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As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/17/06 Silverleaf Resorts Inc 10-K 12/31/05 9:369 Vintage Filings LLC/FA
Annual Report · Form 10-K
Filing Table of Contents
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1: 10-K Annual Report HTML 1,414K
2: EX-10.84 Material Contract HTML 79K
3: EX-10.85 Material Contract HTML 81K
4: EX-21.1 Subsidiaries of the Registrant HTML 6K
5: EX-23.1 Consent of Experts or Counsel HTML 6K
6: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 11K
7: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 11K
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9: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) HTML 9K
10-K · Annual Report
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF
1934
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FOR
THE TRANSITION PERIOD FROM _________ TO _________
Silverleaf
Resorts, Inc.
(Exact
Name of Registrant as Specified in its Charter)
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75-2259890
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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1221
River Bend Drive, Suite 120
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75247
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Dallas,
Texas
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(Zip
Code)
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(Address
of Principal Executive Offices)
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Registrant's
Telephone Number, Including Area Code: 214-631-1166
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock, $.01 par value
Securities
Registered Pursuant to Section 12(g) of the Act:
None
_______________
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the Registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Securities Act. Yes o No x
Indicate
by check mark whether the Registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was
required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act. Yes o No
x
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The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the last sales price of the Common Stock on June
30, 2005
as reported on the OTC Bulletin Board operated by Nasdaq Stock Market,
Inc., was
approximately $18,744,635 (based on 13,200,447 shares held by non-affiliates).
There were 36,954,948 shares of the Registrant's Common Stock, $.01 par
value,
outstanding at June 30, 2005.
Certain
information required by Part III of this report (Items 10, 11, 12, 13,
and 14)
is incorporated by reference from the Registrant’s definitive proxy statement to
be filed pursuant to Regulation 14A with respect to the Registrant’s fiscal 2006
annual meeting of shareholders, or if such proxy statement is not so filed
on or
before 120 days after the end of the fiscal year covered by this annual
report,
such information will be included in an amendment to this report filed
no later
than the end of such 120-day period.
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Item
Number
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Page
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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22
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Item
1B.
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Unresolved
Staff Comments
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31
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Item
2.
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Properties
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31
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Item
3.
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Legal
Proceedings
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42
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Item
4.
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Submission
of Matters to a Vote of Security
Holders
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42
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities
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43
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Item
6.
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Selected
Financial Data
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44
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Item
7.
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Management’s
Discussion and Analysis of Financial
Condition and Results of Operations
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45
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Item
7A.
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Quantitative
and Qualitative Disclosures about
Market Risk
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60
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Item
8.
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Financial
Statements and Supplementary
Data
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61
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Item
9.
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Changes
In and Disagreements With Accountants on
Accounting and Financial Disclosure
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61
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Item
9A.
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Controls
and Procedures
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61
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Item
9B.
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Other
Information
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61
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PART
III
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Item
10.
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Directors
and Executive Officers of the
Registrant
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61
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Item
11.
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Executive
Compensation
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62
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Item
12.
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Security
Ownership of Certain Beneficial Owners
and Management
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62
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Item
13.
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Certain
Relationships and Related
Transactions
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62
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Item
14.
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Principal
Accountant Fees and
Services
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63
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules, and
Reports on Form 8-K
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63
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Index
to Consolidated Financial
Statements
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F-1
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Forward-Looking
Statements
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, including in particular, statements about
our
plans, objectives, expectations and prospects under the headings “Business” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” You can identify these statements by forward-looking words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and
similar expressions. Although we believe that the plans, objectives,
expectations and prospects reflected in or suggested by our forward-looking
statements are reasonable, those statements involve uncertainties and risks,
and
we can give no assurance that our plans, objectives, expectations and prospects
will be achieved. Important factors that could cause our actual results to
differ materially from the results anticipated by the forward-looking statements
are contained herein under Part 1, Item 1 “Business-Risk Factors,” Part I, Item
II “Properties,” Part I, Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and elsewhere in this report.
Any or all of these factors could cause our actual results and financial or
legal status for future periods to differ materially from those expressed or
referred to in any forward-looking statement. All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements. Forward-looking statements speak only
as of the date on which they are made.
PART
I
ITEM
1. BUSINESS
Overview
Silverleaf
Resorts, Inc. (the “Company,” "Silverleaf," “we,” or "our") was incorporated in
Texas in 1989. Our principal business is the development, marketing, and
operation of "getaway" and “destination” timeshare resorts. As of December 31,
2005, we own seven "getaway resorts" in Texas, Missouri, Illinois, and Georgia
(the "Getaway Resorts"). We also own six "destination resorts" in Texas,
Missouri, Massachusetts, and Florida (the "Destination Resorts").
The
Getaway Resorts are designed to appeal to vacationers seeking comfortable and
affordable accommodations in locations convenient to their residences and are
located near major metropolitan areas. Our Getaway Resorts are located close
to
principal areas where we market our vacation products to facilitate more
frequent "short-stay" getaways. We believe such short-stay getaways are growing
in popularity as a vacation trend. Our Destination Resorts are located in or
near areas with national tourist appeal and offer our customers the opportunity
to upgrade into a more upscale resort area as their lifestyles and travel
budgets permit. Both the Getaway Resorts and the Destination Resorts
(collectively, the "Existing Resorts") provide a quiet, relaxing vacation
environment. We believe our resorts offer our customers an economical
alternative to commercial vacation lodging. The average price for an annual
one-week vacation ownership interval (“Vacation Interval”) for a two-bedroom
unit at the Existing Resorts was $10,361 for 2005 and $9,671 for
2004.
Owners
of
Silverleaf Vacation Intervals at the Existing Resorts ("Silverleaf Owners")
enjoy certain distinct benefits. These benefits include (i) use of vacant
lodging facilities at the Existing Resorts through our "Bonus Time" Program;
(ii) year-round access to the Existing Resorts' non-lodging amenities such
as
fishing, boating, horseback riding, swimming, tennis, or golf on a daily basis
for little or no additional charge; and (iii) the right to exchange the use
of a
Vacation Interval at one of our Existing Resorts for a different time period
at
a different Existing Resort through our internal exchange program. These
benefits are subject to availability and other limitations. Most Silverleaf
Owners may also enroll in the Vacation Interval exchange network operated by
Resort Condominiums International ("RCI"). Our new destination resort in Florida
is not under contract with RCI; however it is under contract with Interval
International, Inc., a competitor of RCI.
