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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. The laws of most states
require us to file a detailed offering statement and supporting documents with
a
designated state authority, which describe the Company, the project, and our
promotion and sale of Vacation Intervals. The offering statement must be
approved by the appropriate state agency before we may solicit residents of
such
state. The laws of certain states require us to deliver an offering statement
(or disclosure statement), together with certain additional information
concerning the terms of the purchase, to prospective purchasers of Vacation
Intervals who are residents of such states, even if the resort is not located
in
such state. The laws of Missouri generally only require certain disclosures
in
sales documents for prospective purchasers. There are also laws in each state
where we sell Vacation Intervals that grant the purchaser the right to cancel
a
contract of purchase at any time within three to fifteen calendar days following
the sale.
We
market
and sell our Vacation Intervals to residents of certain states adjacent or
proximate to the states where our resorts are located. Many of these neighboring
states also regulate the marketing and sale of Vacation Intervals to their
residents. Most states have additional laws which regulate our activities and
protect purchasers, such as real estate licensure laws; travel sales licensure
laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize,
gift, and sweepstakes laws; and other related laws. We do not register all
of
our resorts in each of the states where we register certain
resorts.
Most
of
the states where we currently operate have enacted laws and regulations that
limit our ability to market our resorts through telemarketing activities. These
states have enacted "do not call" lists that permit consumers to block
telemarketing activities by registering their telephone numbers for a period
of
years for a nominal fee. We purchase these lists from the various states
quarterly and do not contact those telephone numbers listed. Additionally,
the
federal "Do-Not-Call Implementation Act" (the "DNC Act"), which was enacted
on
March 11, 2003, provided for the establishment of a National Do Not Call
Registry administered by the United States Federal Trade Commission ("FTC")
under its Telemarketing Sales Rule ("TSR") and the Federal Communications
Commission. The FTC began enforcement actions in October 2003 for violations
of
the TSR by telemarketers. Violations could result in penalties up to $11,000
per
violation. The FTC has reported that approximately 83 million telephone numbers
had been registered on the National Do Not Call List Registry by the end of
2004. Since the introduction of state and federal Do-Not-Call legislation,
we
have become somewhat more reliant on direct mail solicitations as an alternative
to some of the telemarketing techniques we have historically utilized. Existing
and future restrictions on telemarketing practices could cause our sales to
decline.
We
believe we are in material compliance with applicable federal and state laws
and
regulations relating to the sales and marketing of Vacation Intervals in the
jurisdictions in which we currently do business. However, we are normally and
currently the subject of a number of consumer complaints and regulatory
inquiries generally relating to our marketing or sales practices. We always
attempt to resolve all such complaints or inquiries directly with the consumer
or the regulatory authority involved. We cannot be certain that all of these
complaints and inquiries by regulators can be resolved without adverse
regulatory actions or other consequences, such as class action lawsuits or
rescission offers. We expect some level of consumer complaints in the ordinary
course of business as we aggressively market and sell Vacation Intervals to
households, which may include individuals who may not be financially
sophisticated. We cannot be certain that the costs of resolving consumer
complaints, regulatory inquiries, or of qualifying under Vacation Interval
ownership regulations in all jurisdictions in which we conduct sales or wish
to
conduct sales in the future will not be significant, that we are in material
compliance with applicable federal and state laws and regulations, or that
violations of law will not have adverse implications, including negative public
relations, potential litigation, and regulatory sanctions. The expense, negative
publicity, and potential sanctions associated with the failure to comply with
applicable laws or regulations could have a material adverse effect on our
results of operations, liquidity, or financial position. Further, we cannot
be
certain that either the federal government or states having jurisdiction over
our business will not adopt additional regulations or take other actions that
would adversely affect our results of operations, liquidity, and financial
position.
During
the 1980's and continuing through the present, the timeshare industry has been
and continues to be afflicted with negative publicity and prosecutorial
attention due to, among other things, marketing practices which were widely
viewed as deceptive or fraudulent. Among the many timeshare companies which
have
been the subject of federal, state, and local enforcement actions and
investigations in the past were certain of the partnerships and corporations
that were merged into the Company prior to 1996 (the “Merged Companies,” or
individually “Merged Company”). Some of the settlements, injunctions, and
decrees resulting from litigation and enforcement actions (the "Orders") to
which certain of the Merged Companies consented in the 1980’s purport to bind
all successors and assigns, and accordingly may also be enforceable against
the
Company. In addition, at that time the Company was directly a party to one
such
Order issued in Missouri. No past or present officers, directors, or employees
of the Company or any Merged Company were named as subjects or respondents
in
any of these Orders; however, each Order purports to bind generically unnamed
"officers, directors, and employees" of certain Merged Companies. Therefore,
certain of these Orders may be interpreted to be enforceable against the present
officers, directors, and employees of the Company even though they were not
individually named as subjects of the enforcement actions which resulted in
these Orders. These Orders require, among other things, that all parties bound
by the Orders, including the Company, refrain from engaging in deceptive sales
practices in connection with the offer and sale of Vacation Intervals. The
requirements of the Orders are substantially what applicable state and federal
laws and regulations mandate, but the consequence of violating the Orders may
be
that sanctions (including possible financial penalties and suspension or loss
of
licensure) may be imposed more summarily and may be harsher than would be the
case if the Orders did not bind the Company. In addition, the existence of
the
Orders may be viewed negatively by prospective regulators in jurisdictions
where
the Company does not now do business, with attendant risks of increased costs
and reduced opportunities.
In
early
1997, we were the subject of some consumer complaints that triggered
governmental investigations into the Company's affairs. In March 1997, we
entered into an Assurance of Voluntary Compliance with the Texas Attorney
General, in which we agreed to make additional disclosure to purchasers of
Vacation Intervals regarding the limited availability of our Bonus Time program
during certain periods. We paid $15,200 for investigatory costs and attorneys'
fees of the Texas Attorney General in connection with this matter. Also, in
March 1997, we entered into an agreed order (the "Agreed Order") with the Texas
Real Estate Commission requiring that we comply with certain aspects of the
Texas Timeshare Act, Texas Real Estate License Act, and Rules of the Texas
Real
Estate Commission, with which we had allegedly been in non-compliance until
mid-1995. The allegations included (i) our admitted failure to register the
Missouri Destination Resorts in Texas (due to our misunderstanding of the reach
of the Texas Timeshare Act); (ii) payment of referral fees for Vacation Interval
sales, the receipt of which was improper on the part of the recipients; and
(iii) miscellaneous other actions alleged to violate the Texas Timeshare Act,
which we denied. While the Agreed Order acknowledged that we independently
resolved ten consumer complaints referenced in the Agreed Order, discontinued
the practices complained of, and registered the Missouri Destination Resorts
during 1995 and 1996, the Texas Real Estate Commission ordered us to cease
these
discontinued practices and enhance our disclosure to purchasers of Vacation
Intervals. In the Agreed Order, we agreed to make a voluntary donation of
$30,000 to the State of Texas. The Agreed Order also directed that we revise
our
training manual for timeshare salespersons and verification officers. While
the
Agreed Order resolved all of the alleged violations contained in complaints
received by the Texas Real Estate Commission through December 31, 1996, we
have
encountered and expect to encounter some level of additional consumer
complaints, regulatory scrutiny, and periodic remedial action in the ordinary
course of our business. In this regard, during 2004 we renewed our
timeshare-offering plan in the state of New York, which we inadvertently allowed
to lapse in 2001. As part of this renewal process, we rescinded approximately
$897,000 of sales to New York residents that were made in 2001 after our
timeshare offering plan lapsed.
We
have
established compliance and supervisory methods in training sales and marketing
personnel as to adherence to legal requirements. With regard to direct mailings,
a designated compliance employee reviews all mailings to determine if they
comply with applicable state legal requirements. With regard to telemarketing,
our marketing management personnel prepare a script for telemarketers based
upon
applicable state legal requirements. All telemarketers receive training that
include, among other things, directions to adhere strictly to the approved
script. Telemarketers are also monitored by their supervisors to ensure that
they do not deviate from the approved script. Additionally, sales personnel
receive training as to such applicable legal requirements. We have a salaried
employee at each sales office who reviews the sales documents prior to closing
a
sale to review compliance with legal requirements. Periodically, we are notified
by regulatory agencies to revise our disclosures to consumers and to remedy
other alleged inadequacies regarding the sales and marketing process. In such
cases, we revise our direct mailings, telemarketing scripts, or sales disclosure
documents, as appropriate, to comply with such requests. We have supervisors
to
monitor compliance with all state and federal Do-Not-Call
regulations.
We
are
not currently aware of any non-compliance with any state or federal statute,
rule, or regulation which we believe would have a material adverse effect on
our
business, results of operations, or financial condition.
Environmental
Matters.
Under
various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and tort liability and for
investigation and clean-up costs incurred by such parties in connection with
the
contamination. Such laws typically impose clean-up responsibility and liability
without regard to whether the owner or operator knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted
to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The cost of investigation, remediation,
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owner's ability to sell such property or
to
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances at a disposal or treatment
facility also may be liable for the costs of removal or remediation of a release
of hazardous or toxic substances at such disposal or treatment facility, whether
or not such facility is owned or operated by such person. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Finally, the owner or operator of a site may be subject to common law claims
by
third parties based on damages and costs resulting from environmental
contamination emanating from a site or from environmental regulatory violations.
In connection with our ownership and operation of our properties, we may be
potentially liable for such claims.
Certain
federal, state, and local laws, regulations, and ordinances govern the removal,
encapsulation, or disturbance of asbestos-containing materials ("ACMs") when
such materials are in poor condition or in the event of construction,
remodeling, renovation, or demolition of a building. Such laws may impose
liability for release of ACMs and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated
with
ACMs. In connection with our ownership and operation of our properties, we
may
be potentially liable for such costs. In 1994, we conducted a limited asbestos
survey at each of our Existing Resorts, which surveys did not reveal material
potential losses associated with ACMs at certain of the Existing
Resorts.
In
addition, recent studies have linked radon, a naturally occurring substance,
to
increased risks of lung cancer. While there are currently no state or federal
requirements regarding the monitoring for, presence of, or exposure to radon
in
indoor air, the EPA and the Surgeon General recommend testing residences for
the
presence of radon in indoor air, and the EPA further recommends that
concentrations of radon in indoor air be limited to less than 4 picocuries
per
liter of air (Pci/L) (the "Recommended Action Level"). The presence of radon
in
concentrations equal to or greater than the Recommended Action Level in one
or
more of our properties may adversely affect our ability to sell Vacation
Intervals at such properties and the market value of such property. We have
not
tested our properties for radon. Recently-enacted federal legislation will
eventually require us to disclose to potential purchasers of Vacation Intervals
at our resorts that were constructed prior to 1978 any known lead-paint hazards
and will impose treble damages for failure to so notify.
Electric
transmission lines are located in the vicinity of some of our properties.
Electric transmission lines are one of many sources of electromagnetic fields
("EMFs") to which people may be exposed. Research into potential health impacts
associated with exposure to EMFs has produced inconclusive results.
Notwithstanding the lack of conclusive scientific evidence, some states now
regulate the strength of electric and magnetic fields emanating from electric
transmission lines, while others have required transmission facilities to
measure for levels of EMFs. In addition, we understand that lawsuits have,
on
occasion, been filed (primarily against electric utilities) alleging personal
injuries resulting from exposure as well as fear of adverse health effects.
In
addition, fear of adverse health effects from transmission lines has been a
factor considered in determining property value in obtaining financing and
in
condemnation and eminent domain proceedings brought by power companies seeking
to construct transmission lines. Therefore, there is a potential for the value
of a property to be adversely affected as a result of its proximity to a
transmission line and for the Company to be exposed to damage claims by persons
exposed to EMFs.
We
conducted Phase I environmental assessments at each of our resorts during 2001
or later, in order to identify potential environmental concerns. These Phase
I
assessments were carried out in accordance with accepted industry practices
and
consisted of non-invasive investigations of environmental conditions at the
properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, and the
preparation and issuance of written reports. Our Phase I assessments of the
properties did not reveal any environmental liability that we believe would
have
a material adverse effect on our business, assets, or results of operations
taken as a whole; nor are we aware of any such material environmental liability.
Nevertheless, it is possible that our Phase I assessments did not reveal all
environmental liabilities or that there are material environmental liabilities
of which we are unaware. Moreover, there can be no assurance that (i) future
laws, ordinances, or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the properties will
not
be affected by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks) or by third
parties unrelated to us. We do not believe that compliance with applicable
environmental laws or regulations will have a material adverse effect on our
results of operations, liquidity, or financial position.
We
believe that our properties are in compliance in all material respects with
all
federal, state, and local laws, ordinances, and regulations regarding hazardous
or toxic substances. We have not been notified by any governmental authority
or
any third party, and are not otherwise aware, of any material noncompliance,
liability, or claim relating to hazardous or toxic substances or petroleum
products in connection with any of our present properties.
Utility
Regulation.
At
December 31, 2004, we owned the water supply and waste-water treatment
facilities at several of the Existing Resorts, which are regulated by various
governmental agencies. The Texas Natural Resource Conservation Commission is
the
primary state umbrella agency regulating utilities at the resorts in Texas;
and
the Missouri Department of Natural Resources and Public Service Commission
of
Missouri are the primary state umbrella agencies regulating utilities at the
resorts in Missouri. The Environmental Protection Agency, division of Water
Pollution Control, and the Illinois Commerce Commission are the primary state
agencies regulating water utilities in Illinois. These agencies regulate the
rates and charges for the services (allowing a reasonable rate of return in
relation to invested capital and other factors), the size and quality of the
plants, the quality of water supplied, the efficacy of waste-water treatment,
and many other aspects of the utilities' operations. The agencies have approval
rights regarding the entity owning the utilities (including its financial
strength) and the right to approve a transfer of the applicable permits upon
any
change in control of the entity holding the permits. Other federal, state,
regional, and local environmental, health, and other agencies also regulate
various aspects of the provision of water and waste-water treatment services.
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.
Other
Regulation. Under
various state and federal laws governing housing and places of public
accommodation, we are required to meet certain requirements related to access
and use by disabled persons. Although we believe that our facilities are
generally in compliance with present requirements of such laws, we are aware
of
certain of our properties that are not in full compliance with all aspects
of
such laws. We are presently responding, and expect to respond in the future,
to
inquiries, claims, and concerns from consumers and regulators regarding our
compliance with existing state and federal regulations affording the disabled
access to housing and accommodations. It is our practice to respond positively
to all such inquiries, claims and concerns and to work with regulators and
consumers to resolve all issues arising under existing regulations concerning
access and use of our properties by disabled persons. We believe that we will
incur additional costs of compliance and/or remediation in the future with
regard to the requirements of such existing regulations. Future legislation
may
also impose new or further burdens or restrictions on owners of timeshare resort
properties with respect to access by the disabled. The ultimate cost of
compliance with such legislation and/or remediation of conditions found to
be
non-compliant is not currently ascertainable, and while such costs are not
expected to have a material effect on our business, such costs could be
substantial. Limitations or restrictions on the completion of certain
renovations may limit application of our growth strategy in certain instances
or
reduce profit margins on our operations.
Employees
At
December 31, 2005, we had 1,437 full and part-time employees and the Clubs
collectively had 720 full and part-time employees. Our employee relations are
good, both at the Company and at the Clubs. None
of
our employees are represented by a labor union and we are not aware of any
union
organization efforts with respect to any of our employees.
Insurance
We
carry
comprehensive liability, fire, hurricane, and storm insurance with respect
to
our resorts, with policy specifications, insured limits, and deductibles
customarily carried for similar properties, which we believe are adequate.
