afflicted with negative publicity and
prosecutorial attention due, 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
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substantially what applicable state and federal laws and regulations mandate,
but the consequence of violating the Orders may be that sanctions (including
possible financial penalties and suspension or loss of licensure) may be imposed
more summarily and may be harsher than would be the case if the Orders did not
bind the Company. In addition, the existence of the Orders may be viewed
negatively by prospective regulators in jurisdictions where the Company does not
now do business, with attendant risks of increased costs and reduced
opportunities.
In early 1997, the Company was the subject of some consumer complaints
which 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 acknowledged that Silverleaf
independently resolved ten consumer complaints referenced in the Agreed Order,
discontinued the practices complained of, and 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 directed
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 has encountered and expects to encounter
some level of additional consumer complaints in the ordinary course of its
business.
The Company employs the following methods in training sales and marketing
personnel as to legal requirements. With regard to direct mailings, a designated
compliance employee of the Company reviews all mailings to determine if they
comply with applicable state legal requirements. With regard to telemarketing,
the Company's Vice President -- Marketing prepares a script for telemarketers
based upon applicable state legal requirements. All telemarketers receive
training which includes, among other things, directions to adhere strictly to
the Company approved script. Telemarketers are also monitored by their
supervisors to ensure that they do not deviate from the Company approved script.
With regard to sales functions, the Company distributes sales manuals which
summarize applicable state legal requirements. Additionally, such sales
personnel receive training as to such applicable legal requirements. The Company
has a salaried employee at each sales office who reviews the sales documents
prior to closing a sale to review compliance with legal requirements.
Additionally, a member of the corporate office staff calls each purchaser within
48 hours after the sale to verify information. Periodically, the Company is
notified by regulatory agencies to revise its disclosures to consumers and to
remedy other alleged inadequacies regarding the sales and marketing process. In
such cases, the Company revises its direct mailings, telemarketing scripts, or
sales disclosure documents, as appropriate, in an attempt to comply with such
requests.
ENVIRONMENTAL MATTERS. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner or operator of
real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property, and may be held
liable to a governmental entity or to third parties for property damage and tort
liability and for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation of responsibility. The cost of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate the
contamination on such property, may adversely affect the owner's ability to sell
such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic
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substances at a disposal or treatment facility also may be liable for the costs
of removal or remediation of a release of hazardous or toxic substances at such
disposal or treatment facility, whether or not such facility is owned or
operated by such person. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it incurs
in connection with the contamination. Finally, the owner or operator of a site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site or from
environmental regulatory violations. In connection with its ownership and
operation of its properties, the Company may be potentially liable for such
claims.
Certain Federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. In 1994, the
Company conducted a limited asbestos survey at each of the Existing Resorts,
which surveys did not reveal material potential losses associated with ACM's at
certain of the Existing Resorts.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to sell Vacation Intervals at such properties and the market
value of such property. The Company has not tested its properties for radon.
Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at the Company's resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify.
Electric transmission lines are located in the vicinity of the Company's
properties. Electric transmission lines are one of many sources of
electromagnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the Company
understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse health effects. In addition, fear of adverse health effects
from transmission lines has been a factor considered in determining property
value in obtaining financing and in condemnation and eminent domain proceedings
brought by power companies seeking to construct transmission lines. Therefore,
there is a potential for the value of a property to be adversely affected as a
result of its proximity to a transmission line and for the Company to be exposed
to damage claims by persons exposed to EMFs.
In 1994, the Company conducted Phase I environmental assessments at several
of its Existing Resorts in order to identify potential environmental concerns.
Also, the Company has obtained more recent Phase I environmental assessments for
each of the remaining Existing Resorts and New Resorts. These Phase I
assessments were carried out in accordance with accepted industry practices and
consisted of non-invasive investigations of environmental conditions at the
properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, and the
preparation and issuance of written reports. The Company's Phase I assessments
of the properties have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations taken as a whole; nor is the Company aware of any such
material environmental liability. Nevertheless, it is possible that the
Company's
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<PAGE> 76
Phase I assessments do not reveal all environmental liabilities or that there
are material environmental liabilities of which the Company is unaware.
Moreover, there can be no assurance that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the properties will not be affected by the
condition of land or operations in the vicinity of the properties (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company. The Company does not believe that compliance with applicable
environmental laws or regulations will have a material adverse effect on the
Company's results of operations, liquidity, or financial position.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances. The Company has not been notified by
any governmental authority or any third party, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties. See "Risk Factors -- Possible Environmental Liabilities".
UTILITY REGULATION. The Company owns its own water supply and waste-water
treatment facilities at several of the Existing Resorts, which are regulated by
various governmental agencies. See "-- Other Operations". The Texas Natural
Resources Conservation Commission ("TNRCC") is the primary state umbrella agency
regulating utilities at the resorts in Texas, and the Missouri Department of
Natural Resources and Public Service Commission of Missouri are the primary
state umbrella agencies regulating utilities at the resorts in Missouri. The
Environmental Protection Agency, division of Water Pollution Control, and the
Illinois Commerce Commission are the primary state agencies regulating water
utilities in Illinois. These agencies regulate the rates and charges for the
services (allowing a reasonable rate of return in relation to invested capital
and other factors), the size and quality of the plants, the quality of water
supplied, the efficacy of waste-water treatment, and many other aspects of the
utilities' operations. The agencies have approval rights regarding the entity
owning the utilities (including its financial strength) and the right to approve
a transfer of the applicable permits upon any change in control of the entity
holding the permits. Other federal, state, regional and local environmental,
health and other agencies also regulate various aspects of the provision of
water and waste-water treatment services. Currently, the Holly Lake Resort's
water supply facilities do not comply with certain Texas rules regarding minimum
water capacity. Accordingly, the Company plans to build an additional water
storage facility at Holly Lake, with construction expected to begin in the third
quarter of 1998.
OTHER REGULATION. Under various state and federal laws governing housing
and places of public accommodation, the Company is required to meet certain
requirements related to access and use by disabled persons. Many of these
requirements did not take effect until after January 1, 1991. Although
management of the Company believes that its facilities (other than the Oak N'
Spruce Resort which has not yet been reviewed for ADA compliance) are
substantially in compliance with present requirements of such laws, the Company
will incur additional costs of compliance. Additional legislation may impose
further burdens or restrictions on owners with respect to access by disabled
persons. The ultimate amount of the cost of compliance with such legislation is
not currently ascertainable, and, while such costs are not expected to have a
material effect on the Company, such costs could be substantial. Limitations or
restrictions on the completion of certain renovations may limit application of
the Company's growth strategy in certain instances or reduce profit margins on
the Company's operations. See "Risk Factors -- Cost of Compliance with Laws
Governing Accessibility of Facilities to Disabled Persons".
EMPLOYEES
At December 31, 1997, the Company employed 1,559 persons. The Company
believes employee relations are good. None of the employees are represented by a
labor union.
INSURANCE
The Company carries comprehensive liability, fire, hurricane and storm
insurance with respect to the Company's resorts, with policy specifications,
insured limits and deductibles customarily carried for similar properties which
the Company believes are adequate. There are, however, certain types of losses
(such as losses arising from floods and acts of war) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose its capital invested in a resort, as well as the anticipated
future revenues from such resort and would continue
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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 operation, liquidity or financial position. The Company self-insures
for property damage to certain vehicles and heavy equipment. See "Risk
Factors -- Natural Disasters; Uninsured Loss".
LEGAL PROCEEDINGS
The Company is a party to litigation and is subject to claims respecting
tort, contract, and consumer disputes, among others. In the judgment of
management, none of such pending lawsuits or claims against the Company, either
individually or in the aggregate, is likely to have a material adverse effect on
the Company or its business. See "-- Description of New Resorts -- Gulf Coast
Resort", "Risk Factors -- Regulation of Marketing and Sales of Vacation
Intervals and Related Laws" and "Risk Factors -- Development, Construction, and
Property Acquisition Activities".
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<PAGE> 78
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each person
who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert E. Mead........................ 51 Chairman of the Board and Chief
Executive Officer
Sharon K. Brayfield................... 37 Director and President
David T. O'Connor..................... 56 Executive Vice President -- Sales
Joe W. Conner......................... 41 Chief Financial Officer, Treasurer
Thomas C. Franks...................... 44 Vice President -- Investor Relations
and Governmental Affairs, President of
Silverleaf Resort Acquisitions, Inc.
Larry H. Fritz........................ 45 Vice President -- Marketing
Ioannis N. Gioldasis.................. 47 Vice President -- Promotions
Robert G. Levy........................ 49 Vice President -- Resort Operations
James J. Oestreich.................... 57 Vice President -- Marketing
Development
Sandra G. Cearley..................... 36 Secretary
Stuart Marshall Bloch................. 55 Director
James B. Francis, Jr. ................ 48 Director
Michael A. Jenkins.................... 55 Director
</TABLE>
ROBERT E. MEAD founded the Company, has served as its Chairman of the Board
since its inception, and has served as its Chief Executive Officer since May
1990. Mr. Mead began his career in hotel and motel management and also operated
his own construction company. Mr. Mead currently serves as a trustee on the
Board of Directors of ARDA and has over 18 years of experience in the timeshare
industry, with special expertise in the areas of consumer finance, hospitality
management and real estate development.
SHARON K. BRAYFIELD has served as the President of the Company since 1992
and manages all of the Company's day to day activities. Ms. Brayfield began her
career with an Affiliated Company in 1982 as the Public Relations Director of
Ozark Mountain Resort. In 1989, she was promoted to Executive Vice President of
Resort Operations for an Affiliated Company and in 1991 was named Chief
Operations Officer of the Company. For the past five years and through April
1997, Ms. Brayfield was also the President of the Master Club.
DAVID T. O'CONNOR has over 20 years of experience in real estate and
timeshare sales and has worked periodically with Mr. Mead over the past 14
years. Mr. O'Connor has served as the Company's Executive Vice
President -- Sales for the last two years and as Vice President -- Sales since
1991. In such capacities, he directed all field sales, including the design and
preparation of all training materials, incentive programs, and follow-up sales
procedures. For the five year period ended May 12, 1997, Mr. O'Connor was an
employee of Recreational Consultants, Inc., which was an independent contractor
of the Company. See "Certain Relationships and Related Transactions".
JOE W. CONNER joined the Company in February 1997 as Chief Financial
Officer and has responsibility for all accounting, financial reporting and
taxation issues. From 1995 to 1997, Mr. Conner served as Vice President of
Finance and Administration and Chief Financial Officer of the Jacobsen Division
of Textron, Inc. From 1993 to 1995, Mr. Conner was Executive Vice President and
Chief Financial Officer for Furr's/Bishop's, Inc. Mr. Conner worked for Club
Corporation of America from 1985 to 1993, and last served as Sr. Vice President,
Chief Financial Officer and Director. Mr. Conner is a certified public
accountant.
THOMAS C. FRANKS was hired in August 1997 as President of a newly-formed,
wholly-owned subsidiary of the Company, Silverleaf Resort Acquisitions, Inc. In
February 1998, Mr. Franks was also named as Vice President -- Investor Relations
and Governmental Affairs for the Company. Mr. Franks has more than 15 years of
experience in the timeshare industry and is responsible for acquisitions and
industry and governmental relations. Mr. Franks served as the President of ARDA
from February 1991 through July 1997.
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LARRY H. FRITZ has been employed by the Company (or an Affiliated Company)
periodically over the past nine years and has served in various marketing
management positions. Since 1991, Mr. Fritz has served as the Company's chief
marketing officer, with responsibility for daily marketing operations, and
currently serves as the Company's Vice President -- Marketing.
IOANNIS N. GIOLDASIS has been with the Company since May 1993 and currently
serves as Vice President -- Promotions. Mr. Gioldasis is responsible for the
design and implementation of marketing strategies and promotional concepts for
lead generation in Texas and other markets. Prior to joining the Company, Mr.
Gioldasis was a national field director for Resort Property Consultants, Inc.
ROBERT G. LEVY was appointed Vice President -- Resort Operations in March
1997 and administers the Company's Management Agreement with the Master Club.
Since 1990, Mr. Levy has held a variety of managerial positions with the Master
Club including Project Manager, General Manager, Texas Regional Manager, and
Director of Operations. Prior thereto, Mr. Levy spent 18 years in hotel, motel,
and resort management, and was associated with the Sheraton, Ramada Inn, and
Holiday Inn hotel chains.
JAMES J. OESTREICH joined the Company in February 1998 as Vice
President -- Marketing Development. A company owned by Mr. Oestreich, Bull's Eye
Marketing, Inc. ("Bull's Eye"), has served as a marketing consultant to the
Company since August 1995. From January 1991 to August 1995, Mr. Oestreich
served as Vice President of Sales and Marketing for Casablanca Express, Inc.
From August 1995 until joining the Company, Mr. Oestreich served as President of
Bull's Eye, a provider of marketing services to the resort and direct sales
industries.
SANDRA G. CEARLEY has served as Secretary of the Company since its
inception. Ms. Cearley maintains corporate minute books, oversees regulatory
filings, and coordinates legal matters with the Company's attorneys.
STUART MARSHALL BLOCH was elected as a Director of the Company in July
1997. Since 1972, Mr. Bloch has been a partner in the law firm of Ingersoll &
Bloch, in Washington, D.C. Ingersoll & Bloch has served as general counsel to
ARDA since 1972. Mr. Bloch is also currently serving as counsel to the law firm
of Holland & Knight, LLC. Mr. Bloch is the founding director and a past
president of the International Foundation for Timesharing. Mr. Bloch has
authored numerous articles dealing with real estate law and the timeshare
industry.
JAMES B. FRANCIS, JR. was elected as a Director of the Company in July
1997. During 1996, Mr. Francis' company, Francis Enterprises, Inc., served as a
consultant to the Company in connection with governmental and public affairs.
From 1980 to 1996, Mr. Francis was a partner in the firm of Bright & Co., which
managed various business investments, including the Dallas Cowboys Football
Club.
MICHAEL A. JENKINS was elected as a Director of the Company in July 1997.
In 1971, Mr. Jenkins founded and became the President of Leisure and Recreation
Concepts, Inc., which has planned and designed over 850 theme parks, resorts,
retail areas, and major attractions worldwide. Mr. Jenkins has more than 35
years in the leisure industry and serves on the Board of Directors of Leisure
and Recreational Concepts, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has five members and three committees
which were formed after the IPO: (i) an Executive Committee, (ii) an Audit
Committee, and (iii) a Compensation Committee. Members of these committees serve
until the next annual meeting of Directors and until their successors are
elected and qualified.
EXECUTIVE COMMITTEE. In July 1997, the Board of Directors established an
executive committee (the "Executive Committee"), which is authorized in the
intervals between meetings of the Board of Directors to perform all of the
rights and duties of the Board of Directors, except the power to declare
dividends or distributions on stock, approve any merger or share exchange which
does not require shareholder approval, amend the Bylaws, issue stock other than
as permitted by statute, recommend to the shareholders any action that requires
shareholder approval, or exercise rights delegated to the Audit Committee or
Compensation Committee. The current members of the Executive Committee are Ms.
Brayfield and Messrs. Francis and Mead.
AUDIT COMMITTEE. In July 1997, the Board of Directors established an audit
committee (the "Audit Committee"), which consists of two or more directors who
meet the independence requirements imposed by the
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NYSE's Audit Committee Policy. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews the plans
and results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants and the adequacy of the Company's internal accounting
controls, and considers the range of audit and non-audit fees. The current
members of the Audit Committee are Messrs. Bloch and Jenkins.
COMPENSATION COMMITTEE. In July 1997, the Board of Directors established a
compensation committee (the "Compensation Committee"), which at all times will
consist of two or more directors, a majority of whom are non-employee directors
(an "Independent Director") within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), to determine compensation
for the Company's senior executive officers and to administer the Company's 1997
Stock Option Plan. The current members of the Compensation Committee are Messrs.
Francis and Jenkins. For the year ended December 31, 1997, the Compensation
Committee and the Board of Directors made all decisions regarding executive
compensation and administration of the 1997 Stock Option Plan.
The Board of Directors of the Company does not have a nominating committee
or any other committee except as set forth above.
CLASSIFIED BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes serving
staggered terms. The Board of Directors consists of one Class I director (Mr.
Bloch), two Class II directors (Ms. Brayfield and Mr. Jenkins), and two Class
III directors (Mr. Mead and Mr. Francis). At each annual meeting of
shareholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The terms
of the initial Class I director, the Class II directors and the Class III
directors will expire upon the election and qualification of successor directors
at the annual meeting of shareholders to be held in calendar years 1998, 1999
and 2000, respectively. The classification of directors makes it more difficult
for a significant shareholder to change the composition of the Board of
Directors in a relatively short period of time. The term of the Company's sole
Class I director (Mr. Bloch) is scheduled to expire at the Company's May 1998
annual shareholders meeting; however, in February 1998 the Board of Directors
nominated Mr. Bloch for a second term. If elected by the shareholders at the May
1998 annual meeting, Mr. Bloch will continue to serve until the Company's 2001
annual shareholders meeting.
DIRECTOR COMPENSATION
The Company has granted to each Independent Director (Messrs. Bloch,
Francis, and Jenkins), as directors' fees, options to purchase 40,000 shares of
Common Stock at $16 per share. Such options vest in three equal portions over a
term of three years, with the first vesting period occurring in May 1998. The
options expire in June 2007. In addition to such option grants, each of the
Independent Directors receive a stipend (currently $1,000) for attending
meetings of the Board of Directors. Officers of the Company who are directors
will not be paid any director fees but will be reimbursed for expenses of
attending meetings of the Board of Directors.