Certain
Significant 2005 Events
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During
the fourth quarter of 2004, we completed the acquisition of a 4.8-acre
tract of land located in Davenport, Florida, just outside Orlando,
Florida, for an aggregate purchase price of approximately $6.0 million.
The site, formerly known as the Villas at Polo Park, is near the
major
Florida tourist attractions of Walt Disney World, Sea World, and
Universal
Studios. The property is comprised of 48 two and three bedroom units
and
provides resort amenities such as a heated outdoor swimming pool,
fitness
center, arcade, playground, sand volleyball and basketball courts.
Our
public offering statement filed with the Florida Bureau of Standards
and
Registrations was approved during the first quarter of 2005, granting
us
sales approval for 16 units encompassing 832 one-week Vacation Intervals.
Since that time we have operated the property as a timeshare resort
under
the name “Orlando Breeze.” By December 31, 2005, we were granted sales
approval for all of the 48 units at the resort, encompassing a total
of
2,496 one-week Vacation Intervals.
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·
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During
the first quarter of 2005, we sold the water distribution and waste
water
treatment utilities assets at eight of our timeshare resorts for
an
aggregate sales price of $13.2 million, which resulted in a pretax
gain of
$879,000 once all conditions of the sale were met. The purchasers
of the
utilities are Algonquin Water Resources of Texas, LLC, a Texas limited
liability company; Algonquin Water Resources of Missouri, LLC, a
Missouri
limited liability company; Algonquin Water Resources of Illinois,
LLC, an
Illinois limited liability company; Algonquin Water Resources of
America,
Inc., a Delaware corporation; and Algonquin Power Income Fund, an
open-ended investment trust established under the laws of Ontario,
Canada
(collectively, the “Purchasers”). Certain of the Purchasers entered into a
services agreement to provide uninterrupted water supply and waste
water
treatment services to the eight timeshare resorts to which the transferred
utility assets relate. The Purchasers charge the timeshare resorts
the
tariffed rate for those utility services that are regulated by the
states
in which the resorts are located. For any unregulated utility services,
the Purchasers charge a rate set in accordance with the ratemaking
procedures of the Texas Commission on Environmental Quality. The
proceeds
of the sale of these utility assets were used to reduce senior debt
in
accordance with our loan agreements with our senior lenders.
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Notwithstanding
the closing of this sale of utilities assets, our agreement with the Purchasers
contains provisions relating to the required post-closing receipt of customary
governmental approvals from utility regulators in Missouri and Texas. During
the
third quarter of 2005, the Purchasers received governmental approval from the
utility regulators in Missouri. Approval from the utility regulators in Texas
is
still pending at this time. If the Purchasers do not receive required approvals
from Texas regulators relating to the utility assets in Texas (the “Texas
Assets”) within eighteen months of closing, the Texas Assets will be reconveyed
to us, the transaction involving the Texas Assets will be rescinded, and we
will
be obligated to return to the Purchasers approximately $6.2 million of the
purchase price attributable to the Texas Assets.
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·
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During
the third quarter of 2005 we closed a term securitization transaction
with
a newly-formed, wholly-owned off-balance sheet special purpose finance
subsidiary (“SF-III”), a Delaware limited liability company, which is a
qualified special purpose entity formed for the purpose of issuing
$108.7
million of its Series 2005-A Notes in a private placement through
UBS
Securities LLC. The Series 2005-A Notes were issued pursuant to an
Indenture ("Indenture") between Silverleaf, as servicer of the timeshare
receivables, SF-III, and Wells Fargo Bank, National Association,
as
Indenture Trustee, Custodian, Backup Servicer, and Account Intermediary.
The Series 2005-A Notes were issued in four classes as follows:
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$46,857,000
4.857% Timeshare Loan-Backed Notes, Series 2005-A, Class A;
$28,522,000
5.158% Timeshare Loan-Backed Notes, Series 2005-A, Class B;
$16,299,000
5.758% Timeshare Loan-Backed Notes, Series 2005-A, Class C; and
$16,977,000
6.756% Timeshare Loan-Backed Notes, Series 2005-A, Class D.
The
Class
A Notes, Class B Notes, Class C Notes and Class D Notes have received a rating
from Moody's Investor Services, Inc. of “Aaa”, “Aa2”, “A2” and “Baa2”,
respectively.
The
Series 2005-A Notes are secured by timeshare receivables sold to SF-III by
us
pursuant to a transfer agreement between SF-III and us. Under that agreement,
we
sold to SF-III approximately $132.8 million in timeshare receivables that were
previously pledged as collateral under revolving credit facilities with our
senior lenders and our wholly-owned, off-balance sheet subsidiary, Silverleaf
Finance I, Inc. (“SF-I”), also a qualified special purpose entity. We dissolved
SF-I simultaneously with the sale of timeshare receivables to SF-III. The
timeshare receivables we sold to SF-III are without recourse to us, except
for
breaches of certain representations and warranties at the time of sale.
We
are
responsible
for servicing the timeshare receivables purchased by SF-III pursuant to the
terms of the Indenture and will receive a fee for our services. Such fees
received approximate our internal cost of servicing such receivables, and
approximates the fee a third party would receive to service such receivables.
As
a result, the related net servicing asset or liability was estimated to be
insignificant.
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·
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During
2005, we entered into receivables and
inventory loan agreements with three new senior lenders. We consolidated,
amended, and restated the receivable facilities with another senior
lender, and paid in full the term loans and one inventory loan we
had
outstanding with that same senior lender. We paid in full the aggregate
outstanding balance of receivables and inventory loans with two other
senior lenders, and we entered into an amendment and expansion of
our
conduit term loan agreement through our wholly-owned on-balance sheet
financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”), which was
formed in December 2003. All of these transactions are discussed
further
under the heading “Description Of Our Senior Credit Facilities At December
31, 2005”.