There
are, however, certain types of losses (such as losses arising from floods and
acts of war) that are not generally insured because they are either uninsurable
or not economically insurable. Should an uninsured loss or a loss in excess
of
insured limits occur, we could lose the capital invested in a resort, as well
as
the anticipated future revenues from such resort, and would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could have a material adverse effect on our results
of
operations, liquidity, or financial position. We self-insure for employee
medical claims reduced by certain stop-loss provisions. We also self-insure
for
property damage to certain vehicles and heavy equipment.
Description
of Certain Indebtedness
Existing
Indebtedness.
The
following table summarizes our credit agreements with our senior lenders and
our
off-balance sheet special purpose finance subsidiary as of December 31, 2005
(in
thousands):
| |
|
Facility
Amount
|
|
12/31/05
Balance
|
|
|
Receivable
Based Revolving Facilities
|
|
$
|
185,000
|
|
$
|
82,461
|
|
|
Receivable
Based Non-Revolving Facilities
|
|
|
58,063
|
|
|
58,063
|
|
|
Inventory
Loans
|
|
|
49,335
|
|
|
34,335
|
|
|
Sub-Total
On Balance Sheet
|
|
|
292,398
|
|
|
174,859
|
|
|
Off-Balance
Sheet Receivable Based Term Loan *
|
|
|
89,113
|
|
|
89,113
|
|
|
Grand
Total
|
|
$
|
381,511
|
|
$
|
263,972
|
|
*
Through
SF-III, our off-balance sheet qualified special purpose entity formed during
the
third quarter of 2005.
We
use
these credit agreements to finance the sale of Vacation Intervals, to finance
construction, and for working capital needs. The loans mature between March
2007
and March 2014, and are collateralized (or cross-collateralized) by customer
notes receivable, inventory, construction in process, land, improvements, and
related equipment at certain of the Existing Resorts. These credit facilities
bear interest at variable rates tied to the prime rate, LIBOR, or the corporate
rate charged by certain banks. The credit facilities secured by customer notes
receivable allow advances up to 75% of the unpaid balance of certain eligible
customer notes receivable. In addition, we have $3.8 million of senior
subordinated notes due April 2007, $2.1 million of senior subordinated notes
due
April 2008, and $24.7 million of senior subordinated notes due April 2010,
with
interest payable semi-annually on April 1 and October 1. Our payment and
performance under these senior subordinated notes has been guaranteed by all
of
our present and future domestic restricted subsidiaries.
As
of
December 31, 2005, certain of our credit facilities include restrictions on
our
ability to pay dividends based on minimum levels of net income and cash flow.
The credit agreements contain covenants including requirements that we (i)
preserve and maintain the collateral securing the loans; (ii) pay all taxes
and
other obligations relating to the collateral; and (iii) refrain from selling
or
transferring the collateral or permitting any encumbrances on the collateral.
The credit agreements also contain restrictive covenants which include (i)
restrictions on liens against and dispositions of collateral, (ii) restrictions
on distributions to affiliates and prepayments of loans from affiliates, (iii)
restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and
(v)
restrictions on mergers, consolidations, or other reorganizations of the
Company. Under certain credit facilities, a sale of all or substantially all
of
the assets of the Company, a merger, consolidation, or reorganization of the
Company, or other changes of control of the ownership of the Company, would
constitute an event of default and permit the senior lenders to accelerate
the
maturity of the facility.
Our
credit facilities also contain operating covenants requiring us to maintain
a
minimum tangible net worth, the most restrictive being to maintain a minimum
tangible net worth at all times greater than the tangible net worth as of
December 31, 2004, or $132.1 million, plus 50% of the aggregate amount of net
income after December 31, 2004, maintain sales and marketing expenses as a
percentage of sales below 55.0% for the latest rolling 12 months, maintain
a
notes receivable delinquency rate below 10%, maintain a minimum interest
coverage ratio of 1.25 to 1 for the latest rolling 12 months, maintain positive
net income for each year end, and for any two consecutive fiscal quarters,
maintain a leverage ratio of at least 6.0 to 1, and maintain a minimum weighted
average FICO Credit Bureau Score of 640 for all fiscal calendar quarter sales
with respect to which a FICO score can be obtained. In addition, our senior
lenders have provided us with waivers and amended financial covenants whereby
we
exclude the $28.7 million increase in our allowance for uncollectable notes
during the first quarter of 2003 from the calculation of our minimum required
consolidated net income, and from the calculation of our minimum required
interest coverage ratio of 1.25 to 1.0. We were also given a waiver for our
failure to maintain our ratio of sales and marketing expense below the required
standard in the first quarter of 2003. As of December 31, 2003, 2004, and
2005, we were in compliance with these operating covenants. However, future
compliance with these covenants cannot be assured. Nor is there any assurance
that our lenders will be prepared to give us waivers in the future, as they
have
in the past, if we are unable to fully comply with one or more
covenants.
The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at December 31, 2004 and 2005 (in
thousands):
| |
|
December
31,___
|
|
| |
|
2004
|
|
2005
|
|
$55.9
million loan agreement, which contains certain financial covenants,
due
March 2007, principal and interest payable from the proceeds
obtained on
customer notes receivable pledged as collateral for the note
(the loan
agreement was limited to a $44.6 million revolver with an interest
rate of
LIBOR plus 3% with a 6% floor, revolving through March 2006,
and a $11.3
million term loan with an interest rate of 8%; as of December
31, 2005 the
loan agreement has been terminated)
|
|
$
|
37,514
|
|
$
|
—
|
|
|
$11.3
million term loan with an interest rate of 8%, due in March 2007
|
|
|
9,991
|
|
|
—
|
|
$55.1
million loan agreement, which contains certain financial covenants,
due
March 2007, principal and interest payable from the proceeds
obtained on
customer notes receivable pledged as collateral for the note
(the loan
agreement was limited to a $44.1 million revolver with an interest
rate of
LIBOR plus 3% with a 6% floor, revolving through March 2006,
and a $11.0
million term loan with an interest rate of 8%; as of December
31, 2005 the
loan agreement has been terminated)
|
|
|
37,039
|
|
|
—
|
|
|
$11.0
million term loan with an interest rate of 8%, due in March 2007
|
|
|
9,852
|
|
|
—
|
|
$7.9
million loan agreement, which contains certain financial covenants,
due
March 2007, principal and interest payable from the proceeds
obtained on
customer notes receivable pledged as collateral for the note
(the loan
agreement was limited to a $6.2 million revolver with an interest
rate of
Prime plus 3% with a 6% floor, revolving through March 2006,
and a $1.7
million term loan with an interest rate of 8%; as of December
31, 2005 the
loan agreement has been terminated)
|
|
|
5,250
|
|
|
—
|
|
|
$1.7
million term loan with an interest rate of 8%, due in March 2007
|
|
|
1,415
|
|
|
—
|
|
|
$100.0
million revolving loan agreement, which contains certain financial
covenants, revolving through June 2008 and due June 2011, 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 1.0%
(the loan agreement is currently limited to $60 million of availability)
|
|
|
—
|
|
|
53,661
|
|
| |
|
December
31,___
|
|
| |
|
2004
|
|
2005
|
|
|
$66.4
million conduit loan, due March 2014, principal and interest
payable from
the proceeds obtained on customer notes receivable pledged as
collateral
for the note, at an interest rate of 7.035%
|
|
$
|
50,299
|
|
$
|
37,224
|
|
|
$26.3
million conduit loan, due September 2011, principal and interest
payable
from the proceeds obtained on customer notes receivable pledged
as
collateral for the note, at an interest rate of 7.9%
|
|
|
—
|
|
|
20,839
|
|
$40.4
million loan agreement, which contains certain financial covenants,
due
March 2009, principal and interest payable from the proceeds
obtained on
customer notes receivable pledged as collateral for the note
(as of
December 31, 2005 the loan agreement has been terminated)
|
|
|
18,689
|
|
|
—
|
|
|
$50
million revolving loan agreement, which contains certain financial
covenants, revolving through and due April 2008, 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 4.25%
|
|
|
—
|
|
|
28,800
|
|
|
$25
million revolving loan agreement, which contains certain financial
covenants, revolving through May 2007, due May 2010, 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
1.5%, with a 6.5% floor
|
|
|
—
|
|
|
—
|
|
$70
million loan agreement, capacity reduced by amounts outstanding
under the
$10 million inventory loan agreement and the $9 million supplemental
revolving loan agreement, which contains certain financial covenants,
due
February 2006, principal and interest payable from the proceeds
obtained
on customer notes receivable pledged as collateral for the note,
at an
interest rate of LIBOR plus 2.65% with a 6.0% floor (as of December
31,
2005 the loan agreement has been terminated)
|
|
|
9,080
|
|
|
—
|
|
$9
million supplemental revolving loan agreement, which contains
certain
financial covenants, due March 2007, principal and interest payable
from
the proceeds obtained on customer notes receivable pledged as
collateral
for the note, at an interest rate of LIBOR plus 2.67% with a
6% floor (as
of December 31, 2005 the loan agreement has been terminated)
|
|
|
5,735
|
|
|
—
|
|
$10
million revolving loan agreement, which contains certain financial
covenants, revolving through March 2006, due March 2009, collateralized
by
either notes receivable or inventory, interest payable monthly,
at an
interest rate of the higher of Prime plus 2% or Federal Funds
plus 4.75%
with a 6.0% floor (as of December 31, 2005 the loan agreement
has been
terminated)
|
|
|
10,000
|
|
|
—
|
|
|
$10
million inventory loan agreement, which contains certain financial
covenants, revolving through August 2008, due August 2010, interest
payable monthly, at an interest rate of LIBOR plus 3.25%
|
|
|
10,000
|
|
|
10,000
|
|
|
$6
million inventory loan agreement, which contains certain financial
covenants, revolving through August 2008, due August 2010, interest
payable monthly, at an interest rate of Prime plus 3% with a
6% floor
|
|
|
6,000
|
|
|
—
|
|
|
$5
million inventory term loan agreement, which contains certain
financial
covenants, due March 2007, interest payable monthly, at an interest
rate
of Prime plus 3% with a 6% floor
|
|
|
—
|
|
|
3,335
|
|
|
$15
million inventory loan agreement, which contains certain financial
covenants, revolving through and due April 2008, interest payable
monthly,
at an interest rate of Prime plus 3%
|
|
|
—
|
|
|
15,000
|
|
|
$15
million inventory loan agreement, which contains certain financial
covenants, revolving through December 2008, due December 2010,
interest
payable monthly, at an interest rate of Prime plus 2%
|
|
|
—
|
|
|
6,000
|
|
|
Various
notes, due from March 2006 through December 2009,
collateralized
by
various assets with interest rates ranging from 2.95% to 10.25%
|
|
|
7,122
|
|
|
2,282
|
|
|
Total
notes payable
|
|
|
217,986
|
|
|
177,141
|
|
|
Capital
lease obligations
|
|
|
324
|
|
|
128
|
|
|
Total
notes payable and capital lease obligations
|
|
|
218,310
|
|
|
177,269
|
|
| |
|
|
|
|
|
|
|
8.0%
senior subordinated notes, due 2010, interest payable semiannually
on
April 1 and October 1, guaranteed by all of the Company’s present and
future domestic restricted subsidiaries
|
|
|
24,671
|
|
|
24,671
|
|
6.0%
senior subordinated notes, due 2007, interest payable semiannually
on
April 1 and October 1, guaranteed by all of the Company’s present and
future domestic restricted subsidiaries
|
|
|
3,796
|
|
|
3,796
|
|
10½%
senior subordinated notes, subordinate to the 6.0% senior subordinated
notes above, due 2008, interest payable semiannually on April
1 and
October 1, guaranteed by all of the Company’s present and future domestic
restricted subsidiaries
|
|
|
2,146
|
|
|
2,146
|
|
Interest
on the 6.0% senior subordinated notes, due 2007, and the 8.0%
senior
subordinated notes, due 2010, interest payable semiannually through
October 2007 on April 1 and October 1, guaranteed by all of the
Company’s
present and future domestic restricted subsidiaries
|
|
|
4,270
|
|
|
2,562
|
|
|
Total
senior subordinated notes
|
|
|
34,883
|
|
|
33,175
|
|
| |
|
|
|
|
|
|
|
|
Total
|
|
$
|
253,193
|
|
$
|
210,444
|
|
At
December 31, 2005, LIBOR rates on the Company’s senior credit facilities were
from 4.26% to 4.49%, and the Prime rate on these facilities was 7.00%.
Textron
Facility.
We
have a
long-standing relationship with Textron Financial Corporation dating back to
August 1995. Since that time, we have had various loan facilities in place
with
Textron. Our current facilities with Textron Financial are as follows at
December 31, 2005:
| |
·
|
Receivables
Loan - During the third quarter of 2005 we reached an agreement with
Textron to consolidate, amend, and restate all prior receivables
loan
agreements between our two companies. Under the terms of the new
agreement, we entered into a $100 million revolving loan agreement,
of
which $60 million is currently available, secured by notes receivable
from
timeshare sales and unsold inventory of timeshare intervals. The
additional $40 million under the agreement will not be available
unless
Textron seeks and finds third party participants, which by agreement
with
us they are not currently doing. The agreement matures in June 2011
and
bears interest at a rate of Prime plus 1%, with a 6% floor.
|
| |
·
|
Inventory
Loans - We have two revolving inventory loan facilities in the aggregate
amount of $16 million, revolving through August 2008 and due in August
2010, which bear interest at a rate of LIBOR plus 3.25% and Prime
plus 3%
with a 6% floor, respectively. During the first quarter of 2005,
we also
entered into a $5 million inventory term loan facility with Textron.
The
term loan is due in March 2007 and bears interest at a rate of Prime
plus
3% with a 6% floor.
|
| |
·
|
Conduit
Loans - During the fourth quarter of 2003, we closed a $66.4 million
conduit term loan transaction through our conduit financing subsidiary,
SF-II, which was arranged through Textron. Under the terms of the
SF-II
conduit loan, we sold approximately $78.1 million of our Vacation
Interval
receivables to SF-II for an amount equal to the aggregate principal
balances of the receivables. Textron financed the purchase of these
receivables through a one-time advance to SF-II of $66.4 million,
which is
approximately 85% of the outstanding balance of the receivables SF-II
purchased from us. All customer receivables that we transferred to
SF-II
have been pledged as security to Textron. Textron has also received
as
additional collateral a pledge of all of our equity interest in SF-II
and
a $15.7 million demand note from us to SF-II under which payment
may be
demanded if SF-II defaults on its loan from the senior lender. Textron's
conduit loan to SF-II will mature in 2014 and bears interest at a
fixed
annual rate of 7.035%. During the first quarter of 2005,
we entered into a $26.3 million amendment and expansion of our conduit
term loan agreement with SF-II. Under the terms of the amendment,
we sold
approximately $31.0 million of notes receivable and received cash
proceeds
of approximately $26.3 million. The new conduit term loan with SF-II
will
mature in 2011 and bears interest at a fixed annual rate of
7.9%.
|
CapitalSource
Facility.
During
the second quarter of 2005, we entered into a $50 million receivables loan
agreement with CapitalSource, which matures in April 2008 and bears interest
at
a rate of LIBOR plus 4.25%. We also entered into a $15 million inventory loan
agreement with CapitalSource, which also matures in April 2008 and bears
interest at a rate of Prime plus 3%.