DIRECTORS AND OFFICERS INSURANCE
The Company has purchased a directors and officers liability insurance
policy with coverage typical for a public company. The directors and officers
liability insurance policy insures (i) the officers and directors of the Company
from any claim arising out of an alleged wrongful act by such person while
acting as an officer or director of the Company, (ii) the Company to the extent
it has indemnified an officer and director for such loss, and (iii) the Company
for losses incurred in connection with claims made against the Company for
covered wrongful acts.
INDEMNIFICATION
The Company's articles of incorporation ("Charter") provide for the
indemnification of the Company's officers and directors against certain
liabilities to the fullest extent permitted under applicable law. The Charter
also provides that the directors and officers of the Company be exculpated from
monetary damages to the fullest extent permitted under applicable law.
Additionally, the Company has entered into written Indemnification Agreements
with its directors and officers. It is the position of the Securities and
Exchange Commission (the
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"Commission") that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and unenforceable
under the Securities Act of 1933, as amended (the "Securities Act").
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual base
salary and other annual compensation earned in 1997 by the Company's Chief
Executive Officer and each of the other four most highly compensated executive
officers whose cash compensation (salary and bonus) on an annualized basis
exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY(A) BONUS COMPENSATION(B) (#)
- --------------------------- ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Robert E. Mead,........... 1997 $500,000 $ -- $ -- --
Chief Executive Officer
Sharon K. Brayfield,...... 1997 133,101 -- 298,761 --
President
David T. O'Connor,........ 1997 -- -- 726,310(c) 200,000
Executive Vice
President -- Sales
Joe W. Conner,............ 1997 158,428 20,000 -- 35,000
Chief Financial Officer
Larry H. Fritz,........... 1997 95,417 -- 60,140 25,000
Vice
President -- Marketing
</TABLE>
- ---------------
(a) These amounts are shown before elective contributions by the Named Executive
Officers in the form of salary reductions under the Company's Section 125
Flexible Benefit Plan. Such plan is available to all employees.
(b) Except as otherwise noted, these amounts represent additional compensation
based on sales of Vacation Intervals and other sales-related criteria. See
"-- Employment and Noncompetition Agreements".
(c) Through May 11, 1997, a portion of this amount was paid as sales commissions
to Recreational Consultants, Inc., a corporation of which Mr. O'Connor is
the principal. See "Certain Relationships and Related
Transactions -- Transactions with Related Individuals". Of this amount,
$1,725 represents a perquisite for personal use of a Company automobile.
1997 STOCK OPTION PLAN. The Company has established a stock option plan
(the "1997 Stock Option Plan" or "Plan") to attract and retain directors,
officers, and key employees of the Company and to provide them incentives to
maximize the Company's performance. 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 options intended to
qualify as "incentive stock options" under Section 422 of the Code.
The 1997 Stock Option Plan is administered by the Compensation Committee,
which selects the individuals to whom options are to be granted and determines
the number of shares to be subject thereto and the terms and conditions thereof.
The Compensation Committee is also authorized to adopt, amend and rescind rules
relating to the administration of the 1997 Stock Option Plan. Presently, a
maximum of 1,100,000 shares are reserved for issuance under the Plan and options
for 1,004,500 shares have been granted. The Company will file a Registration
Statement to register such shares.
Nonqualified stock options 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 and upon such conditions determined by the Compensation Committee.
Incentive stock options are designed to comply with the provisions of the
Code and are subject to restrictions contained therein, including exercise
prices equal to at least 100% of fair market value of common stock on the grant
date and a ten year restriction on their term; however, incentive stock options
granted to any person owning more than 10% of the voting power of the stock of
the Company shall have exercise prices equal to at least 110% of the fair market
value of the common stock on the grant date and shall not be exercisable after
five years from the date the option is granted.
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Under the 1997 Stock Option Plan, the Board of Directors of the Company
reserves the right to exercise the powers and functions of the Compensation
Committee. Also, the Board of Directors reserves the right to amend the Plan at
any time; however, the Board of Directors may not without the approval of the
shareholders of the Company (i) increase the total number of shares reserved for
options under the Plan (other than for certain changes in the capital structure
of the Company), (ii) reduce the required exercise price of any incentive stock
options, or (iii) modify the provisions of the Plan regarding eligibility. In
February 1998, the Board of Directors approved an amendment to the Plan
reserving an additional 500,000 shares of Common Stock for issuance under the
Plan; however, this amendment will not become effective unless it is approved by
the shareholders.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997. The following table
contains information concerning the grant of stock options under the Company's
1997 Stock Option Plan made during the year ended December 31, 1997 to the Named
Executive Officers. The table also lists potential realizable values of such
options on the basis of assumed annual compounded stock appreciation rates of 5%
and 10% over the life of the options which are set for a maximum of ten years.
No options were exercised during 1997 by any of the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL EXERCISE ANNUAL RATE OF SHARE
SECURITIES OPTIONS GRANTED TO OR BASE PRICE APPRECIATION(B)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME OPTIONS GRANTED(A) FISCAL YEAR SHARE DATE 5% ($) 10% ($)
---- ------------------ ------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Mead............... -- -- -- -- -- --
Sharon K. Brayfield.......... -- -- -- -- -- --
David T. O'Connor............ 200,000 22.8 $16.00 6/2007 $2,012 $5,100
Joe W. Conner................ 35,000 4.0 $16.00 6/2007 $ 352 $ 892
Larry H. Fritz............... 25,000 2.9 $16.00 6/2007 $ 252 $ 637
</TABLE>
- ---------------
(a) These options will vest in four equal increments on the first, second,
third and fourth anniversaries of the date of the grant.
(b) The potential realizable value (in thousands of dollars) is reported net of
the option price, but before income taxes associated with exercise. These
amounts represent assumed annual compounded rates of appreciation at 5% and
10% only from the date of grant to the expiration date of the option. The
rates of appreciation shown in this table are required by the Commission and
are not intended to forecast or be indicative of possible future performance
of the Common Stock.
OPTIONS/SAR EXERCISES AND YEAR-END VALUE TABLE.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS/SAR AT MONEY OPTIONS/ SARS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END ($)(A)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Mead................ -- -- -- -- -- --
Sharon K. Brayfield........... -- -- -- -- -- --
David T. O'Connor............. -- -- -- 200,000 -- $1,300
Joe W. Conner................. -- -- -- 35,000 -- $ 298
Larry H. Fritz................ -- -- -- 25,000 -- $ 213
</TABLE>
- ---------------
(a) The value at year end (in thousands of dollars) is reported net of the
option price.
SECTION 162(M) LIMITATION. In general, under Section 162(m) of the Code,
income tax deductions of publicly-held corporations may be limited to the extent
total compensation (including base salary, annual bonus, stock option exercises
and non-qualified benefits paid) for certain executive officers exceeds $1
million (less the amount of any "excess parachute payments" as defined in
Section 280G of the Code) in any one year. However, under Section 162(m), the
deduction limit does not apply to certain "performance-based compensation"
established by an independent compensation committee which is adequately
disclosed to, and approved by, the shareholders.
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DISCRETIONARY PERFORMANCE AWARDS. Performance awards, including bonuses, may
be granted by the Compensation Committee on an individual or group basis.
Generally, these awards will be based upon specific agreements or performance
criteria and will be paid in cash.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Effective January 1, 1997, Mr. Mead entered into a three year employment
agreement with the Company which provides for an annual base salary of $500,000,
use of a company vehicle, and other fringe benefits such as health insurance,
vacation, and sick leave as determined by the Board of Directors of the Company
from time to time. Either party may terminate the agreement upon 30 days notice
to the other.
Effective January 1, 1997, Ms. Brayfield entered into a three year
employment agreement with the Company which provides for an annual base salary
of $133,101, use of a company vehicle, and other fringe benefits such as health
insurance, vacation, and sick leave as determined by the Board of Directors of
the Company from time to time. Ms. Brayfield's agreement with the Company also
provides for an incentive bonus equal to .35% of the Company's net sales from
Vacation Intervals. Either party may terminate the agreement upon 30 days notice
to the other.
Effective May 12, 1997, Mr. O'Connor entered into an employment agreement
with the Company with a term through December 31, 1999. Pursuant to the
agreement, Mr. O'Connor will receive commissions equal to 1.35% of the Company's
net sales from Vacation Intervals, plus additional commissions based on weekly
sales of upgrades and revenue per guest. The Company will also provide Mr.
O'Connor with use of a company vehicle and other fringe benefits such as health
insurance, vacation, and sick leave as determined by the Board of Directors of
the Company from time to time. Either party may terminate the agreement upon 30
days notice to the other. See "Certain Relationships and Related Transactions".
In July 1997, Mr. Franks entered into an employment agreement with the
Company which provides for an annual base salary of $325,000, use of a company
vehicle, and other fringe benefits such as health insurance, vacation, and sick
leave as determined by the Board of Directors of the Company from time to time.
Either party may terminate the agreement upon 30 days notice to the other;
however, if the Company terminates Mr. Franks for other than "good cause", the
Company shall be obligated to make a severance payment to him in an amount equal
to his annual base salary. In connection with Mr. Franks employment, in August
1997, the Company purchased a house for $531,000 and leased the house to Mr.
Franks for 13 months at a rental equal to (i) the Company's interest on a
$418,000 mortgage loan incurred in connection with the purchase, plus (ii)
insurance and taxes, which amount is currently $3,124 per month. Mr. Franks has
the option to purchase the house at the end of the 13-month term for $531,000,
plus 8% per annum on the Company's down payment for the house ($113,000). The
Company also granted him nonqualified options to purchase 100,000 shares of
Common Stock pursuant to the 1997 Stock Option Plan at $16.00 per share, which
options will vest in equal installments over a four-year period beginning August
1998.
In January 1998, Mr. Oestreich entered into an employment agreement with
the Company which provides for an annual base salary of $300,000, use of a
company vehicle, and other fringe benefits such as health insurance, vacations
and sick leave as determined by the Board of Directors of the Company from time
to time. Mr. Oestreich will also receive additional compensation equal to .5% of
Vacation Interval sales directly attributable to his efforts. The Company also
granted him nonqualified and incentive stock options to purchase 100,000 shares
of Common Stock pursuant to the 1997 Stock Option Plan at $22.84 per share,
which options will vest in equal installments over a four-year period beginning
December 1998.
In January 1998, Allen Hudson entered into an employment agreement with the
Company, contingent upon his commencement of full-time services no later than
July 1, 1998. Mr. Hudson will serve as Executive Vice President of Architecture
and Engineering Services for a term of four years from the date he commences
work. Mr. Hudson's agreement provides for an annual base salary of $350,000, use
of a company vehicle, and other fringe benefits such as health insurance,
vacations and sick leave as determined by the Board of Directors of the Company
from time to time. Mr. Hudson will also receive $500,000 to be paid over a three
year period as compensation for and in consideration of the exclusivity of his
services. The Company also granted him nonqualified options to purchase 25,000
shares of Common Stock pursuant to the 1997 Stock Option Plan at an
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<PAGE> 84
exercise price equal to the average of the high and low trading prices of the
Common Stock on the effective date of his employment agreement. The options will
vest in equal installments over a four-year period beginning one year after he
commences work. The agreement provides that upon Mr. Hudson's relocation to the
Dallas/Ft. Worth area, the Company will purchase his Branson, Missouri
condominium for $108,000.
Each of the employment agreements discussed above provides that such
persons will not (i) influence any employee or independent contractor to
terminate its relationship with the Company, or (ii) disclose any confidential
information of the Company. The agreements with Mr. Mead, Ms. Brayfield, and Mr.
O'Connor provide that such persons will not directly or indirectly compete with
the Company in any county in which it conducts its business or markets its
products for a period of two years following the termination of the agreement.
The agreements with Messrs. Oestreich and Hudson contain substantially similar
restrictions which will be effective for a period of one year following
termination of the agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REPAYMENT OF AFFILIATED DEBT
Approximately $9.9 million of the net proceeds from the IPO in June 1997
were used to repay outstanding debt to Mr. Mead and affiliated persons or
entities. The Company repaid the affiliated debt of the Company set forth below,
and Mr. Mead, Chairman of the Board and Chief Executive Officer of the Company,
and certain entities affiliated with Mr. Mead, simultaneously repaid their debt
to the Company. Such affiliated debt is explained below:
<TABLE>
<CAPTION>
COMPONENTS OF AMOUNT PAID
AFFILIATED DEBT OF THE COMPANY IN JUNE 1997
------------------------------ --------------
(IN THOUSANDS)
<S> <C>
Debt of CBI to Mr. Mead(a).................................. $ 6,101
Debt of Silverleaf to Mr. Mead and affiliates(b)............ 8,298
Debt of Silverleaf to Pace, STG and Ralph
Brotherton(c)(d)(e)....................................... 563
-------
Total............................................. 14,962
Less:
Receivable from Mr. Mead(a)............................... (4,727)
Receivable from STG and Pace(f)........................... (363)
-------
Net Affiliated Party Debt of Silverleaf........... $ 9,872
=======
</TABLE>
- ---------------
(a) Prior to the Consolidation Transactions, Mr. Mead owned 100% of the stock of
CBI. During this period, Silverleaf made loans to Mr. Mead who
simultaneously made loans of similar amounts to CBI to finance its
operations. The Silverleaf loans to Mr. Mead bore interest at 8% per annum,
and the loans by Mr. Mead to CBI bore interest at 9% per annum. As a result
of the Consolidation Transactions, the debt of Mr. Mead to CBI and of CBI to
Mr. Mead has been consolidated on the Company's financial statements. The
above table reflects, on a consolidated basis, the remaining debt paid to
Mr. Mead from the Company and the remaining receivable paid by Mr. Mead to
the Company in June 1997.
(b) Mr. Mead owned 100% of the stock of Freedom Financial Corporation ("FFC")
prior to the Consolidation Transactions. As a part of the Consolidation
Transactions, the Company acquired certain assets held by FFC and the
Company assumed certain liabilities associated with these assets. See Note 9
of Notes to Consolidated Financial Statements. Liabilities assumed were
approximately $8.9 million consisting primarily of notes payable to Mr. Mead
and his affiliates of $7.6 million. The affiliates of Mr. Mead include
certain family partnerships and trusts. The notes payable to Mr. Mead and
his affiliates originated from loans of $1.1 million and asset sales of $1.6
million made by Mr. Mead and his affiliates to FFC during 1987 and 1988.
(c) Includes approximately $417,000 paid to Pace Finance Company ("Pace"), a
Texas corporation wholly owned by Mr. Mead. Pace loaned the Company
approximately $541,000, $655,000 and $0, in 1995, 1996 and 1997,
respectively. The Company secured such loans by pledging notes secured by
Vacation Intervals with an aggregate principal balance of approximately
$901,000, $1.1 million and $0 million, in 1995, 1996 and 1997, respectively.
The Company made payments to Pace of approximately $636,000, $863,000 and
$275,000, in 1995, 1996 and 1997, respectively.
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<PAGE> 85
(d) Includes approximately $96,000 paid to STG Investments ("STG"), a Texas
general partnership owned by trusts beneficially owned by Mr. Mead's
children.
(e) Includes approximately $50,000 owing to Ralph Brotherton, who serves as a
trustee of trusts for the children of Mr. Mead. This debt arose from the
1995 redemption of Mr. Brotherton's equity interest in Equal Investment
Company ("EIC") in exchange for a $100,000 note from EIC. Subsequently, EIC
was merged into the Company and the Company became liable for the note to
Mr. Brotherton. The note to Mr. Brotherton did not bear interest.
(f) In June 1997, STG and Pace paid Silverleaf approximately $221,000 and
$142,000, respectively, relating to cash payments on notes receivable of
Silverleaf collected and held by STG and Pace on behalf of Silverleaf.
TRANSACTIONS WITH RELATED ENTITIES
FFC loaned the Company approximately $555,000 in 1995. To secure such
loans, in 1995 the Company pledged to FFC notes secured by Vacation Intervals
with an aggregate principal balance of approximately $740,000. The Company made
principal and interest payments to FFC of approximately $871,000 in 1995.
Prior to the Consolidation Transactions in December, 1995, Silverleaf
engaged in various transactions with entities affiliated with Mr. Mead. As a
result of the Consolidation Transactions, all transactions between Silverleaf
and the entities which were parties to the Consolidation Transactions were
eliminated through consolidation and restatement of the Company's financial
statements, and are therefore not specifically discussed herein. See Note 1 of
Notes to Consolidated Financial Statements.
Prior to the Consolidation Transactions, Pace purchased delinquent notes
secured by Vacation Intervals from an Affiliated Company. From time to time,
Pace sold these delinquent notes to the Company, generally at a price of $200
per note. The Company then reacquired through foreclosure the underlying
Vacation Intervals for resale. Pace's note sales to the Company equaled $24,200
in 1996. In February 1997, Pace sold its remaining inventory of notes to the
Company for a consideration of $16,400.
STG loaned the Company approximately $272,000 in 1995. As security, the
Company pledged to STG notes secured by Vacation Intervals with an aggregate
principal balance of approximately $454,000 in 1995. The Company made principal
and interest payments to STG of approximately $533,000 and $247,000, in 1995 and
1996, respectively. These loans were repaid in full by the Company in 1996.
The Company paid Mr. Hudson's architectural firm Hudson & Company, Inc.
approximately $338,000, $421,000, and $401,000, during 1995, 1996, and 1997,
respectively, for architectural services rendered to the Company.
TRANSACTIONS WITH RELATED INDIVIDUALS
In March 1997, Mr. Mead entered into a lease agreement with the Company
which granted him the exclusive right to use approximately 500 acres adjoining
an Existing Resort for hunting purposes. This land is subject to deed
restrictions which prohibit the construction of new units, and most of this land
is located in a flood plain. The land will remain available to Silverleaf Owners
for hiking and nature trails. In exchange for these lease rights, Mr. Mead
agreed to pay the annual property taxes on this land which are estimated at
approximately $5,000. This lease agreement has a ten-year term and may be
renewed by Mr. Mead for four additional ten-year terms.