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·
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During
the third quarter of 2005 the American Stock Exchange ("AMEX") approved
our application to list our shares of common stock under the ticker
symbol
“SVL”. Our stock began trading on the AMEX effective September 19, 2005.
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·
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In
December 2005, we announced plans to open our first showroom-style,
off-site sales office. The showroom, which is centrally located in
the
Dallas/Fort Worth metroplex in Irving, Texas, opened in March 2006.
We
estimate that the new facility will generate annual sales to new
members
of $10 to $12 million.
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Certain
Significant Events Subsequent to 2005
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·
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In
January 2006, we purchased approximately 30 acres of undeveloped
land
contiguous to our Orlando Breeze resort in Orlando, Florida for a
purchase
price of $4.0 million. Extensive planning and pre-development work
must be
completed before we can begin developing the property. In addition,
development of the property is subject to state and local governmental
approvals necessary before commencing timeshare operations.
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·
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In
March 2006, we closed a $100 million revolving senior credit facility
through a newly-formed, wholly-owned and consolidated special purpose
finance subsidiary, Silverleaf Finance IV, LLC ("SF-IV"), a Delaware
limited liability company. SF-IV was formed for the purpose of issuing
a
$100 million variable funding note ("VFN") to UBS Real Estate Securities
Inc. (“UBS”). The VFN bears interest on advances by UBS to SF-IV at an
initial rate equal to LIBOR plus 1.5%. The VFN is secured by customer
notes receivable we sold to SF-IV and will mature in March 2010.
Proceeds
from the sale of customer notes receivable to SF-IV were used to
fund
normal business operations and for general working capital purposes.
The
VFN was issued pursuant to the terms and conditions of an indenture
between SF-IV, UBS, and Wells Fargo Bank, National Association, as
indenture trustee. We will continue to service the customer notes
receivable sold to SF-IV under the terms of an agreement with the
indenture trustee and SF-IV.
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Operations
Our
primary business is marketing and selling Vacation Intervals from our inventory
to individual consumers. Our principal activities in this regard
include:
○ acquiring
and developing timeshare resorts;
○ marketing
and selling one-week annual and biennial Vacation Intervals to prospective
first-time owners;
○ marketing
and selling upgraded and additional Vacation Intervals to existing Silverleaf
Owners;
○ financing
the purchase of Vacation Intervals; and
○ managing
timeshare resorts.
We
have
in-house capabilities which enable us to coordinate all aspects of development
and expansion of the Existing Resorts and the potential development of any
future resorts, including site selection, design, and construction pursuant
to
standardized plans and specifications.
We
perform substantial marketing and sales functions internally. We have made
significant investments in operating technology, including telemarketing and
computer systems and proprietary software applications. We identify potential
purchasers through internally developed marketing techniques and through
cooperative arrangements with outside vendors. We sell Vacation Intervals
predominately through on-site sales offices located at certain of our resorts,
which are located near major metropolitan areas. This practice provides us
an
alternative to marketing costs of subsidized airfare or lodging, which are
typically associated with the timeshare industry. Beginning in 2006, we will
begin limited marketing and sales activity at our first off-site sales center,
which is located in the Dallas / Ft. Worth metroplex.
As
part
of the Vacation Interval sales process, we offer potential purchasers financing
of up to 90% of the purchase price over a seven-year to ten-year period. We
have
historically financed our operations by borrowing from third-party lending
institutions at an advance rate of 75% of eligible customer receivables. At
December 31, 2005 and 2004, we had a portfolio of approximately 30,293 and
34,437 customer promissory notes, respectively, totaling approximately $230.5
and $250.4 million, respectively, with an average yield of 15.3% and 15.1%
per
annum, respectively, which compares favorably to our weighted average cost
of
borrowings of 8.1% per annum at December 31, 2005. We cease recognition of
interest income when collection is no longer deemed probable. At December 31,
2005 and 2004, approximately $337,000 and $2.0 million in principal, or 0.1%
and
0.8%, respectively, of our loans to Silverleaf Owners were 61 to 120 days past
due. As of December 31, 2005 and 2004, no timeshare loans receivable were over
120 days past due. We continue collection efforts with regard to all timeshare
notes receivable from customers until all collection techniques that we utilize
have been exhausted. We provide for uncollectible notes by reserving an
estimated amount that our management believes is sufficient to cover anticipated
losses from customer defaults.
Each
timeshare resort has a timeshare owners' association (a "Club"). At December
31,
2005, each Club (other than the club at Orlando Breeze) operates through a
centralized organization to manage its respective resort on a collective basis.
This centralized organization is Silverleaf Club, a Texas not-for-profit
corporation. Silverleaf Club is under contract with each Club for each of the
Existing Resorts to operate and manage their resort. In turn, we have a contract
(“Management Agreement”) with Silverleaf Club, under which we perform the
supervisory and management functions of all the Existing Resorts on a collective
basis. All costs of operating the timeshare resorts, including management fees
payable to us under the Management Agreement, are to be covered by monthly
dues
paid by the timeshare owners to their respective Clubs as well as income
generated by the operation of certain amenities at the timeshare resorts.
Orlando
Breeze has its own club (“Orlando Breeze Resort Club”), which is operated
independently of Silverleaf Club. We also provide certain supervisory and
management functions for Orlando Breeze Resort Club under the terms of a written
agreement.
Marketing
and Sales
Marketing
is the process by which we attract potential customers to visit and tour an
Existing Resort or attend a sales presentation. Sales is the process by which
we
seek to sell a Vacation Interval to a potential customer once he arrives for
a
tour at an Existing Resort or attends a sales presentation.
Marketing. Our
in-house marketing staff creates databases of new prospects, which are
principally developed through cooperative arrangements with outside vendors
to
identify prospects that meet our marketing criteria. Using our automated dialing
and bulk mailing equipment, in-house marketing specialists conduct coordinated
telemarketing and direct mail procedures which invite prospects to tour one
of
our resorts and receive an incentive, such as a free gift.
Sales.
