SILVERLEAF RESORTS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 001-13003

SILVERLEAF RESORTS, INC.

(Exact Name of Registrant as Specified in its Charter)

TEXAS 75-2259890
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1221 RIVER BEND DRIVE, SUITE 120 75247
DALLAS, TEXAS (Zip Code)
(Address of Principal Executive Offices)

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

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]

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. [ ]

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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 November 13,
2002 as reported by the Electronic Quotation Service of Pink Sheets LLC, was
approximately $3,224,300 (based on 17,913,004 Shares held by non-affiliates).
At November 13, 2002, there were 36,826,906 shares of the Registrant's Common
Stock outstanding.

Documents Incorporated by Reference: None

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FORM 10-K INDEX

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EXPLANATORY NOTE

The Company has undergone material operational and financial changes since
December 31, 2000. The disclosures contained in this annual report on Form 10-K
for the year ended December 31, 2001 should be read in conjunction with the
summary set forth below of certain material events regarding the Company that
have occurred since December 31, 2000, as well as the more detailed descriptions
of subsequent events that appear throughout the text of this annual report for
2001.

CLOSING OF EXCHANGE OFFER

On May 2, 2002, the Company completed an exchange offer (the "Exchange
Offer") commenced on March 15, 2002 regarding its 10 1/2% senior subordinated
notes due 2008 (the "Old Notes"). A total of $56,934,000 in principal amount of
the Company's Old Notes were exchanged for a combination of $28,467,000 in
principal amount of the Company's new class of 6.0% senior subordinated notes
due 2007 ("Exchange Notes") and 23,937,489 shares of the Company's common stock
representing approximately 65% of the common stock outstanding immediately
following the Exchange Offer. Under the terms of the Exchange Offer, tendering
holders collectively received cash payments of $1,335,545 on May 16, 2002, and
received a further cash payment of $334,455 on October 1, 2002. A total of
$9,766,000 in principal amount of the Company's Old Notes were not tendered and
remain outstanding. As a condition of the Exchange Offer, the Company paid all
past due interest to non-tendering holders of its Old Notes. Under the terms of
the Exchange Offer, the acceleration of the maturity date on the Old Notes which
occurred in May 2001 was rescinded, and the original maturity date in 2008 for
the Old Notes was reinstated. Past due interest paid to nontendering holders of
the Old Notes was $1,827,806 The indenture under which the Old Notes were issued
(the "Old Indenture") was also consensually amended as a part of the Exchange
Offer. As a result of the Exchange Offer, the number of issued and outstanding
shares of the Company's common stock increased from 12,889,417 on December 31,
2001 to 36,826,906 on May 2, 2002.

The Company also completed amendments to its credit facilities with its
principal senior lenders as well as amendments to a $100 million conduit
facility through one of its unconsolidated subsidiaries. Finalization of the
Exchange Offer and the amendment of its principal credit facilities effective in
May 2002, marks the completion of the Company's debt restructuring plan
announced on March 15, 2002, which was necessitated by severe liquidity problems
first announced by the Company on February 27, 2001. As a part of the debt
restructuring, the Company's noteholders and senior lenders waived all
previously declared events of default.

As a result of the change in stock ownership resulting from the issuance of
23,937,489 new shares of common stock, and in accordance with the terms of the
Exchange Offer, three new independent directors joined the Company's board in
May 2002. These new independent directors now comprise three of the five members
of the Company's board of directors.

EVENTS LEADING TO THE EXCHANGE OFFER

On February 27, 2001, the Company publicly disclosed that its negotiations
for expansion and extension of certain credit facilities with a principal lender
as well as negotiations with other financing sources had proven unsuccessful and
that the Company did not have sufficient financing in place to sustain its
operations at then existing levels. As a result of its liquidity concerns, it
became clear to the Company that conditions either then existed, or soon would
exist, which would constitute defaults under all of its existing credit
facilities and under the Old Indenture. Consequently, the Company also publicly
announced on February 27, 2001 that it was reducing its sales and marketing
operations in an attempt to conserve cash, downsize its business to a
sustainable level, and thereby attempt to maintain itself as a going concern
until all available alternatives could be explored. The Company further
disclosed that it would pursue funding alternatives with its principal lenders
and others to provide adequate financial resources for a reduced level of
operations. In accordance with its public announcement of February 27, 2001, the
Company immediately commenced a downsizing of its operations. The Company's
principal downsizing activities included the following:

o a 50% projected reduction in vacation interval sales in order to operate
within existing liquidity restraints;

o a reduction in Company employees from approximately 2,900 on February
27, 2001 to approximately 1,800 at December 31, 2001;

o the closing of three of the Company's five telemarketing call centers;

o the slowing of new construction at the fully developed timeshare resorts
owned by the Company;

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o the Company's proposed sale of the Kansas City, Missouri and Las Vegas,
Nevada undeveloped timeshare resort locations; and

o a reduction of general and administrative expenses in all departments.