Resort
Funding Facility. During
the second quarter of 2005, we entered into a $25 million receivables loan
agreement with Resort Funding, which matures in May 2010 and bears interest
at a
rate of Prime plus 1.5% with a 6.5% floor. We have not yet borrowed against
this
loan facility.
Wells
Fargo Foothill Facility. During
the fourth quarter of 2005, we entered into a $50 million receivables loan
agreement with Wells Fargo Foothill, which matures in December 2011 and bears
interest at a rate of Prime plus 0.5% with a 6% floor. We also entered into
a
$15 million inventory loan agreement with Wells Fargo Foothill, which matures
in
December 2010 and bears interest at a rate of Prime plus 2% with a 6% floor.
As
of December 31, 2005, we have borrowed against the inventory facility but have
not yet borrowed against the receivables facility.
Silverleaf
Finance III Facility. During
the third quarter of 2005 we closed a term securitization transaction with
a
newly-formed, wholly-owned off-balance sheet qualified special purpose finance
subsidiary, SF-III, a Delaware limited liability company, which was 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 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 by SF-III in four classes as follows:
$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 qualified special purpose entity, SF-I. 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.
We
utilized the net cash proceeds from our 2005 fundings under our credit
facilities for general
working capital purposes
to
finance our existing operations, retire the aggregate balance outstanding under
various non-revolving credit facilities and term loans, pay off in full the
credit facility of SF-I, pay off in full the credit facility of another senior
lender, and repay a portion of our
revolving
credit facilities with our existing senior lenders.
Financial
Covenants Under Senior Credit Facilities.
The
Company’s senior credit facilities discussed above provide certain financial
covenants that we must satisfy. Any failure to comply with the financial
covenants in any single loan agreement will result in a cross default under
the
various facilities. The financial covenants as they exist at December 31, 2005
are described below.
Tangible
Net Worth Covenant. Each
of
our senior lenders has a somewhat different requirement, the most restrictive
being that we must maintain a Tangible Net Worth at all times greater than
the
Tangible Net Worth as of December 31, 2004, or $132.1 million, plus 50% of
the
aggregate amount of Consolidated Net Income after December 31, 2004. “Tangible
Net Worth” is (i) the consolidated net worth of the Company and our consolidated
subsidiaries, plus (ii) to the extent not otherwise included in the such
consolidated net worth, unsecured subordinated indebtedness of the Company
and
our consolidated subsidiaries the terms and conditions of which are reasonably
satisfactory to the required banks, minus (iii) the consolidated intangibles
of
the Company and our consolidated subsidiaries, including, without limitation,
goodwill, trademarks, trade names, copyrights, patents, patent applications,
licenses and rights in any of the foregoing and other items treated as
intangibles in accordance with generally accepted accounting principles.
“Consolidated Net Income” is the consolidated net income of the Company and our
subsidiaries, after deduction of all expenses, taxes, and other proper charges
(but excluding any extraordinary profits or losses), determined in accordance
with generally accepted accounting principles. It also excludes the $28.7
million increase in our allowance for uncollectible notes booked in the first
quarter of 2003.
Marketing
and Sales Expenses Covenant.
Our
ratio of marketing expenses to total sales for the latest rolling 12 months
then
ending must not equal or exceed .55 to 1 as of the last day of any fiscal
quarter. Two senior lenders have increased the ratio we are required to stay
below to .57 to 1 as of the last day of each fiscal quarter.
Minimum
Loan Delinquency Covenant.
Our over
30-day delinquency rate on our entire consumer loan portfolio may not be greater
than 10% as of the last day of each fiscal quarter.
Debt
Service Covenant.
Our
ratio of (i) EBITDA less capital expenditures (excluding the $28.7 million
increase in our allowance for uncollectible notes booked in the first quarter
of
2003) as determined in accordance with generally accepted accounting principles
to (ii) the
interest expense minus all non-cash items constituting interest expense for
such
period, for the latest rolling 12 months then ending must not be
less
than 1.25 to 1 as of the last day of each fiscal quarter.
Profitable
Operations Covenant.
Our
Consolidated Net Income (i) for any fiscal year must not be less than $1.00,
(ii) for any two consecutive fiscal quarters (reviewed on an individual rather
than on an aggregate basis) must not be less than $1.00, and (iii) for any
rolling 12-month period must not be less than $1.00, excluding the $28.7 million
increase in our allowance for uncollectible notes booked in the first quarter
of
2003.
Leverage
Ratio Covenant. Our
ratio
of debt to Tangible Net Worth must not exceed 6.0 to 1 at any time during the
term of the loans.
FICO
Score Covenant. Our
weighted average FICO Credit Bureau Score for all sales to Silverleaf Owners
with respect to which a FICO score can be obtained must not be less than 640
for
any fiscal calendar quarter.
We
received waivers under our old senior credit facilities of covenant defaults
that occurred in the first quarter of 2003 due to our increase in our allowance
for uncollectible notes and our failure to maintain a ratio of sales and
marketing expense to total sales of no more than 52.5%. As a result of these
amendments and waivers, we have been in full compliance with all of our credit
facilities with our senior lenders since December 31, 2003.
Termination
of Silverleaf Finance I Facility
During
the fourth quarter of 2000, our qualified special purpose entity, SF-I, entered
into a loan and security agreement with Autobahn Funding Company LLC
(“Autobahn”), as Lender, DZ Bank, as Agent, and other parties. We serviced
receivables that we sold to SF-I under a separate agreement. SF-I pledged the
receivables it purchased from us as collateral for funds borrowed from Autobahn.
The facility began with a maximum borrowing capacity of $100 million and a
scheduled maturity of October 2005. It was subsequently extended to revolve
through March 2006 with a final maximum borrowing capacity of $75 million.
We
dissolved SF-I simultaneously with the sale of our timeshare receivables to
SF-III.
ITEM
1A. RISK FACTORS
If
our assumptions and estimates in our business model are wrong, our future
results could be negatively impacted.
The
financial covenants in our credit facilities are based upon a business model
prepared by our management. We used a number of assumptions and estimates in
preparing the business model, including:
o We
estimated that we will sell our existing and planned inventory of Vacation
Intervals within 15 years;
o We
assumed that our level of sales and operating profits and costs can be
maintained and will grow in future periods;
o We
assumed the availability of credit facilities necessary to sustain our
operations and anticipated growth; and
o We
assumed that we can raise the prices on our products and services as market
conditions allow.
These
assumptions and estimates are subject to significant business, economic and
competitive risks and uncertainties. If our assumptions and estimates are wrong,
our future financial condition and results of operations may vary significantly
from those projected in the business model.
Neither
our past nor present independent auditors have reviewed or expressed an opinion
about our business model or our ability to achieve it.
Changes
in the timeshare industry could affect our operations.
We
operate solely within the timeshare industry. Our results of operations and
financial position could be negatively affected by any of the following
events:
o An
oversupply of timeshare units,
o A
reduction in demand for timeshare units,
o Changes
in travel and vacation patterns,
o A
decrease in popularity of our resorts with our consumers,
o Governmental
regulations or taxation of the timeshare industry, and
o Negative
publicity about the timeshare industry.
We
may be impacted by general economic conditions.
Our
customers may be more vulnerable to deteriorating economic conditions than
consumers in the luxury or upscale timeshare markets. An economic slowdown
in
the United States could depress consumer spending for Vacation Intervals.
Additionally, significant increases in the cost of transportation may limit
the
number of potential customers who travel to our resorts for a sales
presentation. During an economic slowdown we could experience increased
delinquencies in the payment of Vacation Interval promissory notes and monthly
Club dues.
We
are at risk for defaults by our customers.
We
offer
financing to the buyers of Vacation Intervals at our resorts. Notes receivable
from timeshare buyers constitute one of our principal assets. These buyers
make
down payments of at least 10% of the purchase price and deliver promissory
notes
to us for the balances. The promissory notes generally bear interest at a fixed
rate, are payable over a seven-year to ten-year period, and are secured by
a
first mortgage on the Vacation Interval. We bear the risk of defaults on these
promissory notes. Although we prescreen prospects by credit scoring them in
the
early stages of the marketing and sales process, we generally do not perform
a
detailed credit history review of our customers, as is the case with most other
timeshare developers.
We
recorded 16.2% of the purchase price of Vacation Intervals as a provision for
uncollectible notes for the year ended December 31, 2005. Our sales were
decreased by $2.6 million for customer returns in 2005. When a buyer of a
Vacation Interval defaults, we foreclose on the Vacation Interval and attempt
to
resell it. The associated marketing, selling, and administrative costs from
the
original sale are not recovered; and we will incur such costs again when we
resell the Vacation Interval. Although we may have recourse against a Vacation
Interval buyer for the unpaid price, certain states have laws that limit our
ability to recover personal judgments against customers who have defaulted
on
their loans. For example, if we were to file a lawsuit to collect the balance
owed to us by a customer in Texas (where approximately 52% of Vacation Interval
sales took place in 2005), the customer could file a court proceeding to
determine the fair market value of the property foreclosed upon. In such event,
we may not recover a personal judgment against the customer for the full amount
of the deficiency. We would only recover an amount that the indebtedness owed
to
us exceeds the fair market value of the property. Accordingly, we have generally
not pursued this remedy.
At
December 31, 2005, we had Vacation Interval customer notes receivable in the
approximate principal amount of $230.5 million, and had an allowance for
uncollectible notes of approximately $52.5 million. We cannot be certain that
this allowance is adequate.
We
must borrow funds to finance our operations.
Our
business is dependent on our ability to finance customer notes receivable
through our banks. At December 31, 2005, we owed approximately $174.9 million
of
principal to our senior lenders.
Borrowing
Base. We
have
receivable-based loan agreements with senior lenders to borrow up to
approximately $243.1 million. We pledged our customer promissory notes and
mortgages as security under these agreements. Our senior lenders typically
lend
us 75% of the principal amount of our customers' notes, and 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 notes receivable in the
approximate principal amount of $230.5 million. Approximately $337,000 in
principal amount of our customers' notes were 61 days or more past due and,
therefore, ineligible as collateral. The amount of customer notes receivable
eligible as collateral in the future may not be sufficient to support the
borrowings we may require for our liquidity and continued growth.
Negative
Cash Flow. We
ordinarily receive only 10% to 15% of the purchase price as a down payment
on
the sale of a Vacation Interval, but we must pay in full the costs of
development, marketing, and sale of the interval. Maximum borrowings available
under our credit facilities may not be sufficient to cover these costs, thereby
straining our capital resources, liquidity, and capacity to grow.
Interest
Rate Mismatch. At
December 31, 2005, our portfolio of customer loans had a weighted average fixed
interest rate of 15.3%. At such date, our borrowings (which bear interest
predominantly at variable rates) against the portfolio had a weighted average
cost of funds 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 to our senior lenders. Because our existing indebtedness currently bears
interest at variable rates and our customer notes receivable bear interest
at
fixed rates, increases in interest rates charged by our senior lenders would
erode the spread in interest rates that we have historically enjoyed and could
cause the interest expense on our borrowings to exceed our interest income
on
our portfolio of customer notes receivable. Therefore, any increase in interest
rates, particularly if sustained, could have a material adverse effect on our
results of operations, liquidity, and financial position. To the extent interest
rates decrease on loans available to our customers, we face an increased risk
that customers will pre-pay their loans, which would reduce our income from
financing activities.
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%.
Maturity
Mismatch. We
typically provide financing to our customers over a seven-year to ten-year
period. Our customer notes had an average maturity of 5.5 years at December
31,
2005. Our senior credit facilities have scheduled maturity dates between March
2007 and March 2014. Additionally, should our revolving credit facilities be
declared in default, the amount outstanding could be declared to be immediately
due and payable. Accordingly, there could be a mismatch between our anticipated
cash receipts and cash disbursements in 2006 and subsequent periods. Although
we
have historically been able to secure financing sufficient to fund our
operations, we do not presently have agreements with our senior lenders to
extend the term of our existing funding commitments beyond their scheduled
maturity dates or to replace such commitments upon their expiration. If we
are
unable to refinance our existing loans, we could be required to sell our
portfolio of customer notes receivable, probably at a substantial discount,
or
to seek other alternatives to enable us to continue in business. We cannot
be
certain that we will be able to obtain required financing in the
future.
Impact
on Sales.
Limitations on the availability of financing would inhibit sales of Vacation
Intervals due to (i) the lack of funds to finance the initial negative cash
flow
that results from sales that we finance and (ii) reduced demand if we are unable
to provide financing to purchasers of Vacation Intervals.
We
may not be able to obtain additional financing.
Several
unpredictable factors may cause our adjusted earnings before interest, income
taxes, depreciation and amortization to be insufficient to meet debt service
requirements or satisfy financial covenants. We incurred net losses in one
of
the past three years and in two of the past five years. Should we record net
losses in future periods, our cash flow and our ability to obtain additional
financing could be materially and adversely impacted.
Many
of
the factors that will determine whether or not we generate sufficient earnings
before interest, income taxes, depreciation and amortization to meet current
or
future debt service requirements and satisfy financial covenants are inherently
difficult to predict. These factors include:
| |
o
|
the
number of sales of Vacation
Intervals;
|
| |
o
|
the
average purchase price per
interval;
|
| |
o
|
the
number of customer defaults;
|
| |
o
|
our sales and marketing costs and other operating
expenses; and |
| |
o
|
the continued sale of notes
receivable. |
Our
current and planned expenses and debt repayment levels are and will be to a
large extent fixed in the short term, and are based in part on past expectations
as to future revenues and cash flows. We may be unable to reduce spending in
a
timely manner to compensate for any past or future revenue or cash flow
shortfall. It is possible that our revenue, cash flow or operating results
may
not meet the expectations of our business model, and may even result in our
being unable to meet the debt repayment schedules or financial covenants
contained in the various agreements which evidence our indebtedness.
Our
leverage is significant and may impair our ability to obtain additional
financing, reduce the amount of cash available for operations, and make us
more
vulnerable to financial downturns.
Our
agreements with our various lenders may:
| |
o
|
require
a substantial portion of our cash flow to be used to pay interest
expense
and principal;
|
| |
o
|
impair
our ability to obtain on acceptable terms, if at all, additional
financing
that might be necessary for working capital, capital expenditures
or other
purposes; and
|
| |
o
|
limit
our ability to further refinance or amend the terms of our existing
debt
obligations, if necessary or
advisable.
|
We
may
not be able to manage our financial leverage as we intend, and we may not be
able to achieve an appropriate balance between the rate of growth which we
consider acceptable and future reductions in financial leverage. If we are
not
able to achieve growth in adjusted earnings before interest, income taxes,
depreciation and amortization, we may not be able to refinance our existing
debt
obligations and we may be precluded from incurring additional indebtedness
due
to cash flow coverage requirements under existing or future debt
instruments.
Our
business is highly regulated.
We
are
subject to substantial governmental regulation in the conduct of our business.
See “Item 1. Business - Governmental Regulation, Environmental Matters, Utility
Regulation, Other Regulation, and Item 3. Legal Proceedings.” If we are found to
have violated any statute, rule, or regulation applicable to us, our assets,
or
our business, it could have a material adverse effect on our results of
operations, liquidity, and financial condition.
We
are dependent on our key personnel.
The
loss
of the services of the key members of management or our inability to hire when
needed, retain, and integrate needed new or replacement management and employees
could have a material adverse effect on our results of operations, liquidity,
and financial position in future periods.
We
will incur costs at our resorts for additional development and construction
activities.