We sell
our Vacation Intervals primarily through on-site salespersons at certain
Existing Resorts. Upon arrival at an Existing Resort for a scheduled tour,
the
prospect is met by a member of our sales force who leads the prospect on a
90-minute tour of the resort and its amenities. At the conclusion of the tour,
the sales representative explains the benefits and costs of becoming a
Silverleaf Owner. The presentation also includes a description of the financing
alternatives that we offer. Prior to the closing of any sale, a verification
officer interviews each prospect to ensure our compliance with sales policies
and regulatory agency requirements. The verification officer also plays a Bonus
Time video for the customer to explain the limitations on the Bonus Time
program. No sale becomes final until a statutory waiting period (which varies
from state to state) of three to fifteen calendar days has passed. We also
sell
our Vacation Intervals to existing Silverleaf Owners as either upgraded sales
of
more desirable higher priced Vacation Intervals or additional week Vacation
Interval sales.
Sales
representatives receive commissions ranging from 4.0% to 16.0% of the sales
price of a Vacation Interval depending on established guidelines. Sales managers
also receive commissions of 2.0% to 6.0% and are subject to commission
chargebacks in the event the purchaser fails to make the first required payment.
Sales directors also receive commissions of 1.5% to 3.5%, which are also subject
to chargebacks.
Prospects
who are interested in a lower priced product are offered biennial (alternate
year) intervals or other low priced products that entitle the prospect to sample
a resort for a specified number of nights. The prospect may apply the cost
of a
lower priced product against the down payment on a Vacation Interval if
purchased by a certain date. In addition, we actively market both on-site and
off-site upgraded Vacation Intervals to existing Silverleaf Owners, as well
as
additional week sales to existing Silverleaf Owners. Although most upgrades
and
additional week sales are sold by our in-house sales staff, we have contracted
with a third party to assist in offsite marketing of these at the Destination
Resorts. We have been focusing on increasing the percentage mix of sales to
existing customers in 2005 and 2004. These upgrade and additional week programs
have been well received by Silverleaf Owners and accounted for approximately
55.2% and 52.4% of our gross revenues from Vacation Interval sales for the
years
ended December 31, 2005 and 2004, respectively. By offering lower priced
products and upgraded and additional week Vacation Intervals, we believe we
offer an affordable product for all prospects in our target market. Also, by
offering products with a range of prices, we attempt to broaden our market
with
initial sales of lower-priced products, which we attempt to gradually upgrade
and/or augment with additional week sales over time.
In
December 2005, we announced plans to open our first showroom-style, off-site
sales office. The showroom, located in the Dallas/Fort Worth metroplex in
Irving, Texas, opened in March 2006 and operates under the name "Silverleaf
Vacation Store." It offers potential customers an interactive “virtual”
experience of our resorts, including a model unit, photo gallery, and film
presentation for each of our 13 current resorts and their related amenities.
The
16,500 square-foot showroom cost approximately $1.1 million and employs
approximately 30 to 40 on-site sales personnel. Following the initial start-up
period, we believe this new showroom will generate between $10 million to $12
million in annual sales to new members. The showroom will provide us with a
significant sales opportunity by enabling potential customers to experience
the
quality and service of our resorts in their own community. We expect that new
owners who purchase at these showrooms will later participate in our upgrade
and
additional week sales programs.
Our
sales
representatives are a critical component of our sales and marketing effort.
We
continually strive to attract, train, and retain a dedicated sales force. We
provide intensive sales instruction and training, which assists the sales
representatives in acquainting prospects with the resort's benefits. Our sales
instruction and training also focuses on compliance by each sales representative
with all federal, state, and local laws applicable to timeshare sales. Each
sales representative is our employee and receives some employment benefits.
At
December 31, 2005, we employed 459 sales representatives at our Existing
Resorts.
Seasonality
Our
sales
of Vacation Intervals have generally been lower in the months of November and
December. Cash flow and earnings may be impacted by the timing of development,
the completion of future resorts, and the potential impact of weather or other
conditions in the regions where we operate. Our quarterly operating results
could be negatively impacted by these factors.
Customer
Financing
We
offer
financing to buyers of Vacation Intervals at our resorts. Buyers who elect
to
finance their purchases through us typically make down payments of at least
10%
of the purchase prices and deliver promissory notes for the balances. The
promissory notes generally bear interest at a fixed rate, are generally payable
over a seven-year to ten-year period, and are secured by a first mortgage on
the
Vacation Interval. We bear the risk of defaults on these promissory notes.
In
2005, we began obtaining a pre-screen credit score on touring families. If
the
credit score does not meet certain minimum credit criteria, a 15% down payment
is required instead of our standard 10% down payment. There are a number of
risks associated with financing customers’ purchases of Vacation Intervals. For
an explanation of these risks, please see "Risk Factors" beginning on page
22 of
this report.
In
2005
we accrued 16.2% of the purchase price of Vacation Intervals as a provision
for
uncollectible notes. The allowance for doubtful accounts was 22.8% of gross
notes receivable as of December 31, 2005 compared to 21.1% at December 31,
2004.
We plan to continue our current collection programs and seek new programs to
reduce note defaults and improve the credit quality of our customers. However,
there can be no assurance that our efforts will be successful.
For
the
year ended December 31, 2005, we decreased our sales by $2.6 million for
customer returns (cancellations of sales transactions in which the customer
fails to make the first installment payment). If a buyer of a Vacation Interval
defaults, we generally must foreclose on the Vacation Interval and attempt
to
resell it. When this occurs the associated marketing, selling, and
administrative costs from the original sale are not recovered and sales and
marketing costs must be incurred again to resell the Vacation Interval.
Although, in many cases, we may have recourse against a Vacation Interval buyer
for the unpaid price, certain states have laws that limit or hinder our ability
to recover personal judgments against customers who have defaulted on their
loans. For example, under Texas law, if we pursue a post-foreclosure deficiency
claim against a customer, the customer may file a court proceeding to determine
the fair market value of the property foreclosed upon. In such event, we may
not
recover a personal judgment against the customer for the full amount of the
deficiency, but may recover only to the extent that the indebtedness owed to
the
Company exceeds the fair market value of the property. Accordingly, we do not
generally pursue this remedy because we have not found it to be cost effective.
