-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V83r6S4cJXsomXvcuRuXwBkfCUw/5l30R1p5g6hbrUvBhQiczC8as78ssOx3PPO/ IaUkn8CNjx6l1S8SYvUCew== 0000950134-02-014741.txt : 20021119 0000950134-02-014741.hdr.sgml : 20021119 20021119165529 ACCESSION NUMBER: 0000950134-02-014741 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20021119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILVERLEAF RESORTS INC CENTRAL INDEX KEY: 0001033032 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 752259890 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13003 FILM NUMBER: 02833485 BUSINESS ADDRESS: STREET 1: 1221 RIVERBEND DR STREET 2: SUITE 120 CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146311166 MAIL ADDRESS: STREET 1: 1221 RIVERBEND DR STREET 2: SUITE 120 CITY: DALLAS STATE: TX ZIP: 75247 10-Q 1 d00321ce10vq.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number: 001-13003 SILVERLEAF RESORTS, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2259890 (State of incorporation) (I.R.S. Employer Identification No.) 1221 RIVER BEND DRIVE, SUITE 120 DALLAS, TEXAS 75247 (Address of principal executive offices, including zip code) 214-631-1166 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Number of shares of common stock outstanding of the issuer's Common Stock, par value $0.01 per share, as of November 13, 2002: 36,826,906 ================================================================================ EXPLANATORY NOTE On November 19, 2002, the Company simultaneously filed the following delinquent and/or amended reports with the Securities and Exchange Commission: (i) Forms 10-Q for the quarterly periods ended June 30, 2002 and March 31, 2002; (ii) Forms 10-K for the years ended December 31, 2001 and December 31, 2000; (iii) Forms 10-Q for the quarterly periods ended September 30, 2001, June 30, 2001, and March 31, 2001; and (iv) Forms 10-Q/A for the quarterly periods ended September 30, 2000, June 30, 2000, and March 31, 2000. The disclosures contained in this Form 10-Q for the quarter ended September 30, 2001 should be read in conjunction with the other SEC reports described above also filed on November 19, 2002. CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS QUALIFIED BY THE WORDS "BELIEVE," "INTEND," "ANTICIPATE," "EXPECTS" AND WORDS OF SIMILAR IMPORT, ARE "FORWARD-LOOKING STATEMENTS" AND ARE THUS PROSPECTIVE. THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY REGARDING THE COMPANY'S FUTURE PROFITABILITY, PROSPECTS AND RESULTS OF OPERATIONS. ALL SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "CAUTIONARY STATEMENTS" BEGINNING ON PAGE 28 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS REPORT ON FORM 10-Q AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN THE FORWARD-LOOKING STATEMENTS. 1 SILVERLEAF RESORTS, INC. INDEX
Page ---- PART I. FINANCIAL INFORMATION (Unaudited) Item 1. Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2001 and 2000................... 3 Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000............................................... 4 Condensed Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 2001................................ 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000............................ 6 Notes to the Condensed Consolidated Financial Statements............ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................... 20 Item 3. Defaults Upon senior Securities..................................... 21 Item 6. Exhibits and Reports on Form 8-K.................................... 21 Signatures.......................................................... 21
2 PART I. FINANCIAL INFORMATION (UNAUDITED) ITEM 1. FINANCIAL STATEMENTS SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ REVENUES: Vacation Interval sales $ 31,338 $ 67,585 $ 117,470 $ 181,421 Sampler sales 950 994 2,888 2,537 ------------ ------------ ------------ ------------ Total sales 32,288 68,579 120,358 183,958 Interest income 10,616 10,469 30,762 28,635 Management fee income 159 150 393 697 Other income 1,276 1,836 3,264 4,020 ------------ ------------ ------------ ------------ Total revenues 44,339 81,034 154,777 217,310 COSTS AND OPERATING EXPENSES: Cost of Vacation Interval sales 6,549 11,282 22,964 31,385 Sales and marketing 15,955 32,577 64,675 94,960 Provision for uncollectible notes 6,816 39,597 25,551 60,128 Operating, general and administrative 8,782 8,766 26,224 25,894 Depreciation and amortization 1,607 1,925 5,132 5,624 Interest expense and lender fees 8,620 8,939 27,733 23,037 Impairment loss of long-lived assets 2,559 -- 5,443 -- ------------ ------------ ------------ ------------ Total costs and operating expenses 50,888 103,086 177,722 241,028 Loss before benefit for income taxes and extraordinary item (6,549) (22,052) (22,945) (23,718) Benefit for income taxes 50 8,164 149 8,788 ------------ ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM (6,499) (13,888) (22,796) (14,930) Extraordinary gain on extinguishment of debt (net of income taxes of $197) -- -- -- 316 ------------ ------------ ------------ ------------ NET LOSS $ (6,499) $ (13,888) $ (22,796) $ (14,614) ============ ============ ============ ============ BASIC AND DILUTED EARNINGS PER SHARE: Loss before extraordinary item $ (0.50) $ (1.08) $ (1.77) $ (1.16) Extraordinary item -- -- -- 0.02 ------------ ------------ ------------ ------------ Net loss $ (0.50) $ (1.08) $ (1.77) $ (1.14) ============ ============ ============ ============ WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING: 12,889,417 12,889,417 12,889,417 12,889,417 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 3 SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (Unaudited)
September 30, December 31, ASSETS 2001 2000 ----------- ----------- Cash and cash equivalents $ 4,438 $ 6,800 Restricted cash 3,836 1,660 Notes receivable, net of allowance for uncollectible notes of $65,840 and $74,778, respectively 283,070 263,792 Accrued interest receivable 2,688 2,194 Investment in Special Purpose Entity 4,573 5,280 Amounts due from affiliates 806 671 Inventories 102,443 105,023 Land, equipment, buildings, and utilities, net 41,020 49,230 Income taxes receivable 5,005 12,511 Land held for sale 5,256 5,256 Prepaid and other assets 12,143 15,197 ----------- ----------- TOTAL ASSETS $ 465,278 $ 467,614 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts payable and accrued expenses $ 8,826 $ 15,952 Accrued interest payable 8,712 3,269 Amounts due to affiliates 934 3,285 Unearned revenues 6,543 9,507 Deferred income taxes, net 19 168 Notes payable and capital lease obligations 298,204 270,597 Senior subordinated notes 66,700 66,700 ----------- ----------- Total Liabilities 389,938 369,478 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, par value $0.01 per share, 100,000,000 shares authorized, 13,311,517 shares issued, and 12,889,417 shares outstanding 133 133 Additional paid-in capital 109,339 109,339 Retained deficit (29,133) (6,337) Treasury stock, at cost (422,100 shares) (4,999) (4,999) ----------- ----------- Total Shareholders' Equity 75,340 98,136 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 465,278 $ 467,614 =========== ===========
See notes to condensed consolidated financial statements. 4 SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands, except share and per share amounts) (Unaudited)
Common Stock ------------------------- Number of $0.01 Additional Treasury Stock Shares Par Paid-in Retained ------------------------ Issued Value Capital Deficit Shares Cost Total ---------- ---------- ---------- ---------- -------- ---------- ---------- January 1, 2001 13,311,517 $ 133 $ 109,339 $ (6,337) (422,100) $ (4,999) $ 98,136 Net loss -- -- -- (22,796) -- -- (22,796) ---------- ---------- ---------- ---------- -------- ---------- ---------- September 30, 2001 13,311,517 $ 133 $ 109,339 $ (29,133) (422,100) $ (4,999) $ 75,340 ========== ========== ========== ========== ======== ========== ==========