We
intend
to continue to develop our Existing Resorts. We also intend to acquire or
develop additional timeshare resorts; however, continued development of our
resorts places substantial demands on our liquidity and capital resources,
as
well as on our personnel and administrative capabilities. Risks associated
with
our development and construction activities include:
| |
o
|
construction
costs or delays at a property may exceed original estimates which
could
make the development uneconomical or unprofitable;
|
| |
o
|
sales
of Vacation Intervals at a newly completed property may not be sufficient
to make the property profitable; and
|
| |
o
|
financing
may not be available on favorable terms for development of or the
continued sales of Vacation Intervals at a property.
|
We
cannot
be certain that we will have the liquidity and capital resources to develop
and
expand our resorts as we presently intend.
Our
development and construction activities, as well as our ownership and management
of real estate, are subject to comprehensive federal, state, and local laws
regulating such matters as environmental and health concerns, protection of
endangered species, water supplies, zoning, land development, land use, building
design and construction, marketing and sales, and other matters. Our failure
to
maintain the requisite licenses, permits, allocations, authorizations, and
other
entitlements pursuant to such laws could impact the development, completion,
and
sale of Vacation Intervals at our resorts. The enactment of "slow growth" or
"no-growth" initiatives or changes in labor or other laws in any area where
our
resorts are located could also delay, affect the cost or feasibility of, or
preclude entirely the expansion planned at one or more of our resorts.
Most
of
our resorts are located in rustic areas which in the past has often required
us
to provide public utility water and sanitation services in order to proceed
with
development. This development is subject to permission and regulation by
governmental agencies, the denial or conditioning of which could limit or
preclude development. Operation of the utilities also subjects us to risk of
liability in connection with both the quality of fresh water provided and the
treatment and discharge of waste-water.
We
must incur costs to comply with laws governing accessibility of facilities
to
disabled persons.
We
are
subject to a number of state and federal laws, including the Fair Housing Act
and the Americans with Disabilities Act (the "ADA"), that impose requirements
related to access and use by disabled persons of a variety of public
accommodations and facilities. The ADA requirements did not become effective
until after January 1, 1991. Although we believe our Existing Resorts are
substantially in compliance with these laws, we will incur additional costs
to
fully comply with these laws. Additional federal, state, and local legislation
may impose further restrictions or requirements on us with respect to access
by
disabled persons. The ultimate cost of compliance with such legislation is
not
currently known. Such costs are not expected to have a material effect on our
results of operations, liquidity, and financial condition, but these costs
could
be substantial.
We
may be vulnerable to regional conditions.
Our
performance and the value of our properties are affected by regional factors,
including local economic conditions (which may be adversely impacted by business
layoffs or downsizing, industry slowdowns, changing demographics, and other
factors) and the local regulatory climate. Our current geographic concentration
could make us more susceptible to adverse events or conditions that affect
these
areas in particular. At December 31, 2005, 55% of our owners lived in Texas,
15%
lived in Illinois, 8% lived in Massachusetts, and 4% lived in Missouri. Our
remaining customer base lives primarily in other states within the United States
of America.
We
may be liable for environmental claims.
Under
various federal, state, and local laws, ordinances, and regulations, as well
as
common law, the owner or operator of real property generally is liable for
the
costs of removal or remediation of certain hazardous or toxic substances located
on, in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of
the
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner's ability
to sell or lease a property or to borrow money using such real property as
collateral. Other federal and state laws require the removal or encapsulation
of
asbestos-containing material when such material is in poor condition or in
the
event of construction, demolition, remodeling, or renovation. Other statutes
may
require the removal of underground storage tanks. Noncompliance with these
and
other environmental, health, or safety requirements may result in the need
to
cease or alter operations at a property. Further, the owner or operator of
a
site may be subject to common law claims by third parties based on damages
and
costs resulting from violations of environmental regulations or from
contamination associated with the site. Phase I environmental reports (which
typically involve inspection without soil sampling or ground water analysis)
were prepared in 2001 by independent environmental consultants for all of the
Existing Resorts. The reports did not reveal, nor are we aware of, any
environmental liability that would have a material adverse effect on our results
of operations, liquidity, or financial position. We cannot be certain that
the
Phase I reports revealed all environmental liabilities or that no prior owner
created any material environmental condition not known to us.
Certain
environmental laws impose liability on a previous owner of property to the
extent hazardous or toxic substances were present during the prior ownership
period. A transfer of the property may not relieve an owner of such liability.
Thus, we may have liability with respect to properties previously sold by us
or
by our predecessors.
We
believe that we are in compliance in all material respects with all federal,
state, and local ordinances and regulations regarding hazardous or toxic
substances. We have not been notified by any governmental authority or third
party of any non-compliance, liability, or other claim in connection with any
of
our present or former properties.
Our
sales could decline if our resorts do not qualify for participation in an
exchange network.
The
attractiveness of Vacation Interval ownership is enhanced by the availability
of
exchange networks that allow Silverleaf Owners to exchange in a particular
year
the occupancy right in their Vacation Interval for an occupancy right in another
participating network resort. According to ARDA, the ability to exchange
Vacation Intervals was cited by many buyers as an important reason for
purchasing a Vacation Interval. Several companies, including RCI, provide
broad-based Vacation Interval exchange services, and as of December 31, 2005,
the Existing Resorts are qualified for participation in the RCI exchange network
(except for Orlando Breeze, which is qualified through Interval International,
a
competitor of RCI). We cannot be certain that we will be able to continue to
qualify the Existing Resorts or any future resorts for participation in these
networks or any other exchange network. If such exchange networks cease to
function effectively, or if our resorts are not accepted as exchanges for other
desirable resorts, our sales of Vacation Intervals could decline.
Our
sales would be affected by a secondary market for Vacation Intervals.
We
believe the market for resale of Vacation Intervals is very limited and that
resale prices are substantially below the original purchase price of a Vacation
Interval. This may make ownership of Vacation Intervals less attractive to
prospective buyers. Owners of Vacation Intervals who wish to sell their Vacation
Interval compete with our sales. Vacation Interval resale clearing houses and
brokers, including Internet-based clearinghouses, do not currently have a
material impact on our sales. However, if the secondary market for Vacation
Intervals becomes more organized and liquid, whether through Internet-based
clearinghouses and brokers or other means, the availability of resale intervals
at lower prices could materially adversely affect our prices and our ability
to
sell new Vacation Intervals.
Our
sales are seasonal in nature.
Our
sales
of Vacation Intervals have generally been lower in the months of November and
December. Cash flow and earnings may be impacted by the timing of development,
the completion of future resorts, and the potential impact of weather or other
conditions in the regions where we operate. Our quarterly operating results
could be negatively impacted by these factors.
We
are not insured for certain types of losses.
We
do not
insure certain types of losses (such as losses arising from floods and acts
of
war) either because insurance is unavailable or unaffordable. Should an
uninsured loss or a loss in excess of insured limits occur, we could be required
to repair damage at our expense or lose our capital invested in a resort, as
well as the anticipated future revenues from such resort. We would continue
to
be obligated on any mortgage indebtedness or other obligations related to the
property. Our results of operations, liquidity, and financial position could
be
adversely affected by such losses.
We
will continue to be leveraged.
Our
ability to finance customer notes receivable and develop our resorts will be
financed through borrowed funds, which would be collateralized by certain of
our
assets. In addition, our loan agreements contain financial covenants that must
be complied with in order to continue to borrow additional funds. Failure to
comply with such covenants could result in an event of default which, if not
cured or waived, could have a material adverse effect on our results of
operations, liquidity, and financial position. Future loan agreements would
likely contain similar restrictions.
The
indentures pertaining to our 6% and 8% senior subordinated notes permit us
to
incur certain additional indebtedness, including indebtedness secured by our
customer notes receivable. Accordingly, to the extent our customer notes
receivable increase and we have sufficient credit facilities available, we
may
be able to borrow additional funds. The indentures pertaining to our 6% and
8%
senior subordinated notes also permit us to borrow additional funds in order
to
finance development of our resorts. Future construction loans will likely result
in liens against the respective properties.
Common
Stock could be impacted by our indebtedness.
The
level
of our indebtedness could negatively impact holders of our Common Stock,
because:
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o
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a
substantial portion of our cash flow from operations must be dedicated
to
the payment of principal and interest on our indebtedness;
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o
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our
ability to obtain additional debt financing in the future for working
capital, capital expenditures or acquisitions may be limited;
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o
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our
level of indebtedness could limit our flexibility in reacting to
changes
in the industry and economic conditions generally;
|
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o
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negative
covenants in our loan agreements may limit our management’s ability to
operate our business in the best interests of our
shareholders;
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o
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some
of our loans are at variable rates of interest, and a substantial
increase
in interest rates could adversely affect our ability to meet debt
service
obligations; and
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o
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increased
interest expense will reduce earnings, if any.
|
We
could lose the right to supervise and manage the Clubs.
Each
Existing Resort has a Club that operates through a centralized organization
called Silverleaf Club, to manage most of our Existing Resorts on a collective
basis, except for Orlando Breeze, which has its own Club. The consolidation
of
operations at most of our Existing Resorts through Silverleaf Club
permits:
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o
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a
centralized reservation system for all
resorts;
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o
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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;
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o
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centralized
management for the entire resort system;
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o
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centralized
legal, accounting, and administrative services for the entire resort
system; and
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o
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uniform
implementation of various rules and regulations governing all resorts.
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We
currently have the right to unilaterally appoint the board of directors or
governors of the Clubs until the respective control periods have expired
(typically triggered by the percentage of sales of the planned development),
unless otherwise provided by the bylaws of the association or under applicable
law. Thereafter, the bylaws of certain of the Clubs require that a majority
of
the members of the board of directors or governors of the Club be owners of
Vacation Intervals of that resort. The loss of control of the board of directors
or governors of a Club could result in our being unable to unilaterally cause
the renewal of the collective Management Agreement with that Club when it
expires in 2010. This could result in a loss of revenue and have other
materially adverse effects on our business, financial condition, or results
of
operations.
We
could issue Preferred Stock that would have rights and preferences senior to
Common Stock.
Our
Articles of Incorporation authorize the Board of Directors to issue up to
10,000,000 shares of Preferred Stock in one or more series and to establish
the
preferences and rights (including the right to vote and the right to convert
into Common Stock) of any series of Preferred Stock issued. Such preferences
and
rights would likely grant to the holders of the Preferred Stock certain
preferences in right of payment upon a dissolution of the Company and the
liquidation of our assets that would not be available to the holders of our
Common Stock. To the extent that our credit facilities would permit, the Board
could also establish a dividend payable to the holders of the Preferred Stock
that would not be available to the holders of the Common Stock.
Our
cash flow may not be adequate upon an acceleration of deferred
taxes.
While
we
report sales of Vacation Intervals as income for financial reporting purposes
at
the time of the sale, for federal income tax purposes, we report substantially
all Vacation Interval sales on the installment method. Under the installment
method, we recognize income for regular federal income tax purposes on the
sale
of Vacation Intervals when cash is received in the form of a down payment and
as
payments on customer loans are received. Our liability for deferred taxes (i.e.,
taxes owed to taxing authorities in the future in consequence of income
previously reported in the financial statements) was $80.1 million at December
31, 2005, primarily attributable to this method of reporting Vacation Interval
sales, before utilization of any available deferred tax benefits (up to $71.6
million at December 31, 2005), including net operating loss carryforwards,
limitations on the use of which are discussed below. These amounts do not
include accrued interest on the deferred taxes, which will be payable if the
deferred taxes become payable, the amount of which is not now reasonably
ascertainable. If we should sell the installment notes or be required to factor
them or if the notes were foreclosed on by one of our senior lenders or
otherwise disposed of, the deferred gain would be reportable for regular federal
tax purposes and the deferred taxes, including interest on the taxes for the
period the taxes were deferred, as computed under Section 453 of the Internal
Revenue Code of 1986, as amended (the "Code"), would become due. We cannot
be
certain that we would have sufficient cash resources to pay those taxes and
interest nor can we be certain how the payment of such taxes may affect our
operational liquidity needs. Furthermore, if our sales of Vacation Intervals
should decrease in the future, our diminished operations may not generate either
sufficient tax losses to offset taxable income or funds to pay the deferred
tax
liability from prior periods.
We
will be subject to Alternative Minimum Taxes.
For
purposes of computing the 20% alternative minimum tax ("AMT") imposed under
Section 55 of the Code on our alternative minimum taxable income (“AMTI”), the
installment sale method is generally not allowed. The Code requires an
adjustment to our AMTI for a portion of our adjusted current earnings (“ACE”).
Our ACE must be computed without application of the installment sale method.
Accordingly, we anticipate that we will pay significant AMT in future years.
Section 53 of the Code does provide that we will be allowed a credit (“minimum
tax credit”) against our regular federal income tax liability for all or a
portion of any AMT previously paid.
Due
to
losses incurred in 2000 and 2001, we received refunds of AMT totaling $8.3
million during 2001 and $1.6 million during 2002 as a result of the carryback
of
our 2000 and 2001 AMT losses to 1999, 1998, and 1997. For 2005, we believe
our
AMT liability is approximately $2.2 million, with the result that we will have
total AMT credit carryforwards of approximately $2.9 million as of December
31,
2005.
Due
to
the exchange offer described in the next paragraph, an ownership change, within
the meaning of Section 382(g) of the Code occurred. Under Section 383, the
amount of the excess credits which exist as of the date of an ownership change
can be used to offset tax liability for post-change years only to the extent
of
the Section 383 Credit Limitation, which amount is defined as the tax liability
which is attributable to so much of the taxable income as does not exceed the
Section 382 limitation for such post-change year to the extent available after
the application of various adjustments. As a result of the above-described
refunds of previously paid AMT, there is no minimum tax credit that is subject
to Section 383 of the Code as a result of our ownership change. If it is
subsequently determined that we have an AMT liability for prior years, and
thus
a minimum tax credit as of the time of the exchange offer, or if additional
"ownership changes" within the meaning of Section 382(g) of the Code occur
in
the future, we cannot be certain that such ownership changes will not result
in
a limitation on the use of any such minimum tax credit.
Our
use of net operating loss carryforwards could be limited by an ownership
change.
We
had
net operating loss ("NOL") carryforwards of approximately $178.4 million at
December 31, 2005, for regular federal income tax purposes, related primarily
to
the immediate deduction of expenses and the simultaneous deferral of installment
sale gains. In addition to the general limitations on the carryback and
carryforward of NOLs under Section 172 of the Code, Section 382 of the Code
imposes additional limitations on the utilization of NOLs by a corporation
following various types of ownership changes which result in more than a 50
percentage point change in ownership of a corporation within a three year
period. Our completion in 2002 of our exchange offer with certain holders of
our
senior subordinated notes resulted in an ownership change within the meaning
of
Section 382(g) of the Code as of May 2, 2002 (the "change date"). As a result,
a
portion of our NOL is subject to an annual limitation for a portion of the
taxable year, which includes the change date as well as the taxable years
beginning after the change date. The annual limitation will be equal to the
value of our stock immediately before the ownership change, multiplied by the
long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term
rates in effect for any month in the three-calendar-month period ending with
the
calendar month in which the change date occurs). This annual limitation is
small
in comparison to the size of the NOL carryforwards. However, the annual
limitation may be increased for any recognized built-in gain, which existed
as
of the change date to the extent allowed in Section 382(h) of the Code.
We
believe that the built-in gain associated with the installment sale gains as
of
the change date increases the Section 382 Limitation and will allow the
utilization of most of the NOL as needed. Nevertheless, we cannot be certain
that the limitations of Section 382 will not limit or deny our future
utilization of the NOL. Such limitation or denial could require us to pay
substantial additional federal and state taxes and interest for periods
following the change date. As of December 31, 2005, we believe that the portion
of our NOL subject to these limitations is approximately $57.8 million.