At
December 31, 2005, we had notes receivable (including notes unrelated to
Vacation Intervals) in the approximate principal amount of $230.1 million with
an allowance for uncollectible notes of approximately $52.5 million.
Approximately $69.0 million in principal amount of our total notes receivable
remain outstanding under the conduit term loan between our consolidated finance
subsidiary, SF-II, and Textron Financial Corporation.
Additionally,
at December 31, 2005, our off-balance sheet finance subsidiary, SF-III, held
notes receivable totaling $106.9 million, with related borrowings of $89.1
million. Except for the repurchase of notes that fail to meet initial
eligibility requirements, we are not obligated to repurchase defaulted or any
other contracts sold to SF-III. As the Servicer of the notes receivable sold
to
SF-III, we are obligated by the terms of the conduit facility to foreclose
upon
the Vacation Interval securing a defaulted note receivable. We may, but are
not
obligated to, purchase the foreclosed Vacation Interval for an amount equal
to
the net fair market value of the Vacation Interval, which may not be less than
fifteen percent of the original acquisition price that the customer paid for
the
Vacation Interval. For the year ended December 31, 2005, we paid approximately
$386,000 to repurchase the Vacation Intervals securing defaulted notes
receivable to facilitate the re-marketing of those Vacation Intervals. Our
total
investment in SF-III was valued at $22.8 million at December 31,
2005.
We
recognize interest income as earned. Interest income is accrued on notes
receivable, net of an estimated amount that will not be collected, until the
individual notes become 90 days delinquent. Once a note becomes 90 days
delinquent, the accrual of additional interest income ceases until collection
is
deemed probable.
We
intend
to borrow additional funds under our existing revolving credit facilities with
our senior lenders to finance our operations. At December 31, 2005, we had
borrowings under our senior credit facilities in the approximate principal
amount of $174.9 million, of which $140.5 million of such facilities are
receivables based and currently permit borrowings of 75% of the principal amount
of performing notes. Payments from Silverleaf Owners on such notes are credited
directly to the senior lender and applied against our loan balance. At December
31, 2005, we had a portfolio of approximately 30,293 Vacation Interval customer
promissory notes in the approximate principal amount of $230.5 million, of
which
approximately $337,000 in principal amount was 61 days or more past due and
therefore ineligible as collateral.
At
December 31, 2005, our portfolio of customer notes receivable had an average
yield of 15.3%. At such date, our borrowings, which primarily bear interest
at
variable rates, had a weighted average cost of 8.1%. We have historically
derived net interest income from our financing activities because the interest
rates we charge our customers who finance the purchase of their Vacation
Intervals exceed the interest rates we pay our senior lenders. Because our
existing indebtedness currently bears interest primarily at variable rates
and
our customer notes receivable bear interest at fixed rates, increases in
interest rates would erode the spread in interest rates that we have
historically experienced and could cause our interest expense on borrowings
to
exceed our interest income on our portfolio of customer loans. Therefore, any
increase in interest rates, particularly if sustained, could have a material
adverse effect on our results of operations, liquidity, and financial
position.
To
partially offset an increase in interest rates, we have engaged in one interest
rate hedging transaction related to our conduit loan through SF-II, with a
balance of $58.1 million on December 31, 2005. In addition, the Series 2005-A
Notes related to our off-balance sheet special purpose finance subsidiary,
SF-III, had a balance of $89.1 million at December 31, 2005 and bear interest
at
fixed rates ranging from 4.857% to 6.756%.
Limitations
on availability of financing would inhibit sales of Vacation Intervals due
to
(i) the lack of funds to finance the initial negative cash flow that results
from sales that we finance, and (ii) reduced demand if we are unable to provide
financing to purchasers of Vacation Intervals. We ordinarily receive only 10%
to
15% of the purchase price as a cash down payment on the sale of a Vacation
Interval that we finance, but must pay in full the costs of developing,
marketing, and selling the Vacation Interval. Maximum borrowings available
under
our current credit agreements may not be sufficient to cover these costs,
thereby straining capital resources, liquidity, and capacity to grow. In
addition, to the extent interest rates decrease generally on loans available
to
our customers, we face an increased risk that customers will pre-pay their
loans
and reduce our income from financing activities.
We
typically provide financing to customers over a seven-year to ten-year period.
Our customer notes receivable had an average maturity of 5.5 years at December
31, 2005. Our credit facilities have scheduled maturities between March 2007
and
March 2014. Additionally, our revolving credit facilities could be declared
immediately due and payable as a result of any default by us. Although it
appears that we have adequate liquidity to meet our needs through at least
March
2007, we are continuing to identify additional financing arrangements beyond
such date.
Development
and Acquisition Process
We
intend
to develop at our Existing Resorts and/or acquire new resorts only to the extent
we deem such expansion financially beneficial, and then only as the capital
markets permit.
If
we are
able to develop or acquire new resorts, we will do so under our established
development policies. Before committing capital to a site, we test the market
using our own market analysis testing techniques and explore the zoning and
land-use laws applicable to the potential site and the regulatory issues
pertaining to licenses and permits for timeshare marketing, sales, and
operations. We also contact various governmental entities and review
applications for necessary governmental permits and approvals. If we are
satisfied with our market analysis and regulatory review, we will prepare a
conceptual layout of the resort, including building site plans and resort
amenities. After we apply our standard lodging unit design and amenity package,
we prepare a budget that estimates the cost of developing the resort, including
costs of lodging facilities, infrastructure, and amenities, as well as projected
sales, marketing, and general and administrative costs. We typically perform
additional due diligence, including obtaining an environmental report by an
environmental consulting firm, a survey of the property, and a title commitment.
We employ legal counsel to review these documents and pertinent legal issues.
If
we are satisfied with the site after the environmental and legal review, we
will
complete the purchase of the property.
We
manage
all construction activities internally. We typically complete the development
of
a new resort's basic infrastructure and models within one year, with additional
units to be added within 180 to 270 days based on demand, weather permitting.