Mr. Mead agreed to purchase a condominium in Mexico and a residential
property in Texas from the Company. The Company's acquisition cost of these
properties in 1995 was approximately $420,000. Mr. Mead agreed to pay the
Company the higher of (i) its acquisition cost plus an additional 15% per annum
(approximately $464,000), or (ii) the appraised fair market value of these
properties. In September 1997, Mr. Mead reimbursed the Company for its cost
(plus 15%) of the condominium in Mexico and the residential property in Texas.
Pending the receipt of an appraisal on the condominium in Mexico, Mr. Mead has
agreed to pay an additional sum to the Company to the extent the appraised fair
market value of the properties exceeds the amount paid by Mr. Mead.
In connection with the IPO in June 1997, the Company entered into a
Registration Rights Agreement with Mr. Mead with respect to 7,625,000 of his
shares of Common Stock. The Company has agreed to pay all
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<PAGE> 86
expenses associated with the registration of Mr. Mead's shares offered for sale
in this Prospectus (500,000 shares plus any shares subject to the Underwriters'
over-allotment option).
During 1995, the Company loaned $15,000 to Ms. Brayfield at 8.0% interest
per annum. Due to a previous loan balance and the accrual of interest, her
aggregate debt to the Company was $71,000 at December 31, 1995. Her largest
outstanding loan balances in 1995 and 1996 were approximately $71,000 and
$77,000, respectively. The Company forgave this loan effective December 31,
1996.
During 1996, the Company was a party to a consulting agreement with Francis
Enterprises, Inc. ("FEI"), a Texas corporation which is wholly owned by Mr.
Francis, a director of the Company. FEI received approximately $201,000 (and the
Company expensed approximately $208,000) in 1996 under this agreement. FEI
provided advice to the Company in connection with governmental and public
affairs. This consulting agreement was terminated in February 1997. An affiliate
of Mr. Francis owns a 10% net profits interest in a 45 acre tract of land in
Mississippi owned by the Company. See "Management -- Directors and Executive
Officers" and "Business -- Other Operations".
The Company paid Recreational Consultants, Inc., an entity of which Mr.
O'Connor is the principal, approximately $430,000, $539,000, and $302,000 in
sales commissions in 1995, 1996, and 1997, respectively. See
"Management -- Executive Compensation".
Mr. O'Connor was indebted to the Company during 1995 for advances by the
Company on his behalf, which debt bore interest at approximately 8% per annum.
The largest outstanding balance during 1995 was approximately $156,000. This
debt was satisfied at the end of 1995.
Mr. Bloch serves as counsel to the law firm of Holland & Knight, LLC. The
Company has retained the services of Holland & Knight for limited purposes.
In February 1998, the Company purchased the stock of Bull's Eye Marketing,
Inc. ("Bull's Eye") for $250,000 from Mr. Oestreich, the sole shareholder of
Bull's Eye.
Mr. Hudson's employment agreement provides that upon his relocation to
Dallas, the Company will be obligated to purchase his Branson, Missouri
condominium for $108,000 in cash. In addition to his salary, Mr. Hudson will
also receive $500,000 to be paid over a three-year period as compensation for
and in consideration of the exclusivity of his services.
For information concerning employment agreements with certain officers see
"Management -- Employment and Noncompetition Agreements".
TRANSACTIONS WITH THE MASTER CLUB
Prior to May 1997, Ms. Brayfield, an officer and director of the Company,
was the principal executive officer of the Master Club. In May 1997, Robert G.
Levy, an officer of the Company, was elected as President of the Master Club.
The Company manages the Existing Resorts under a management agreement with the
Master Club. The Company is entitled to a management fee equal to 15% of the
Master Club's gross revenues, but the Company's right to receive such fee on an
annual basis is limited to the amount of the Master Club's net income. If the
management fee is limited due to the Master Club's net income in a given year,
such deficiency may be recovered from the Master Club in subsequent years,
subject to the net income limitation. Accordingly, receivables for unpaid
management fee deficiencies from the Master Club due to the net income
limitation are not accrued on the books of the Company. In 1995, 1996 and 1997,
the Company reported management fees from the Master Club of approximately $2.5
million, $2.2 million, and $2.3 million, respectively. The Master Club bears and
pays all expenses of operating the Existing Resorts, while the Company bears the
expense of new development and all marketing and sales activities. To the extent
the Master Club pays for payroll or other general and administrative expenses
that relate to the Company's development, marketing, or sales activities, the
Master Club allocates and charges such expenses to the Company. During 1995,
1996 and 1997, the Master Club charged the Company approximately $1.9 million,
$2.1 million, and $2.6 million, respectively, for expenses attributable to the
Company. Also, during 1996, the Company advanced on behalf of the Master Club
approximately $940,000 for expenditures related to refurbishment of the Existing
Resorts. After netting
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<PAGE> 87
management fees earned, expenses charged back, and the advance for refurbishment
expenditures, the Company owed the Master Club approximately $429,000 at the end
of 1995, and the Master Club owed the Company approximately $1.1 million and
$1.3 million at the end of 1996 and 1997, respectively. See "Business --
Clubs/Master Club".
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of December 31, 1997, and as
adjusted to reflect the sale of 2,000,000 shares of Common Stock by the Company
and 500,000 shares of Common Stock by Robert E. Mead in the Equity Offering,
with respect to (i) each person known by the Company to beneficially own 5% or
more of the outstanding shares of Common Stock, (ii) each person who is a
director or Named Executive Officer of the Company, and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
PRIOR TO THE BENEFICIAL OWNERSHIP
EQUITY OFFERING AFTER THE EQUITY OFFERING(B)
NAME AND ADDRESS OF ----------------------- NUMBER OF SHARES -----------------------------
BENEFICIAL OWNER(A) SHARES PERCENTAGE BEING OFFERED(B) SHARES PERCENTAGE
------------------- --------- ---------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Robert E. Mead(c)...... 7,625,100 67.4% 500,000 7,125,100 53.5%
Sharon K.
Brayfield(c)......... 86,517 * -- 86,517 *
David T. O'Connor(c)... -- -- -- -- --
Joe W. Conner(c)....... -- -- -- -- --
Larry H. Fritz(c)...... -- -- -- -- --
Stuart Marshall
Bloch(d)............. 14,333(e) * -- 14,333(e) *
James B. Francis,
Jr.(f)............... 15,333(e) * -- 15,333(e) *
Michael A.
Jenkins(g)........... 13,333(e) * -- 13,333(e) *
--------- ---- ------- --------- ----
All directors and
executive officers as
a group (13
persons)............. 7,754,616 68.6% 500,000 7,254,616 54.5%
========= ==== ======= ========= ====
</TABLE>
- ---------------
* Less than 1%.
(a) Except as otherwise indicated, each beneficial owner has the sole power to
vote, as applicable, and to dispose of all shares of Common Stock owned by
such beneficial owner. None of such persons has the right, pursuant to stock
options or otherwise, to acquire shares of the Company's Common Stock within
60 days.
(b) Does not reflect the possible sale of up to an additional 375,000 shares of
Common Stock by Mr. Mead upon the exercise of the underwriters'
over-allotment option.
(c) The address of such person is 1221 Riverbend Drive, Suite 120, Dallas, Texas
75247.
(d) The address of such person is 1401 16th St., N.W., Washington, D.C. 20036.
(e) Includes options to purchase 13,333 shares, which options are exercisable
within 60 days from the date hereof.
(f) The address of such person is 8300 Douglas Avenue, Suite 800, Dallas, Texas
75225.
(g) The address of such person is 2151 Fort Worth Avenue, Dallas, Texas
75211-1812.
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<PAGE> 88
DESCRIPTION OF CERTAIN INDEBTEDNESS
EXISTING INDEBTEDNESS. The Company has revolving credit agreements with
three lenders providing for loans up to an aggregate of $115.0 million, which
the Company uses to finance the sale of Vacation Intervals and for working
capital needs. The Company also has a $12.0 million facility for such purpose
which will be paid from proceeds of the Note Offering and the Equity Offering
and not renewed. Additionally, the Company has a revolving credit agreement with
one of its lenders providing for loans up to $15.0 million to finance
construction, which facility was not utilized in 1997. The Company has a $10.0
million non-revolving line of credit which has been used to finance development
of units at the Fox River and Timber Creek resorts and the acquisition of the
Oak N' Spruce Resort, the two Galveston sites, and the Las Vegas site, and which
becomes due upon the closing of the Equity Offering. The other foregoing loans
mature between December 1999 and October 2005, and are collateralized (or
cross-collateralized) by customer notes receivable (as defined in "Description
of Notes -- Certain Definitions"), construction in process, land, improvements,
and related equipment of certain of the Existing Resorts and New Resorts. These
credit facilities bear interest at variable rates tied to the prime rate, LIBOR
or the corporate rate charged by certain banks. The credit facilities secured by
customer notes receivable limit advances to 70% of the unpaid balance of certain
eligible customer notes receivable.
The Company's credit facilities contain restrictive and financial
covenants, including covenants relating to (i) the maintenance of a minimum net
worth ranging up to $67 million, minimum liquidity, including a debt to equity
ratio of not greater than 2.5 to 1 and a senior debt to equity ratio of not
greater than 2.0 to 1, (ii) restrictions on liens against and dispositions of
collateral, (iii) restrictions on distributions to affiliates and prepayments of
loans from affiliates, (iv) restrictions on changes in control and management of
the Company, (v) restrictions on sales of substantially all of the assets of the
Company, and (vi) restrictions on mergers, consolidations or other
reorganizations of the Company. Under certain credit facilities, a sale of all
or substantially all of the assets of the Company, a merger, consolidation or
reorganization of the Company, or other changes of control of the ownership of
the Company would constitute an event of default and permit the lenders to
accelerate the maturity thereof. The credit facilities also include customary
events of default, including, without limitation, (i) failure to pay principal,
interest or fees when due, (ii) untruth of any representation of warranty, (iii)
failure to perform or timely observe covenants, (iv) defaults under other
indebtedness, and (v) bankruptcy.
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The following table summarizes the Company's loans, other notes payable and
capital lease obligations at December 31, 1997:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
$60 million revolving loan due December 1999, extendable for
a period of one year, with drawings permitted until
maturity, at an interest rate of LIBOR plus 2.55%, secured
by customer notes receivable.............................. $ 1,529
$40 million revolving loan due October 2005 with drawings
permitted until October 31, 2000, at a variable rate of
LIBOR plus 2.5%, secured by customer notes receivable..... 22,137
$15 million revolving loan due November 2002 with drawings
permitted until November 30, 1998, at an interest rate of
Prime plus 2%, secured by customer notes receivable....... 12,596
$12 million loan due May 2003, at a variable rate of 2.75%
plus a Base Rate (11.25% at December 31, 1997), secured by
customer notes receivable................................. 4,122
$10 million revolving construction loan due October 2000
with drawings permitted until April 30, 1999 at a variable
rate of LIBOR plus 3.5%, secured by land, construction in
process and customer notes receivable..................... 0(a)
$10 million non-revolving line of credit due upon the
earlier of the Equity Offering or January 2000 with
drawings permitted until December 1998 at a variable rate
of LIBOR plus 3%, secured by land, improvements, and
equipment of various Existing Resorts and New Resorts..... 4,070(b)
Various notes, due from January 1998 through October 2002,
collateralized by various assets with interest rates
ranging from 4.2% to 14.0%................................ 1,785
-------
Total notes payable............................... 46,239
Capital lease obligations................................... 2,632
-------
Total notes payable and capital lease
obligations...................................... $48,871
=======
</TABLE>
- ---------------
(a) In March 1998, the borrowing capacity under this facility was increased to
$15.0 million.
(b) A non-binding letter of intent has been executed to increase the borrowing
capacity to $15.0 million and to convert the facility to a revolving loan.
At December 31, 1997, the prime rate was 8.5% and LIBOR rates were from
5.72% to 5.81%.
Substantially all notes payable will be repaid from the proceeds of the
Equity Offering and the Note Offering. See "Sources and Uses of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Credit Suisse First Boston Mortgage Capital, L.L.C. ("CSFBMC"), an
affiliate of Credit Suisse First Boston Corporation, is the lender under the
$60.0 million revolving loan and $10.0 million non-revolving line of credit. As
of December 31, 1997, the Company was indebted to CSFBMC in the amount of $5.6
million.
The Company's future lending and development activities will likely be
financed with indebtedness under the existing revolving credit facilities or
under credit facilities to be obtained by the Company in the future. Such new
credit facilities would likely be collateralized by the Company's assets and
contain restrictive covenants. However, the Company does not presently have
binding agreements to extend the terms of its existing financing arrangements or
for any replacement financing arrangements upon the expiration of such funding
commitments, and there can be no assurance that alternative or additional
arrangements can be made on terms that are satisfactory to the Company.
Accordingly, future sales of Vacation Intervals may be limited by both the
availability of funds to finance customer purchases of Vacation Intervals and by
reduced demand which may result if the Company is unable to provide financing to
purchasers of Vacation Intervals. 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.
The foregoing summary of certain provisions of the Company's credit
facilities is subject to and qualified in its entirety by reference to the terms
of the credit facilities, copies of which are filed as exhibits (or incorporated
by reference) to the Registration Statement of which this Prospectus is a part.
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<PAGE> 90
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") among
the Company, each Subsidiary of the Company, as guarantors, and Norwest Bank
Minnesota, N.A., as trustee (the "Trustee"). The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Notes are subject to all such terms, and prospective investors are referred to
the Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. A copy of the
proposed form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The definitions of certain
terms used in the following summary are set forth below under "-- Certain
Definitions". For purposes of this summary, the term "Company" refers only to
Silverleaf Resorts, Inc. and not to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and the
Guarantors and will be subordinated in right of payment to all existing and
future Senior Debt. The Notes will rank pari passu with any future senior
subordinated indebtedness of the Company and will rank senior to all
subordinated indebtedness of the Company. In addition, and subject to the
Subsidiary Guarantees, the Notes will be structurally subordinated to all
existing and future liabilities of the Guarantors. As of December 31, 1997, on a
pro forma basis giving effect to the consummation of the Note Offering and the
Equity Offering and the application of proceeds thereof, the Company would have
had no Senior Debt. However, the Company would have had $130.0 million of unused
commitments under the credit facilities, all of which would have been secured
Senior Debt. At such date, the Subsidiaries had no material liabilities (other
than intercompany payables). The Indenture will permit the incurrence of
additional Senior Debt and other indebtedness in the future, including secured
indebtedness, subject to certain restrictions. See "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" and
"-- Liens".
The Company's payment obligations under the Notes will be guaranteed by all
of the Company's present and future Domestic Restricted Subsidiaries. See
"Subsidiary Guarantees". As of the date of the Indenture, all of the Company's
Subsidiaries will be Restricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
guarantee the Notes or be subject to the restrictive covenants set forth in the
Indenture. See "Subsidiary Guarantees" and "Designation of Restricted Subsidiary
as Unrestricted or Unrestricted Subsidiary as Restricted" and "Risk
Factors -- Fraudulent Transfer Statutes".
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $200.0 million,
of which $75.0 million will be issued in the Note Offering, and will mature on
April 1, 2008. Interest on the Notes will accrue at the rate of 10.5% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1998, to holders of record of Notes ("Holders") on the
immediately preceding March 15 and September 15. Additional Notes may be issued
from time to time after the Note Offering, subject to the provisions of the
Indenture described below under the caption "-- Certain Covenants -- Incurrence
of Indebtedness and Issuance of Preferred Stock". Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, interest and premium, if any, on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest and
premium, if any, may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes;
provided that all payments of principal, interest and premium, if any, with
respect to Notes the Holders of which have given wire transfer instructions to
the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof. See, however,
"Global Notes and Definitive Notes". Until otherwise designated by the Company,
the Company's office or agency in New York will be the
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<PAGE> 91
office of the Trustee maintained for such purpose. The Notes will be issued in
denominations of $1,000 and integral multiples thereof. All payments will be in
immediately available funds.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed, on a senior subordinated basis, by each of the Company's
present and future Domestic Restricted Subsidiaries. The Notes will not be
guaranteed by any present or future foreign subsidiary or any Unrestricted
Subsidiary. As of December 31, 1997, the total assets of and investment by the
Company in the Guarantors was approximately $2.8 million. See Note 14 of Notes
to Consolidated Financial Statements. The Subsidiary Guarantee of each Guarantor
will be subordinated to the prior payment in full of all Senior Debt of such
Guarantor (none was outstanding as of December 31, 1997) and any amounts for
which the Guarantors become liable under guarantees issued from time to time
with respect to Senior Debt, both subject to the limitations described under the
caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock". The obligations of each Guarantor under its Subsidiary
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law, which may limit or obviate the effect of such Subsidiary
Guarantees. See "Risk Factors -- Fraudulent Transfer Statutes".
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee; (ii) immediately after giving effect to such transaction, no Default or
Event of Default exists; (iii) such Guarantor, or any Person formed by or
surviving any such consolidation or merger, would have Consolidated Net Worth
(immediately after giving effect to such transaction) equal to or greater than
the Consolidated Net Worth of such Guarantor immediately preceding the
transaction; and (iv) the Company would be permitted by virtue of the Company's
pro forma Consolidated Coverage Ratio, immediately after giving effect to such
transaction, to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Coverage Ratio test set forth in the first paragraph of the
covenant described under the caption "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock".
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "-- Repurchase
at the Option of Holders -- Asset Sales".
Additional Subsidiary Guarantees. The Indenture will provide that if the
Company or any of its Restricted Subsidiaries shall acquire or create another
Domestic Restricted Subsidiary after the date of the Indenture, then such newly
acquired or created Domestic Restricted Subsidiary shall execute a Subsidiary
Guarantee and deliver an opinion of counsel, in accordance with the terms of the
Indenture.