See notes to condensed consolidated financial statements. 5 SILVERLEAF RESORTS, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------------- 2001 2000 ----------- ----------- OPERATING ACTIVITIES: Net loss $ (22,796) $ (14,614) Adjustments to reconcile net loss to net cash used in operating activities: Provision for uncollectible notes 25,551 60,128 Depreciation and amortization 5,132 5,624 Gain on sale of investment -- (317) Deferred income taxes (149) (8,633) Extraordinary gain on extinguishment of debt before taxes -- (513) Impairment loss of long-lived assets 5,443 -- Increase (decrease) in cash from changes in assets and liabilities: Restricted cash (2,176) (275) Notes receivable (46,660) (125,440) Accrued interest receivable (494) (721) Investment in Special Purpose Entity 707 -- Amounts due from affiliates (2,486) (4,302) Inventories 4,275 (9,359) Land held for sale -- 456 Prepaid and other assets 1,677 (1,855) Income tax receivable 7,506 (3,404) Accounts payable and accrued expenses (7,126) 1,608 Accrued interest payable 5,443 2,655 Unearned revenues (2,964) 3,669 Income taxes payable -- (185) ----------- ----------- Net cash used in operating activities (29,117) (95,478) ----------- ----------- INVESTING ACTIVITIES: Purchases of land, equipment, buildings, and utilities (681) (1,688) ----------- ----------- Net cash used in investing activities (681) (1,688) ----------- ----------- FINANCING ACTIVITIES: Proceeds from borrowings from unaffiliated entities 82,793 142,951 Payments on borrowings to unaffiliated entities (55,357) (43,003) ----------- ----------- Net cash provided by financing activities 27,436 99,948 ----------- ----------- Net change in cash and cash equivalents (2,362) 2,782 CASH AND CASH EQUIVALENTS: Beginning of period 6,800 4,814 ----------- ----------- End of period $ 4,438 $ 7,596 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized $ 17,882 $ 20,432 Income taxes paid (refunds received) $ (7,506) $ 3,630 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Land and equipment acquired under capital leases $ 171 $ 4,188
See notes to consolidated condensed financial statements. 6 SILVERLEAF RESORTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BACKGROUND These condensed consolidated financial statements of Silverleaf Resorts, Inc. and subsidiaries ("the Company") presented herein do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Form 10-K for the year ended December 31, 2000 as filed with the Securities and Exchange Commission. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in such Form 10-K. SFAS No. 140 - In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"), which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140 revises SFAS No. 125's standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the SFAS No. 125's provisions without reconsideration. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. SFAS No. 140 is to be applied prospectively with certain exceptions. The Company adopted the new disclosures required under SFAS No. 140 as of December 31, 2000. The adoption of SFAS No. 140 in 2001 did not have a material impact on the Company's results of operations, financial position, or cash flows. SFAS No. 144 - In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 establishes a single accounting method for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and extends the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 also requires that an impairment loss be recognized for assets held-for-use when the carrying amount of an asset (group) is not recoverable. The carrying amount of an asset (group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (group), excluding interest charges. Estimates of future cash flows used to test the recoverability of a long-lived asset (group) must incorporate the entity's own assumptions about its use of the asset (group) and must factor in all available evidence. SFAS No. 144 was effective for the Company for the quarter ending March 31, 2002. The adoption of SFAS No. 144 in 2002 did not have a material impact on the Company's results of operations, financial position, or cash flows. SFAS No. 145 - In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current GAAP criteria for extraordinary classification. In addition, SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent with sale-leaseback accounting rules. SFAS No. 145 also contains other non-substantive corrections to authoritative accounting literature. The changes related to debt extinguishment will be effective for fiscal years beginning after May 15, 2002, and the changes related to lease accounting will be 7 effective for transactions occurring after May 15, 2002. The adoption of SFAS No. 145 will require the Company to reclassify its extraordinary gains to ordinary. SFAS No. 146 - In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. SFAS No. 146 is effective after fiscal years beginning after December 31, 2002. The adoption of SFAS No. 146 will not have any immediate effect on the Company's results of operations, financial position, or cash flows. NOTE 2 - DEBT RESTRUCTURING Since February 2001, when the Company disclosed significant liquidity issues arising primarily from the failure to close a credit facility with its largest secured creditor, management and its financial advisors have been attempting to develop and implement a plan to return the Company to sound financial condition. During this period, the Company negotiated and closed short-term secured financing arrangements with three lenders, which allowed it to operate at reduced sales levels as compared to original plans and prior years. With the exception of the Company's inability to pay interest due on the Senior Subordinated Notes, these short-term arrangements were adequate to keep the Company's unsecured creditors current on amounts owed. Under the Exchange Offer that was closed on May 2, 2002, $56,934,000 in principal amount of the Company's 10 1/2% senior subordinated notes were exchanged for a combination of $28,467,000 in principal amount of the Company's new class of 6.0% senior subordinated notes due 2007 and 23,937,489 shares of the Company's common stock, representing approximately 65% of the common stock outstanding after the Exchange Offer. As a result of the exchange, the Company recorded a pre-tax extraordinary gain of $17.9 million in the second quarter of 2002. Under the terms of the Exchange Offer, tendering holders collectively received cash payments of $1,335,545 on May 16, 2002, and a further payment of $334,455 on October 1, 2002. A total of $9,766,000 in principal amount of the Company's 10 1/2% notes were not tendered and remain outstanding. As a condition of the Exchange Offer, the Company has paid all past due interest to non-tendering holders of its 10 1/2% notes. Under the terms of the Exchange Offer, the acceleration of the maturity date on the 10 1/2% notes which occurred in May 2001 has been rescinded, and the original maturity date in 2008 for the 10 1/2% notes has been reinstated. Past due interest paid to non-tendering holders of the 10 1/2% notes was $1,827,806. The indenture under which the 10 1/2% notes were issued was also consentually amended as a part of the Exchange Offer. Management has also negotiated two-year revolving, three-year term out arrangements for $214 million with its three principal secured lenders, which were closed at the same time as of the Exchange Offer. In addition, the Company amended its $100 million off-balance-sheet credit facility through the Company's SPE. Under these revised credit arrangements, two of the three creditors converted $42.1 million of existing debt to a subordinated Tranche B. Tranche A is secured by a first lien on currently pledged notes receivable. Tranche B is secured by a second lien on the notes, a lien on resort assets, an assignment of the Company's management contracts with the Clubs, a portfolio of unpledged receivables currently ineligible for pledge under the existing facility, and a security interest in the stock of Silverleaf Finance I, Inc., the Company's SPE. Among other aspects of these revised arrangements, the Company will be required to operate within certain parameters of a revised business model and satisfy the financial covenants set forth in the Amended Senior Credit Facilities, including maintaining a minimum tangible net worth of $100 million or greater, as defined, sales and marketing expenses as a percentage of sales below 55.0% for the last three quarters of 2002 and below 52.5% thereafter, notes receivable delinquency rate below 25%, a minimum interest coverage ratio of 1.1 to 1.0 (increasing to 1.25 to 1 in 2003), and a minimum net income. However, such results cannot be assured. Compliance with these covenants will require that improvements be made in several areas of the Company's operations. The principal changes in operations that management believes will be necessary to satisfy the financial 8 covenants are to reduce sales and marketing expense as a percentage of sales, to improve profitability, and to improve customer credit quality, which the Company believes will result in reduced credit losses. During the second and third quarters of 2001, the Company closed three outside