A
normal part of the development process is the establishment of a functional
sales office at the new resort.
Clubs
/ Silverleaf Club
We
have
the right to appoint the directors of the Silverleaf Club through our right
to
supervise the management of the boards of directors of the individual clubs
at
each of our resorts under the terms of the Management Agreement. 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 their
Club. If a Silverleaf Owner fails to pay his monthly dues, his Club may
institute foreclosure proceedings regarding the delinquent Silverleaf Owner's
Vacation Interval. The number of foreclosures that occurred as a result of
Silverleaf Owners failing to pay monthly dues was 808 in 2005 and 545 in 2004.
Typically, we purchase at foreclosure all Vacation Intervals that are the
subject of foreclosure proceedings instituted by the Club because of delinquent
dues.
At
December 31, 2005, the Club at each timeshare resort (other than Orlando Breeze)
operates through a centralized organization provided by Silverleaf Club to
manage the resorts on a collective basis. The consolidation of resort operations
through Silverleaf Club permits: (i) a centralized reservation system for all
resorts; (ii) substantial cost savings by purchasing goods and services for
all
resorts on a group basis, which generally results in a lower cost of goods
and
services than if such goods and services were purchased by each resort on an
individual basis; (iii) centralized management for the entire resort system;
(iv) centralized legal, accounting, and administrative services for the entire
resort system; and (v) uniform implementation of various rules and regulations
governing all resorts. All furniture, furnishings, recreational equipment,
and
other personal property used in connection with the operation of the Existing
Resorts are owned by either that resort’s Club or the Silverleaf Club, rather
than by us.
Orlando
Breeze has its own club, Orlando Breeze Resort Club, which is operated
independently of Silverleaf Club; however, we supervise the management and
operation of the Orlando Breeze Resort Club under the terms of a written
agreement.
At
December 31, 2005, Silverleaf Club had 710 full-time employees and Orlando
Breeze Resort Club had 10 full-time employees.
Each Club is solely responsible for their salaries, as well as the direct
expenses of operating the Existing Resorts, while we are responsible for the
direct expenses of new development and all marketing and sales activities.
To
the extent Silverleaf Club provides payroll, administrative, and other services
that directly benefit the Company, we reimburse Silverleaf Club for such
services and vice versa.
Silverleaf
Club collects dues from Silverleaf Owners, plus certain other amounts assessed
against the Silverleaf Owners from time to time, and generates income by the
operation of certain amenities at the Existing Resorts. Silverleaf Club and
Orlando Breeze Resort Club dues were approximately $54.96 per month ($27.48
for
biennial owners) during 2005, except for certain members of Oak N’ Spruce
Resort, who prepay dues at an annual rate of approximately $458. Such amounts
are used by the respective Clubs to pay the costs of operating the Existing
Resorts and the management fees due to the Company pursuant to Management
Agreements. The Management Agreement with Silverleaf Club authorizes the Company
to supervise the management and operations of the resorts and provide for a
maximum management fee equal to 15% of gross revenues of Silverleaf Club, but
our right to receive such a fee on an annual basis is limited to the amount
of
Silverleaf Club's net income. However, if we do not receive the maximum fee,
such deficiency is deferred for payment to succeeding years, subject again
to
the annual net income limitation. The Management Agreement between Orlando
Breeze Resort Club and us authorizes us to supervise management and operation
of
Orlando Breeze Resort and provides for a maximum annual management fee equal
to
15% of gross revenues of Orlando Breeze Resort Club, but our right to receive
such a fee on an annual basis is limited to the amount of Orlando Breeze Resort
Club’s net income. However, if we do not receive the maximum fee, such
deficiency is deferred for payment to succeeding years, subject again to the
annual net income limitation. Due to anticipated refurbishment of units at
the
Existing Resorts, together with the operational and maintenance expenses
associated with our current expansion and development plans, our 2005 management
fees were subject to the annual net income limitation. Accordingly, for the
year
ended December 31, 2005, management fees recognized were $1.9 million. For
financial reporting purposes, management fees from Silverleaf Club are
recognized based on the lower of (i) the aforementioned maximum fees or (ii)
Silverleaf Club’s net income. The Silverleaf Club Management Agreement is
effective through March 2010, and will continue year-to-year thereafter unless
cancelled by either party. As a result of the past performance of the Silverleaf
Club, it is uncertain whether Silverleaf Club will consistently generate
positive net income. Therefore, future income to the Company under the
Management Agreement with Silverleaf Club could be limited. At December 31,
2005, there were approximately 94,000 Vacation Interval owners who pay dues
to
Silverleaf Club and approximately 400 Vacation Interval owners who pay dues
to
Orlando Breeze Resort Club. If we develop new resorts outside of Florida, their
respective Clubs are expected to be added to the Silverleaf Club Management
Agreement.
Other
Operations
Operation
of Amenities.
We own,
operate, and receive the revenues from the marina at The Villages, the golf
course and pro shop at Holiday Hills, and the golf course and pro shop at Apple
Mountain. Although we own the golf course at Holly Lake, a homeowners’
association in the development operates the golf course. In general, Silverleaf
Club receives revenues from the various amenities that require a usage fee,
such
as watercraft rentals, horseback rides, and restaurants.
Samplers.
We also
recognize revenues from sales of Samplers, which allow prospective Vacation
Interval purchasers to sample a resort for a specified number of nights. A
five-night Sampler package primarily sells for between $595 and $1,000. For
the
years ended December 31, 2005, 2004, and 2003, we recognized $2.6 million,
$2.2
million, and $1.8 million, respectively, in revenues from Sampler
sales.
Utility
Services.