SUBORDINATION
The payment of principal of, interest and premium, if any, on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred. See "Risk Factors -- Subordination".
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate specified in
the applicable
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Senior Debt) before the Holders of Notes will be entitled to receive any payment
with respect to the Notes, and until all Obligations with respect to Senior Debt
are paid in full, any distribution to which the Holders of Notes would be
entitled shall be made to the holders of Senior Debt (except that Holders of
Notes may receive Permitted Junior Securities and payments made from the trust
described under "Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Payments on the Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest, if any, on the
Notes that have come due have been paid in full in cash. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 180 days.
The Indenture will further require that the Company promptly notify holders
of Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
The Obligations of a Guarantor under its Subsidiary Guarantee are senior
subordinated obligations. Therefore, the rights of the Holders of the Notes to
receive payment by a Guarantor pursuant to a Subsidiary Guarantee will be
subordinated in right of payment to the rights of holders of Senior Debt of such
Guarantor. The terms of the subordination provisions described above with
respect to the Company's Obligations under the Notes apply equally to a
Guarantor and the Obligations of such Guarantor under the Subsidiary Guarantee.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency of the Company, Holders of Notes may recover less
ratably than creditors of the Company and the Guarantors who are holders of
Senior Debt. The Indenture will limit, subject to certain financial tests, the
amount of additional Indebtedness, including Senior Debt, that the Company and
its Restricted Subsidiaries can incur. See "-- Certain Covenants -- Incurrence
of Indebtedness and Issuance of Preferred Stock".
No Senior Subordinated Debt. The Indenture will provide that (i) the
Company will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment to
any Senior Debt and senior in any respect in right of payment to the Notes, and
(ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt and senior in any respect in right of payment to the
Subsidiary Guarantees. No Indebtedness shall be deemed to be Senior Debt solely
because it is secured and no Indebtedness shall be deemed to be subordinated
solely because it is convertible into Equity Interests.
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OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to April 1,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 105.25%
2004...................................................... 103.50%
2005...................................................... 101.75%
2006 and thereafter....................................... 100.00%
</TABLE>
Notwithstanding the foregoing, on or prior to April 1, 2001, the Company
may redeem up to 33 1/3% of the aggregate principal amount of the Notes at a
redemption price of 110.5% of the principal amount thereof, plus accrued and
unpaid interest thereon to the redemption date, with the net cash proceeds of
one or more public offerings of Common Stock of the Company, provided that at
least 66 2/3% of the initially outstanding aggregate principal amount of Notes
remains outstanding immediately after the occurrence of such redemption; and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of such offering.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
Mandatory Redemption
Except as set forth below under "-- Repurchase at the Option of Holders",
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon, to the date of purchase (the "Change of Control Payment").
Within ten days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
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On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 90 days following a Change of Control, the Company will either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Notes
required by this covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to another Person or group may
be uncertain.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of cash; provided that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet) of
the Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to be
cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds at its option, (a) to repay Senior Debt
of the Company or a Guarantor, or (b) to the acquisition of a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term
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assets, in each case, in the same line of business as the Company and its
Restricted Subsidiaries were engaged on the date of the Indenture or in a
Related Business. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving Senior Debt or otherwise invest such
Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds".
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the Company
will be required to make an offer to all Holders of Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes that may be purchased
out of the Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount thereof plus accrued and unpaid interest thereon to the
date of purchase, in accordance with the procedures set forth in the Indenture.
To the extent that the aggregate amount of Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of Notes surrendered by Holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
Repurchase Limitations
The Company's credit facilities variously prohibit the Company from
prepaying any Notes and provide that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Debt to which the Company
becomes a party may contain similar restrictions and provisions. In the event a
Change of Control or Asset Sale occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or repay the restrictive Indebtedness. If the Company does not
obtain such a consent or repay such borrowings, the Company will continue to be
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the Indenture
which would, in turn, constitute a default under the Company's credit
facilities. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of Notes. Finally, the Company's
ability to repurchase Notes may be limited by the Company's then existing
financial resources. See "Risk Factors -- Payment Upon a Change of Control and
Certain Asset Sales" and "Description of Certain Indebtedness".
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's or
any of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company and dividends and distributions payable
solely to the Company or to a Guarantor); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company; (iii) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinate to the Notes or the
Subsidiary Guarantees, except a payment of interest or principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless, at the time of and after giving effect to
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage
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Ratio test set forth in the first paragraph of the covenant described below
under the caption "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the date of the Indenture of
Equity Interests of the Company (other than Disqualified Stock) or of
Disqualified Stock or debt securities of the Company that have been
converted into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or convertible debt securities) sold to a
Restricted Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into or exchanged for
Disqualified Stock), plus (iii) to the extent that any Unrestricted
Subsidiary is redesignated as a Restricted Subsidiary after the date of the
Indenture, the fair market value of the Company's Investment in such
Subsidiary as of the date of such redesignation; provided, however, that
the foregoing amount shall not exceed the amount of Investments made (and
treated as a Restricted Investment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary, plus (iv) an amount equal to
the net reduction in Investments (other than Permitted Investments) made by
the Company or any Restricted Subsidiaries in any Person resulting from
dividends or distributions on, or repurchases or redemptions of, such
Investments by such Person, net cash proceeds realized upon the sale of
such Investment to an unaffiliated purchaser, reductions in obligations of
such Person guaranteed by, and repayments of loans or advances or other
transfers of assets by such Person to, the Company or a Restricted
Subsidiary, provided, however, that no amount shall be included under this
clause (iv) to the extent it is already included in Consolidated Net
Income.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Restricted Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness; (iv) the
defeasance, redemption, repurchase or other acquisition of subordinated
Indebtedness with Excess Proceeds remaining after an Asset Sale Offer; (v) the
payment of any dividend by a Restricted Subsidiary of the Company to the holders
of its respective Equity Interests on a pro rata basis; (vi) repurchases of
Equity Interests of the Company deemed to occur upon exercise of employee
options, warrants or rights if such Equity Interests represent a portion of the
exercise price of or withholding tax due upon exercise of such options, warrants
or rights; (vii) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Restricted Subsidiary
held by any employee or former employee pursuant to the terms of any of the
Company's or such Restricted Subsidiaries' benefit plans or arrangements;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $1.0 million in any
twelve-month period and $5.0 million in the aggregate and no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction; and (viii) additional Restricted Payments in an amount not to
exceed $5.0 million.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors whose resolution with respect thereto
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shall be delivered to the Trustee, such determination to be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $1.0 million. Not
later than the date of making any Restricted Payment, the Company shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company and the Guarantors
will not issue any Disqualified Stock and the Company will not permit any of its
Restricted Subsidiaries which are not Guarantors to issue any shares of
preferred stock other than to the Company or to a Wholly Owned Restricted
Subsidiary which is a Guarantor, provided that any subsequent issuance or
transfer of Capital Stock that results in such Guarantor ceasing to be a Wholly
Owned Restricted Subsidiary or any subsequent transfer of such preferred stock
(other than to the Company or another Wholly Owned Restricted Subsidiary which
is a Guarantor) will be deemed, in each case, to be the issuance of such
preferred stock by the issuer thereof; provided, however, that the Company and
any Guarantor may incur Indebtedness (including Acquired Debt) or issue shares
of Disqualified Stock if the Consolidated Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.0 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness secured by Mortgages Receivable (including
pursuant to the Company's credit facilities) in an aggregate principal
amount (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of the Company and its Restricted
Subsidiaries thereunder) outstanding after giving effect to such incurrence
not to exceed 70% of the Mortgages Receivable of the Company or such
Restricted Subsidiary at the date of incurrence;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant, equipment, land or
inventory used or held for sale in the business of the Company or such
Restricted Subsidiary in an aggregate principal amount at any time
outstanding for the Company and its Restricted Subsidiaries not to exceed
$5.0 million;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in connection with the acquisition of assets
or a new Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted Subsidiary
prior to such acquisition by the Company or one of its Restricted
Subsidiaries and was not incurred in connection with, or in contemplation
of, such acquisition by the Company or one of it Restricted Subsidiaries;
and provided further that the principal amount (or accreted value, as
applicable) of such Indebtedness, together with any other outstanding
Indebtedness incurred pursuant to this clause (iii), does not exceed $5.0
million;
(iv) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace Existing
Indebtedness or Indebtedness that was permitted by the Indenture to be
incurred;
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(v) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries; provided, however, that (A) if the
Company or a Guarantor is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the Notes and the Subsidiary Guarantees
and (B)(i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Restricted Subsidiary and (ii) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be;
(vi) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the terms of
this Indenture to be outstanding;
(vii) the guarantee by the Company or any Restricted Subsidiary of
Indebtedness of the Company or a Restricted Subsidiary that was permitted
to be incurred by another provision of this covenant;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed an incurrence of Indebtedness by a Restricted Subsidiary of the
Company;
(ix) the incurrence by the Company and the Guarantors of Indebtedness
represented by $75.0 million of Notes offered hereby, the Subsidiary
Guarantees thereof, and the Indenture;
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of Existing Indebtedness of the Company or any such Restricted
Subsidiary;
(xi) the incurrence by the Company or any of its Restricted
Subsidiaries in the ordinary course of business of Indebtedness; (A) in
respect of performance, completion, surety or similar bonds or guarantees
(including pursuant to letters of credit) in connection with new
construction, development, leasing of billboards, or compliance with
federal, state or local law, or (B) in respect of bankers acceptances,
letters of credit, appeal or similar bonds other than pursuant to clause
(A) in an aggregate amount at any time outstanding for the Company and its
Restricted Subsidiaries not to exceed $5.0 million;
(xii) the incurrence of Indebtedness of the Company or any Restricted
Subsidiary arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations in connection with the
disposition of any assets of the Company or any such Restricted Subsidiary
(other than Guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such assets for the purpose of financing such
acquisition), in principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection with
such disposition; and
(xiii) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount
(or accreted value, as applicable) at any time (including all indebtedness
incurred to replace, refund or refinance any such indebtedness) outstanding
for the Company and its Restricted Subsidiaries not to exceed $7.5 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this covenant.
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Designation of Restricted Subsidiary as Unrestricted or Unrestricted
Subsidiary as Restricted.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if at the time of such designation: (a) all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated are deemed to be a Restricted
Payment at the time of such designation (all such outstanding Investments will
be deemed to constitute an amount equal to the greatest of (i) the net book
value of such Investments at the time of such designation, (ii) the fair market
value of such Investments at the time of such designation and (iii) the original
fair market value of such Investments at the time they were made), and such
Restricted Payment is permitted at such time under the covenant described under
the caption "Restricted Payments"; (b) giving pro forma effect thereto as if
such designation had occurred at the beginning of the Company's most recently
completed four fiscal quarters for which internal financial statements are
available preceding the date of such designation, the pro forma Consolidated
Coverage Ratio for such period is greater than the historical Consolidated
Coverage Ratio for such period; (c) no Default or Event of Default shall have
occurred and be continuing immediately preceding such designation and giving pro
forma effect thereto or would occur as a consequence thereof; and (d) such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The Board of Directors may redesignate any Unrestricted Subsidiary to be
Restricted Subsidiary if at the time of such redesignation: (x) giving pro forma
effect to the redesignation and incurrence of Indebtedness of the Unrestricted
Subsidiary (if any) as if they occurred at the beginning of the Company's most
recently completed four fiscal quarters for which internal financial statements
are available preceding the date of such redesignation, (i) any Indebtedness of
such Unrestricted Subsidiary (including any Non-Recourse Debt) could be incurred
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock", and (ii) the pro forma
Consolidated Coverage Ratio for such period is greater than the historical
Consolidated Coverage Ratio for such period; (y) the newly redesignated Domestic
Restricted Subsidiary executes and delivers a Subsidiary Guarantee and an
opinion of counsel as required by the Indenture; and (z) no Default or Event of
Default shall have occurred and be continuing immediately preceding such
redesignation and giving pro forma effect thereto or would occur as a
consequence thereof.
Any such designation or redesignation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation or redesignation and an
Officers' Certificate certifying that such designation or redesignation complied
with the foregoing conditions.
If, at any time, any Unrestricted Subsidiary would fail to meet the
definition of an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture. If the Unrestricted
Subsidiary at such time would not be permitted to be redesignated a Restricted
Subsidiary, the Company shall be in default of the above covenant.
Liens
The Indenture will provide that the Company will not and will not permit
any of its Restricted Subsidiaries to, create, incur, assume or otherwise cause
or suffer to exist or become effective any Lien of any kind (other than
Permitted Liens) upon any of their property or assets, now owned or hereafter
acquired, or any income or profits therefrom (or assign or convey any right to
receive income therefrom), which secures Indebtedness or trade payables that
rank pari passu with or are subordinated to the Notes or the Subsidiary
Guarantees, as applicable, unless (i) if such Lien secures Indebtedness or trade
payables that rank pari passu with the Notes or Subsidiary Guarantees, as
applicable, the Notes and such Subsidiary Guarantees are secured on an equal and
ratable basis with the obligation so secured until such time as such obligation
is no longer secured by a Lien or (ii) if such Lien secures Indebtedness or
trade payables that are subordinated to the Notes or Subsidiary Guarantees, as
applicable, such Lien shall be subordinated to a Lien granted to the Holders of
Notes and Subsidiary Guarantees on the same collateral as that securing such
Lien to the same extent as such Indebtedness, as applicable, until such
obligation is no longer secured by a lien.
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Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (b) pay any Indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the date of the Indenture,
(b) the Indenture and the Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that,
in the case of Indebtedness, such Indebtedness was permitted by the terms of the
Indenture to be incurred, (e) by reason of customary non-assignment provisions
in leases entered into in the ordinary course of business and consistent with
past practices, (f) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired, (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
(h) restrictions contained in security agreements or mortgages to the extent
such restrictions restrict the transfer of the property or assets subject to
such security agreements or mortgages, (i) any restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into for the sale
or disposition of all or substantially all of the capital stock or assets of
such Restricted Subsidiary pending the closing of the sale of such sale or
disposition, or (j) any restriction in any agreement that is not more
restrictive than the restrictions in the Company's credit facilities as in
effect on the date of the Indenture.
Merger, Consolidation, or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock".
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Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing; provided that (x) any employment, compensation or indemnity agreement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the Company
or such Restricted Subsidiary, (y) transactions between or among the Company
and/or its Restricted Subsidiaries and (z) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption
"-- Restricted Payments", in each case, shall not be deemed Affiliate
Transactions, and provided further that transactions between the Company or a
Restricted Subsidiary and any Club in the ordinary course of business shall not
be subject to clause (ii)(b) above.
Sale and Leaseback Transactions
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company may enter into a sale and leaseback
transaction if (i) the Company could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback transaction
pursuant to the Consolidated Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence of
Additional Indebtedness and Issuance of Preferred Stock", and (b) incurred a
Lien to secure such Indebtedness pursuant to the covenant described above under
the caption "-- Liens", (ii) the gross cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction, and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the Company applies the proceeds of
such transaction in compliance with, the covenant described above under the
caption "-- Repurchase at the Option of Holders -- Asset Sales".
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted
Subsidiaries
The Indenture will provide that the Company (i) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Restricted Subsidiary of the Company to any Person (other than to the
Company or a Wholly Owned Restricted Subsidiary that is a Guarantor), unless (a)
such transfer, conveyance, sale, lease or other disposition is of all the
Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales", and (ii) will not
permit any Wholly Owned Restricted Subsidiary of the Company to issue any of its
Equity Interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company that is a
Guarantor.
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Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than the same line of business as the Company and
its Restricted Subsidiaries were engaged in on the date of the Indenture or a
Related Business, except to such extent as would not be material to the Company
and its Restricted Subsidiaries taken as a whole.