sales offices, closed three telemarketing centers, and reduced headcount in sales, marketing, and general and administrative functions. These changes resulted in $2.7 million of asset write-offs, including $1.4 million of prepaid booth rentals and marketing supplies and $1.3 million of fixed assets related to the closed sales offices and closed telemarketing centers. As a result of these actions, management believes that the necessary operating changes needed to reduce sales and marketing expense to an appropriate level are being implemented. Due to the high level of defaults experienced in customer receivables during 2000, which continued throughout 2001, the Company's provision for uncollectible notes was relatively high as a percentage of Vacation Interval sales during 2000 and 2001. Management believes the high level of defaults experienced in 2000 was due to the deterioration of the economy in the United States, which began to have a significant impact on the Company's existing customers and on consumer confidence in general in late 2000, and a substantial reduction by the Company in two programs that were previously used to remedy defaulted notes receivable. Management believes the high level of defaults in 2001 was also attributable to the fact that customers concerned about the Company's liquidity issues began defaulting on their notes after the Company's liquidity announcement in February 2001, in addition to continuing economic concerns. Since the third quarter of 2001, the Company has been operating under new sales practices whereby no sales are permitted unless the touring customer has a minimum income level beyond that previously required and has a valid major credit card. Further, the marketing division is employing a best practices program, which management believes should facilitate marketing to customers who are more likely to be a good credit risk. However, should there be further deterioration in the economy, and if enhanced sales practices do not result in sufficiently improved collections, the Company may not be able to realize improvements in the overall credit quality of its notes receivable portfolio that these actions are designed to achieve. While the Company announced the completion of its restructuring and refinancing transactions on May 2, 2002, the Company's ability to continue as a going concern is dependent on other factors as well, including the improvements to the Company's operations described above be achieved. In addition, the Amended Senior Credit Facilities require the Company to satisfy certain financial covenants. Management believes that if the improvements to its operations are successful, the Company will be able to improve its operating results to achieve compliance with the financial covenants during the term of the Amended Senior Credit Facilities. However, the Company's plan to utilize certain of its assets, predominantly inventory, extends for periods of up to fifteen years. Accordingly, the Company will need to either extend the Amended Senior Credit Facilities or obtain new sources of financing through the issuance of other debt, equity, or collateralized mortgage-backed securities, the proceeds of which would be used to refinance the debt under the Amended Senior Credit Facilities, finance mortgages receivable, or for other purposes. The Company may not have these additional sources of financing available to it at the times when such financings are necessary. Due to the uncertainties mentioned above, the independent auditors report on the Company's financial statements for the period ended December 31, 2001 contains an explanatory paragraph concerning the Company's ability to continue as a going concern. NOTE 3 - EARNINGS PER SHARE For the three and nine month periods ended September 30, 2001, and September 30, 2000, the weighted average shares outstanding assuming dilution was anti-dilutive. Outstanding stock options totaling approximately 1,249,500 options were potentially dilutive securities that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three and nine month periods ended September 30, 2001. 9 NOTE 4 - NOTES RECEIVABLE The Company provides financing to the purchasers of Vacation Intervals, which are collateralized by their interest in such Vacation Intervals. The notes receivable generally have initial terms of seven to ten years. The average yield on outstanding notes receivable at September 30, 2001 was approximately 13.6%. In connection with the sampler program, the Company routinely enters into notes receivable with terms of 10 months. Notes receivable from sampler sales were $4.1 million and $1.8 million at September 30, 2000 and 2001, respectively, and are non-interest bearing. Management considers both pledged and sold-with-recourse notes receivable in the Company's allowance for uncollectible notes. The Company considers accounts over 60 days past due to be delinquent. As of September 30, 2001, $10.8 million of notes receivable, net of accounts charged off, were considered delinquent. An additional $52.9 million of notes would have been considered to be delinquent had the Company not granted payment concessions to the customers. The activity in the allowance for uncollectible notes is as follows for the three and nine months ended September 30, 2000 and 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Balance, beginning of period ........................ $ 80,036 $ 47,646 $ 74,778 $ 32,023 Provision for credit losses ......................... 6,816 39,597 25,551 60,128 Provision for customer releases charged to operating, general, And administrative expenses ....................... -- 309 -- 874 Receivables charged off ............................. (21,012) (17,220) (34,489) (22,693) -------- -------- -------- -------- Balance, end of period .............................. $ 65,840 $ 70,332 $ 65,840 $ 70,332 ======== ======== ======== ========
NOTE 5 - DEBT Notes payable, capital lease obligations, and senior subordinated notes as of September 30, 2001 and December 31, 2000 (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------- -------- $60 million loan agreement, which contains certain financial covenants, due August 2002, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 3.55% (additional draws are no longer available under this facility; upon the completion of the debt restructuring described in Note 2, maturity was extended to August 2003) ............................................ $ 17,677 $ 23,049 $70 million loan agreement, capacity reduced by amounts outstanding under the $10 million inventory loan agreement (and the $10 million supplemental revolving loan agreement as of September 30, 2001), which contains certain financial covenants, due August 2004, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 2.65% (operating under forbearance at September 30, 2001; additional draws are no longer available under this facility) ........................................................................ 38,408 41,319 $10 million supplemental revolving loan agreement, which contains certain financial covenants, due August 2002 (extended to March 2007 upon completion of the debt restructuring described in Note 2), principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 2.67% (revolving under forbearance at September 30, 2001) ............................................... 9,682 -- $75 million revolving loan agreement, which contains certain financial covenants, due April 2005, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 3.00% (revolving under forbearance at September 30, 2001; upon completion of the debt restructuring described in Note 2, the revolving loan agreement was amended to limit the outstanding balance to $72 million, consisting of $56.9 million revolver with an interest rate of LIBOR plus 3% with a 6% floor and a $15.1 million term loan with an interest rate of 8%; both facilities mature March 2007) .......................... 70,300 57,133 $75 million revolving loan agreement, which contains certain financial covenants, due November 2005, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 2.67% (revolving under forbearance at September 30, 2001; upon completion of the debt restructuring described in Note 2, the revolving loan agreement was amended to limit the outstanding balance to $71 million, consisting of $56.1 million revolver with an interest rate of LIBOR plus 3% with a 6% floor and a $14.9 million term loan with an interest rate of 8%; both facilities mature March 2007) ........................................ 69,573 74,101 $10.2 million revolving loan agreement, which contains certain financial covenants, due April 2006, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of Prime plus 2.00% (revolving under forbearance at September 30, 2001; upon completion of the debt restructuring described in Note 2, the revolving