At
December 31, 2004, we owned the water supply facilities at Piney Shores, The
Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills, Timber Creek,
and Fox River resorts. We also owned the waste-water treatment facilities at
The
Villages, Piney Shores, Ozark Mountain, Holly Lake, Timber Creek, and Fox River
resorts. We maintained permits to supply and charge third parties for the water
supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark Mountain,
Hill Country, Piney Shores, and Timber Creek resorts, and the waste-water
facilities at the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and
The Villages resorts. In March 2005, all of our utility services assets and
liabilities were sold for an aggregate sales price of $13.2 million, which
resulted in a pretax gain of $879,000. Certain of the Purchasers entered into
a
services agreement to provide uninterrupted water supply and waste water
treatment services to the eight timeshare resorts to which the transferred
utility assets relate. The Purchasers charge the timeshare resorts the tariffed
rate for those utility services that are regulated by the states in which the
resorts are located. For any unregulated utility services, the Purchasers charge
a rate set in accordance with the ratemaking procedures of the Texas Commission
on Environmental Quality.
Other
Property. At
December 31, 2005, we owned approximately 11 acres in Mississippi, and we are
entitled to 85% of any profits from this land. An affiliate of a director of
the
Company owns a 10% net profits interest in this land. We subsequently sold
approximately 4 acres of this land during the first quarter of 2006 for
approximately $733,000, which resulted in a pretax gain of approximately
$400,000.
Since
1998, we owned 1,940 acres of undeveloped land near Philadelphia, Pennsylvania,
which we were holding for future development as a timeshare resort. In 2005,
we
sold this property for an aggregate sales price of $6.1 million after related
expenses, which resulted in a gain of $3.6 million.
We
also
own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts
that we are in the initial stages of developing. We have not yet finalized
our
future development plans for this site; however, we believe that its proximity
to major population centers in the Northeastern United States and the year-round
outdoor recreational attractions in the Berkshire region make this property
suitable for future development as a timeshare resort.
Policies
with Respect to Certain Activities
Our
board
of directors sets policies with regard to all aspects of our business operations
without a vote of security holders. In some instances the power to set certain
policies may be delegated by the board of directors to a committee comprised
of
its members, or to the officers of the Company. As set forth herein under the
headings "Customer Financing" and "Description of Certain Indebtedness," we
borrow money to finance all of our operations and we make loans to our customers
to finance the purchase of our Vacation Intervals.
We
do
not:
○ invest
in
the securities of unaffiliated issuers for the purpose of exercising
control;
○ underwrite
securities of other issuers;
○ engage
in
the purchase and sale (or turnover) of investments sponsored by other issuers;
or
○ offer
securities in exchange for property.
Nor
do we
propose to engage in any of the above activities. In the past we have from
time
to time repurchased or otherwise reacquired our own common stock and other
securities. In May 2002 we reacquired $56.9 million in principal amount of
our
10 ½% senior subordinated notes in exchange for $28.5 million of our 6% senior
subordinated notes and 23.9 million shares of our common stock. In July 2003
we
reacquired $7.6 million in principal amount of our 10 ½% senior subordinated
notes for approximately $2.4 million of cash, which resulted in a one-time
gain
of approximately $5.1 million. In June 2004 we completed an offer to exchange
$24.7 million in principal amount of our 6% senior subordinated notes due 2007
for $24.7 million in principal amount of our 8% senior subordinated notes due
2010 and a cash payment of approximately $271,000, representing accrued, unpaid
interest from April 1, 2004 through June 6, 2004. We have no policy or proposed
policy with respect to future repurchases or re-acquisitions of our common
stock
or other securities; however, our board of directors may approve such repurchase
activities if it finds these activities to be in the best interests of the
Company and its shareholders.
Investment
Policies
Our
board
of directors also determines all of our policies concerning investments,
including the percentage of assets, which we may invest in any one type of
investment, and the principles and procedures we will employ in connection
with
the acquisition of assets. The board of directors both determines our policies
with regard to investment matters and may change these policies without a vote
of security holders. We do not propose to invest in any investments or
activities not related directly or indirectly to (i) the timeshare business,
(ii) the acquisition, development, marketing, selling or financing of Vacation
Intervals, or (iii) the management of timeshare resorts. We currently have
no
policies limiting the geographic areas in which we might engage in investments
in the timeshare business, or limiting the percentage of our assets invested
in
any specific timeshare related property. We primarily acquire assets for income
and not to hold for possible capital gain.
Participation
in Vacation Interval Exchange Networks
Silverleaf
Plus Program. In
February 2006 we began selling the new Silverleaf Plus program. This program,
administered through Silverleaf Club, includes all of the prior benefits to
Silverleaf Club members plus enhanced vacation options through the Silverleaf
exchange program. In addition to use of their owned weeks and bonus time,
Silverleaf Club members who purchase with the Silverleaf Plus program can also
split their weeks into a minimum of 2-day up to 5-day increments, and extend
any
unused days into the following year.
Internal
Exchanges.
As a
convenience to Silverleaf Owners, each purchaser of a Silverleaf Vacation
Interval has certain exchange privileges through the Silverleaf Club which
may
be used to: (i) exchange an interval for a different interval (week) at the
same
resort so long as the desired interval is of an equal or lower rating; and
(ii)
exchange an interval for the same interval of equal or lower rating at any
other
Existing Resort. These exchange rights are conditioned upon availability of
the
desired interval or resort.
Exchanges.
We
believe that our Vacation Intervals are made more attractive by our
participation in a Vacation Interval exchange network operated by RCI. At
December 31, 2005, the Existing Resorts (except for Orlando Breeze) are
registered with RCI, and approximately one-third of Silverleaf Owners
participate in RCI's exchange network. Membership in RCI allows participating
Silverleaf Owners to exchange their occupancy right in a unit in a particular
year for an occupancy right at the same time or a different time of the same
or
lower color rating in another participating resort, based upon availability
and
the payment of a variable exchange fee. A member may exchange a Vacation
Interval for an occupancy right in another participating resort by listing
the
Vacation Interval as available with the exchange organization and by requesting
occupancy at another participating resort, indicating the particular resort
or
geographic area to which the member desires to travel, the size of the unit
desired, and the period during which occupancy is desired.
RCI
assigns a rating of "red,” "white,” or "blue" to each Vacation Interval for
participating resorts based upon a number of factors, including the location
and
size of the unit, the quality of the resort, and the period during which the
Vacation Interval is available, and attempts to satisfy exchange requests by
providing an occupancy right in another Vacation Interval with a similar rating.