Limitation on Status as an Investment Company
The Indenture will prohibit the Company and its Restricted Subsidiaries
from being required to register as an "investment company" (as defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming subject
to regulation under the Investment Company Act.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
and the Guarantors will furnish to the Holders of Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition and
results of operations of the Company and its consolidated Subsidiaries (showing
in reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the financial condition and results of
operations of the Company and its Restricted Subsidiaries separate from the
financial condition and results of operations of the Unrestricted Subsidiaries
of the Company), and, with respect to the annual information only, a report
thereon by the Company's independent certified public accountants, and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company to comply for 30 days after notice
from the Trustee or the Holders of at least 25% in principal amount of their
outstanding Notes with the provisions described under the captions
"-- Repurchase at the Option of Holders -- Change of Control", "-- Repurchase at
the Option of Holders -- Asset Sales", "-- Certain Covenants -- Restricted
Payments", "Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock", and "-- Certain Covenants -- Merger, Consolidation or Sale of
Assets"; (iv) failure by the Company to comply with any of its other agreements
in the Indenture or the Notes for 60 days after notice from the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by
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the Company or any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; provided, that in the case of any
such Payment Default under clause (a) such default continues beyond the lesser
of 30 days or the longest period for cure provided in any such Indebtedness as
to which a Payment Default exists, or in the case of any acceleration of
Indebtedness described in clause (b), such Indebtedness is not discharged or
such acceleration cured, waived, rescinded or annulled within the lesser of 30
days after acceleration or the longest period for cure provided in any such
Indebtedness which has been accelerated; (vi) failure by the Company or any of
its Restricted Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (viii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (ix) certain events of
bankruptcy or insolvency with respect to the Company, any of its Significant
Restricted Subsidiaries, or any group of Restricted Subsidiaries, that taken as
a whole, would constitute a Significant Restricted Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately, provided, however, that
so long as any Designated Senior Debt is outstanding, no such acceleration shall
be effective until five business days after the giving of written notice to the
Company and the representatives under the Designated Senior Debt of such
acceleration. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, any Significant Restricted Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Restricted
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company or any
Guarantor with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes . If an Event of Default
occurs prior to April 1, 2003 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company or any Guarantor with the
intention of avoiding the prohibition on redemption of the Notes prior to such
date, then the Make-Whole Price shall become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Subsidiary Guarantees, the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
and the Guarantors' obligations discharged with respect to the outstanding Notes
("Legal Defeasance") except for (i) the rights of Holders of outstanding Notes
to receive payments in respect of the principal of, interest and premium, if
any, on such Notes when such payments are due from the trust referred to below,
(ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, mutilated, destroyed, lost or stolen Notes and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and its
Subsidiaries released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, interest and premium, if any, on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of defeating,
hindering,
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delaying or defrauding creditors of the Company or others; and (viii) the
Company must deliver to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that all conditions precedent provided for relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes ), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes ).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(subject to the last sentence of this paragraph, other than a payment required
by one of the covenants described above under the caption "Repurchase at the
Option of Holders") or (viii) make any change in the foregoing amendment and
waiver provisions. In addition, any amendment to the provisions of Article 10 of
the Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes. In addition, without the consent of the holders of 66 2/3% in principal
amount of the Notes then outstanding (including consents obtained in connection
with a tender offer or exchange offer for Notes), no waiver or amendment to the
Indenture may make any change in the provisions described above under the
caption "Repurchase at the Option of Holders -- Change of Control" that
adversely affect the rights of any Holder of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guarantors and the Trustee may amend or supplement the
Indenture, the Subsidiary Guarantees, or the Notes to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption of the Company's or the
Subsidiary Guarantors' obligations to Holders of Notes in the case of a merger
or consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
GOVERNING LAW
The Indenture, the Subsidiary Guarantees and the Notes will be, subject to
certain exceptions, governed by and construed in accordance with the internal
laws of the State of New York, without regard to the choice of law rules
thereof.
GLOBAL NOTE AND DEFINITIVE NOTES
The Notes will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the date of the closing of
the sale of the Notes with, or on behalf of, The Depository Trust
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Company (the "Depositary") and registered in the name of Cede & Co., as nominee
of the Depositary (such nominee being referred to herein as the "Global Note
Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Underwriters,
banks and trust companies, clearing corporations and certain other
organizations). Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary, (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Global Notes may be exchanged for registered definitive certificates
("Definitive Notes") if (i) the Depositary notifies the Company that it is
unwilling or unable to continue as depositary for the Global Notes and the
Company thereupon fails to appoint a successor depositary within 90 days, (ii)
the Company, in its sole discretion, determines that the Global Notes (in whole
but not in part) should be exchanged for Definitive Notes and delivers a written
notice to such effect to the Trustee or (iii) there shall have occurred and be
continuing a Default or an Event of Default with respect to the Notes. Upon the
occurrence of any of the preceding events in (i), (ii) or (iii) above,
Definitive Notes shall be issued in such names and issued in any approved
denominations as the Depositary shall instruct the Trustee.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for purposes.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its powers, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Silverleaf Resorts, Inc., 1221 Riverbend Drive,
Suite 120, Dallas, Texas 75247, Attention: Corporate Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business consistent with past
practices (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "-- Repurchase at the Option of
Holders -- Change of Control" and/or the provisions described above under the
caption "-- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any of
its Restricted
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Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the Company
to a Wholly-Owned Restricted Subsidiary that is a Guarantor or by a Restricted
Subsidiary to the Company or to another Wholly-Owned Restricted Subsidiary that
is a Guarantor, (ii) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary that is a Guarantor, (iii) a Restricted Payment that is permitted by
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments" will not be deemed to be Asset Sales, and (iv)
sales, leases or contracts for deed in the ordinary course of business of
Vacation Intervals or Mortgages Receivable, will not be deemed to be Asset
Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the full faith and credit of the
United States government or any agency or instrumentality thereof having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii) above
and (v) commercial paper having the highest rating obtainable from either
Moody's Investors Service, Inc. or Standard & Poor's Corporation and, in each
case, maturing within six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than the Principal and his
Related Parties, becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is currently exercisable or is exercisable
only upon the occurrence of a subsequent condition), directly or indirectly, of
more than 50% of the Voting Stock of the Company (measured by voting power
rather than number of shares), (iv) the Company consolidates with, or merges
with or into, any Person, or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any Person, or
any Person consolidates with, or merges with or into, the Company, in any such
event pursuant to a transaction in which any of the outstanding Voting Stock of
the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of the Company
outstanding immediately prior to such transaction is converted into or exchanged
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for Voting Stock of the surviving or transferee Person constituting a majority
of the outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance), or (v) the first day
on which a majority of the members of the Board of Directors of the Company are
not Continuing Directors.
"Club" means the owners' associations for any of the Company's resorts or
developments, or of nearby residential or condominium tracts developed by the
Company or its predecessors, and the Master Club.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income, minus (v)
non-cash items increasing such Consolidated Net Income for such period
(excluding any such non-cash items to the extent they represent a reversal of
amounts that were accrued in prior periods and were then excluded from
Consolidated Cash Flow as a result of the second parenthetical in clause (iv)),
plus, (vi) non-cash items increasing Consolidated Net Income for a prior period
which were excluded from Consolidated Cash Flow in such period due to the
application of clause (v), to the extent such non-cash item is collected in cash
in a subsequent period, in each case, on a consolidated basis and determined in
accordance with GAAP. The recognition of revenue on the accrual basis in
accordance with GAAP upon the sale, lease, or sale by contract for deed of
Vacation Intervals shall not be deemed a non-cash item increasing Consolidated
Net Income. Notwithstanding the foregoing, the provision for taxes on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of the referent Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in the same proportion) that the Net Income of such Person was included in
calculating Consolidated Net Income.
"Consolidated Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Consolidated Interest Expense of
such Person and its Restricted Subsidiaries for such period. In the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, issues,
guarantees, repays, redeems, retires, repurchases or defeases any Indebtedness
or Disqualified Stock (other than revolving credit borrowings) subsequent to the
commencement of the period for which the Consolidated Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation of
the Consolidated Coverage Ratio is made (the "Calculation Date"), then the
Consolidated Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, issuance, Guarantee, repayment, redemption, retirement,
repurchase, or defeasance of Indebtedness or Disqualified Stock (and in the case
of incurrence or issuance, the pro forma application of the net proceeds
thereof) as if the same had occurred at the beginning of the applicable
four-quarter reference period. In addition, for purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the four-quarter reference
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period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Consolidated Interest Expense attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Consolidated Interest Expense will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date. For purposes of this definition, whenever pro
forma effect is given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness incurred in connection therewith shall be
determined in good faith by a responsible financial or accounting officer of the
Company.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon), and (iv) the product of (a) all
dividend payments, whether or not in cash, on any series of Disqualified Stock
of such Person or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests of the Company,
times (b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case on a consolidated
basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash by the referent Person to the Company or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a consolidated Restricted Subsidiary of such
Person, (y) all investments as of such date in unconsolidated Subsidiaries and
in Persons that are not Restricted Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt
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discount and expense and unamortized deferred charges as of such date, all of
the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Company's credit facilities and (ii) any other Senior Debt permitted under the
Indenture, in either case in which the principal amount of which is $25.0
million or more and that has been designated by the Company as "Designated
Senior Debt".
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 360 days after the date on which the Notes mature.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary that is not
formed, incorporated or organized in a jurisdiction outside the United States.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $10.0 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Company's credit facilities) in existence on the
date of the Indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each of (i) the Company's subsidiaries and (ii) any
other Subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the Indenture, and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the
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case of any Indebtedness that does not require current payments of interest, and
(ii) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business), or
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP,
in each case excluding (i) Mortgages Receivable and (ii) receivables from
"Sampler" contracts or lot or condominium sales. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Restricted Subsidiary of the Company, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to the
fair market value of the Equity Interests of such Restricted Subsidiary not sold
or disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "-- Restricted Payments".
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Make-Whole Amount" means, with respect to any Note, an amount equal to the
excess, if any, of (a) the present value of the remaining principal, premium and
interest payments that would be payable with respect to such Note if such Note
were redeemed on April 1, 2003, computed using a discount rate equal to the
Treasury Rate plus 75 basis points, over (b) the outstanding principal amount of
such Note.
"Make-Whole Average Life" means, with respect to any date of acceleration
of Notes, the number of years (calculated to the nearest one-twelfth) from such
date to April 1, 2003.
"Make-Whole Price" means, with respect to any Note, the greater of (a) the
sum of the principal amount of and Make-Whole Amount with respect to such Note,
and (b) the redemption price of such Note on April 1, 2003.
"Mortgages Receivable" means the gross principal amount of notes receivable
of the Company and its Restricted Subsidiaries secured by Liens on Vacation
Intervals (including notes receivable secured by Vacation Intervals or other
comparable timeshare interests acquired by the Company and its Restricted
Subsidiaries), determined in accordance with GAAP.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on (or tax benefit from) such gain
or loss, realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain or
loss, together with any related provision for taxes on (or tax benefit from)
such extraordinary or nonrecurring gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than the Company's credit facilities or other revolving Indebtedness if
there is no corresponding permanent reduction in commitments with respect
thereto) secured by a Lien on the
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<PAGE> 113
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company in
a Person, if as a result of such Investment (i) such Person becomes a Wholly
Owned Restricted Subsidiary of the Company and a Guarantor that is engaged in
the same business as the Company and its Restricted Subsidiaries were engaged in
on the date of the Indenture or a Related Business, or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor and that
is engaged in the same line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of the Indenture or a Related Business;
(d) any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "-- Repurchase at the Option
of Holders -- Asset Sales"; (e) any acquisition of assets solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the Company;
(f) payroll, travel, and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (g) loans or
advances to employees made in the ordinary course of business consistent with
past practices in an aggregate amount outstanding at any one time not to exceed
$500,000; (h) stock, obligations, or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or a
Restricted Subsidiary; (i) any Investment acquired by the Company or any of its
Restricted Subsidiaries (1) in exchange for any other Investment or receivable
held by the Company or any such Restricted Subsidiary in connection with or as a
result of any bankruptcy, workout, reorganization or recapitalization of the
issuer of such other Investment or receivable or (2) as a result of a
foreclosure (or deed in lieu of) by the Company or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer of title
with respect to any secured Investment in default; (i) Hedging Obligations
permitted under the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock"; (j)
all Investments existing on the date of the Indenture; (k) Investments by the
Company or a Restricted Subsidiary in a Club in an aggregate amount outstanding
at any one time not to exceed $2.0 million; and (l) other Investments in any
Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (l)
that are at the time outstanding, not to exceed $5.0 million.
"Permitted Liens" means (i) Liens existing on the date of the Indenture to
the extent and in the manner such Liens are in effect on such date; (ii) Liens
securing Senior Debt and Liens on assets securing Guarantees of Senior Debt, in
each case permitted to be incurred under the Indenture; (iii) Liens (if any)
securing the Notes and the Subsidiary Guarantees; (iv) Liens securing Permitted
Refinancing Indebtedness which is incurred to refinance any Indebtedness which
has been secured by a Lien permitted under the Indenture and which has been
incurred in accordance with the provisions of the Indenture, provided, however,
that such Liens are not materially less favorable to the Holders and are not
materially more favorable to the Lien Holder with respect to such Liens than the
Liens in respect of the Indebtedness being refinanced; (v) Liens in favor of the
Company or any Wholly-Owned Restricted Subsidiary; (vi) Liens on property of a
Person existing at the time such Person is
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<PAGE> 114
merged into or consolidated with the Company or any Restricted Subsidiary of the
Company; provided that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company; (vii) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company, provided that such Liens were in existence
prior to the contemplation of such acquisition; (viii) Liens to secure the
performance of statutory obligations, surety or appeal bonds, performance bonds
or other obligations of a like nature incurred in the ordinary course of
business; (ix) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (x) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries; and (xi) Liens incurred in the ordinary course of business of the
Company or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $1.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
date the same as or later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes or the Subsidiary Guarantees, as applicable, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Notes and the
Subsidiary Guarantees, as applicable, on terms at least as favorable to the
Holders of Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Principal" means Robert E. Mead.
"Related Business" means, at any time, any business related, ancillary or
complementary (as determined in good faith by the Board of Directors) to the
business conducted by the Company and its Restricted Subsidiaries on the date of
the Indenture.
"Related Party" with respect to the Principal means (A) a spouse or any
immediate family member of the Principal or (B) or trust, corporation,
partnership or other entity, the beneficiaries, stockholders, partners, owners
or Persons beneficially holding an 80% or more controlling interest of which
consist of the Principal and/or such other Persons referred to in the
immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Significant Restricted Subsidiary" of a Person means any Significant
Subsidiary that is a "Restricted Subsidiary".
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Senior Debt" means (i) all Indebtedness outstanding under the Company's
credit facilities, (ii) any other Indebtedness permitted to be incurred by the
Company or a Restricted Subsidiary under the terms of the Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is on a parity with or subordinated in right of payment to the Notes or
Subsidiary Guarantees, as applicable, and (iii) all Obligations with respect to
the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (w) any liability for federal, state, local or other taxes
owed or owing by the Company, (x) any Indebtedness of the Company or any
Guarantor to the Company or any of their respective Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Treasury Rate" means, at any time of computation, the yield to maturity at
such time (as compiled by and published in the most recent Federal Reserve
Statistical Release H.15(519), which has become publicly available at least two
business days prior to the date of acceleration of the Notes, or if such
Statistical Release is no longer published, any publicly available source of
similar market data) of United States Treasury securities with a constant
maturity most nearly equal to the Make-Whole Average Life; provided, however,
that if the Make-Whole Average Life is not equal to the constant maturity of the
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the
Make-Whole Average Life is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Unrestricted Subsidiary" means (ii) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries.
"Vacation Interval" means an interest entitling the holder to use, for a
limited period on an annual or other recurrent basis, a lodging unit, together
with associated privileges and rights, at a Company resort, including, without
limitation, a fee interest, a leasehold, a vendee's interest under a contract of
deed, or other interest based on a floating period or points based system.
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<PAGE> 116
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated April 2, 1998 (the "Underwriting Agreement") by and among Credit Suisse
First Boston Corporation and Donaldson, Lufkin & Jenrette Securities Corporation
(the "Underwriters"), the Company, and the Subsidiary Guarantors, the Company
has agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase from the Company the respective principal amount of Notes set
forth opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITERS NOTES
------------ -----------
<S> <C>
Credit Suisse First Boston Corporation...................... $60,000,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 15,000,000
-----------
$75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Notes, if any are purchased.
The Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances the purchase commitments of non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to investors initially at the offering price to
investors set forth on the cover page of this Prospectus, and to certain dealers
at such price less a concession of 1.5% of the principal amount per Note, and
the Underwriters and such dealers may allow a discount of .25% of such principal
amount on sales to certain other dealers. After the public offering, the public
offering price, concession and discount may be changed by the Underwriters.
The Underwriters have informed the Company that they will not confirm sales
of the Notes to any accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
The Notes are a new issue of securities with no established trading market.
Credit Suisse First Boston Corporation has advised the Company that it presently
intends to make a market in the Notes. The Underwriters are not obligated,
however, to make a market in the Notes and may discontinue any market making at
any time without notice. Accordingly, no assurance can be given as to the
development or liquidity of any trading market for the Notes.
It is expected that delivery of the Notes will be made against payment
therefor on or about the date specified in the last paragraph of the cover page
of this Prospectus, which is the fourth business day following the date hereof.
Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally
are required to settle in three business days, unless the parties to any such
trade expressly agree otherwise. Accordingly, purchasers who wish to trade Notes
on the date hereof will be required, by virtue of the fact that the Notes
initially will settle in T+ 4, to specify an alternate settlement cycle at the
time of any such trade to prevent a failed settlement. Purchasers of Notes who
wish to trade Notes on the date hereof should consult their own advisor.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession when the
Notes are purchased to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Notes to be higher than it would otherwise be in the absence of
such transactions. These transactions may be effected in the over-the-counter
market or otherwise and, if commenced, may be discontinued at any time.
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Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Notes. In addition, neither the
Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company intends to use more than 10% of the net proceeds from the
Equity Offering to repay indebtedness owed by it to CSFBMC, an affiliate of
Credit Suisse First Boston Corporation, the lead managing Underwriter. To the
best of its knowledge, the Company is currently in compliance with the terms of
its credit facilities with CSFBMC. The decision of Credit Suisse First Boston
Corporation to distribute the Notes was made independently of CSFBMC which had
no involvement in determining whether or when to distribute the Notes under the
Note Offering or the terms of the Note Offering. Credit Suisse First Boston
Corporation will not receive any benefit from the Note Offering other than its
respective portion of the underwriting commissions and discounts.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes in Canada
must be made in accordance with applicable securities laws which will vary
depending on the relevant jurisdiction, and which may require resales to be made
in accordance with available statutory exemptions or pursuant to a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the Notes.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Notes in Canada who receives a purchase confirmation will
be deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that (i) such purchaser is entitled under applicable
provincial securities laws to purchase such Notes without the benefit of a
prospectus qualified under such securities laws, (ii) where required by law,
such purchaser is purchasing as principal and not as agent, and (iii) such
purchaser has reviewed the text above under "Resale Restrictions".
RIGHT OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws. Following a
decision of the U.S. Supreme Court, it is possible that Ontario purchasers will
not be able to rely upon the remedies set out in Section 12(2) of the United
States Securities Act of 1933 where securities are being offered under a U.S.
private placement memorandum such as this document.
ENFORCEMENT OF LEGAL RIGHTS
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or such persons outside of Canada.