Additionally, during 2001 the Company implemented other downsizing measures
it deemed prudent in order to position itself for a reduced and sustainable
level of operations. While its downsizing measures during 2001 reduced the
Company's projected costs of operations in periods after the first quarter of
2001, the Company also sustained substantial restructuring costs during the year
ended December 31, 2001 in order to implement its corporate downsizing and to
develop a plan for the restructuring of its debt (the "Restructuring Plan"). The
Company continued to incur further restructuring costs in connection with the
Restructuring Plan in the first two quarters of 2002.

On April 1, 2001, the Company was unable to make the regularly scheduled
interest payment on the Old Notes as a result of defaults which had occurred
under one or more of its senior credit facilities. As it was required to do
under the Old Indenture, the Company issued a Payment Blockage Notice to the Old
Indenture Trustee advising that the payment due April 1 could not be made. The
Old Indenture Trustee delivered a notice of default to the Company on May 1,
2001 when the Company failed to cure the April 1 interest payment default. The
Old Indenture Trustee further notified the Company on May 21, 2001 that it had
been instructed by holders of more than 25% of the principal amount of the Old
Notes outstanding to accelerate payment of the principal, interest, and other
charges due under the Old Notes.

As a result of the Company's announcements in February 2001 concerning its
liquidity and financial condition, the price of the Company's common stock
dropped below the continued listing requirements of the New York Stock Exchange
("NYSE"). On April 27, 2001, the Company announced that it intended to file a
plan with the NYSE by June 4, 2001 to advise the NYSE how the Company would be
able to return to compliance with the continued listing requirements. However,
due to the Company's inability to restructure its financial affairs before that
date, the Company was unable to file a plan with the NYSE, and the Company's
common stock was suspended from trading in June 2001 and subsequently delisted
from trading with the NYSE in August 2001. Bid and ask quotations regarding the
Company's common stock are now reported by the Electronic Quotation Service
operated by Pink Sheets LLC; however, these quotations are not necessarily
indicative of actual trading activity.

RESTRUCTURING PLAN

Commencing in March 2001, the Company explored strategic alternatives,
including the possibility of a sale of the Company or its assets and/or
reorganizing under court-supervised proceedings. None of these explorations
resulted in options which the Company believed were viable or in the best
interest of the Company, its shareholders or its creditors. On September 19,
2001, the Board of Directors of the Company determined it would be in the best
interests of the Company to focus its attention on the process of formulating an
out of court reorganization of its indebtedness to its principal creditors; this
process ultimately resulted in the Restructuring Plan.

In order to develop the Restructuring Plan, the Company engaged in extended
negotiations during the third and fourth quarters of 2001 with the Senior
Lenders and DZ Bank, which resulted in amendments to the senior credit
facilities ("Amended Senior Credit Facilities") and the DZ Bank facility
("Amended DZ Bank Facility"). The Company also engaged in extensive discussions
with an ad hoc committee of holders of the Old Notes (the "Noteholders'
Committee"). As a result of these discussions, the Company and the Noteholders'
Committee negotiated the basic terms of the Exchange Offer. An Offer to Exchange
was distributed to holders of the Old Notes on March 15, 2002, and on May 2,
2002, the Company completed the Exchange Offer and the Restructuring Plan.

While the purpose of the Restructuring Plan is to provide the Company with a
sufficient level of liquidity from its operations to meet future requirements,
there is no certainty that the Company will be able to comply with the terms of
the Amended Senior Credit Facility, the Amended DZ Bank Facility, the Exchange
Notes or the Old Notes, and continue to operate as a going concern. See
"Cautionary Statements " beginning on page 34 of the following annual report.