Moreover,
we cannot be certain that future ownership changes will not limit or deny our
future utilization of all of our NOL. If we cannot utilize our NOL, we will
be
required to pay substantial additional federal and state taxes and interest.
Such tax and interest liabilities may adversely affect our
liquidity.
We
could be liable for back payroll taxes if our independent contractors are
reclassified as employees.
Although
we treat all on-site sales personnel as employees for payroll tax purposes,
we
do have independent contractor agreements with certain sales and marketing
persons or entities. We have not treated these independent contractors as
employees and do not withhold payroll taxes from the amounts paid to such
persons or entities. In the event the Internal Revenue Service or any state
or
local taxing authority were to successfully classify such persons or entities
as
employees, rather than as independent contractors, we could be liable for back
payroll taxes. This could have a material adverse effect on our results of
operations, liquidity and financial position.
We
could be negatively impacted by National and state Do Not Call
Lists.
We
rely
heavily on telemarketing activities to arrange tours of our resorts to potential
customers. On July 3, 2003, the Federal Communications Commission ("FCC")
released new rules and regulations promulgated under the Telephone Consumer
Protection Act of 1991, which could have a negative impact on our telemarketing
activities. The FCC has implemented, in conjunction with the Federal Trade
Commission ("FTC"), a National Do Not Call Registry, which applies to both
interstate and intrastate commercial telemarketing calls. The
FTC
has reported that approximately 83 million telephone numbers had been registered
on the National Do Not Call Registry by the end of 2004. This
could sharply limit the number of contacts we will be able to make through
our
telemarketing activities. We will continue to telemarket to individuals who
do
not place their telephone numbers on a do-not-call list and those with whom
we
have an established business relationship. Our use of autodialers to call
potential customers in our database could also be restricted by new call
abandonment standards specified in the FCC rules and regulations. We cannot
currently determine the impact that these new regulations could have on our
sales; however, the large number of telephone numbers registered on the National
Do Not Call Registry and the restrictions on our use of autodialers could
negatively affect our sales and marketing efforts and require us to use less
effective, more expensive alternative marketing methods. The
new
rules became effective on October 1, 2003 and we have experienced a decline
in
the number of telemarketing calls we are able to complete as a result of the
changes in the rules relating to the use of automatic dialers. All companies
involved in telemarketing expect some negative impact to their businesses as
a
result of the do-not-call rules and other federal and state legislation, which
seeks to protect the privacy of consumers from various types of marketing
solicitations. Because of our historical dependence on telemarketing, we believe
that these changes in the law will continue to have a material impact on our
operations and will require us to modify our historical marketing practices
in
order to both remain compliant with the law and to achieve the levels of resort
tours by consumers which are necessary for our profitable operation. We will
continue to assess both the rules' impact on operations and alternative methods
of marketing, such as direct mail, that are not impacted by the new rules.
In
addition to the National Do Not Call List, various states have implemented
Do
Not Call legislation that also may affect our business.
The
substantially increased costs of our compliance with the requirements of the
Sarbanes-Oxley Act, including the requirements of Section 404, may
adversely affect our available cash, our management team’s attention to our core
business, and the price of our stock.
We
are
not yet required to fully comply with the internal control reporting provisions
of §404 of the Sarbanes-Oxley Act of 2002, and the rules and regulations
promulgated thereunder by the SEC to implement §404. Unless extended further by
the SEC, companies of our size (i.e., non-accelerated filers) are required
to be
in full compliance with §404 for fiscal years ending on or after July 15,
2007. If we become subject to §404, we will be required to furnish a report by
our management to include in our Annual Report on Form 10-K regarding the
effectiveness of our internal control over financial reporting. The report
would
include, among other things, an assessment of the effectiveness of our internal
control over financial reporting as of the end of our fiscal year, including
a
statement as to whether or not our internal control over financial reporting
is
effective. This assessment must include disclosure of any material weaknesses
in
our internal control over financial reporting identified by management.
Section 404 would also require our auditors to express an opinion on the
effectiveness of our internal control. In an effort to be prepared to comply
with the requirements of §404, we have taken steps over the last several years
to increase the effectiveness of our internal control over financial reporting.
These internal control enhancements have resulted in substantially increased
costs to us. Our management also regularly evaluates the effectiveness and
design and operation of our disclosure controls and procedures and our internal
control over financial reporting. While we currently believe our disclosure
controls and procedures and our internal controls over financial reporting
which
are in place are effective and properly documented, we may find it necessary
to
continue to incur substantially increased costs in future periods to further
enhance our internal controls over financial reporting. There can be no
assurance that our continuing assessment of the effectiveness of our internal
control over financial reporting will not result in increased costs of
compliance which may adversely affect our available cash, our management team’s
attention to our core business, and our stock price.
The
market trading price of our Common Stock has been and is likely to continue
to
be volatile.
The
market trading price of our common stock has been and is likely to continue
to
be subject to significant fluctuations. For example, the closing market trading
price for our common stock has fluctuated over the past two years from a low
of
$0.67 to a high of $4.29. Because of our stock’s history of trading volatility,
we believe that significant market fluctuations are likely to continue in future
periods.
The
trading market for our Common Stock may be limited.
Only
approximately 35% of our shares are held by non-affiliates and there has
historically been a low and inconsistent trading volume for our shares. For
example, the average daily trading volume for our shares for the two-month
period ended February 28, 2006 was approximately 75,000 shares. There can be
no
assurance that an active and steady trading market, which is not subject to
extreme fluctuations, will develop for our shares.
Sales
of Common Stock by existing shareholders, including officers or directors,
may
adversely affect the market price of our Common Stock.
Approximately
65% of our common stock is held by affiliates, including our officers and
directors. Volume sales of stock by these affiliates in the trading market
coupled with the historically low daily trading volume for our common stock
may
materially and adversely affect the market price of our common stock.
We
may fail to meet the continued listing requirements of the AMEX.
Effective
as of September 19, 2005, AMEX accepted our stock for trading. However, due
to
the historic volatility of the market trading price of our common stock, there
can be no assurance that we will continue to meet the requirements for continued
listing on AMEX. Our failure to comply with AMEX listing standards could result
in the delisting of our common stock by AMEX, thereby limiting the ability
of
our shareholders to sell our common stock.
Certain
of our existing shareholders have the ability to exert a significant amount
of
control over the Company.
As
of
December 31, 2005, Robert E. Mead, our Chairman of the Board and Chief Executive
Officer, beneficially owned approximately 30.3% of our outstanding common stock
and two related entities, Grace Brothers, Ltd. and Grace Investments, Ltd.,
(collectively “Grace”), beneficially owned 32.3% of our common stock. As a
result, these individuals and entities are able to exert significant influence
over the Company and its activities, including the nomination, election and
removal of our board of directors, the adoption of amendments to our charter
documents, and the outcome of any corporate transaction or other matter
submitted to our shareholders for approval, including mergers, consolidations,
and the sale of all or substantially all of our assets.
Mr.
Mead's interests and Grace's interest may conflict with the interests of other
holders of our common stock and they
may
take
actions affecting us with which other shareholders may disagree. For example,
if
they determined to act in concert, Grace and Mr. Mead may decide not to enter
into a transaction in which our shareholders would receive consideration for
their shares that is much higher than the cost of their investment in our common
stock, or than the then current market price of our common stock.
Available
Information
We
file
reports with the Securities and Exchange Commission (“SEC”), including our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant
to the requirements of the Securities Exchange Act of 1934. The general public
may read and copy any materials that we file with the SEC at the SEC’s Public
Reference Room located at 100 F Street, NE, Washington, DC 20549. The public
may
also obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. This site is located at
www.sec.gov.
Our
Internet address is www.silverleafresorts.com.
On our
Internet website, we provide a link to the SEC’s website where our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished to the SEC pursuant
to
the requirements of the Securities Exchange Act of 1934 can be viewed. Upon
request, we will make available free of charge copies of the aforementioned
reports, as well as copies of the charters of the three independent committees
of our board of directors and our Code of Business Conduct and Ethics. This
information can be requested by written request to us at: Silverleaf Resorts
Inc. Attention: Sandra G. Cearley, Corporate Secretary, 1221 River Bend Drive,
Suite 120, Dallas, Texas 75247. The information contained on our website, or
on
other websites linked to our website, is not part of this report.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
principal executive office, located in Dallas, Texas, is approximately 66,000
square feet of leased space. We also maintain two leased telemarketing centers
in the Dallas area. Our sales are conducted primarily through sales centers
located at our various resorts and an off-site sales center in Irving, Texas,
which opened in March 2006.
At
December 31, 2005, we owned a total of 13 timeshare resorts. Each of these
resorts was encumbered by various liens and security agreements at December
31,
2005 due to inventory from each resort being pledged as collateral under our
inventory credit facilities with our senior lenders. See Footnote 8 - Debt,
in
the Notes to our Consolidated Financial Statements for a further description
of
these credit facilities. Principal developmental activity which occurred at
our
Existing Resorts during 2005 and future plans are summarized below.
Continued
Development of The Villages Resort. The
Villages Resort, located approximately 100 miles east of Dallas, Texas, has
346
existing units. We intend to develop approximately 84 additional units (4,368
Vacation Intervals) at this resort in the future. During 2005, we added 12
new
units at this resort.
Continued
Development of Piney Shores Resort. Piney
Shores Resort, located near Conroe, Texas, north of Houston, has 178 existing
units. We intend to develop approximately 114 additional units (5,928 Vacation
Intervals) at this resort. During 2005, we did not add any new units at this
resort.
Continued
Development of Timber Creek Resort. Timber
Creek Resort, located in Desoto, Missouri, has 72 existing units. We intend
to
develop approximately 84 additional units (4,368 Vacation Intervals) at this
resort. During 2005, we did not add any new units at this resort.
Continued
Development of
Fox River Resort. Fox
River
Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 222
existing units. We intend to develop approximately 228 additional units (11,856
Vacation Intervals) at this resort. During 2005, we added 24 new units at this
resort.
Continued
Development of
Apple Mountain Resort. Apple
Mountain Resort, located approximately 125 miles north of Atlanta, Georgia,
has
72 existing units. We intend to develop approximately 180 additional units
(9,360 Vacation Intervals) at this resort. During 2005, we did not add any
new
units at this resort.
Continued
Development of
Ozark Mountain Resort. Ozark
Mountain Resort, located approximately 15 miles from Branson, Missouri, has
136
existing units. We intend to develop approximately 24 additional units (1,248
Vacation Intervals) at this resort. During 2005, we did not add any new units
at
this resort.
Continued
Development of
Holiday Hills Resort. Holiday
Hills Resort, located two miles east of Branson, Missouri, in Taney County,
has
422 existing units. We intend to develop approximately 366 additional units
(19,004 Vacation Intervals) at this resort. During 2005, we added 30 units
at
this resort. In addition, in December 2005 we acquired approximately 81 acres
of
land near this resort that we intend to newly develop in the
future.
Continued
Development of
Hill Country Resort. Hill
Country Resort, located near Canyon Lake in the hill country of central Texas
between Austin and San Antonio, has 290 existing units. We intend to develop
approximately 222 additional units (11,544 Vacation Intervals) at this resort.
During 2005, we added 12 new units at this resort.
Continued Development
of Oak N' Spruce Resort. Oak
N’
Spruce Resort, located 134 miles west of Boston, Massachusetts, has 284 existing
units. We intend to develop approximately 66 additional units (3,432 Vacation
Intervals) at this resort in the future. During 2005, we added 12 new units
at
this resort.
Continued
Development of
Silverleaf’s Seaside Resort. Silverleaf’s
Seaside Resort, located in Galveston, Texas, has 96 existing units. We intend
to
develop approximately 186 additional units (9,672 Vacation Intervals) at this
resort. During 2005, we added 12 new units at this resort.
Continued
Development of Orlando Breeze Resort. Orlando
Breeze Resort, located in Davenport, Florida, just outside Orlando, Florida,
has
48 existing units. We intend to develop approximately 24 additional units (1,248
Vacation Intervals) at this resort. During 2005, we did not add any new units
at
this resort. Our public offering statement filed with the Florida Bureau of
Standards and Registrations was approved in February 2005, granting us timeshare
sales approval for 16 units encompassing 832 one-week Vacation Intervals. By
December 31, 2005, we were granted sales approval for all of the 48 existing
units at the resort, encompassing a total of 2,496 one-week Vacation Intervals.
As
of
December 31, 2005, we had construction commitments of approximately $11.0
million.
In
December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia,
Pennsylvania, for approximately $1.9 million. The property was intended to
be
developed as a Getaway Resort (i.e., Beech Mountain Resort). We received
regulatory approval to develop 408 units
(21,216 Vacation Intervals), but we did not schedule dates for construction,
completion of initial units, or commencement of marketing and sales efforts.
In
2003, we determined that we would not develop this property as initially
planned. 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.
Future
Growth Strategy
Our
future growth strategy is to conservatively increase annual revenues through
a
combination of:
| |
·
|
continuing
to develop new or existing resorts;
|
| |
·
|
maintaining
marketing, sales, and development activities at those resorts in
accordance with our current business
model;
|
| |
·
|
concentrating
on marketing to existing members, including sales of upgraded Vacation
Intervals, additional week sales, and existing owner referral
programs;
|
| |
·
|
opening
new off-site sales centers in major metropolitan areas;
and
|
| |
·
|
emphasizing
our secondary products, such as biennial (alternate year) intervals,
to
broaden our potential market with a wider price range of products
for
first time buyers.
|
Competitive
Advantages
We
believe our business affords us the following competitive
advantages:
Convenient
Getaway Locations.
Our
Getaway Resorts are located within a two-hour drive of a majority of our target
customers' residences, which accommodates what we believe to be the growing
demand for shorter, more frequent, close-to-home vacations. This proximity
of
our customer base to our resorts facilitates use of our Bonus Time program,
allowing Silverleaf Owners to use vacant units, subject to availability and
certain limitations. We believe we are the only timeshare operator that offers
customers these expanded use benefits. Silverleaf Owners can also conveniently
drive to and enjoy non-lodging resort amenities at our resorts year-round on
a
day use "country-club" type basis.
Substantial
Internal Growth Capacity.
At
December 31, 2005, we had an inventory of 27,396 Vacation Intervals and a master
plan to construct new units which will result in up to 82,028 additional
Vacation Intervals at our Existing Resorts. Our master plan for construction
of
new units is contingent upon future sales at our Existing Resorts and the
availability of financing, granting of governmental permits, and future
land-planning and site-layout considerations.
In-House
Operations.
We have
in-house marketing, sales, financing, development, and property management
capabilities. While we utilize outside contractors to supplement internal
resources, our internal capabilities provide greater control over all phases
of
our operations, help maintain operating standards, and reduce overall
costs.
Lower
Construction and Operating Costs.
We have
developed and generally employ standard architectural designs and operating
procedures, which we believe significantly reduce construction and operating
expenses. Standardization and integration also allow us to rapidly develop
new
inventory in response to demand. Weather permitting, new units at Existing
Resorts can normally be constructed on an "as needed" basis within 180 to 270
days.
Centralized
Property Management Supervision.
We
presently supervise the operation of all of our Existing Resorts (except for
Orlando Breeze) on an integrated, centralized, and collective basis through
our
Management Agreement with Silverleaf Club with operating and maintenance costs
paid from Silverleaf Owners' monthly dues. While our Orlando Breeze resort
in
Florida has its own separate Club (Orlando Breeze Resort Club) we also provide
centralized supervision of its operations under the terms of a written
agreement, to ensure the quality of services provided to Orlando Breeze
timeshare owners. We believe that consolidation of resort operations benefits
Silverleaf Owners by providing them with a uniform level of service,
accommodations, and amenities on a standardized, cost-effective basis.