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NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Notes to whom the Securities Act (British Columbia) applies
is advised that such purchaser is required to file with the British Columbia
Securities Commission a report within ten days of the sale of any Notes acquired
by such purchaser pursuant to this Note Offering. Such report must be in the
form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from the Company. Only one such report
must be filed in respect of Notes acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Notes should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Notes in
their particular circumstances and with respect to the eligibility of the Notes
for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Meadows, Owens, Collier, Reed, Cousins & Blau,
L.L.P., Dallas, Texas. Latham & Watkins, Los Angeles, California, is acting as
counsel for the Underwriters in connection with the Note Offering.
EXPERTS
The consolidated financial statements of Silverleaf Resorts, Inc. at
December 31, 1995, 1996, and 1997 and for the years then ended included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports and
other information with the Commission. The Company has filed with the Commission
a Registration Statement on Form S-1 (together with all amendments, exhibits and
schedules thereto, the "Registration Statement") under the Securities Act with
respect to the Senior Subordinated Notes offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information with respect to the Company and the Notes offered hereby,
reference is hereby made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Seven World Trade Center, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the public reference section of the Commission at its Washington address
upon payment of the fees prescribed by the Commission or may be examined without
charge at the offices of the Commission. The Commission maintains a web site
that contains reports, proxy statements and other information filed with the
Commission; the address of this site is http://www.sec.gov. Copies of such
material may also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
119
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements
Consolidated Balance Sheets at December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996, and 1997...................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1996, and 1997.......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996, and 1997...................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Silverleaf Resorts, Inc.
We have audited the accompanying consolidated balance sheets of Silverleaf
Resorts, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Silverleaf Resorts, Inc. and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 24, 1998 (March 6, 1998 as to the last two paragraphs of Note 15)
F-2
<PAGE> 122
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
Cash and equivalents........................................ $ 973 $ 4,970
Restricted cash............................................. -- 200
Notes receivable, net....................................... 55,794 92,036
Amounts due from affiliates................................. 6,237 1,389
Inventory................................................... 10,300 28,310
Land, equipment, building and utilities, net................ 12,633 21,629
Land held for sale.......................................... 466 466
Prepaid and other assets.................................... 2,860 7,401
Net assets of discontinued operations....................... 1,589 --
------- --------
TOTAL ASSETS...................................... $90,852 $156,401
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses..................... $ 3,156 $ 5,106
Amounts due to affiliates................................. 14,765 --
Unearned revenues......................................... 1,790 3,122
Income taxes payable...................................... 3,650 1,500
Deferred income taxes, net................................ 4,843 14,037
Notes payable and capital lease obligations............... 41,986 48,871
------- --------
Total Liabilities................................. 70,190 72,636
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, par value $0.01 per share, 100,000,000
shares authorized, 7,711,517 shares issued and
outstanding at December 31, 1996 and 11,311,517 shares
issued and outstanding at December 31, 1997............ 77 113
Additional paid-in capital................................ 13,470 64,577
Retained earnings......................................... 7,115 19,075
------- --------
Total Shareholders' Equity........................ 20,662 83,765
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $90,852 $156,401
======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 123
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Vacation Interval sales................................ $ 34,091 $ 45,907 $ 68,682
Interest income........................................ 3,968 6,297 9,149
Interest income from affiliates........................ 393 377 247
Management fee income.................................. 2,478 2,187 2,331
Lease income........................................... 1,310 1,717 1,415
Other income........................................... 1,832 1,440 3,234
--------- ---------- ----------
Total revenues................................. 44,072 57,925 85,058
--------- ---------- ----------
COSTS AND OPERATING EXPENSES:
Cost of Vacation Interval sales........................ 3,280 2,805 6,600
Sales and marketing.................................... 17,850 21,839 30,559
Provision for uncollectible notes...................... 6,632 8,733 10,524
Operating, general and administrative.................. 8,780 10,116 12,230
Depreciation and amortization.......................... 863 1,264 1,497
Interest expense to affiliates......................... 1,403 880 422
Interest expense to unaffiliated entities.............. 2,206 3,879 4,242
--------- ---------- ----------
Total costs and operating expenses............. 41,014 49,516 66,074
--------- ---------- ----------
Income from continuing operations before income taxes.... 3,058 8,409 18,984
Income tax expense....................................... 1,512 3,140 7,024
--------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS........................ 1,546 5,269 11,960
DISCONTINUED OPERATIONS:
Income (loss) from operations (less applicable income
taxes of $0 in 1995 and a benefit of $99 in 1996.... (1,484) (168) --
Loss on disposal including provision for operating
Losses during the phase out period (plus applicable
income tax benefit of $74 in 1996).................. -- (127) --
--------- ---------- ----------
Total loss from discontinued operations........ (1,484) (295) --
--------- ---------- ----------
NET INCOME..................................... $ 62 $ 4,974 $ 11,960
========= ========== ==========
INCOME PER SHARE FROM CONTINUING OPERATIONS -- Basic and
Diluted................................................ $ 0.20 $ 0.68 $ 1.22
========= ========== ==========
NET INCOME PER SHARE -- Basic and Diluted................ $ 0.01 $ 0.64 $ 1.22
========= ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- Basic... 7,590,295 7,711,517 9,767,407
========= ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -- Diluted................................. 7,590,295 7,711,517 9,816,819
========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 124
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- NET
NUMBER OF $0.01 UNREALIZED ADDITIONAL
SHARES PAR GAINS PAID-IN RETAINED
ISSUED VALUE (LOSSES) CAPITAL EARNINGS TOTAL
----------- ----- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1995...................... 7,588,952 $ 76 $(45) $ 8,006 $ 2,079 $10,116
Contributions...................... 209,082 2 -- 5,563 -- 5,565
Repurchase and retirement of Common
Stock........................... (86,517) (1) -- (99) -- (100)
Realized loss on investments
available for sale.............. -- -- 45 -- -- 45
Net income......................... -- -- -- -- 62 62
----------- ---- ---- ------- ------- -------
DECEMBER 31, 1995.................... 7,711,517 77 -- 13,470 2,141 15,688
Net income......................... -- -- -- -- 4,974 4,974
----------- ---- ---- ------- ------- -------
DECEMBER 31, 1996.................... 7,711,517 77 -- 13,470 7,115 20,662
Issuance of Common Stock........... 3,600,000 36 -- 51,107 -- 51,143
Net income......................... -- -- -- -- 11,960 11,960
----------- ---- ---- ------- ------- -------
DECEMBER 31, 1997.................... 11,311,517 $113 $ -- $64,577 $19,075 $83,765
=========== ==== ==== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 125
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 62 $ 4,974 $ 11,960
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 863 1,264 1,497
Discontinued operations................................ 1,476 3,794 1,589
Loss on investment in joint venture.................... 151 -- --
(Gain) Loss on disposal of land, equipment, building
and utilities......................................... 116 64 (34)
Loss on sale of marketable securities.................. 9 -- --
Deferred tax provision................................. 871 1,975 9,194
Increase (decrease) in cash from changes in assets and
liabilities (exclusive of amounts contributed):
Restricted cash...................................... -- -- (200)
Amounts due from affiliates.......................... 452 (1,734) 551
Inventory............................................ (380) (5,846) (18,010)
Prepaid and other assets............................. 42 (1,559) (4,541)
Accounts payable and accrued expenses................ 161 394 1,950
Amounts due to affiliates............................ (711) 114 (286)
Interest payable to affiliates....................... (41) 1,238 (6,244)
Unearned revenues.................................... 23 701 1,332
Income taxes payable................................. 619 996 (2,150)
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 3,713 6,375 (3,392)
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of marketable securities............... 59 -- --
Issuance of notes receivable from affiliates.............. (237) (208) --
Collections of notes receivable from affiliates........... -- -- 4,297
Proceeds from sales of land, equipment, building and
utilities.............................................. -- -- 1,176
Proceeds from sales of land held for sale................. 733 600 --
Purchases of land, equipment, building and utilities...... (4,497) (4,162) (8,692)
Notes receivable, net..................................... (15,662) (20,226) (36,242)
-------- -------- --------
Net cash used in investing activities............. (19,604) (23,996) (39,461)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities....... 22,668 26,648 54,069
Payments on borrowings to unaffiliated entities........... (4,005) (8,939) (50,127)
Proceeds from borrowings from affiliates.................. 2,468 619 68
Payments on borrowings to affiliates...................... (1,117) (1,112) (8,303)
Net proceeds from initial public offering................. -- -- 51,143
Discontinued operations................................... (1,340) (2,334) --
-------- -------- --------
Net cash provided by financing activities......... 18,674 14,882 46,850
-------- -------- --------
NET INCREASE (DECREASE) IN CASH............................. 2,783 (2,739) 3,997
CASH AND EQUIVALENTS
BEGINNING OF PERIOD....................................... 929 3,712 973
-------- -------- --------
END OF PERIOD............................................. $ 3,712 $ 973 $ 4,970
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid, net of amounts capitalized................. $ 1,946 $ 3,003 $ 10,007
Income taxes paid......................................... 17 -- --
Assets contributed........................................ 14,489 -- --
Liabilities assumed with contributed assets............... 8,924 -- --
Land and equipment acquired under capital leases.......... 409 814 2,943
Repurchase of Common Stock through issuance of debt....... 100 -- --
Costs incurred in connection with initial public
offering............................................... -- -- 6,457
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 126
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. NATURE OF BUSINESS
Silverleaf Resorts, Inc., a Texas Corporation (the "Company" or "Silverleaf"),
formerly known as Ascension Capital Corporation ("ACC"), operates as Silverleaf
Vacation Club, Inc. Silverleaf's principal activities consist of (i) developing
and acquiring timeshare resorts; (ii) marketing and selling one-week annual and
biennial vacation intervals ("Vacation Intervals") to new prospective owners;
(iii) marketing and selling upgraded Vacation Intervals to existing Silverleaf
Owners; (iv) providing financing for the purchase of Vacation Intervals; and (v)
operating timeshare resorts. The Company has in-house sales, marketing,
financing, and property management capabilities and coordinates all aspects of
expansion of its ten existing resorts (the "Existing Resorts") and the
development of any new timeshare resort, including site selection, design, and
construction. The Company operates its Existing Resorts under a management
agreement with a non-profit corporation, Master Club ("Master Club"), which
bears the costs of operating, maintaining, and refurbishing the resorts from
monthly dues paid by the Vacation Interval owners. The Company receives a
management fee from Master Club to compensate it for the services provided. In
addition to Vacation Interval sales revenues, interest income derived from its
financing activities and the management fee received from Master Club, the
Company generates additional revenue from leasing of unsold intervals, utility
operations related to the resorts and other sources. All of the operations are
directly related to the resort real estate development industry. Sales of
Vacation Intervals are marketed to individuals primarily through direct mail and
telephone solicitation.
The consolidated financial statements of the Company as of and for the
years ended December 31, 1996 and 1997, reflect the operations of the Company
and its wholly owned subsidiaries, Condominium Builders, Inc. ("CBI"), Villages
Land, Inc. ("VLI"), Silverleaf Travel, Inc. ("STI"), Database Research, Inc.
("DRI"), and Silverleaf Acquisitions, Inc. ("SAI"), a wholly owned subsidiary
formed in July 1997 for the purpose of acquiring additional timeshare
operations.
The Company was formed as a result of the combination of ACC, Equal
Investment Corporation ("EIC"), CBI, and Holly Ranch Water Company, Inc.
("HRWCI") on December 29, 1995 (HRWCI was liquidated in 1995). ACC and EIC were
the 99% general partner and 1% limited partner, respectively, of Ascension
Resorts, Ltd. ("ARL"). The historical consolidated financial statements have
been restated utilizing the historical cost basis of the combined entities so as
to present the consolidated financial condition, operations, equity and cash
flows since these entities were under common ownership and control.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
Revenue and Expense Recognition -- A substantial portion of Vacation
Interval sales are made in exchange for mortgage notes receivable, which are
secured by a deed of trust on the Vacation Interval sold. The Company recognizes
the sale of a Vacation Interval under the accrual method. Revenues are
recognized after a binding sales contract has been executed, a 10% minimum down
payment has been received, and the statutory rescission period has expired. If
all criteria are met except that construction is not substantially complete,
revenues are recognized on the percentage-of-completion basis. Under this
method, the portion of revenue applicable to costs incurred, as compared to
total estimated construction and direct selling costs, is recognized in the
period of sale. The remaining amount is deferred and recognized as the remaining
costs are incurred. If a customer fails to make the first installment payment
when due, the Company reverses the sale and the recovered property is placed
back into inventory at the lower of its original historical cost basis or market
value and any payments made by the customer during the period which are not
refunded are recorded as other revenues. In addition to sales of Vacation
Intervals to new prospective owners the Company sells upgraded Vacation
Intervals to existing Silverleaf Owners.
F-7
<PAGE> 127
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues are recognized on these upgrade Vacation Interval sales when the
criteria described above are satisfied. The revenue recognized is the net of the
incremental increase in the upgrade sales price and cost of sales is the
incremental increase in the cost of the Vacation Interval purchased. A provision
for estimated customer returns (customer returns represent cancellations of
properly recorded sales transactions which occur within one year after the sale)
is reported net against Vacation Interval sales.
The Company recognizes interest income as earned. To the extent interest
payments become delinquent the Company ceases recognition of the interest income
until collection is probable. When inventory is returned to the Company any
unpaid note receivable balances, net of the lower of historical cost or market
of the Vacation Interval which is the amount at which the Vacation Interval is
being restored to inventory, are charged against the previously established
allowance for uncollectible notes.
Revenues related to one-time Sampler contracts, which entitles the
prospective owner to sample a resort for various periods, are recorded as
earned.
The Company receives fees for management services provided to Master Club.
These revenues are recognized on an accrual basis in the period the services are
provided.
Utilities, services and other income is recognized on an accrual basis in
the period service is provided.
Sales and marketing costs are expensed in the period the corresponding
revenue is recognized.
Cash and Equivalents -- Cash and equivalents consist of all highly liquid
investments with an original maturity at the date of purchase of three months or
less. Cash and cash equivalents consist of cash, certificates of deposit and
money market funds.
Restricted cash -- Restricted cash consists of a certificate of deposit
which serves as collateral for a construction bond.
Provision for Uncollectible Notes -- The Company records a provision for
uncollectible notes at the time revenue is recognized. Such provision is
recorded in an amount sufficient to maintain the allowance at a level considered
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes. The allowance for
doubtful notes takes into consideration both notes held by the Company and those
sold with recourse. Such allowance for uncollectible notes is adjusted based
upon periodic analysis of the portfolio, historical credit loss experience and
current economic factors. The allowance for uncollectible notes is reduced by
actual cancellations (which occur more than one year after the sale) and losses
experienced, including losses related to previously sold notes receivable which
became delinquent and were reacquired pursuant to the recourse obligations
discussed herein. Recourse to the Company on sales of customer notes receivable
is governed by the agreements between the purchasers and the Company.
Inventory -- Inventory is stated at the lower of cost or market. Cost
includes amounts for land, construction materials, direct labor and overhead,
taxes and capitalized interest incurred in the construction or through the
acquisition by purchase of resort dwellings held for timeshare sale. These costs
are capitalized as inventory and are allocated to Vacation Intervals based upon
their relative sales values. Upon sale of a Vacation Interval these costs are
charged to cost of sales on a specific identification basis. Vacation Intervals
reacquired are placed back into inventory at the lower of their original
historical cost basis or market value. Company management routinely reviews the
carrying value of its inventory on an individual project basis to determine that
the carrying value does not exceed market.
Land Held for Sale -- Land held for sale represents undeveloped land and is
recorded at the lower of cost or fair value less costs to sell.
Impairment -- Company management routinely reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
F-8
<PAGE> 128
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Land, Equipment, Building and Utilities -- Land, equipment (including
equipment under capital lease), building and utilities are stated at cost, which
includes amounts for construction materials, direct labor and overhead and
capitalized interest. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
operations as incurred; significant betterments and renewals are capitalized.
Depreciation is calculated for all fixed assets, other than land, using the
straight-line method over the estimated useful life of the asset, ranging from 3
to 20 years.
Discontinued Operations -- During 1996, the Company adopted a plan to
discontinue its development and sale of condominiums by CBI. Those operations
have been reported as a separate component of operations and the assets and
liabilities have been combined and included in net assets of discontinued
operations on the balance sheet.
Income Taxes -- Deferred income taxes are recorded for temporary
differences between the bases of assets and liabilities as recognized by tax
laws and their carrying value as reported in the financial statements. Provision
is made or benefit recognized for deferred taxes relating to temporary
differences in the recognition of expense and income for financial reporting
purposes. To the extent a deferred tax asset does not meet the criteria of "more
likely than not" for realization, a valuation allowance is recorded.
Earnings per Share -- The Company has adopted the new computation and
disclosure requirements of Statement of Financial Accounting Standards ("SFAS")
No. 128 -- "Earnings Per Share." Basic earnings per share is computed by
dividing net income by the weighted average shares outstanding. Earnings per
share assuming dilution is computed by dividing net income by the weighted
average number of shares and equivalent shares outstanding. The number of
equivalent shares is computed using the treasury stock method which assumes that
the increase in the number of shares resulting from the exercise of the stock
options described in Note 9 is reduced by the number of shares which could have
been repurchased by Silverleaf with the proceeds from the exercise of the
options. In 1997, the weighted average shares outstanding was calculated by
increasing the average weighted average shares outstanding by the assumed
issuance of 321,737 shares upon exercise of the options and the repurchase of
272,325 shares with the proceeds of the exercise of such options.
No options were granted or outstanding prior to 1997.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from such
estimates.
Environmental Remediation Costs -- The Company accrues for losses
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. Accruals for estimated losses from
environmental remediation obligations generally are recognized no later than
completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable. Company management is not aware of any
environmental remediation obligations which would materially affect the
operations, financial position or cash flow of the Company.