DELAYED AUDITS AND DELINQUENT REPORTS

On April 2, 2001, the Company notified the Commission that it would be
unable to timely file its Annual Report on Form 10-K for the year ended December
31, 2000 due to the Company's announced liquidity and going concern issues.
Until the Company was able to finalize the terms of the Restructuring Plan in
December 2001, it was unable, due to uncertainties, to finalize its accounting
records and financial statements for the year ended December 31, 2000.
Nevertheless, the Company did announce on April 2, 2001 that it anticipated that
it would record a substantial non-cash charge related to various items which
would result in a loss for the fourth

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quarter and year ended December 31, 2000. The uncertainties preventing the
Company from finalizing its accounting records and financial statements related
primarily to the Company's need to fully assess the impact of (i) the downsizing
of its operations, (ii) the availability or unavailability of additional
financing from new or existing sources to sustain its downsized operations, and
(iii) the Company's assessment of the value of its assets at December 31, 2000.
The Company finalized its financial statements for the year ended December 31,
2000, during the first quarter of 2002 and its auditors completed work on the
audit of the Company's financial statements for the year ended December 31, 2000
on March 12, 2002.

On November 19, 2002, the Company simultaneously filed the following
delinquent and/or amended reports with the Securities and Exchange Commission:

o Forms 10-Q for each of the quarterly periods ended June 30, 2002 and
March 31, 2002;

o Form 10-K for the year ended December 31, 2001;

o Forms 10-Q for each of the quarterly periods ended September 30, 2001,
June 30, 2001, and March 31, 2001;

o Form 10-K for the year ended December 31, 2000;

o Forms 10-Q/A for each of the quarterly periods ended September 30, 2000,
June 30, 2000, and March 31, 2000.

The disclosures contained in this Form 10-K for the year ended December 31, 2001
should be read in conjunction with the other SEC reports set forth above also
filed on November 19, 2002. While the Company has now filed the above
referenced reports, this report and the Company's Form 10-K for 2000 do not
fully comply with SEC requirements, because of the disclaimer of opinion
discussed below concerning the Company's 2000 financial statements.

DISCLAIMER OF OPINION BY PRIOR INDEPENDENT AUDITORS CONCERNING 2000 FINANCIAL
STATEMENTS

On March 12, 2002, the Company's former independent auditors, Deloitte &
Touche LLP, disclaimed an opinion on the consolidated balance sheet of the
Company and its consolidated subsidiaries as of December 31, 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 2000. Deloitte & Touche LLP disclaimed an
opinion because of pervasive uncertainties regarding the Company's ability to
continue as a going concern. These pervasive uncertainties were related to the
Company's pre-Exchange Offer difficulties in meeting its loan agreement
covenants and financing needs, its losses from operations, and its negative cash
flows from operating activities which raised substantial doubt about the
Company's ability to continue as a going concern. Deloitte & Touche LLP's report
dated March 12, 2002 on the Company's consolidated financial statements for the
year ended December 31, 1999 did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. See "Management's Discussion and Analysis of Financial
condition and Results of Operations."

On June 19, 2002, the Company terminated Deloitte & Touche LLP and retained
BDO Seidman LLP as its independent auditor. The Company filed a Form 8-K with
the Securities and Exchange Commission on June 25, 2002 disclosing this change
of auditors. In connection with the Company's audits for the years ended
December 31, 1999 and 2000 and subsequently through the date of its dismissal,
the company had no disagreements with Deloitte & Touche LLP on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused it to make reference to the subject
matter of the disagreement in its report on the consolidated financial
statements of the Company.

INDEPENDENT AUDITOR'S REPORT ON 2001 FINANCIAL STATEMENTS - - GOING CONCERN
EXPLANATORY PARAGRAPH

On September 12, 2002, the Company's new independent auditors, BDO Seidman
LLP, issued its report expressing its opinion on the consolidated balance sheet
of the Company and its consolidated subsidiaries as of December 31, 2001 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 2001. While the report of BDO Seidman LLP
does contain an explanatory paragraph about the Company's ability to continue as
a going concern, the report does not disclaim an opinion as to the Company's
financial statements for the year ended December 31, 2001, nor is the report
qualified or modified as to audit scope or accounting principles. The Company
believes it can comply with the terms and conditions of its Restructuring Plan
consummated on May 2, 2002 and thereby continue as a going concern. However,
uncertainties remain. See

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"Business and Properties - Cautionary Statements" beginning on page 34. The
accompanying consolidated financial statements which appear beginning at page
F-1 of this annual report do not include any adjustments that may be necessary
if the Company is not able to continue as a going concern.

CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K UNDER ITEMS 1, 2, AND 7, IN
ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-K, INCLUDING
STATEMENTS QUALIFIED BY THE WORDS "BELIEVE," "INTEND," "ANTICIPATE," "EXPECTS"
AND WORDS OF SIMILAR IMPORT, ARE "FORWARD-LOOKING STATEMENTS" AND ARE THUS
PROSPECTIVE. THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY
REGARDING ITS FUTURE PROFITABILITY, PROSPECTS AND RESULTS OF OPERATIONS. ALL
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS,
UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING "CAUTIONARY
STATEMENTS" BEGINNING ON PAGE 34 IN PART I, ITEM 1 OF THIS REPORT. ALL
FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS REPORT ON FORM 10-K
AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS
OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN
THE FORWARD-LOOKING STATEMENTS.

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PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

OVERVIEW

The principal business of Silverleaf Resorts, Inc. ("Silverleaf" or the
"Company") is the development, marketing, and operation of "drive-to" timeshare
resorts. Silverleaf currently owns and/or manages fourteen "drive-to resorts" in
Texas, Missouri, Illinois, Alabama, Georgia, South Carolina, Pennsylvania, and
Tennessee (the "Drive-to Resorts"). Eight of the Drive-to Resorts are owned and
managed by the Company (the "Owned Drive-to Resorts") and six of the Drive-to
Resorts are only managed by the Company (the "Managed Drive-to Resorts").
Silverleaf also owns and/or manages five "destination resorts" in Texas,
Missouri, Mississippi, and Massachusetts (the "Destination Resorts"). Four of
the Destination Resorts are owned by Silverleaf (the "Owned Destination
Resorts") and one Destination Resort is only managed by the Company (the
"Managed Destination Resort").

The Owned Drive-to Resorts are designed to appeal to vacationers seeking
comfortable and affordable accommodations in locations convenient to their
residences and are located proximate to major metropolitan areas. Silverleaf
locates its Owned Drive-to Resorts near principal market areas to facilitate
more frequent "short stay" getaways, which it believes is a growing vacation
trend. Silverleaf's Owned Destination Resorts, which are located in or near
areas with national tourist appeal, offer Silverleaf customers the opportunity
to upgrade into a more upscale resort area as their lifestyles and travel
budgets permit. Both the Owned Drive-to Resorts and the Owned Destination
Resorts (collectively, the "Existing Owned Resorts") provide a quiet, relaxing
vacation environment. Silverleaf believes its resorts offer its customers an
economical alternative to commercial vacation lodging. The average price for an
annual one-week vacation ownership ("Vacation Interval") for a two-bedroom unit
at the Existing Owned Resorts was $9,688 for 2001 and $9,768 for 2000.

The six Managed Drive-to Resorts and the Managed Destination Resort
(collectively, the "Managed Existing Resorts") are managed by Silverleaf under
the terms of long-term management contracts. See "Business and
Properties--Description of Timeshare Resorts Owned and Operated by the Company"
beginning at page 13.

Owners of Silverleaf Vacation Intervals at the Existing Owned Resorts
("Silverleaf Owners") enjoy benefits which are uncommon in the timeshare
industry. These benefits include (i) use of vacant lodging facilities at the
Existing Owned Resorts through Silverleaf's "Bonus Time" Program; (ii)
year-round access to the Existing Owned Resorts' non-lodging amenities such as
fishing, boating, horseback riding, tennis, or golf on a daily basis for little
or no additional charge; and (iii) the right to exchange a Vacation Interval for
a different time period or different Existing Resort through Silverleaf's
internal exchange program. These benefits are subject to availability and other
limitations. Most Silverleaf Owners may also enroll in the Vacation Interval
exchange network operated by Resort Condominiums International ("RCI"). One of
the Company's Owned Destination Resorts, Oak N' Spruce Resort, is under contract
with Interval International, a competitor of RCI.

OPERATIONS

Silverleaf is in the business of marketing and selling Vacation Intervals
from its inventory to individual consumers. Silverleaf's principal activities in
this regard include (i) acquiring and developing timeshare resorts; (ii)
marketing and selling one week annual and biennial Vacation Intervals to
prospective first-time owners; (iii) marketing and selling upgraded Vacation
Intervals to existing Silverleaf Owners; (iv) providing financing for the
purchase of Vacation Intervals; and (v) managing timeshare resorts. The Company
has in-house capabilities which enable it to coordinate all aspects of
development and expansion of the Existing Owned Resorts and the potential
development of any future resorts, including site selection, design, and
construction pursuant to standardized plans and specifications. The Company
performs substantial marketing and sales functions internally and has made
significant investments in operating technology, including telemarketing and
computer systems and proprietary software applications. The Company identifies
potential purchasers through internally developed marketing techniques, and
sells Vacation Intervals through on-site sales offices located at certain of its
resorts which are located in close proximity to major metropolitan areas. This
practice allows the Company an alternative to marketing costs of subsidized
airfare and lodging which are typically associated with the timeshare industry.