10 loan agreement was amended to form a $8.1 million revolver with an interest rate of Prime plus 3% with a 6% floor and a $2.1 million term loan with an interest rate of 8%; both facilities mature March 2007)........................... 10,087 -- $45 million revolving loan agreement ($55 million as of September 30, 2001), which contains certain financial covenants, due August 2005, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of Prime (Prime plus 2.00% as of September 30, 2001) (revolving under forbearance at September 30, 2001; upon completion of the debt restructuring described in Note 2, the revolving loan agreement was amended to limit the outstanding balance to $48 million, consisting of $38 million revolver with an interest rate of Federal Funds plus 2.75% with a 6% floor and a $10 million term loan with an interest rate of 8%; both facilities mature March 2007)................................... 51,854 41,817 $10 million inventory loan agreement, which contains certain financial covenants, due August 2002 (extended to March 2007 upon completion of the debt restructuring described in Note 2), interest payable monthly, at an interest rate of LIBOR plus 3.50% (revolving under forbearance at September 30, 2001) ........................................................................ 9,936 9,936 $10 million inventory loan agreement, which contains certain financial covenants, due March 31, 2002 (extended to March 2007 upon completion of the debt restructuring described in Note 2), interest payable monthly, at an interest rate of LIBOR plus 3.25% (revolving under forbearance at September 30, 2001) ........................................................................ 9,375 8,175 Various notes, due from January 2002 through November 2009, collateralized by various assets with interest rates ranging from 0.9% to 17.0% ............... 3,898 4,044 -------- -------- Total notes payable ....................................................... 290,790 259,574 Capital lease obligations ........................................................... 7,414 11,023 -------- -------- Total notes payable and capital lease obligations ......................... 298,204 270,597 10 1/2% senior subordinated notes, due 2008, interest payable semiannually on April 1 and October 1, guaranteed by all of the Company's present and future domestic restricted subsidiaries (in default at September 30, 2001; see debt restructuring described in Note 2) .................. 66,700 66,700 -------- -------- Total ..................................................................... $364,904 $337,297 ======== ========
At September 30, 2001, LIBOR rates were from 2.60% to 2.64%, and the Prime rate was 6.00%. At December 31, 2000, LIBOR rates were from 6.40% to 6.56%, and the Prime rate was 9.50%. As of September 30, 2001, the Company was unable to make payments on accelerated balances due under the senior subordinated notes. The total interest due on these notes as of September 30, 2001, was $7.4 million. NOTE 6 - SUBSIDIARY GUARANTEES As of September 30, 2001, all subsidiaries of the Company have guaranteed the $66.7 million of senior subordinated notes. The separate financial statements and other disclosures concerning each guaranteeing subsidiary (each, a "Guarantor Subsidiary") are not presented herein because the Company's management has determined that such information is not material to investors. The guarantee of each Guarantor Subsidiary is full and unconditional and joint and several. Each Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together comprise all direct and indirect subsidiaries of the Company. Combined summarized operating results of the Guarantor Subsidiaries for the nine months ended September 30, 2001 and 2000, are as follows (in thousands):
September 30, ------------------------------------- 2001 2000 --------- --------- Revenues $ -- $ -- Expenses -- -- --------- --------- Net loss $ -- $ -- ========= =========
11 Combined summarized balance sheet information as of September 30, 2001 for the Guarantor Subsidiaries is as follows (in thousands):
September 30, 2001 --------- Other assets $ 10 --------- Total assets $ 10 ========= Investment by parent (includes equity and amounts due to parent) $ 10 --------- Total liabilities and equity $ 10 =========
NOTE 7 - RELATED PARTIES In the third quarter of 2001, Silverleaf Club entered into a loan agreement for $1.8 million, whereby the Company guaranteed such debt with certain of its assets. NOTE 8 - SUBSEQUENT EVENTS In October 2001, a class action was filed against the Company by plaintiffs who purchased Vacation Intervals from the Company. The plaintiffs allege that the Company failed to deliver them complete copies of the contracts for the purchase of Vacation Intervals as they did not receive a complete legal description of the resort. The plaintiffs further claim that the Company violated various provisions of the Texas Deceptive Trade Practices Act with respect to maintenance fees charged by the Company to its Vacation Interval owners. The petition alleges actual damages of $34.5 million plus consequential damages of an unspecified amount, as well as all attorneys' fees, expenses, and costs. The Company intends to vigorously defend against the claims and believes it has several defenses. The Company has not yet fully assessed the claims and has not recorded an accrual for this case. In February 2002, a class action was filed against the Company by a couple who purchased a Vacation Interval from the Company. The plaintiffs allege that the Company violated the Texas Government Code by charging a document preparation fee in regard to instruments affecting title to real estate, and that such fee constituted a partial prepayment that should have been credited against their note. The petition seeks recovery of the $275 document preparation fee, $825 of treble damages, and injunctions preventing the Company from engaging in such practices. The Company has not yet fully assessed the claims and has not recorded an accrual for this case. During 2002, the Company sold $69.3 million of notes receivable to the SPE and recognized pre-tax gains of $5.3 million. The SPE funded these purchases through advances under a credit agreement arranged for this purpose. In conjunction with these sales, the Company received cash consideration of $57.2 million, which was used to pay down borrowings under its revolving loan facilities. In May 2002, the Company completed the restructuring of its debt as described in Note 2. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed throughout this Form 10-Q filing are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, those discussed in the Company's Form 10-K for the year ended December 31, 2000. The Company currently owns and/or manages 19 resorts in various stages of development. These resorts offer a wide array of country club-like amenities, such as golf, swimming, horseback riding, boating, and many organized activities for children and adults. The Company represents an owner base of over 120,000. The condensed 12 consolidated financial statements of the Company include the accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are wholly-owned. RESULTS OF OPERATIONS The following table sets forth certain operating information for the Company.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ----- ----- ----- ----- As a percentage of total revenues: Vacation Interval sales 70.7% 83.4% 75.9% 83.5% Sampler sales 2.1% 1.2% 1.9% 1.2% ----- ----- ----- ----- Total sales 72.8% 84.6% 77.8% 84.7% Interest income 23.9% 12.9% 19.9% 13.2% Management fee income 0.4% 0.2% 0.2% 0.3% Other income 2.9% 2.3% 2.1% 1.8% ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% As a percentage of Vacation Interval sales: Cost of Vacation Interval sales 20.9% 16.7% 19.5% 17.3% Provision for uncollectible notes 21.7% 58.6% 21.8% 33.1% As a percentage of total sales: Sales and marketing 49.4% 47.5% 53.7% 51.6% As a percentage of total revenues: Operating, general and administrative 19.8% 10.8% 16.9% 11.9% Depreciation and amortization 3.6% 2.4% 3.3% 2.6% As a percentage of interest income: Interest expense and lender fees 81.2% 85.4% 90.2% 80.5%