Integration also facilitates our internal exchange program and the Bonus Time
program.
Experienced
Management.
Our
senior management has extensive experience in the acquisition, development,
marketing, sales, and operation of timeshare resorts. The senior officers have
an average of sixteen years of experience in the timeshare
industry.
Resorts
Summary
The
following tables set forth certain information regarding each of the Existing
Resorts at December 31, 2005, unless otherwise indicated.
Existing
Resorts
|
|
|
|
|
Units
at Resorts
|
|
Vacation
Intervals at Resorts
|
|
|
|
Vacation
Intervals Sold
|
|
|
|
|
|
|
|
|
Primary
Market Served
|
|
Inventory
At 12/31/05
|
|
Planned
Expansion(b)
|
|
Inventory
At 12/31/05
|
|
Planned
Expansion
|
|
Date
Sales Commenced
|
|
Through
12/31/05
(c)
|
|
In
2005 Only (a)
|
|
Percentage
Through 12/31/05
|
|
Avereage
Sales Price in 2005 (a)
|
|
Amenities
/ Activities(d)
|
|
|
Getaway
Resorts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holly
Lake
|
|
|
Dallas-
|
|
|
130
|
|
|
—
|
|
|
1,833
|
|
|
—
|
|
1982
|
|
|
4,667
|
|
|
687
|
|
|
71.8
|
%
|
$
|
9,065
|
|
|
B,F,G,H,M,S,T
|
|
|
Hawkins,
TX
|
|
|
Ft.
Worth, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Villages
|
|
|
Dallas-
|
|
|
346
|
|
|
84
|
|
|
6,017
|
|
|
4,368
(g
|
)
|
1980
|
|
|
11,567
|
|
|
1,293
|
|
|
65.8
|
%
|
|
10,022
|
|
|
B,F,H,M,S,T
|
|
|
Flint,
TX
|
|
|
Ft.
Worth, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lake
O' The Woods
|
|
|
Dallas-
|
|
|
64
|
|
|
—
|
|
|
685
|
|
|
—
|
|
1987
|
|
|
2,515
|
|
|
716
|
|
|
78.6
|
%
|
|
8,688
|
|
|
F,M,S,T(e)
|
|
|
Flint,
TX
|
|
|
Ft.
Worth, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Piney
Shores
|
|
|
Houston,
TX
|
|
|
178
|
|
|
114
(g
|
)
|
|
2,911
|
|
|
5,928
(g
|
)
|
1988
|
|
|
6,153
|
|
|
855
|
|
|
67.9
|
%
|
|
11,742
|
|
|
B,F,H,M,S,T
|
|
|
Conroe,
TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber
Creek
|
|
|
St.
Louis,
|
|
|
72
|
|
|
84
(g
|
)
|
|
1,360
|
|
|
4,368
(g
|
)
|
1997
|
|
|
2,384
|
|
|
171
|
|
|
63.7
|
%
|
|
13,384
|
|
|
B,F,G,M,S,T
|
|
|
DeSoto,
MO
|
|
|
MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fox
River
|
|
|
Chicago,
IL
|
|
|
222
|
|
|
228
(g
|
)
|
|
2,798
|
|
|
11,856
(g
|
)
|
1997
|
|
|
8,746
|
|
|
1,140
|
|
|
75.8
|
%
|
|
12,898
|
|
|
B,F,G,M,S,T
|
|
|
Sheridan,
IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apple
Mountain
|
|
|
Atlanta,
GA
|
|
|
72
|
|
|
180
(g
|
)
|
|
2,178
|
|
|
9,360
(g
|
)
|
1999
|
|
|
1,566
|
|
|
167
|
|
|
41.8
|
%
|
|
15,032
|
|
|
G,M,S,T
|
|
|
Clarkesville,
GA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Destination
Resorts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ozark
Mountain
|
|
|
Branson,
|
|
|
136
|
|
|
24
(g
|
)
|
|
1,143
|
|
|
1,248
(g
|
)
|
1982
|
|
|
5,705
|
|
|
87
|
|
|
83.3
|
%
|
|
9,124
|
|
|
B,F,M,S,T
|
|
|
Kimberling
City, MO
|
|
|
MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holiday
Hills
|
|
|
Branson,
|
|
|
422
|
|
|
366
(g
|
)
|
|
2,314
|
|
|
19,004
(g
|
)
|
1984
|
|
|
19,494
|
|
|
1,325
|
|
|
89.4
|
%
|
|
8,781
|
|
|
G,S,T(e)
|
|
|
Branson,
MO
|
|
|
MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hill
Country
|
|
|
Austin-San
|
|
|
290
(f
|
)
|
|
222
(g
|
)
|
|
2,059
|
|
|
11,544
(g
|
)
|
1984
|
|
|
12,649
|
|
|
1,715
|
|
|
86.0
|
%
|
|
9,408
|
|
|
H,M,S,T(e)
|
|
|
Canyon
Lake, TX
|
|
|
Antonio,
TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oak
N' Spruce
|
|
|
Boston,
MA-
|
|
|
284
|
|
|
66
(g
|
)
|
|
1,607
|
|
|
3,432
(g
|
)
|
1998
|
|
|
13,161
|
|
|
1,343
|
|
|
89.1
|
%
|
|
11,188
|
|
|
F,M,S,T
|
|
|
South
Lee, MA
|
|
|
New
York, NY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silverleaf's
Seaside
|
|
|
Galveston,
|
|
|
96
|
|
|
186
(g
|
)
|
|
473
|
|
|
9,672
(g
|
)
|
2000
|
|
|
4,519
|
|
|
652
|
|
|
90.5
|
%
|
|
9,940
|
|
|
S,T
|
|
|
Galveston,
TX
|
|
|
TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orlando
Breeze
|
|
|
Orlando,
|
|
|
48
|
|
|
24
(g
|
)
|
|
2,018
|
|
|
1,248
(g
|
)
|
2005
|
|
|
478
|
|
|
39
|
|
|
19.2
|
%
|
|
14,246
|
|
|
S
|
|
|
Davenport,
FL
|
|
|
FL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2,360
|
|
|
1,578
|
|
|
27,396
|
|
|
82,028
|
|
|
|
|
|
93,604
|
|
|
10,190
|
|
|
77.4
|
%
|
$
|
10,361
|
|
|
|
|
| (a) |
These
totals do not reflect sales of upgraded Vacation Intervals to existing
Silverleaf Owners. In this context, a sale of an "upgraded Vacation
Interval" refers to an exchange of a lower priced interval for a
higher
priced interval in which the Silverleaf Owner is given credit for
all
principal payments previously made toward the purchase of the lower
priced
interval. For the year ended December 31, 2005, upgrade sales at
the
Existing Resorts were as follows:
|
|
|
|
Upgraded
Vacation
Intervals
Sold
|
|
Average
Sales Price
For
the Year
Ended
12/31/05
—
Net of
|
|
|
Holly
Lake
|
|
|
69
|
|
$
|
5,657
|
|
|
The
Villages
|
|
|
280
|
|
|
7,514
|
|
|
Lake
O' The Woods
|
|
|
40
|
|
|
5,806
|
|
|
Piney
Shores
|
|
|
240
|
|
|
7,815
|
|
|
Hill
Country
|
|
|
854
|
|
|
8,319
|
|
|
Timber
Creek
|
|
|
18
|
|
|
5,248
|
|
|
Fox
River
|
|
|
279
|
|
|
7,896
|
|
|
Ozark
Mountain
|
|
|
55
|
|
|
9,307
|
|
|
Holiday
Hills
|
|
|
1,240
|
|
|
9,158
|
|
|
Oak
N’ Spruce
|
|
|
424
|
|
|
9,767
|
|
|
Apple
Mountain
|
|
|
28
|
|
|
5,773
|
|
|
Silverleaf's
Seaside
|
|
|
667
|
|
|
9,354
|
|
|
Orlando
Breeze
|
|
|
451
|
|
|
9,817
|
|
| |
|
|
4,645
|
|
|
|
|
|
|
The
average sales price for the 4,645 upgraded Vacation Intervals
sold was
$8,793 for the year ended December 31,
2005.
|
| (b) |
Represents
units included in our master plan. This plan is subject to change
based
upon various factors, including consumer demand, the availability
of
financing, grant of governmental land-use permits, and future
land-planning and site layout considerations. The following chart
reflects
the status of certain planned units at December 31,
2005:
|
|
|
|
Land-Use
Process
Not
Started
|
|
Land-Use
Process
Pending
|
|
Land-Use
Process
Complete
|
|
|
|
Total
|
|
|
The
Villages
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
Piney
Shores
|
|
|
—
|
|
|
—
|
|
|
114
|
|
|
—
|
|
|
114
|
|
|
Timber
Creek
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
Fox
River
|
|
|
—
|
|
|
—
|
|
|
222
|
|
|
6
|
|
|
228
|
|
|
Apple
Mountain
|
|
|
126
|
|
|
—
|
|
|
54
|
|
|
—
|
|
|
180
|
|
|
Ozark
Mountain
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
|
24
|
|
|
Holiday
Hills
|
|
|
—
|
|
|
—
|
|
|
354
|
|
|
12
|
|
|
366
|
|
|
Hill
Country
|
|
|
—
|
|
|
—
|
|
|
222
|
|
|
—
|
|
|
222
|
|
|
Oak
N' Spruce
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
24
|
|
|
66
|
|
|
Silverleaf's
Seaside
|
|
|
—
|
|
|
—
|
|
|
162
|
|
|
24
|
|
|
186
|
|
|
Orlando
Breeze
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
24
|
|
| |
|
|
126
|
|
|
—
|
|
|
1,374
|
|
|
78
|
|
|
1,578
|
|
|
|
"Land-Use
Process Pending" means that we have commenced the process which we
believe
is required under current law in order to obtain the necessary land-use
authorizations from the applicable local governmental authority with
jurisdiction, including submitting for approval any architectural
drawings, preliminary plats, or other attendant items as may be
required.
|
|
|
"Land-Use
Process Complete" means either that (i) we believe that we have obtained
all necessary land-use authorizations under current law from the
applicable local governmental authority with jurisdiction, including
the
approval and filing of any required preliminary or final plat and
the
issuance of building permit(s), in each case to the extent applicable,
or
(ii) upon payment of any required filing or other fees, we believe
that we
will under current law obtain such necessary authorizations without
further process.
|
| (c) |
These
totals are net of intervals received from upgrading customers and
from
intervals received from
cancellations.
|
| (d) |
Principal
amenities available to Silverleaf Owners at each resort are indicated
by
the following symbols: B — boating; F — fishing; G — golf; H — horseback
riding; M — miniature golf; S — swimming pool; and T —
tennis.
|
| (e) |
Boating
is available near the resort.
|
| (f) |
Includes
three units which have not been finished-out for accommodations
and which
are currently used for other
purposes.
|
| (g) |
Engineering,
architectural, and construction estimates have not been completed,
and we
cannot be certain that we will develop these properties at the
unit
numbers currently projected.
|
Features
Common To Existing Resorts
Getaway
Resorts are primarily located in rustic areas offering Silverleaf Owners a
quiet, relaxing vacation environment. Furthermore, the resorts offer different
vacation activities, including golf, fishing, boating, swimming, horseback
riding, tennis, and archery. Destination Resorts are located in or near areas
with national tourist appeal. Features common to the Existing Resorts include
the following:
Bonus
Time Program.
Silverleaf Club’s Bonus Time program offers Silverleaf Club members a benefit
not typically enjoyed by any other timeshare owners. In addition to the right
to
use a unit one week per year, the Bonus Time program allows all Silverleaf
Club
members, who are current on their dues and installment payments, to use vacant
units for up to three nights at a time at any of our owned resorts. Sunday
through Thursday night stays are currently without charge, while Friday through
Saturday stays presently cost $49.95 per night payable to Silverleaf Club.
The
Bonus Time program is limited based on the availability of units. Availability
is created when a Silverleaf Owner does not use his or her owned week.
Silverleaf Owners who have utilized the resort less frequently are given
priority to use the program and may only use an interval with an equal or lower
rating than their owned Vacation Interval. We believe this program is important
as many vacationers prefer shorter two to three day vacations. Owners of unused
intervals that are utilized by the Bonus Time program are not compensated other
than by their participation in the Bonus Time program.
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.
Year-Round
Use of Amenities.
Even
when not using the lodging facilities, Silverleaf Owners have unlimited
year-round day usage of the amenities located at the Existing Resorts, such
as
boating, fishing, miniature golf, tennis, swimming, or hiking, for little or
no
additional cost. Certain amenities, however, such as golf, horseback riding,
or
watercraft rentals, may require a usage fee.
Exchange
Privileges.
Each
Silverleaf Owner has certain exchange privileges through the Silverleaf Club
which may be used on an annual basis to (i) exchange an interval for a different
interval (week) at the same resort so long as the desired interval is of an
equal or lower rating; or (ii) exchange an interval for the same interval (week)
at any other of the Existing Resorts. These exchange rights are a convenience
we
provide our members as an accommodation to them, and are conditioned upon
availability of the desired interval or resort. Approximately 4,455 exchanges
occurred in 2005. Silverleaf Owners pay an exchange fee of $75 to Silverleaf
Club for each such internal exchange. In addition, most Silverleaf Owners may
join the exchange program administered by RCI for an annual fee of $89. Orlando
Breeze, is not under contract with RCI; however it is under contract with
Interval International, Inc., a competitor of RCI.
Deeded
Ownership.
We
typically sell a Vacation Interval that entitles the owner to use a specific
unit for a designated one-week interval each year. The Vacation Interval
purchaser receives a recorded deed, which grants the purchaser a percentage
interest in a specific unit for a designated week. We also sell a biennial
(alternate year) Vacation Interval that allows the owner to use a unit for
a
one-week interval every other year with reduced dues.
Management
Club.
Each of
the Existing Resorts has a Club for the benefit of the timeshare owners. At
December 31, 2005, the Clubs (except for the club at Orlando Breeze) operate
under Silverleaf Club to manage the Existing Resorts on a centralized and
collective basis. We have contracted with Silverleaf Club to perform the
supervisory and management functions granted by the Clubs. Costs of these
operations are covered by monthly dues paid by timeshare owners to their
respective Clubs together with income generated by the operation of certain
amenities at each respective resort. Our new destination resort in Florida,
Orlando Breeze, has its own club, Orlando Breeze Resort Club, which operates
independently of Silverleaf Club; however, we supervise the management and
operation of the Orlando Breeze Resort Club under the terms of a written
agreement.
On-Site
Security.
Each of
the Resorts is patrolled by security personnel who are either employees of
the
Management Club or personnel of independent security service companies that
have
contracted with the Clubs.
Description
Of Timeshare Resorts Owned and Operated By Silverleaf
Getaway
Resorts
Holly
Lake Resort. Holly
Lake is a family-oriented golf resort located in the Piney Woods of east Texas,
approximately 105 miles east of Dallas, Texas. The timeshare portion of Holly
Lake is part of a 4,300 acre mixed-use development of single-family lots and
timeshare units with other third-party developers. We own approximately 1,206
acres within Holly Lake, of which approximately 1,133 acres may not be developed
due to deed restrictions. At December 31, 2005, approximately 27 acres were
developed. We have no future development plans.