F-9
<PAGE> 129
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassification -- During 1997, the Company began classifying the
components of the previously reported provision for uncollectible notes into the
following three categories based on the nature of the item: credit losses,
customer returns and customer releases (customer releases represent voluntary
cancellations of properly recorded sales transactions which in the opinion of
management is consistent with the maintenance of overall customer goodwill).
Provision pertaining to credit losses, customer returns and customer releases
are classified in Provision for uncollectible notes, Vacation Interval sales,
and Operating, general and administrative, respectively. The Company has
reclassified these amounts within the previously reported financial statements
to conform to the classification for the year ended December 31, 1997. The
reclassification has no balance sheet effect and has no effect on previously
reported net income. The reclassification had the effect of decreasing Vacation
Interval sales, decreasing the provision for uncollectible notes, and increasing
Operating, general and administrative for the years ended December 31, 1995,
1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Vacation Interval sales................................ $ 1,794 $ 2,196 $ 2,829
Provision for uncollectible notes...................... (2,512) (3,342) (4,044)
Operating, general and administrative.................. 718 1,146 1,215
------- ------- -------
Net.......................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
Information affected by this reclassification contained elsewhere in the notes
to consolidated financial statements has also been updated.
In addition, certain other reclassifications have been made to the 1995 and 1996
financial statements to conform to 1997 presentation. These reclassifications
had no effect on net income.
SFAS No. 130 -- SFAS No. 130, "Reporting on Comprehensive Income",
establishes standards for reporting and presenting comprehensive income in the
financial statements and will be effective for Silverleaf beginning in 1998. At
present, Management believes that the adoption of this statement will not have a
material impact on the Company's financial statements.
SFAS No. 131 -- SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. SFAS No. 131 may require additional disclosures
and will be effective for Silverleaf beginning in 1998.
3. CONCENTRATIONS OF RISK
Credit Risk -- The Company is exposed to on-balance sheet credit risk
related to its notes receivable. The Company is exposed to off-balance sheet
credit risk related to loans sold under recourse provisions.
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.
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, Texas and certain other states
F-10
<PAGE> 130
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have laws which limit the Company's ability to recover personal judgments
against customers who have defaulted on their loans. Accordingly, the Company
has generally not pursued this remedy. (See Note 4)
Interest Rate Risk -- The Company has historically derived net interest
income from its financing activities because the interest rates it charges its
customers who finance the purchase of their Vacation Intervals exceed the
interest rates the Company pays to its lenders. Because the Company's
indebtedness bears interest at variable rates and the Company's customer
receivables bear interest at fixed rates, increases in interest rates will erode
the spread in interest rates that the Company has historically obtained and
could cause the rate on the Company's borrowings to exceed the rate at which the
Company provides financing to its customers. The Company has not engaged in
interest rate hedging transactions. Therefore, any increase in interest rates,
particularly if sustained, could have a material adverse effect on the Company's
results of operations, cash flows and financial position.
Availability of Funding Sources -- The Company funds substantially all of
the notes receivable, timeshare inventory and land inventory which it originates
or purchases with borrowings through its financing facilities, internally
generated funds and proceeds from the IPO. Borrowings are in turn repaid with
the proceeds received by the Company from repayments of such notes receivable.
To the extent that the Company is not successful in maintaining or replacing
existing financings, it would have to curtail its operations or sell assets,
thereby having a material adverse effect on the Company's results of operations,
cash flows and financial condition.
Geographic Concentration -- The Company's notes receivable are primarily
originated in Texas, Missouri and Illinois. The risk inherent in such
concentrations is dependent upon regional and general economic stability which
affects property values and the financial stability of the borrowers. The
Company's Vacation Interval inventories are concentrated in Texas and Missouri
with construction occurring in other markets including Illinois and Nevada. The
risk inherent in such concentrations is in the continued popularity of the
resort destinations, which affects the marketability of the Company's products
and the collection of notes receivable.
4. NOTES RECEIVABLE
The Company provides financing to the purchasers of Vacation Intervals
which are collateralized by their interest in such Vacation Intervals. The notes
receivable generally have initial terms of up to seven years. The average yield
on outstanding notes receivable at December 31, 1997 was approximately 14.5%.
In connection with the Sampler program the Company routinely enters into
notes receivable with terms of 10 months. These notes receivable totaled $1,568
at December 31, 1996 and $1,523 at December 31, 1997, and are typically
non-interest bearing. These notes receivable have not been discounted as
management has determined the effects would not be material to the consolidated
financial statements of the Company.
Notes receivable are scheduled to mature as follows at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 12,868
1999........................................................ 13,872
2000........................................................ 16,018
2001........................................................ 18,497
2002........................................................ 21,359
Thereafter.................................................. 22,043
--------
104,657
Less allowance for uncollectible notes...................... (12,621)
--------
Notes receivable, net............................. $ 92,036
========
</TABLE>
Estimated customer returns of $2,829 have been excluded from the above
schedule.
F-11
<PAGE> 131
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule summarizes the original principal amount of notes
receivable sold with recourse to third parties and affiliates during the years
ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Unaffiliated third parties.............................. $565 $ -- $ --
Affiliates.............................................. -- -- --
---- ---- ----
Total notes receivable sold................... $565 $ -- $ --
==== ==== ====
</TABLE>
The following schedule summarizes outstanding principal maturities of notes
receivable sold with recourse as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- ------
<S> <C> <C>
Unaffiliated third parties.................................. $ 9,693 $6,550
Affiliates.................................................. 1,355 841
------- ------
Total outstanding notes receivable sold with
recourse........................................ $11,048 $7,391
======= ======
</TABLE>
Management considers both pledged and sold-with-recourse notes receivable
in the Company's allowance for uncollectible notes. The activity in the
allowance for uncollectible notes is as follows for the years ended December 31,
1995, 1996, and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of period......................... $ 8,102 $ 8,067 $ 9,698
Provision for credit losses and other items.......... 7,350 9,879 11,739
Receivables charged off.............................. (7,385) (8,248) (8,816)
------- ------- -------
Balance, end of period............................... $ 8,067 $ 9,698 $12,621
======= ======= =======
</TABLE>
Provision for credit losses for the years ended December 31, 1995, 1996,
and 1997, was $6,632, $8,733, and $10,524, respectively.
5. LAND, EQUIPMENT, BUILDING AND UTILITIES
The Company's land, equipment, building and utilities consist of the
following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Land........................................................ $ 1,346 $ 4,727
Vehicles and equipment...................................... 2,066 1,808
Utility plant, building and facilities...................... 3,398 4,930
Office furniture and equipment.............................. 4,013 8,066
Improvements................................................ 5,551 7,006
------- -------
16,374 26,537
Less accumulated depreciation............................... (3,741) (4,908)
------- -------
Net land, equipment, building and utilities................. $12,633 $21,629
======= =======
</TABLE>
F-12
<PAGE> 132
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense for the years ended December 31,
1995, 1996, and 1997, was $863, $1,264, and $1,497, respectively.
6. INCOME TAXES
Prior to December 29, 1995, CBI operated as a Subchapter S corporation
wholly-owned by the principal shareholder of the Company. The cumulative losses
of CBI incurred prior to the transfer of the stock of CBI to the Company have
been reported on the individual income tax return of its then sole shareholder.
Upon transfer the Company recorded deferred taxes for the difference between the
tax and book basis of the assets, which was not material. Effective January 1,
1996, the Company converted CBI to a C corporation and, accordingly, CBI is
included in the consolidated income tax return of the Company (See Note 12).
Income tax expense consists of the following components for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $ 618 $ 992 $1,500
State.............................................. 17 -- --
------ ------ ------
Total current tax expense.................. 635 992 1,500
Deferred tax expense................................. 877 1,975 5,524
------ ------ ------
Total income tax expense................... $1,512 $2,967 $7,024
====== ====== ======
</TABLE>
A reconciliation of income taxes on reported pretax income at statutory
rates to actual income tax expense for the years ended December 31, 1995, 1996
and 1997, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates................ $1,040 34% $2,700 34% $6,454 34%
State income taxes, net of Federal Tax
benefit.................................... 92 3% 238 3% 570 3%
Other........................................ 380 12% 29 1% -- --
------ -- ------ -- ------ --
Total income tax expense........... $1,512 49% $2,967 38% $7,024 37%
====== == ====== == ====== ==
Income tax expense attributable to:
Continuing operations...................... $1,512 $3,140 $7,024
Discontinued operations.................... -- (173) --
------ ------ ------
Total income tax expense........... $1,512 $2,967 $7,024
====== ====== ======
</TABLE>
F-13
<PAGE> 133
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts for deferred tax assets and liabilities as of December 31, 1996 and
1997, are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Installment sales income.................................. $16,056 $30,207
Other..................................................... 34 --
------- -------
Total deferred tax liabilities.................... 16,090 30,207
------- -------
Deferred tax assets:
Other..................................................... 2,287 162
Alternative minimum tax credit............................ 3,650 1,500
Net operating loss carryforward........................... 5,310 14,508
------- -------
Total deferred tax assets......................... 11,247 16,170
------- -------
Net deferred tax liability........................ $ 4,843 $14,037
======= =======
</TABLE>
The Company reports substantially all Vacation Interval sales which it
finances on the installment method for federal income tax purposes. Under the
installment method, the Company does not recognize income on sales of Vacation
Intervals until the installment payments on customer receivables are received by
the Company. 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 which
would be paid on the deferred taxes related to the installment method. The
amount of interest expense is not estimable as of December 31, 1997.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of
the deferred income which results from the installment sales treatment of
Vacation Interval sales for regular tax purpose. The current AMT payable balance
was adjusted in 1997 to reflect the change in method of accounting for
installment sales under AMT granted by the Internal Revenue Service effective as
of January 1, 1997. The AMT liability creates a deferred tax asset which can be
used to offset any future tax liability from regular Federal income tax. This
deferred tax asset has an unlimited carryover period.
The net operating losses expire beginning in 2007 through 2012. 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. Management believes that it will be able to utilize its net
operating losses from normal operations or in the event an ownership change
should occur which could limit the utilization of the NOL; the Company could
implement a strategy to accelerate income recognition for federal income tax
purposes to utilize the existing NOL. The amount of the deferred tax asset
considered realizable could be decreased if estimates of future taxable income
during the carryforward period are reduced.
The following are the expiration dates and the approximate net operating
loss carryforwards at December 31, 1997:
<TABLE>
<CAPTION>
EXPIRATION DATES
----------------
<S> <C>
2007................................................... $ 315
2008................................................... --
2009................................................... 1,385
2010................................................... 5,353
2011................................................... 4,239
2012................................................... 27,919
-------
$39,211
=======
</TABLE>
F-14
<PAGE> 134
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations related to continuing
operations at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
$40 million revolving loan agreement ($25 million at
December 31, 1996), which contains certain financial
covenants, due October 2005, principal and interest
payable from the proceeds obtained from customer notes
receivable which are pledged as collateral for the note,
at an interest rate of LIBOR plus 2.5%.................... $20,139 $22,137
$12 million revolving loan agreement which contains certain
financial covenants, due May 2003, principal and interest
payable from the proceeds obtained from customer notes
receivable which are pledged as collateral for the note,
at an interest rate of Base plus 2.75% (11.25% at December
31, 1997)................................................. 6,004 4,122
$7.5 million revolving line of credit, which contains
certain financial covenants, retired during 1997, with
monthly interest payments at Base plus 2.75%.............. 4,000 --
$60 million revolving loan agreement ($40 million at
December 31, 1996), which contains certain financial
covenants, due December 1999, principal and interest
payable from the proceeds obtained on customer notes
receivable pledged as collateral for the note, at an
interest rate of LIBOR plus 2.55%......................... 278 1,529
$15 million revolving loan agreement which contains certain
financial covenants, due November 2002, principal and
interest payable from the proceeds obtained from customer
notes receivable which are pledged as collateral for the
note, at an interest rate of Prime plus 2%................ 4,278 12,596
$5.4 million note payable, which contains certain financial
covenants, due October 1999, secured by certain assets of
the Company, interest only payments due through April
1998, with payments of principal and interest due monthly
thereafter until maturity on October 9, 1999, at an
interest rate of Prime plus 2%............................ 5,201 --
$10 million line of credit due January 2000, with drawings
permitted until December 1998, at a variable rate of LIBOR
plus 3%, secured by land, improvements, and equipment of
various Existing Resorts and New Resorts.................. -- 4,070
$10 million revolving construction loan due October 2000,
with drawings permitted until April 1999, a variable rate
of LIBOR plus 3.5% secured by land, construction in
process and customer notes receivable..................... -- --
Various notes, due from January 1998, through October 2002,
collateralized by various assets with interest rates
ranging from 4.2% to 14.0%................................ 1,022 1,785
------- -------
Total notes payable............................... 40,922 46,239
Capital lease obligations................................... 1,064 2,632
------- -------
Total notes payable and capital lease
obligations...................................... $41,986 $48,871
======= =======
</TABLE>
Prime rate at December 31, 1997, was 8.5%.
Applicable LIBOR rates at December 31, 1997, ranged from 5.72% to 5.81%.
Certain of the above debt agreements include restrictions on the Company's
ability to pay dividends based on minimum levels of net income and cash flow.
The debt agreements contain additional covenants including requirements that the
Company (i) preserve and maintain the collateral securing the loans; (ii) pay
all taxes and other obligations relating to the collateral; and (iii) refrain
from selling or transferring the collateral or permitting any encumbrances on
the collateral. Such credit facilities also contain operating covenants
requiring the Company
F-15
<PAGE> 135
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to (i) maintain an aggregate minimum tangible net worth ranging from $12 million
to $67 million; (ii) maintain its legal existence and be in good standing in any
jurisdiction where it conducts business; (iii) remain in the active management
of the Resorts; (iv) ensure that sales and marketing expenses incurred in
connection with marketing the Vacation Intervals do not exceed 50% of the net
sales revenue realized from the sale of the Vacation Intervals; and (v) refrain
from modifying or terminating certain timeshare documents.
Principal maturities of notes payable and capital lease obligations are as
follows at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 7,626
1999........................................................ 11,231
2000........................................................ 6,604
2001........................................................ 6,541
2002........................................................ 6,791
Thereafter.................................................. 10,078
-------
Total............................................. $48,871
=======
</TABLE>
Total interest expense for the years ended December 31, 1995, 1996 and 1997
was $3,609, $4,759 and $4,664, respectively. Interest of $516, $711 and $823 was
capitalized during the years ended 1995, 1996 and 1997, respectively.
As of December 31, 1997 approximately $75,000 of assets of the Company were
pledged as collateral.
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business the Company has been named a defendant
in certain lawsuits. It is the opinion of the Company's management that the
outcome of the suits now pending will not have a material, adverse effect on the
operations, cash flows or the consolidated financial position of the Company.
Prior to 1996, the Company sold certain of its notes receivable with
recourse to third parties and affiliated parties. The Company has a contingent
liability for the notes receivable sold with recourse. The total amount of the
contingent liability was equal to the uncollected balance of the notes as of
December 31, 1997. The Company's management considers both pledged and sold with
recourse notes receivable in the Company's allowance for doubtful notes. (see
Note 4)
The Company has entered into noncancelable operating leases covering office
and storage facilities and small equipment which will expire at various dates
through 2001. The total rental expense incurred during the years ended December
31, 1995, 1996 and 1997, was $310, $481 and $886, respectively. The Company has
also acquired equipment by entering into capital leases. The future minimum
annual commitments for the noncancelable lease agreements are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998........................................................ $1,096 $1,081
1999........................................................ 900 990
2000........................................................ 651 937
2001........................................................ 177 883
2002........................................................ 100 620
------ ------
Total minimum future lease payments......................... 2,924 $4,511
======
Less amounts representing interest.......................... (292)
------
Present value of future minimum lease payments.............. $2,632
======
</TABLE>
F-16
<PAGE> 136
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment acquired under capital leases consists of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Amount of equipment under capital leases.................... $2,240 $4,743
Less accumulated depreciation............................... (599) (861)
------ ------
$1,641 $3,882
====== ======
</TABLE>
Effective January 1, 1997, the Company entered into three year employment
agreements with two executive officers which provide for minimum annual base
salaries, bonuses based on the operating results of the Company and other fringe
benefits as determined by the Board of Directors of the Company from time to
time. Either party may terminate the agreement upon 30 days notice to the other.
In May 1997, the Company entered into an employment agreement with an
executive officer of the Company with a term through December 31, 1999. Pursuant
to the agreement, such officer will receive commissions equal to 1.35% of the
Company's net sales from Vacation Intervals, plus additional commissions based
on weekly sales volume and revenue per guest. Either party may terminate the
agreement upon 30 days notice to the other.
In July 1997, the Company entered into an employment agreement with an
executive officer of the Company. Either party may terminate the agreement upon
30 days notice to the other. The agreement provides for an annual base salary,
options for the purchase of Common Stock, and other fringe benefits.
Additionally, if the officer is terminated without "good cause", the Company
shall be obligated to make severance payments in an amount equal to the
officer's annual base salary. In connection with this officer's employment, in
August 1997, the Company purchased a house for $531 and leased the house to the
officer for 13 months at a rental rate equal to the Company's interest,
insurance and taxes, currently approximately $3 per month. The officer has the
option to purchase the home at the end of the 13 month term for $531 plus 8% per
annum on the Company's down payment for the house.
Each of the employment agreements provide that such person will not
directly or indirectly compete with the Company in any county in which it
conducts its business or markets its products for a period of two years
following the termination of the agreement. The agreements also provide that
such persons will not influence any employee or independent contractor to
terminate its relationship with the Company, or disclose any confidential
information of the Company.