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Revenues Revenues for the quarter ended September 30, 2001 were $44.3 million, representing a $36.7 million or 45.3% decrease over revenues of $81.0 million for the quarter ended September 30, 2000. In February 2001, the Company failed to secure a new credit facility with its largest secured creditor, which created significant liquidity concerns. In addition, the Company's three primary secured lenders have only provided the Company sufficient short-term secured financing to sell at rates substantially reduced from 1999 and 2000 sales levels. As a result, the number of Vacation Intervals sold, exclusive of in-house Vacation Intervals, decreased 52.7% to 2,251 in the third quarter of 2001 from 4,764 in the same period of 2000; and the average price per interval remained fairly constant at $9,784 versus $9,750 in the same period of 2000. Total interval sales for the third quarter of 2001 included 683 biennial intervals (counted as 342 Vacation Intervals) compared to 1,723 (862 Vacation Intervals) in the third quarter of 2000. During the third quarter of 2001, 2,135 in-house Vacation Intervals were sold at an average price of $4,363, compared to 4,406 in-house Vacation Intervals sold at an average price of $4,797 during the comparable 2000 period. Sampler sales decreased $44,000 to $950,000 for the quarter ended September 30, 2001, compared to $994,000 for the same period in 2000. Consistent with the overall decrease in Company operations, fewer samplers were sold in 2001 compared to 2000. However, sampler sales are not recognized as revenue until the Company's obligation has 13 elapsed, which often does not occur until the sampler contract expires eighteen months after the sale is consummated. Hence, a significant portion of sampler sales recognized in 2001 relate to 2000 sales. Interest income increased 1.4% to $10.6 million for the quarter ended September 30, 2001, from $10.5 million for the same period of 2000. This increase primarily resulted from an increase in notes receivable, net of allowance for doubtful notes, as of September 30, 2001 as compared to September 30, 2000. Management fee income, which consists of management fees collected from the resorts' management clubs, can not exceed the management clubs' net income. Management fee income remained fairly constant at $159,000 for the third quarter of 2001, versus $150,000 for the third quarter of 2000. Other income consists of water and utilities income, condominium rental income, marina income, golf course and pro shop income, and other miscellaneous items. Other income decreased $560,000 to $1.3 million for the third quarter of 2001 compared to $1.8 million for the same period of 2000. The decrease primarily relates to a $317,000 gain associated with the sale of land recognized in the third quarter of 2000 and to the discontinuance of condominium rentals. Cost of Sales Cost of sales as a percentage of Vacation Interval sales increased to 20.9% in the third quarter of 2001, from 16.7% for the same period of 2000. As a result of the previously mentioned liquidity concerns, the Company was required to (i) drastically reduce its future plan for Vacation Interval sales at its existing resorts, (ii) abandon plans to develop two resorts already in predevelopment status, (iii) place one resort in predevelopment status on hold, and (iv) abandon plans to sell at the Crown resorts. These changes substantially reduced the Company's future planned Vacation Interval sales. Due to the reduced future sales plan, the Company allocates its resort amenities and land to cost of sales at a higher rate in 2001 compared to 2000. Also, as the Company continues to deplete its inventory of low-cost Vacation Intervals, acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more recently constructed units, which were built at a higher average cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval sales has increased compared to 2000. Sales and Marketing Sales and marketing costs as a percentage of total sales increased to 49.4% for the quarter ended September 30, 2001, from 47.5% for the same period of 2000. As a result of the aforementioned liquidity issues, the Company made several changes during 2001, including the closure of three outside sales offices, closing three telemarketing centers, discontinuing certain lead generation programs, and reducing headcount in both sales and marketing functions. Despite these cost saving measures, sales and marketing costs as a percentage of total sales increased due to the substantial decrease in sales and $249,000 of nonrecurring transition costs associated with these changes. Since the third quarter of 2001, the Company has been operating under new sales practices whereby no sales are permitted unless the touring customer has a minimum income level beyond that previously required and has a valid major credit card. Further, the marketing division is employing a best practices program, which should facilitate marketing to customers who management believes are more likely to be a good credit risk. Provision for Uncollectible Notes The provision for uncollectible notes as a percentage of Vacation Interval sales decreased to 21.7% for the third quarter of 2001, compared to 58.6% for the third quarter of 2000. This decrease is primarily attributable to the deterioration of the economy that came to public awareness in late 2000 and the Company's decision to substantially reduce two programs in 2000 that had previously been used to remedy defaulted notes receivable. The assumptions program, which had been used by the Company since December 1997 to allow delinquent loans to be assumed by other customers, was virtually eliminated due to its high cost of operation. The downgrade program, which was implemented in April 2000 to supplement the assumptions program, allows delinquent customers to downgrade to a more affordable product. In late 2000, the downgrade program was reduced as it became apparent that this program 14 did not significantly reduce delinquencies. As a result of these changes, the Company recognized additional reserves in 2000. Due to the high level of defaults experienced in customer receivables throughout 2001, the provision for uncollectible notes remained relatively high during 2001. Management believes the high provision percentage remained necessary in 2001 because of continuing economic concerns and customers concerned about the Company's liquidity issues began defaulting on their notes after the Company's liquidity announcement in February 2001. Management will continue its current collection programs and seek new programs to reduce note defaults. However, there can be no assurance that these efforts will be successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total revenues increased to 19.8% for the third quarter of 2001, from 10.8% for the same period of 2000. Although the Company substantially reduced its corporate headcount in 2001 to align overhead with the reduced sales levels, operating, general and administrative expense remained constant at $8.8 million for the third quarter of 2001, as compared to 2000, primarily due to $1.4 million of professional fees incurred in 2001 associated with the restructuring of the Company. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues increased to 3.6% for the quarter ended September 30, 2001, compared to 2.4% for the quarter ended September 30, 2000. Overall, depreciation and amortization expense decreased $318,000 for the third quarter of 2001, as compared to 2000, primarily due to the write-off of $1.3 million of fixed assets previously used in the sales and marketing functions in the first quarter of 2001 and a general reduction in capital expenditures in 2001. Impairment Loss of Long-Lived Assets The Company recognized an impairment loss of long-lived assets of $2.6 million in the third quarter of 2001, which primarily consisted of a $2.3 million impairment to write-down both corporate planes to their estimated sales prices and a $230,000 loss related to the re-negotiation and transfer of a capital lease to Silverleaf Club. Interest Expense Interest expense as a percentage of interest income decreased to 81.2% for the third quarter of 2001, from 85.4% for the same period of 2000. This decrease is primarily the result of decreased interest expense related to decreased borrowings against pledged notes receivable. Also, the Company's weighted average cost of borrowing decreased to 7.6% in the third quarter of 2001 compared to 9.7% in the third quarter of 2000. Loss before Benefit for Income Taxes and Extraordinary Item Loss before benefit for income taxes and extraordinary item decreased to $6.5 million for the quarter ended September 30, 2001, as compared to $22.1 million for the quarter ended September 30, 2000, as a result of the above mentioned operating results. Benefit for Income Taxes Benefit for income taxes as a percentage of loss before benefit for income taxes and extraordinary item was 0.8% in the third quarter of 2001, as compared to 37.0% for the third quarter of 2000. The decrease in the effective income tax rate is the result of the 2001 projected income tax benefit being reduced by the effect of a valuation allowance, which reduces the projected net deferred tax assets to zero due to the unpredictability of recovery. 