At
December 31, 2005, 130 units were completed and no additional units are planned
for development. Three different types of units are offered at the resort:
(i)
two bedroom, two bath, vinyl siding, fourplexes; (ii) one bedroom, one bath,
one
sleeping loft, log construction duplexes; and (iii) two bedroom, two bath,
log
construction fourplexes. Each unit has a living room with sleeper sofa and
full
kitchen. Other amenities within each unit include whirlpool tub, color
television, and vaulted ceilings. Certain units include interior ceiling fans,
imported ceramic tile, over-sized sliding glass doors, and rattan and pine
furnishings.
Amenities
at the resort include an 18-hole golf course with pro shop, 19th-hole private
club, country store, indoor rodeo arena and stables, five tennis courts (four
lighted), two different lakes (one with sandy swimming beach, one with boat
launch for water-skiing), three outdoor swimming pools with bathhouses and
pavilion, hiking/nature trails, children's playground area, two miniature golf
courses, five picnic areas, activity center with grill, big screen television,
game room with arcade games and pool tables, horseback trails, and activity
areas for basketball, horseshoes, volleyball, shuffleboard, and archery.
Silverleaf Owners can also rent canoes, bicycles, and water trikes. Homeowners
in neighboring subdivisions are entitled to use the amenities at Holly Lake
pursuant to easements or use agreements.
At
December 31, 2005, the resort contained 6,500 Vacation Intervals, of which
1,833
intervals remained available for sale. We have no plans to build additional
units. Vacation Intervals at the resort are currently priced from $8,000 to
$12,300 for one-week stays. During 2005, 687 Vacation Intervals were
sold.
The
Villages and Lake O' The Woods Resorts.
The
Villages and Lake O' The Woods are sister resorts located on the shores of
Lake
Palestine, approximately 100 miles east of Dallas, Texas. The Villages, located
approximately five miles northwest of Lake O' The Woods, is an active sports
resort popular for water-skiing and boating. Lake O' The Woods is a quiet wooded
resort where Silverleaf Owners can enjoy the seclusion of dense pine forests
less than two hours from the Dallas-Fort Worth metroplex. The Villages is a
mixed-use development of single-family lots and timeshare units, while Lake
O'
The Woods has been developed solely as a timeshare resort. The two resorts
contain approximately 652 acres, of which approximately 379 may not be developed
due to deed restrictions. At December 31, 2005, approximately 181 acres were
developed and we plan to develop another 18 acres in the future.
At
December 31, 2005, 346 units were completed at The Villages and 64 units were
completed at Lake O' The Woods. An additional 84 units are planned for
development at The Villages and no additional units are planned for development
at Lake O' The Woods. There are five different types of units at these resorts:
(i) three bedroom, two and one-half bath, wood siding exterior duplexes and
fourplexes (two units); (ii) two bedroom, two and one-half bath, wood siding
exterior duplexes and fourplexes; (iii) two bedroom, two bath, brick and siding
exterior fourplexes; (iv) two bedroom, two bath, wood and vinyl siding exterior
fourplexes, sixplexes, twelveplexes and a sixteenplex; and (v) one bedroom,
one
bath with two-bed loft sleeping area, log construction duplexes. Amenities
within each unit include full kitchen, whirlpool tub, and color television.
Certain units include interior ceiling fans, ceramic tile, and/or a fireplace.
"Presidents Harbor" units feature a larger, more spacious floor plan with a
back
veranda, washer and dryer, and a more elegant decor.
Both
resorts are situated on Lake Palestine, a 27,000 acre public lake. Recreational
facilities and improvements at The Villages include a full service marina with
convenience store, gas dock, boat launch, water-craft rentals, and covered
and
locked rental boat stalls; three swimming pools; two lighted tennis courts;
miniature golf course; nature trails; camp sites; riding stables;
soccer/softball field; children's playground; RV sites; a new 9,445 square
foot
activity center with theater room with wide-screen television, reading room,
grill, tanning beds, pool table, sauna, and small indoor gym; and competitive
sports facilities which include horseshoe pits, archery range, and shuffleboard,
volleyball, and basketball courts. Silverleaf Owners at The Villages can also
rent or use motor boats, paddle boats, and pontoon boats. Neighboring homeowners
are also entitled to use these amenities pursuant to a use
agreement.
Recreational
facilities at Lake O' The Woods include swimming pool, bathhouse, lighted tennis
court, a recreational beach area with picnic areas, a fishing pier on Lake
Palestine, nature trails, soccer/softball field, children's playground, RV
sites, an activity center with wide-screen television and pool table, horseshoe
pits, archery range, miniature golf course, shuffleboard, volleyball, and
basketball courts.
At
December 31, 2005, The Villages contained 17,584 total Vacation Intervals,
of
which 6,017 remained available for sale. We plan to build 84 additional units
at
The Villages, which would yield an additional 4,368 Vacation Intervals available
for sale. At December 31, 2005, Lake O' The Woods contained 3,200 total Vacation
Intervals, of which 685 remained available for sale. We have no plans to build
additional units at Lake O' The Woods. Vacation Intervals at The Villages and
Lake O' The Woods are currently priced from $8,000 to $16,300 for one-week
stays
(and start at $6,250 for biennial intervals), while one-week "Presidents Harbor"
intervals are priced at $9,900 to $22,500 depending on the value rating of
the
interval. During 2005, 1,293 and 716 Vacation Intervals were sold at The
Villages and Lake O' The Woods, respectively.
Piney
Shores Resort.
Piney
Shores Resort is a quiet, wooded resort ideally located for day-trips from
metropolitan areas in the southeastern Gulf Coast area of Texas. Piney Shores
Resort is located on the shores of Lake Conroe, approximately 40 miles north
of
Houston, Texas. The resort contains approximately 113 acres. At December 31,
2005, approximately 72 acres were developed and we plan to develop another
11
acres in the future.
At
December 31, 2005, 178 units were completed and 114 units are planned for
development at Piney Shores Resort. All units are two bedroom, two bath units
and will comfortably accommodate up to six people. Amenities include a living
room with sleeper, full kitchen, whirlpool tub, color television, and interior
ceiling fans. Certain "lodge-style" units feature stone fireplaces, white-washed
pine wall coverings, "age-worn" paint finishes, and antique furnishings.
“Presidents Cove” units feature a larger, more spacious floor plan with a back
veranda, washer and dryer, and a more elegant décor.
The
primary recreational amenity at the resort is Lake Conroe, a 21,000 acre public
lake. Other recreational facilities and improvements available at the resort
include two swimming pools and a spa, a bathhouse complete with outdoor shower
and restrooms, lighted tennis court, miniature golf course, stables, horseback
riding trails, children's playground, picnic areas, boat launch, beach area,
4,626-square foot activity center, 32-seat theatre room with big screen
television, covered wagon rides, and facilities for horseshoes, archery,
shuffleboard, and basketball.
At
December 31, 2005, the resort contained 9,064 Vacation Intervals, of which
2,911
remained available for sale. We intend to build 114 additional units, which
would yield an additional 5,928 Vacation Intervals available for sale. Vacation
Intervals at the resort are currently priced from $8,000 to $16,300 for one-week
stays (and start at $6,250 for biennial intervals), while one-week “Presidents
Cove” intervals are priced at $9,900 to $22,500 depending on the value rating of
the interval. During 2005, 855 Vacation Intervals were sold.
Timber
Creek Resort. Timber
Creek Resort, in Desoto, Missouri, is located approximately 50 miles south
of
St. Louis, Missouri. The resort contains approximately 332 acres. At December
31, 2005, approximately 180 acres were developed and we plan to develop another
6 acres in the future.
At
December 31, 2005, 72 units were completed and an additional 84 units are
planned for future development at Timber Creek Resort. All units are two
bedroom, two bath units. Amenities within each new unit include a living room
with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
units include a fireplace, ceiling fans, imported ceramic tile, French doors,
and rattan or pine furniture.
The
primary recreational amenity available at the resort is a 40-acre fishing lake.
Other amenities include a clubhouse, a five-hole par three executive golf
course, swimming pool, two lighted tennis courts, themed miniature golf course,
volleyball court, shuffleboard/multi-use sports court, fitness center,
horseshoes, archery, a welcome center, playground, arcade, movie room, tanning
bed, cedar sauna, sales and registration building, hook-ups for recreational
vehicles, and boat docks. We are obligated to maintain and provide campground
facilities for members of the previous owner's campground system.
At
December 31, 2005, the resort contained 3,744 Vacation Intervals and 1,360
Vacation Intervals remained available for sale. We plan to build 84 additional
units, which would collectively yield 4,368 additional Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$8,000 to $16,300 for one-week stays (and start at $6,250 for biennial
intervals). During 2005, 171 Vacation Intervals were sold.
Fox
River Resort. Fox
River
Resort, in Sheridan, Illinois, is located approximately 70 miles southwest
of
Chicago, Illinois. The resort contains approximately 372 acres. At December
31,
2005, approximately 156 acres were developed and we plan to develop another
26
acres in the future.
At
December 31, 2005, 222 units are completed and 228 units are planned for future
development at Fox River Resort. All units are two bedroom, two bath units.
Amenities within each unit include a living room with sleeper sofa, full
kitchen, whirlpool tub, and color television. Certain units include ceiling
fans, ceramic tile, and rattan or pine furniture. “Presidents Lakeside” units
feature a larger, more spacious floor plan with a back veranda, washer and
dryer, and a more elegant décor.
Amenities
currently available at the resort include five-hole par three executive golf
course, outdoor swimming pool, clubhouse, covered pool, miniature golf course,
horseback riding trails, stable and corral, welcome center, sales and
registration buildings, hook-ups for recreational vehicles, a tennis court,
a
basketball court / seasonal ice-skating rink, shuffleboard courts, sand
volleyball courts, outdoor pavilion, and playgrounds. We also offer winter
recreational activities at this resort, including ice-skating, snowmobiling,
and
cross-country skiing. We are obligated to maintain and provide campground
facilities for members of the previous owner's campground system.
At
December 31, 2005, the resort contained 11,544 Vacation Intervals and 2,798
Vacation Intervals remained available for sale. We plan to build 228 additional
units, which would collectively yield 11,856 additional Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$8,000 to $16,300 for one-week stays (and start at $6,250 for biennial
intervals), while one-week “Presidents River” intervals are priced at $9,900 to
$24,000 depending on the value rating of the interval. During 2005, 1,140
Vacation Intervals were sold.
Apple
Mountain Resort.
Apple
Mountain Resort, in Clarkesville, Georgia, is located approximately 125 miles
north of Atlanta, Georgia. The resort is situated on 285 acres of beautiful
open
pastures and rolling hills, with 150 acres being the resort’s golf course. At
December 31, 2005, approximately 191 acres were developed and we plan to develop
another 16 acres in the future.
At
December 31, 2005, 72 units are completed and 180 units are planned for
development at Apple Mountain Resort. The “lodge-style” units were the first
units developed. Each unit is approximately 824 square feet with all units
being
two bedrooms, two full baths. Amenities within each unit include a living room
with sleeper sofa, full kitchen, whirlpool tub, and color television. Certain
units include ceiling fans, imported ceramic tile, electronic door locks, and
rattan or pine furniture.
Amenities
at the resort include a 9,445 square foot administration building and activity
center featuring a theatre room with a wide screen television, a member services
building, pool tables, arcade games, and snack area. Other amenities at the
resort include two tennis courts, swimming pool, shuffleboard, miniature golf
course, and volleyball and basketball courts. This resort is located in the
Blue
Ridge Mountains and offers accessibility to many other outdoor recreational
activities, including Class 5 white water rapids.
The
primary recreational amenity available to the resort is an established 18-hole
golf course situated on approximately 150 acres of open fairways and rolling
hills. Elevation of the course is 1,530 feet at the lowest point and 1,600
feet
at the highest point. The course is designed with approximately 104,000 square
feet of bent grass greens. The course's tees total approximately 2 acres,
fairways total approximately 24 acres, and primary roughs total approximately
29
acres, all covered with TIF 419 Bermuda. The balance of grass totals
approximately 95 acres and is covered with Fescue. The course has 19 sand
bunkers totaling 19,800 square feet and there are approximately seven miles
of
cart paths. Lining the course are apple orchards totaling approximately four
acres, with white pine roughs along twelve of the fairways. The course has
a
five-acre irrigation lake and a pond of approximately 900 square feet located
on
the fifteenth hole. The driving range covers approximately nine acres and has
20,000 square feet of tee area covered in TIF 419 Bermuda. The pro shop offers
a
full line of golfing accessories and equipment. There is also a golf
professional on site to offer lessons and to plan events for the
club.
At
December 31, 2005, the resort contained 3,744 Vacation Intervals, of which
2,178
remained available for sale. We plan to build 180 additional “lodge-style”
units, which would yield an additional 9,360 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,000 to
$16,300 for one-week stays (and start at $6,250 for biennial intervals). During
2005, 167 Vacation Intervals were sold.
Destination
Resorts
Ozark
Mountain Resort.
Ozark
Mountain Resort is a family-oriented resort located on the shores of Table
Rock
Lake, which features bass fishing. The resort is located approximately 15 miles
from Branson, Missouri, a family music and entertainment center, 233 miles
from
Kansas City, and 276 miles from St. Louis. Ozark Mountain Resort is a mixed-use
development of timeshare and condominium units. At December 31, 2005,
approximately 116 acres were developed and we plan to develop one more acre
in
the future.
At
December 31, 2005, 136 units are completed and 24 units are planned for
development at Ozark Mountain Resort. There are two types of units at the
resort: (i) two bedroom, two bath, one-story fourplexes and (ii) two bedroom,
two bath, three-story sixplexes. Each standard unit includes two large bedrooms,
two bathrooms, living room with sleeper sofa, and full kitchen. Other amenities
within each unit include whirlpool tub, color television, and vaulted ceilings.
Certain units contain interior ceiling fans, imported ceramic tile, oversized
sliding glass doors, rattan or pine furnishings, or fireplace. "Presidents
View"
units feature a panoramic view of Table Rock Lake, a larger, more spacious
floor
plan with front and back verandas, washer and dryer, and a more elegant
decor.
The
primary recreational amenity available at the resort is Table Rock Lake, a
43,100-acre public lake. Other recreational facilities and improvements at
the
resort include a swimming beach with dock, an activities center with pool table,
covered boat dock and launch ramp, olympic-sized swimming pool, lighted tennis
court, nature trails, two picnic areas, playground, miniature golf course,
and a
competitive sports area accommodating volleyball, basketball, tetherball,
horseshoes, shuffleboard, and archery. Guests can also rent or use canoes,
or
paddle boats. Owners of neighboring condominium units we developed in the past
are also entitled to use these amenities pursuant to use agreements they have
with us. Similarly, owners of Vacation Intervals are entitled to use certain
amenities of these condominium developments, including a wellness center
featuring a small pool, hot tub, sauna, and exercise equipment.
At
December 31, 2005, the resort contained 6,848 Vacation Intervals, of which
1,143
remained available for sale. We plan to build 24 additional units, which would
yield an additional 1,248 Vacation Intervals available for sale. Vacation
Intervals at the resort are currently priced from $10,500 to $17,000 for
one-week stays, while one-week "Presidents View" intervals are priced at $13,000
to $25,000 depending on the value rating of the interval. During 2005, 87
Vacation Intervals were sold.
Holiday
Hills Resort.