9. EQUITY
The Company completed its initial public offering in June 1997 of 3,600,000
shares of Common Stock at $16.00 per share (the "IPO"). Costs incurred in
connection with the IPO were approximately $6.5 million. Net proceeds were used
primarily for the repayment of amounts owed to affiliates and notes payable to
third parties.
On March 27, 1997 the Board of Directors of the Company increased the
number of common shares authorized to 100,000,000 shares and in May 1997 the
Board of Directors declared a Common 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.
On December 27, 1995, the principal shareholder contributed certain assets
and the Company assumed certain liabilities associated with these assets which
had been held in a dormant entity. These assets and liabilities were recorded by
the Company at their historical cost basis at the date of the transaction. The
historical cost basis of the assets contributed was approximately $14,489 which
included a note receivable from the Company of $10,869. Upon receipt of this
asset, the Company retired the corresponding obligation which had been recorded
in the Company's financial statements. Liabilities assumed had a historical cost
basis of approximately $8,924 consisting primarily of notes payable to
affiliates of $7,631. These amounts were included within the financial
F-17
<PAGE> 137
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements of the Company until their repayment during 1997. The net excess of
assets contributed over liabilities assumed is reflected as an equity
contribution to the Company.
During December 1995, the Company re-acquired a former officer's equity
interest in EIC in exchange for a $100 promissory note. As of December 31, 1996
the amount owed under this agreement was $67 and is included in amounts due to
affiliates. This note was paid in full in June 1997.
During 1997, the Company established a stock option plan (the "1997 Stock
Option Plan" or "Plan"). The 1997 Stock Option Plan provides for the award of
nonqualified stock options to directors, officers, and key employees, and the
grant of incentive stock options to salaried key employees. Nonqualified stock
options will provide for the right to purchase Common Stock at a specified price
which may be less than or equal to fair market value on the date of grant (but
not less than par value). Nonqualified stock options may be granted for any term
and upon such conditions determined by the board of directors of the Company.
The Company has reserved 1,100,000 shares of Common Stock for issuance pursuant
to the Company's 1997 Stock Option Plan. In February 1998, the Board of
Directors approved an amendment to the plan reserving an additional 500,000
shares of Common Stock for issuance under the plan; however, this amendment will
not become effective unless it is approved by the shareholders.
Outstanding options have a graded vesting schedule, with equal installments
of shares exercisable up through four years of the original grant date. These
options are exercisable at prices ranging from $16.00 to $24.50 per share and
expire 10 years from the date of grant.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding, beginning of year...................... -- --
Granted..................................................... 877,000 $17.90
Exercised................................................... -- --
Forfeited................................................... (15,000) $16.00
------- ------
Options outstanding, end of year............................ 862,000 $17.93
======= ======
Exercisable, end of year.................................... -- --
======= ======
</TABLE>
For shares outstanding at December 31,1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER FAIR VALUE AVERAGE REMAINING
RANGE OF EXERCISE PRICES OF SHARES OF OPTIONS EXERCISE PRICE LIFE IN YEARS
- ------------------------ --------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$16.00-$24.50.............................. 862,000 $11.51 $17.93 10
</TABLE>
F-18
<PAGE> 138
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Standards No. 123 -- "Accounting for Stock Based Compensation" ("SFAS
No. 123"). The Company applies the accounting methods of Accounting Principles
Board Opinion No. 25 ("APB No. 25") and related Interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
the options. Had compensation costs for the options been determined based on the
fair value at the grant date for the awards in 1997 consistent with the
provisions of SFAS No. 123, the Company's net income and net income per share
would have been the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net income -- as reported............................... $11,960
Net income -- pro forma................................. 11,404
Net income per share -- as reported:
Basic and diluted..................................... 1.22
Net income per share -- pro forma:
Basic................................................. 1.17
Diluted............................................... 1.16
</TABLE>
The fair value of the options granted are estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 56.5%, risk-free interest rate of 6.625%, expected life
of 7 years and no distribution yield.
10. RELATED PARTY TRANSACTIONS
The Company has entered into certain financing and operating transactions
with affiliate entities of the Company or its shareholders and officers. Pace
Finance Company ("Pace") and Capital Ventures I are entities owned or controlled
by the Company's principal shareholder; STG Investments is a partnership, the
partners of which include certain trusts which benefit the family of the
Company's principal shareholder.
Each timeshare owners association has entered into an agreement with Master
Club, formerly Master Endless Escape Club, a Texas nonprofit corporation which
authorizes Master Club to manage the resorts on a centralized and collective
basis. Master Club, in turn, has entered into a management agreement with the
Company whereby the Company manages the operations of the resorts. Pursuant to
the management agreement, the Company receives a management fee equal to the
lesser of 15% of Master Club's gross revenues, or the net income of Master Club;
however, if the Company does not receive 15% of Master Club's gross revenues,
such deficiency is deferred for payment in succeeding year(s), subject again to
the net income limitation. The management agreement expires in March, 2000, but
will continue year-to-year thereafter unless canceled by either party. During
the years ending December 31, 1995, 1996 and 1997, the Company recorded
management fees from Master Club of $2,478, $2,187, and $2,296, respectively, in
management fee income.
The direct expenses of operating the resorts are paid by Master Club. To
the extent Master Club provides payroll, administrative and other services that
directly benefit the Company, a separate allocation charge is generated and paid
by the Company to Master Club. During the years ended December 31, 1995, 1996
and 1997, the Company incurred $1,911, $2,108, and $2,617, respectively, of
expenses under this agreement.
At December 31, 1996 the net amount receivable from Master Club totaled
$1,133 and at December 31, 1997 the net receivable from Master Club totaled
$1,282. The amounts are included in amounts due to/from affiliates.
The Company incurred and made payments to Recreational Consultants, Inc.,
an entity of which an officer of the Company is the principal. Amounts paid
under this agreement totaled $430, $539, and $302 during the years ended
December 31, 1995, 1996, and 1997, respectively.
F-19
<PAGE> 139
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to 1995, Pace purchased from an affiliate of the Company certain
delinquent notes receivable executed by purchasers of Vacation Intervals. During
1996, the Company purchased notes from Pace for $24. During 1997 the Company and
subsidiaries purchased the remainder of Pace's inventory of notes receivable at
a cash price of $16.
The following schedule represents amounts due from affiliates at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Notes receivable from the principal shareholder, due
December 31, 1997, bearing interest at rates ranging from
8.0%-9.0%................................................. $4,128 $ --
Notes receivable from the other shareholder, which bore
interest at 8%, such Note being forgiven and included in
compensation expense during 1996.......................... -- --
Receivables from other affiliated parties................... 169 --
Interest on shareholders notes receivable................... 371 --
------ ------
4,668 --
Timeshare owners associations and other, net................ 436 107
Amount due from Master Club................................. 1,133 1,282
------ ------
Total amounts due from affiliates................. $6,237 $1,389
====== ======
</TABLE>
The following schedule represents outstanding amounts due to affiliates at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Note payable to Capital Venture I, due December 31, 1997,
bearing interest at 12.0%................................. $ 1,570 $ --
Note payable to principal shareholder, due December 31,
1997, bearing interest at 9.0%............................ 810 --
Note payable to Pace Finance Company due December 31, 1997,
bearing interest at prime plus 3.5% (11.75% at December
31, 1996)................................................. 362 --
Notes payable to principal shareholder, due December 31,
1997, bearing interest at 8.0%............................ 5,153 --
Other affiliated entities (see below), bearing interest at
9.0%...................................................... 340 --
Accrued interest payable to Capital Venture I............... 2,671 --
Accrued interest payable to principal shareholder........... 3,179 --
Accrued interest payable to other affiliated entities (see
below).................................................... 394 --
Accounts payable to other affiliated entities............... 286 --
------- -------
Total notes payable to affiliates................. $14,765 $ --
======= =======
</TABLE>
Notes payable and interest payable to other affiliated entities represent
amounts payable to entities owned or controlled by the Company's principal
shareholder.
During 1997, the Company paid off affiliate debt and accrued interest
totaling approximately $15.0 million and received payments of approximately $5.0
million of affiliate notes receivable and accrued interest. The payment to
affiliates was made with funds from the IPO. On the consolidated balance sheet
dated December 31, 1997, the remaining due from affiliates relates to the Master
Club and the various homeowners' associations.
The Company had a consulting agreement with a director of the Company.
During 1996, $208 was expensed by the Company under this agreement. This
agreement was canceled during 1997.
F-20
<PAGE> 140
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company agreed to sell to the principal shareholder the Company's
interest in a condominium and a residential dwelling at a price in excess of the
Company's carrying value. As of December 31, 1996, the carrying value of these
assets totaled approximately $450. In September 1997, the principal shareholder
paid the Company $508 for these assets, subject to adjustment for an appraisal
of the condominium.
The Company has entered into a ten year lease agreement with the principal
shareholder for personal use of flood plain land adjacent to one of the
Company's resorts in exchange for an annual payment equal to the property taxes
attributable to the land.
The Company paid an employee's architectural firm the amounts of $338, $421
and $401, during 1995, 1996 and 1997, respectively, for architectural services
rendered to the Company.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying value of cash and cash equivalents, other receivables, amounts
due from or to affiliates, and accounts payable and accrued expenses
approximates fair value due to the relatively short term nature of the financial
instruments. The carrying value of the notes receivable approximates fair value
because the weighted average interest rate on the portfolio of notes receivable
approximates current interest rates to be received on similar current notes
receivable. The carrying amount reported on the balance sheet of notes
receivable and payable to affiliates and notes payable and capital lease
obligations approximates their fair value because the interest rates on these
instruments are adjustable or approximate current interest rates charged on
similar current borrowings.
12. DISCONTINUED OPERATIONS
The Company adopted a plan on December 31, 1996 to discontinue its
development and sale of condominiums by CBI. All anticipated future costs of
carrying and selling the remaining inventory of CBI were accrued as of December
31, 1996. Based on the formal plan adopted by the Company, substantially all
assets were sold and liabilities repaid by December 31, 1997 and no accrual for
losses was required. The net assets of the subsidiary as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Inventory of unsold condominiums............................ $1,939
Other Assets................................................ 50
Accounts payable and accrued expenses....................... (199)
Net reserve for gain (loss) on discontinued operations...... (201)
------
Net assets of discontinued operations............. $1,589
======
</TABLE>
The loss from discontinued operations was $1,484, $295 and $0 for the years
ended December 31, 1995, 1996, and 1997 respectively, net of income tax benefits
of $173 for the year ended December 31, 1996. There was no tax effect applicable
to the year ended December 31, 1995, since the discontinued operations were
contained in an S-corporation, and taxable losses were passed directly through
to its shareholder.
F-21
<PAGE> 141
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and diluted earnings per share from discontinued operations are as
follows for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Loss per share from discontinued operations................. $(.19) $(.04) $--
===== ===== ===
</TABLE>
13. ACQUISITIONS
In August 1997, the Company acquired certain land and amenities located
near St. Louis, Missouri and Chicago, Illinois for $2.9 million. The Company is
developing these properties as Drive-to Resorts.
In August 1997, the Company acquired certain land adjacent to the Hill
Country Resort located in Comal County, Texas, for $394. The Company intends to
develop this land as an expansion to the Hill Country Resort.
In November 1997, the Company acquired a parcel of land near the "strip" in
Las Vegas, Nevada, for $2.7 million. This property is intended for development
as a new Destination Resort.
In December 1997, the Company acquired the Oak N' Spruce Resort in the
Berkshire Mountains of western Massachusetts for $5.1 million as a new Drive-to
Resort to serve the greater New York City market. The Company intends additional
development at Oak N' Spruce.
Also in December 1997, the Company acquired a tract of land in Galveston,
Texas for approximately $485. The Company intends to develop this land as a new
beach-front Gulf Coast Destination Resort.
14. SUBSIDIARY GUARANTEES
All subsidiaries of the Company will guarantee the Notes (as defined in
Note 15) which would be issued in the proposed offering of $75.0 million of
Senior Subordinated Notes. The separate financial statements of each
guaranteeing subsidiary (each, a "Guarantor Subsidiary") are not presented
because the Company's management has concluded that such financial statements
are not material to investors. The guarantee of each Guarantor Subsidiary is
full and unconditional and joint and several and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company.
Combined summarized operating results of the Guarantor Subsidiaries are as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ----- -------
<S> <C> <C> <C>
Revenues................................................. $ 433 $ 761 $ 407
======= ===== =======
Loss from continuing operations, before income taxes..... $ (285) $(346) $ (140)
======= ===== =======
Net loss from discontinued operations, net of a benefit
of $257 in 1996........................................ $(1,990) $(438) $ --
======= ===== =======
Net loss................................................. $(1,433) $(656) $ (88)
======= ===== =======
</TABLE>
F-22
<PAGE> 142
SILVERLEAF RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined summarized balance sheet information of the Guarantor Subsidiaries
is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Land, equipment, inventory and utilities, net............... $1,288 $1,985
Net assets of discontinued operations....................... 1,589 --
Other assets................................................ 1,107 825
------ ------
Total assets...................................... $3,984 $2,810
====== ======
Investment by parent (includes equity and amounts due to
parent)................................................... $3,633 $2,810
Other liabilities........................................... 351 --
------ ------
Total liabilities and equity...................... $3,984 $2,810
====== ======
</TABLE>
At December 31, 1997, there is no subsidiary of the Company the capital
stock of which will comprise a substantial portion of the collateral for the
Notes within the meaning of Rule 3-10 of Regulation S-X.
15. SUBSEQUENT EVENTS
In January 1998, the Company entered into an agreement with Crown Resort
Co., LLC ("Crown") to acquire timeshare management rights at eight resorts in
Alabama, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee,
and Texas for $3.8 million. As part of this arrangement, Silverleaf will also
acquire any unsold Vacation Intervals at the eight resorts. This proposed
acquisition is subject to satisfactory completion of customary due-diligence
procedures; accordingly, there is no assurance that the proposed acquisition
will be completed.
In January 1998, the Company entered into an employment agreement proposing
to make an individual an executive officer of the Company. The agreement does
not become effective until the individual relocates to Dallas, Texas, which must
occur before July 1, 1998. The agreement provides for an annual base salary,
options for the purchase of Common Stock, and other fringe benefits. The
agreement also provides for the purchase of the employee's condominium, upon the
individual's relocation to Dallas, for $108. Additionally, if the officer is
terminated without "good cause", the Company shall be obligated to make
severance payments in an amount equal to the officer's base annual salary.
Also, in January 1998, the Company entered into an agreement for the
purchase of all issued and outstanding shares of a California marketing
corporation for $250. This purchase agreement was entered into in conjunction
with a December 1997 employment agreement entered into with an executive
officer.
In February 1998, the Company acquired a parcel of land in Galveston,
Texas, for approximately $1.2 million. The Company intends to develop this
parcel, along with an adjoining parcel acquired in December 1997 as a new
beach-front Destination Resort.
In February 1998, the Company entered into two agreements, one to acquire a
golf course and undeveloped land, near Atlanta, Georgia for $3.5 million, and
another to acquire undeveloped land near Kansas City, Missouri for $1.6 million.
The proposed acquisitions are subject to satisfactory completion of customary
due diligence procedures; accordingly, there is no assurance that either
proposed acquisitions will be completed.
The Company is proposing to sell 2,000,000 shares of Company Common Stock
(the "Equity Offering"). In addition to the 2,000,000 shares being offered for
sale by the Company, the majority shareholder of the Company is offering to sell
500,000 additional shares of the Company.
The Company is also proposing to offer $75.0 million aggregate principal
amount of Senior Subordinated Notes due 2008 (the "Notes"). If issued, the Notes
will be general unsecured obligations of the Company, ranking subordinate in
right of payment to all senior indebtedness of the Company, including
indebtedness under the Company's revolving credit facilities (the "Note
Offering"). The consummation of the Equity Offering is not conditioned upon the
Note Offering; however, the consummation of the Note Offering is conditioned
upon the Equity Offering.
F-23
<PAGE> 143
INSIDE BACK COVER
CAPTION: "Silverleaf's Operations are Vertically Integrated -- Centralized
Operations."
1. First Picture -- photo of exterior of Silverleaf's offices. Caption:
"Centralized Marketing -- Silverleaf Resorts, Inc. Corporate
Headquarters -- Dallas, Texas."
2. Second Picture -- photo of interior of Silverleaf's offices. Caption:
"Sophisticated Telemarketing Technology at Corporate
Headquarters -- Dallas, Texas."
3. Third Picture -- photo of covered wagon drawn by mules accompanied by
three horseback riders. Caption: "Resort Operations -- Management of
Member Activities at Resorts -- Covered Wagon Rides -- Piney Shores
Resort, Conroe, Texas -- Lodge Getaway."
4. Fourth Picture -- photo of exterior of timeshare units. Caption:
"Standardized design, engineering and construction procedures ensure
uniform quality."
<PAGE> 144
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 5
Risk Factors.......................... 19
Sources and Uses of Proceeds.......... 33
Capitalization........................ 34
Unaudited Pro Forma Condensed
Consolidated Financial
Information......................... 35
Selected Consolidated Historical
Financial and Operating
Information......................... 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 42
The Timeshare Industry................ 49
Business.............................. 52
Management............................ 78
Certain Relationships and Related
Transactions........................ 84
Principal Shareholders................ 87
Description of Certain Indebtedness... 88
Description of Notes.................. 90
Underwriting.......................... 117
Notice to Canadian Residents.......... 118
Legal Matters......................... 119
Experts............................... 119
Additional Information................ 119
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
[SILVERLEAF RESORTS LOGO]
SILVERLEAF RESORTS, INC.
$75,000,000
10 1/2% Senior Subordinated
Notes due 2008
P R O S P E C T U S
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- ------------------------------------------------------