15 Net Loss Net loss decreased to $6.5 million for the quarter ended September 30, 2001, as compared to $13.9 million for the quarter ended September 30, 2000, as a result of the above mentioned operating results. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Revenues Revenues for the nine months ended September 30, 2001 were $154.8 million, representing a $62.5 million or 28.8% decrease from revenues of $217.3 million for the nine months ended September 30, 2000. In February 2001, the Company failed to secure a new credit facility with its largest secured creditor, which created significant liquidity concerns. In addition, the Company's three primary secured lenders have only provided the Company sufficient short-term secured financing to sell at rates substantially reduced from 1999 and 2000 sales levels. As a result, Vacation Interval sales decreased $64.0 million to $117.5 million, down from $181.4 million in 2000. In the first nine months of 2001, the number of Vacation Intervals sold, exclusive of in-house Vacation Intervals, decreased 34.4% to 8,253 from 12,588 in the same period of 2000; and the average price per interval remained fairly unchanged at $9,721 versus $9,799 in the same period of 2000. Total interval sales for the nine months ended September 30, 2001 included 2,608 biennial intervals (counted as 1,304 Vacation Intervals) compared to 5,157 (2,579 Vacation Intervals) in the nine months ended September 30, 2000. During the first nine months of 2001, 8,844 in-house Vacation Intervals were sold at an average price of $4,211, compared to 12,112 in-house Vacation Intervals sold at an average price of $4,794 during the comparable 2000 period. Sampler sales increased to $2.9 million for the nine months ended September 30, 2001, compared to $2.5 million for the same period in 2000. Consistent with the overall decrease in Company operations, fewer samplers were sold in 2001 compared to 2000. However, sampler sales are not recognized as revenue until the Company's obligation has elapsed, which often does not occur until the sampler contract expires eighteen months after the sale is consummated. Hence, a significant portion of sampler sales recognized in 2001 relate to 2000 sales. Interest income increased 7.4% to $30.8 million for the nine months ended September 30, 2001, from $28.6 million for the same period of 2000. This increase primarily resulted from an increase in notes receivable, net of allowance for doubtful notes, during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. Management fee income, which consists of management fees collected from the resorts' management clubs, cannot exceed the management clubs' net income. Management fee income decreased $304,000 for the nine months ended September 30, 2001, as compared to the same period of 2000, due to increased operating expenses at the management clubs. Other income consists of water and utilities income, condominium rental income, marina income, golf course and pro shop income, and other miscellaneous items. Other income decreased $756,000 to $3.3 million for the nine months ended September 30, 2001, compared to $4.0 million for the same period of 2000. The decrease relates to a $317,000 gain associated with the sale of land recognized in the third quarter of 2000 and to the discontinuance of condominium rentals. Cost of Sales Cost of sales as a percentage of Vacation Interval sales increased to 19.5% in the nine months ended September 30, 2001, versus 17.3% for the same period of 2000. As a result of the previously mentioned liquidity concerns, the Company was required to (i) drastically reduce its future plan for Vacation Interval sales at its existing resorts, (ii) abandon plans to develop two resorts already in predevelopment status, (iii) place one resort in predevelopment status on hold, and (iv) abandon plans to sell at the Crown resorts. These changes substantially reduced the Company's future planned Vacation Interval sales. Due to the reduced future sales plan, the Company allocates its resort amenities and land to cost of sales at a higher rate in 2001 compared to 2000. 16 Also, as the Company continues to deplete its inventory of low-cost Vacation Intervals, acquired primarily in 1995 and 1996, the Company's sales mix has shifted to more recently constructed units, which were built at a higher average cost per Vacation Interval. Hence, the cost of sales as a percentage of Vacation Interval sales has increased compared to 2000. Sales and Marketing Sales and marketing costs as a percentage of total sales increased to 53.7% for the nine months ended September 30, 2001, from 51.6% for the same period of 2000. As a result of the aforementioned liquidity issues, the Company made several changes during 2001, including the closure of three outside sales offices, closing three telemarketing centers, discontinuing certain lead generation programs, and reducing headcount in both sales and marketing functions. Despite these cost saving measures, sales and marketing costs as a percentage of total sales increased due to the substantial decrease in sales and $1.8 million of nonrecurring transition costs associated with these changes. Since the third quarter of 2001, the Company has been operating under new sales practices whereby no sales are permitted unless the touring customer has a minimum income level beyond that previously required and has a valid major credit card. Further, the marketing division is employing a best practices program, which should facilitate marketing to customers who management believes are more likely to be a good credit risk. Provision for Uncollectible Notes The provision for uncollectible notes as a percentage of Vacation Interval sales decreased to 21.8% for the nine months ended September 30, 2001, compared to 33.1% for the same period of 2000. This decrease is primarily attributable to the deterioration of the economy that came to public awareness in late 2000 and the Company's decision to substantially reduce two programs in 2000 that had previously been used to remedy defaulted notes receivable. The assumptions program, which had been used by the Company since December 1997 to allow delinquent loans to be assumed by other customers, was virtually eliminated due to its high cost of operation. The downgrade program, which was implemented in April 2000 to supplement the assumptions program, allows delinquent customers to downgrade to a more affordable product. In late 2000, the downgrade program was reduced as it became apparent that this program did not significantly reduce delinquencies. As a result of these changes, the Company recognized additional reserves in 2000. Due to the high level of defaults experienced in customer receivables throughout 2001, the provision for uncollectible notes remained relatively high during 2001. Management believes the high provision percentage remained necessary in 2001 because of continuing economic concerns and customers concerned about the Company's liquidity issues began defaulting on their notes after the Company's liquidity announcement in February 2001. Management will continue its current collection programs and seek new programs to reduce note defaults. However, there can be no assurance that these efforts will be successful. Operating, General and Administrative Operating, general and administrative expenses as a percentage of total revenues increased to 16.9% for the nine months ended September 30, 2001, from 11.9% during the nine months ended September 30, 2000. Although the Company substantially reduced its corporate headcount in 2001 to align overhead with the reduced sales levels, operating, general and administrative expense increased $330,000 for the first nine months of 2001, as compared to 2000, primarily due to $3.1 million of professional fees incurred in 2001 associated with the restructuring of the Company. Depreciation and Amortization Depreciation and amortization expense as a percentage of total revenues increased to 3.3% for the nine months ended September 30, 2001, compared to 2.6% for the nine months ended September 30, 2000, due to the decrease in revenues. Overall, depreciation and amortization expense decreased $492,000 for the nine months ended September 30, 2001, as compared to 2000, primarily due to the write-off of $1.3 million of fixed assets previously used in the sales and marketing functions in the first quarter of 2001 and a general reduction in capital expenditures in 2001. 