Holiday
Hills Resort is a resort community located in Taney County, Missouri, two miles
east of Branson, Missouri. The resort is 224 miles from Kansas City and 267
miles from St. Louis. The resort is heavily wooded by cedar, pine, and hardwood
trees, and is favored by Silverleaf Owners seeking quality golf and nightly
entertainment in nearby Branson. Holiday Hills Resort is a mixed-use development
of single-family lots, condominiums, and timeshare units. The resort contains
approximately 485 acres, including a 91-acre golf course. During 2005 we
acquired 81 acres of land nearby the Holiday Hills Resort. At December 31,
2005,
approximately 301 acres were developed and we plan to develop another 127 acres
in the future.
At
December 31, 2005, 422 units were completed and an additional 366 units are
planned for future development. There are four types of timeshare units at
this
resort: (i) two bedroom, two bath, one-story fourplexes, (ii) one bedroom,
one
bath, with upstairs loft, log construction duplexes, (iii) two bedroom, two
bath, two-story fourplexes, and (iv) two bedroom, two bath, three-story
sixplexes and twelveplexes. Each unit includes a living room with sleeper sofa,
full kitchen, whirlpool tub, and color television. Certain units include a
fireplace, ceiling fans, imported tile, oversized sliding glass doors, vaulted
ceilings, and rattan or pine furniture. “Presidents Fairways” units feature a
larger, more spacious floor plan with back veranda, washer and dryer, and a
more
elegant décor.
Taneycomo
Lake, a popular lake for trout fishing, is approximately three miles from the
resort, and Table Rock Lake is approximately ten miles from the resort.
Amenities at the resort include an 18-hole golf course, tennis court, picnic
areas, camp sites, basketball court, activity area which includes shuffleboard,
horseshoes, and a children’s playground, a 5,356 square foot clubhouse that
includes a pro shop, restaurant, and meeting space, a 2,800 square foot outdoor
swimming pool, and a sports pool. Lot and condominium unit owners are also
entitled to use these amenities pursuant to use agreements we have with certain
homeowners’ associations.
At
December 31, 2005, the resort contained 21,808 Vacation Intervals, of which
2,314 remained available for sale. We plan to build 366 additional units, which
would yield an additional 19,004 Vacation Intervals available for sale. Vacation
Intervals at the resort are currently priced from $9,500 to $17,000 for one-week
stays (and start at $7,250 for biennial intervals), while one-week "Presidents
Fairways" intervals are priced at $13,000 to $27,000 depending on the value
rating of the interval. During 2005, 1,325 Vacation Intervals were
sold.
Hill
Country Resort.
Hill
Country Resort is located near Canyon Lake in the hill country of central Texas
between Austin and San Antonio. The resort contains approximately 110 acres.
At
December 31, 2005, approximately 38 acres were developed and we plan to develop
another 19 acres in the future.
At
December 31, 2005, 290 units were completed and 222 units are planned for
development at Hill Country Resort. Some units are single story, while certain
other units are two-story structures in which the bedrooms and baths are located
on the second story. Each unit contains two bedrooms, two bathrooms, living
room
with sleeper sofa, and full kitchen. Other amenities within each unit include
whirlpool tub, color television, and interior design details such as vaulted
ceilings. Certain units include interior ceiling fans, imported ceramic tile,
over-sized sliding glass doors, rattan and pine furnishings, or fireplace.
122
units feature our new "lodge style.” 56 "Presidents Villas" units feature a
larger, more spacious floor plan with back veranda, washer and dryer, and a
more
elegant decor.
Amenities
at the resort include a 7,943-square foot activity center with electronic games,
pool table, and wide-screen television, miniature golf course, a children's
playground areas, barbecue and picnic area, enclosed swimming pool and heated
spa, children's wading pool, tennis court, and activity areas for basketball,
horseshoes, shuffleboard and sand volleyball court. Area sights and activities
include water-tubing on the nearby Guadeloupe River and visiting the many
tourist attractions in San Antonio, such as Sea World, The Alamo, The River
Walk, Fiesta Texas, and the San Antonio Zoo.
At
December 31, 2005, the resort contained 14,708 Vacation Intervals, of which
2,059 remained available for sale. We plan to build 222 additional units, which
collectively would yield 11,544 additional Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $8,000 to
$17,000 for one-week stays (and start at $6,250 for biennial intervals), while
one-week "Presidents Villas" intervals are priced at $9,900 to $27,000 depending
on the value rating of the interval. During 2005, 1,715 Vacation Intervals
were
sold.
Oak
N' Spruce Resort. In
December 1997, we acquired the Oak N' Spruce Resort in the Berkshire mountains
of western Massachusetts. The resort is located approximately 134 miles west
of
Boston, Massachusetts, and 114 miles north of New York City. Oak N' Spruce
Resort is a mixed-use development which includes a hotel and timeshare units.
The resort contains approximately 244 acres. At December 31, 2005, approximately
37 acres were developed and we plan to develop another 10 acres in the future.
At
December 31, 2005, the resort had 284 units completed and 66 units are planned
for development. There are six types of existing units at the resort: (i)
one-bedroom flat, (ii) one-bedroom townhouse, (iii) two-bedroom flat, (iv)
two-bedroom townhouse, (v) two-bedroom, flex-time, and (vi) two-bedroom lodge
style and Presidents style units. There is also a 21-room hotel at the resort
that could be converted to timeshare use. Amenities within each new unit include
a living room with sleeper sofa, full kitchen, whirlpool tub, and color
television. Certain units include ceiling fans, ceramic tile, and rattan or
pine
furniture.
Amenities
at the resort include two indoor heated swimming pools with hot tubs, an outdoor
pool with sauna, health club, lounge, ski rentals, miniature golf, shuffleboard,
basketball and tennis courts, horseshoe pits, hiking and ski trails, and an
activity area for badminton. The resort is also near Beartown State
Forest.
At
December 31, 2005, the resort contained 14,768 Vacation Intervals, of which
1,607 remained available for sale. We plan to build 66 additional "lodge-style"
units, which would yield an additional 3,432 Vacation Intervals available for
sale. Vacation Intervals at the resort are currently priced from $7,500 to
$19,000 for one-week stays (and start at $6,100 for biennial intervals), while
one-week "Presidents Oak" intervals are priced at $9,900 to $25,000 depending
on
the value rating of the interval. During 2005, 1,343 Vacation Intervals were
sold.
Silverleaf’s
Seaside Resort.
Silverleaf’s Seaside Resort is located in Galveston, Texas, approximately 50
miles south of Houston, Texas. The resort contains approximately 87 acres.
At
December 31, 2005, approximately 50 acres were developed and we plan to develop
another 37 acres in the future.
At
December 31, 2005, the resort had 96 units and an additional 186 are planned
for
development. The two bedroom, two bath units are situated in three-story
twelveplex buildings. Amenities within each unit include two large bedrooms,
two
bathrooms (one with a whirlpool tub), living room with sleeper sofa, full
kitchen, color television, and electronic door locks.
With
635
feet of beachfront, the primary amenity at the resort is the Gulf of Mexico.
Other amenities include a lodge with kitchen, tennis court, swimming pool,
sand
volleyball court, playground, picnic pavilion, horseshoes, and shuffleboard.
At
December 31, 2005, the resort contained 4,992 Vacation Intervals of which 473
remained available for sale. We plan to build 186 additional units, which would
yield an additional 9,672 Vacation Intervals for sale. Vacation Intervals at
the
resort are currently priced from $9,000 to $18,500 for one-week stays (and
start
at $6,250 for biennial intervals), while one-week "Presidents Seaside" intervals
are priced at $12,900 to $29,900 depending on the value rating of the interval.
During 2005, 652 Vacation Intervals were sold.
Orlando
Breeze Resort. In
October 2004, we acquired 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. Our public offering statement filed with the Florida
Bureau of Standards and Registrations was approved in February 2005, granting
us
sales approval for 16 units encompassing 832 one-week Vacation Intervals. We
plan to seek approval to sell the remaining 32 units, encompassing 1,664
one-week Vacation Intervals in the future.
At
December 31, 2005, the resort had 48 units and an additional 24 are planned
for
development. The units consist of two and three bedroom units, with eight
two-bedroom units and eight three-bedroom units having been refurbished during
2005. Amenities within each refurbished unit include a living room with sleeper
sofa, full kitchen, color television, ceiling fans, ceramic tile, Broyhill
furniture, and aluminum patio furniture. Amenities at the resort include a
heated outdoor swimming pool with whirlpool, fitness center, arcade, playground,
sand volleyball and basketball courts.
At
December 31, 2005, the resort contained 2,496 Vacation Intervals of which 2,018
remained available for sale. We plan to build 24 additional units, which would
yield an additional 1,248 Vacation Intervals for sale. Vacation Intervals at
the
resort are currently priced from $22,500 to $28,500 for one-week stays. During
2005, 39 Vacation Intervals were sold.
ITEM
3. LEGAL PROCEEDINGS
Holiday
Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et
al,
Circuit
Court of Christian County, Missouri. The homeowners’ associations of five
condominium projects that one of our former subsidiaries constructed in Missouri
filed two separate actions against us in 1999 and 2000, respectively, alleging
breach of warranty, construction defects and breach of management agreements.
These two cases were consolidated. The plaintiffs filed an amended petition
alleging actual damages in excess of $25,000 and punitive damages. We filed
a
counterclaim seeking contractual indemnification under the terms of management
agreements with each of the plaintiffs. The parties mediated this matter in
October 2005 and agreed upon the terms of a settlement. Pursuant to the
terms of the settlement executed by the parties, we agreed to pay to the Holiday
Hills Condominium Association $1.15 million, of which $1.1 million was paid
by
our insurers. The parties agreed to certain other terms, including our deeding
of two non-timeshare condominium units to the plaintiffs, waiving amenities
fees
currently due and owing from the plaintiffs, and making repairs to a parking
lot
and other public areas of the condominium development. The settlement agreement
further provided for each party to execute a general and mutual release of
all
claims and for the dismissal of the suit. The suit was dismissed in February
2006.
Ozark
Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,
Circuit
Court of Stone County, Missouri. The homeowners’ associations of three
condominium projects that one of our former subsidiaries constructed in Missouri
filed an action against us in 2000 alleging construction defects,
misrepresentation, breach of fiduciary duty, negligence, and breach of
management agreements and seeking damages and certain other equitable relief.
A
definitive settlement agreement concerning this matter was executed by all
parties in October 2005. The settlement agreement provides that three of our
insurance carriers pay plaintiffs $500,000. The terms of settlement limit our
possible future contingent liability to a maximum of $200,000. In order for
any
further claims of this sort to be asserted against us by the plaintiffs, the
settlement agreement requires that the plaintiffs must first exhaust all
reasonable efforts to collect at least $200,000 from a third party insurance
carrier and all amounts collected from the carrier would be a credit against
our
$200,000 maximum liability. Should the settlement not be fully implemented,
we
intend to continue to vigorously defend this litigation.
We
are
currently subject to other litigation arising in the normal course of our
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 our judgment, none of the lawsuits currently pending against us,
either individually or in the aggregate, is likely to have a material adverse
effect on our business, results of operations, or financial
condition.
Various
legal actions and claims may be instituted or asserted in the future against
us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements. Some of the matters may involve claims,
which, if granted, could be materially adverse to our financial
condition.
Litigation
is subject to many uncertainties, and the outcome of individual litigated
matters is not predictable with assurance. We will establish reserves from
time
to time when deemed appropriate under generally acceptable accounting
principles. However, the outcome of a claim for which we have not deemed a
reserve to be necessary may be decided unfavorably against us and could require
us to pay damages or make other expenditures in amounts or a range of amounts
that could be materially adverse to our business, results of operations, or
financial condition.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
following table sets forth the high and low closing prices of our Common Stock
for the quarterly periods indicated, which correspond to the quarterly fiscal
periods for financial reporting purposes. Our Common Stock was traded on the
NYSE until June 2001 when it was suspended from trading and subsequently
delisted in August 2001. The suspension and subsequent delisting of our Common
Stock by the NYSE was caused by a drop in the per share trading value of our
stock on the NYSE that began in March 2001. This drop in per share trading
value
persisted and we ceased to meet NYSE listing criteria when our total market
capitalization remained below $15 million and our minimum share price remained
below $1 over a 30 trading-day period. After being delisted by the NYSE, our
Common Stock was quoted on the Electronic Quotation Service of Pink Sheets
LLC
under the symbol SVLF until February 2004, when our shares began trading on
the
OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions. The Common Stock prices from February 2004 to
September 18, 2005 are the closing bid prices as quoted on the OTC Bulletin
Board. During the third quarter of 2005 the American Stock Exchange ("AMEX")
approved our application to list our shares of Common Stock under the ticker
symbol SVL. Our stock began trading on the AMEX effective September 19, 2005.
From that point forward the Common Stock prices shown are the closing bid prices
as quoted on the AMEX.
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First
Quarter
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$
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1.50
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$
|
.67
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|
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1.45
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1.07
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Third
Quarter
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1.45
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1.00
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Fourth
Quarter
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|
|
1.54
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|
|
1.25
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First
Quarter
|
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$
|
1.60
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$ |
1.20
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Second
Quarter
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1.58
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|
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1.25
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Third
Quarter
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|
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2.05
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1.41
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Fourth
Quarter
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4.29
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1.35
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As
of
December 31, 2005, we believe that there were approximately 2,181 holders of
our
Common Stock, which is the only class of our equity securities outstanding.
Our
stock
option plans provide for the award of nonqualified stock options to directors,
officers, and key employees, and the grant of incentive stock options to
salaried key employees. Stock options provide for the right to purchase common
stock at a specified price, which may be less than or equal to fair market
value
on the date of grant (but not less than par value). Stock options may be granted
for any term and upon such conditions determined by our Board of Directors.
Dividend
Policy
We
have
never declared or paid any cash dividends on our capital stock and do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
We currently intend to retain future earnings to finance our operations and
fund
the growth of our business. Any payment of future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
our earnings, financial condition, capital requirements, level of indebtedness,
contractual and other restrictions in respect of the payment of dividends,
and
other factors that our Board of Directors deems relevant.
Shares
Authorized for Issuance under Equity Compensation Plans
Please
see “Security Ownership of Certain Beneficial Owners and Management” under item
12 of this annual report on Form 10-K for information regarding shares
authorized under our equity compensation plans.
Recent
Sales of Unregistered Securities
There
have been no recent sales of unregistered securities.
ITEM
6. SELECTED FINANCIAL DATA
Selected
Consolidated Historical Financial and Operating
Information
The
Selected Consolidated Historical Financial and Operating Information should
be
read in conjunction with the Consolidated Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results
of
Operations appearing elsewhere in this report on Form 10-K.
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(in
thousands, except share and per share amounts)
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Statement
of Income Data:
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Revenues:
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Vacation
Interval sales
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$
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139,359
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$
|
122,805
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$
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123,585
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$
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138,046
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$
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146,416
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Sampler
sales
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3,904
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3,634
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1,765
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2,150
|
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2,623
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Total
sales
|
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143,263
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126,439
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125,350
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140,196
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149,039
|
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|
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|
|
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|
|
|
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Interest
income
|
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41,220
|
|
|
37,537
|
|
|
34,730
|
|
|
37,843
|
|
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38,154
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Management
fee income
|
|
|
2,516
|
|
|
1,920
|
|
|
1,547
|
|
|
1,201
|
|
|
1,856
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Gain
on sale of notes receivable
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—
|
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6,838
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|
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3,205
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|
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1,915
|
|
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6,457
|
|
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Other
income
|
|
|
2,392
|
|
|
2,324
|
|
|
2,834
|
|
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2,522
|
|
|
6,402
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Total
revenues
|
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189,391
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175,058
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167,666
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183,677
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201,908
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Costs
and operating expenses:
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Cost
of Vacation Interval sales
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