For example, an owner of a red Vacation Interval may exchange his interval
for a
red, white, or blue interval. An owner of a white Vacation Interval may exchange
only for a white or blue interval, and an owner of a blue interval may exchange
only for a blue interval. At December 31, 2005, RCI’s designation of our units
of red, white, and blue Vacation Intervals is approximately 57%, 19%, and 24%,
respectively. If RCI is unable to meet the member's initial request, it suggests
alternative resorts based on availability. The annual membership fees in RCI,
which are at the option and expense of the owner of the Vacation Interval,
are
currently $89. Exchange rights with RCI require an additional fee of
approximately $149 for domestic exchanges and $189 for foreign exchanges.
Silverleaf Club charges an exchange fee of $75 for each exchange through its
internal exchange program. Resorts participating in the exchange networks are
required to adhere to certain minimum standards regarding available amenities,
safety, security, décor, unit supplies, maid service, room availability, and
overall ambiance. See "Risk Factors" for a description of risks associated
with
the exchange programs.
Orlando
Breeze is not under contract with RCI; however it is under contract with
Interval International, Inc., a competitor of RCI. An owner of a Vacation
Interval at Orlando Breeze may, for annual membership fees and exchange fees
similar to those charged by RCI, become a member of the Interval International
timeshare exchange system.
Competition
All
of
our operations are contained within and are in support of a single industry
segment - the vacation ownership industry - and we currently operate in only
six
geographic areas of the United States. These geographic areas are Texas,
Missouri, Massachusetts, Illinois, Georgia, and Florida. We encounter
significant competition from other timeshare resorts in the markets that we
serve. 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 International (Marriott Vacation Club brands), The Walt Disney
Company, Hilton Hotels Corporation, Hyatt Corporation, and Four Seasons Resorts
have entered the industry. Other companies in the timeshare industry, including
Sunterra Corporation (“Sunterra”), Cendant Corporation, through its acquisition
of Fairfield Resorts, Inc. (“Fairfield") and Trendwest Resorts, Inc.
(“Trendwest”), Starwood Hotels & Resorts Worldwide Inc. (“Starwood”), Ramada
Vacation Suites ("Ramada"), and Bluegreen Corporation (“Bluegreen”) are, or are
subsidiaries of, public companies with enhanced access to capital and other
resources that public ownership implies.
Fairfield,
Sunterra, and Bluegreen own timeshare resorts in or near Branson, Missouri,
which compete with our Holiday Hills and Ozark Mountain resorts, and to a lesser
extent with our Timber Creek Resort. Sunterra also owns a resort that is located
near and competes with Piney Shores Resort. Additionally, we believe there
are a
number of public or privately-owned and operated timeshare resorts in most
states in which we own resorts that compete with the Existing Resorts.
Many
competitors also own timeshare resorts in or near Orlando, Florida where our
newest resort, Orlando Breeze, is located. However sales of Orlando Breeze
Vacation Intervals are primarily upgrade and additional week interval sales
to
our existing customers, with the sales taking place at our other Existing
Resorts. We do not have a sales office in Orlando that directly competes with
other resort developers and operators located there.
We
believe Marriott, Disney, Hilton, Hyatt, and Four Seasons generally target
consumers with higher annual incomes than our target market. Our other
competitors target consumers with similar income levels as our target market.
Our competitors may possess significantly greater financial, marketing,
personnel, and other resources than we do. We cannot be certain that such
competitors will not significantly reduce the price of their Vacation Intervals
or offer greater convenience, services, or amenities than we do.
The
American Resort Development Association (“ARDA”) recently published a study
entitled State of the Vacation Ownership Industry, 2005 United States Study
(the
“ARDA Study”), which reported sales volume in the United States of $7.9 billion
for 2004, compared to $3.7 billion in 1999 and $1.9 billion in 1995, equating
to
a 10-year compound annual growth rate exceeding 16 percent. The study estimated
that 3.9 million households owned one or more U.S. timeshare intervals or
points equivalent at January 1, 2005, representing a 13.8 percent increase
over the amount reported one year earlier; however, there can be no assurance
that the existing levels of growth in timeshare demand will continue or that
we
will not have to compete with larger and better capitalized competitors in
future periods for a declining number of potential timeshare
purchasers.
While
our
principal competitors are developers of timeshare resorts, we are also subject
to competition from other entities engaged in the commercial lodging business,
including condominiums, hotels, and motels, as well as others engaged in the
leisure business and, to a lesser extent, from campgrounds, recreational
vehicles, tour packages, and second home sales. A reduction in the product
costs
associated with any of these competitors, or an increase in the Company's costs
relative to such competitors' costs, could have a material adverse effect on
our
results of operations, liquidity, and financial position.
Numerous
businesses, individuals, and other entities compete with us in seeking
properties for acquisition and development of new resorts. Some of these
competitors are larger and have greater financial and other resources. Such
competition may result in a higher cost for properties we wish to acquire or
may
cause us to be unable to acquire suitable properties for the development of
new
resorts.
Governmental
Regulation
General.
Our
marketing and sales of Vacation Intervals and other operations are subject
to
extensive regulation by the federal government and the states and jurisdictions
in which the Existing Resorts are located and in which our Vacation Intervals
are marketed and sold. On a federal level, the Federal Trade Commission has
taken the most active regulatory role through the Federal Trade Commission
Act,
which prohibits unfair or deceptive acts or competition in interstate commerce.
Other federal legislation to which the Company is or may be subject includes
the
Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act and
Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate
Settlement Procedures Act, the Consumer Credit Protection Act, the Telephone
Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse
Prevention Act, the Fair Housing Act, the Civil Rights Acts of 1964 and 1968,
the Fair Credit Reporting Act, the Fair Debt Collection Act, and the Americans
with Disabilities Act. Additionally, as a publicly owned company, we are subject
to all federal and state securities laws, including the Sarbanes-Oxley Act
of
2002.
In
response to certain fraudulent marketing practices in the timeshare industry
in
the 1980's, various states enacted legislation aimed at curbing such abuses.
Certain states in which we operate have adopted specific laws and regulations
regarding the marketing and sale of Vacation Intervals. Th