17 Impairment Loss of Long-Lived Assets The Company recognized an impairment loss of long-lived assets of $5.4 million in 2001, which primarily consisted of a $1.3 million write-off of fixed assets related to the closure of three outside sales offices and three telemarketing centers, a $1.4 million write-off of prepaid marketing costs related to the discontinuance of certain lead generation programs, a $230,000 loss related to the renegotiation and transfer of a capital lease to Silverleaf Club, and a $2.3 million impairment to write-down both corporate planes to their estimated sales prices. Interest Expense Interest expense as a percentage of interest income increased to 90.2% for the nine months ended September 30, 2001, from 80.5% for the same period of 2000. This increase is primarily the result of $3.1 million of costs incurred in 2001 related to restructuring the Company's debt, partially offset by a decrease in the Company's weighted average cost of borrowing to 8.4% in the first nine months of 2001 compared to 9.6% in the first nine months of 2000. Loss before Benefit for Income Taxes and Extraordinary Item Loss before benefit for income taxes and extraordinary item was a loss of $22.9 million for the nine months ended September 30, 2001, as compared to a loss of $23.7 million for the nine months ended September 30, 2000, as a result of the aforementioned operating results. Benefit for Income Taxes Benefit for income taxes as a percentage of loss before benefit for income taxes and extraordinary item was 0.6% for the first nine months of 2001, as compared to 37.1% for the same period of 2000. The decrease in the effective income tax rate is the result of the 2001 projected income tax benefit being reduced by the effect of a valuation allowance, which reduces the projected net deferred tax assets to zero due to the unpredictability of recovery. Extraordinary Item There were no extraordinary items during the first nine months of 2001. The Company recognized an extraordinary gain of $316,000, net of income taxes of $198,000, related to the early extinguishment of $1.0 million of 10 1/2% senior subordinated notes in the first nine months of 2000. Net Loss Net loss was $22.8 million for the nine months ended September 30, 2001, as compared to $14.6 million for the nine months ended September 30, 2000, as a result of the aforementioned operating results. LIQUIDITY AND CAPITAL RESOURCES SOURCES OF CASH. The Company generates cash primarily from the cash received on the sale of Vacation Intervals, the financing of customer notes receivable from Silverleaf Owners, management fees, sampler sales, and resort and utility operations. The Company typically receives a 10% down payment on sales of Vacation Intervals and finances the remainder by receipt of a seven-year to ten-year customer promissory note. The Company generates cash from the financing of customer notes receivable by (i) borrowing at an advance rate of up to 85% 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 to ten-year period, borrowing against receivables has historically been a necessary part of normal operations. During the nine months ended September 30, 2001 and September 30, 2000, the Company's operating activities reflected cash used in operating activities of $29.1 million and $95.5 million, respectively. The decrease in cash used in operating activities was the result of a decrease in new customer notes receivable due to a reduction in sales in 2001, a decrease in construction of inventory in 2001, and income tax refunds of $7.5 million in 2001. 18 During the nine months ended September 30, 2001 and September 30, 2000, net cash provided by financing activities was $27.4 million and $99.9 million, respectively. The decrease in cash provided by financing activities was primarily the result of reduced borrowings against pledged notes receivable in 2001. At September 30, 2001, the Company's revolving credit facilities provided for loans of up to $294.3 million of which approximately $288.3 million of principal and interest related to advances under the credit facilities was outstanding. For the nine months ended September 30, 2001, the weighted average cost of funds for all borrowings, including the senior subordinated debt, was 8.4%. Customer defaults have a significant impact on cash available to the Company from financing customer notes receivable in that notes more than 60 days past due are not eligible as collateral. As a result, the Company must repay borrowings against such delinquent notes. Effective October 30, 2000, the Company entered into a $100 million revolving credit agreement to finance Vacation Interval notes receivable through an off-balance-sheet SPE, formed on October 16, 2000. The agreement presently has a term of 5 years. During 2000, the Company sold $74 million of notes receivable to the SPE and recognized pre-tax gains of $4.3 million. The SPE funded these purchases through advances under a credit agreement arranged for this purpose. In conjunction with these sales, the Company received cash consideration of $62.9 million, which was used to pay down borrowings under its revolving loan facilities. During 2001, the Company made no sales of notes receivable to the SPE. At September 30, 2001, the SPE held notes receivable totaling $55.4 million, with related borrowings of $47.7 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, the Company is not obligated to repurchase defaulted or any other contracts sold to the SPE. It is anticipated, however, that the Company will place bids in accordance with the terms of the conduit agreement to repurchase some defaulted contracts in public auctions to facilitate the re-marketing of the underlying collateral. For regular federal income tax purposes, the Company reports substantially all of the Vacation Interval sales it finances under the installment method. Under this method, income on sales of Vacation Intervals is not recognized until cash is received, either in the form of a down payment or as installment payments on customer notes receivable. The deferral of income tax liability conserves cash resources on a current basis. Interest is imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method as the interest expense is not estimable. In addition, the Company is subject to current alternative minimum tax ("AMT") as a result of the deferred income that results from the installment sales treatment. Payment of AMT reduces the future regular tax liability attributable to Vacation Interval sales, and creates a deferred tax asset. In 1998, the Internal Revenue Service approved a change in the method of accounting for installment sales effective as of January 1, 1997. As a result, the Company's alternative minimum taxable income for 1997 through 1999 was increased each year by approximately $9.0 million for the pre-1997 adjustment, which resulted in the Company paying substantial additional federal and state taxes in those years. The Company's AMT loss for 2000 was decreased by such amount. Subsequent to December 31, 2000, the Company applied for and received refunds of $8.3 million during 2001 and $1.6 million during 2002 as the result of the carryback of its 2000 AMT loss to 1999, 1998, and 1997. The net operating losses ("NOL") expire between 2007 through 2021. Realization of the deferred tax assets arising from NOL is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Management currently does not believe that it will be able to utilize its NOL from normal operations. At present, future NOL utilization is expected to be limited to the temporary differences creating deferred tax liabilities. If necessary, management could implement a strategy to accelerate income recognition for federal income tax purposes to utilize the existing NOL. The amount of the deferred tax asset considered realizable could be decreased if estimates of future taxable income during the carryforward period are reduced. Due to the Exchange Offer described in Note 2 of the financial statements, an ownership change within the meaning of Section 382(g) of the Internal Revenue Code ("the Code") has occurred. As a result, a portion of the Company's NOL is subject to an annual limitation for taxable years beginning after the date of the exchange ("change date"), and a portion of the taxable year which includes the change date. The annual limitation will be equal to the value of the stock of the Company immediately before the ownership change, multiplied by the long-term tax-exempt rate 19 (i.e., the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This annual limitation may be increased for any recognized built-in gain to the extent allowed in Section 382(h) of the Code. The ownership change may also limit the use of the Company's minimum tax credit, described above, as provided in Section 383 of the Code. Given its current economic condition, the Company's access to capital and other financial markets is anticipated to be limited. However, to finance the Company's growth, development, and any future expansion plans, the Company may at some time be required to consider the issuance of other debt, equity, or collateralized mortgage-backed securities, the proceeds of which would be used to finance future acquisitions, refinance debt, finance mortgage receivables, or for other purposes. Any debt incurred or issued by the Company may be secured or unsecured, have fixed or variable rate interest, and may be subject to such terms as management deems prudent. USES OF CASH. Investing activities reflect a net use of cash due to capital additions. Net cash used in investing activities for the nine months ended September 30, 2000 and September 30, 2001 was $1.7 million and $681,000, respectively. The decrease in net cash used in investing activities relates to a reduction in equipment purchases in 2001. The Company evaluates sites for additional new resorts or acquisitions on an ongoing basis. Certain debt agreements include restrictions on the Company's ability to pay dividends based on minimum levels of net income and cash flow. Due to the uncertainties mentioned above, the independent auditors report on the Company's financial statements for the period ended December 31, 2001 contains an explanatory paragraph concerning the Company's ability to continue as a going concern. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of and for the nine months ended September 30, 2001, the Company had no significant derivative financial instruments or foreign operations. Interest on the Company's notes receivable portfolio, senior subordinated debt, capital leases, and miscellaneous notes is fixed, whereas interest on the Company's primary loan agreements, which totaled $287 million at September 30, 2001, is variable. The impact of a one-point interest rate change on the outstanding balance of variable-rate financial instruments at September 30, 2001, on the Company's results of operations for the nine months ended September 30, 2001 would be approximately $2.2 million. In addition, if interest rates increase, the fair market value of the Company's fixed rate notes will decline, which may negatively impact the Company's ability to sell new notes. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently subject to litigation arising in the normal course of its business. From time to time, such litigation includes claims regarding employment, tort, contract, truth-in-lending, the marketing and sale of Vacation Intervals, and other consumer protection matters. Litigation has been initiated from time to time by persons seeking individual recoveries for themselves, as well as, in some instances, persons seeking recoveries on behalf of an alleged class. In the judgement of the Company, none of these lawsuits or claims against the Company, either individually or in the aggregate, is likely to have a material adverse effect on the Company, its business, results of operations, or financial condition. In October 2001, a class action was filed against the Company by plaintiffs who purchased Vacation Intervals from the Company. The plaintiffs allege that the Company failed to deliver them complete copies of the contracts for the purchase of Vacation Intervals as they did not receive a complete legal description of the resort. The plaintiffs further claim that the Company violated various provisions of the Texas Deceptive Trade Practices Act with respect to maintenance fees charged by the Company to its Vacation Interval owners. The petition alleges actual damages of $34.5 million plus consequential damages of an unspecified amount, as well as all attorneys' fees, expenses, and costs. The Company intends to vigorously defend against the claims and believes it has several defenses. The Company has not yet fully assessed the claims and has not recorded an accrual for this case. 20 In February 2002, a class action was filed against the Company by a couple who purchased a Vacation Interval from the Company. The plaintiffs allege that the Company violated the Texas Government Code by charging a document preparation fee in regard to instruments affecting title to real estate, and that such fee constituted a partial prepayment that should have been credited against their note. The petition seeks recovery of the $275 document preparation fee, $825 of treble damages, and injunctions preventing the Company from engaging in such practices. The Company has not yet fully assessed the claims and has not recorded an accrual for this case. ITEM 3. DEFAULTS UPON SENIOR SECURITIES On April 1, 2001, the Company was unable to make the regularly scheduled interest payment on its 10-1/2 % Senior Subordinated Notes due 2008 (the "Old Notes"). The Company's payment default on the Old Notes was a direct result of covenant defaults which had occurred under one or more of its senior credit facilities. As it was required to do under the Old Indenture, the Company issued a payment blockage notice to the trustee for the Old Notes (the "Old Indenture Trustee") advising that the payment due April 1, 2001 could not be made. The Old Indenture Trustee delivered a notice of default to the Company on May 1, 2001 when the Company failed to cure the April 1, 2001 interest payment default within 30 days. The Old Indenture Trustee further notified the Company on May 21, 2001 that it had been instructed by holders of more than 25% of the principal amount of the Old Notes outstanding to accelerate payment of the principal, interest, and other charges due under the Old Notes. At September 30, 2001, the Company was still unable to make any payments on the accelerated balances due under the Old Notes due to the payment blockage notice. The total interest arrearage on the $66.7 million in outstanding principal amount of the Old Notes was approximately $7.4 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed herewith: 99.1 Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act of 2002 99.2 Certification of CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company filed the following Current Reports on Form 8-K with the SEC for the quarter ended September 30, 2001: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 19, 2002 By: /s/ ROBERT E. MEAD ------------------ Robert E. Mead Chairman of the Board and Chief Executive Officer Dated: November 19, 2002 By: /s/ HARRY J. WHITE, JR. ----------------------- Harry J. White, Jr Chief Financial Officer 21 CERTIFICATION I, Robert E. Mead, Chairman and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Silverleaf Resorts, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 19, 2002 /S/ ROBERT E. MEAD ------------------------------------ Robert E. Mead Chairman and Chief Executive Officer CERTIFICATION I, Harry J. White, Jr., Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Silverleaf Resorts, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: November 19, 2002 /S/ HARRY J. WHITE, JR. ----------------------- Harry J. White, Jr. Chief Financial Officer 22 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 99.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.1 3 d00321cexv99w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Silverleaf Resorts, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert E. Mead, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 19, 2002 /s/ ROBERT E. MEAD ------------------------------ Robert E. Mead EX-99.2 4 d00321cexv99w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Silverleaf Resorts, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2001 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Harry J. White, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 19, 2002 /s/ HARRY J. WHITE, JR. -------------------------------- Harry J. White, Jr. -----END PRIVACY-ENHANCED MESSAGE-----