As part of the Vacation Interval sales process, the Company offers potential
purchasers financing of up to 90% of the purchase price over a seven-year to
ten-year period. The Company has historically financed its operations by
borrowing from third-party lending institutions at an advance rate of up to 85%
of eligible customer receivables. At December 31, 2001 and 2000, the Company had
a portfolio of approximately 39,684 and 39,530 customer promissory notes,
respectively, totaling approximately $335.7 and $336.4 million with an average
yield of 13.7% and 13.4% per annum, respectively, which compares favorably to
the Company's weighted average cost of borrowings of 8.1% per annum. The Company
ceases

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recognition of interest income when collection is no longer deemed probable. At
December 31, 2001 and 2000, approximately $6.7 million and $26.0 million in
principal, or 2.0% and 7.7%, respectively, of the Company's loans to Silverleaf
Owners were 61 to 120 days past due, and $0.0 and approximately $7.1 million in
principal, or 0.0% and 2.1%, respectively, of the Company's loans to Silverleaf
Owners were more than 120 days past due. However, the Company does continue
collection efforts with regard to all notes deemed uncollectable until all
collection techniques utilized by the Company have been exhausted. The Company
provides for uncollectible notes by reserving an estimated amount which
management believes is sufficient to cover anticipated losses from customer
defaults.

Each timeshare resort that is owned and/or managed by Silverleaf has a
timeshare owners' association (a "Club"). Each Club operates through a
centralized organization to manage their respective resorts on a collective
basis. The principal such organization is Silverleaf Club. Certain resorts which
are not owned by the Company, but only managed by the Company, are operated
through "Crown Club." Crown Club is not actually a separate entity, but consists
of several individual Club management agreements which have terms of three to
five years. Silverleaf Club and Crown Club, in turn, have contracted with the
Company to perform for them the supervisory, management, and maintenance
functions at the Existing Owned Resorts on a collective basis. All costs of
operating the timeshare resorts, including management fees to the Company, 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.

DEVELOPMENTS DURING 2001 AND THEREAFTER

Since February 2001, when the Company disclosed significant liquidity issues
arising primarily from the failure to close a credit facility with its largest
secured creditor, management and its financial advisors have been attempting to
develop and implement a plan to return the Company to sound financial condition.
During this period, the Company negotiated and closed short-term secured
financing arrangements with three lenders, which allowed it to operate at
reduced sales levels as compared to original plans and prior years. With the
exception of the Company's inability to pay interest due on the Senior
Subordinated Notes, these short-term arrangements were adequate to keep the
Company's unsecured creditors current on amounts owed.

Under the Exchange Offer that was closed on May 2, 2002, $56,934,000 in
principal amount of the Company's 10 1/2% senior subordinated notes were
exchanged for a combination of $28,467,000 in principal amount of the Company's
new class of 6.0% senior subordinated notes due 2007 and 23,937,489 shares of
the Company's common stock, representing approximately 65% of the common stock
outstanding after the Exchange Offer. As a result of the exchange, the Company
recorded a pre-tax extraordinary gain of $17.9 million in the second quarter of
2002. Under the terms of the Exchange Offer, tendering holders received cash
payments of $1,335,545 on May 16, 2002, and $334,455 on October 1, 2002. A total
of $9,766,000 in principal amount of the Company's 10 1/2% notes were not
tendered and remain outstanding. As a condition of the Exchange Offer, the
Company has paid all past due interest to non-tendering holders of its 10 1/2%
notes. Under the terms of the Exchange Offer, the acceleration of the maturity
date on the 10 1/2% notes which occurred in May 2001 has been rescinded, and the
original maturity date in 2008 for the 10 1/2% notes has been reinstated. Past
due interest paid to non-tendering holders of the 10 1/2% notes was $1,827,806.
The indenture under which the 10 1/2% notes were issued was also consensually
amended as a part of the Exchange Offer.

Management has also negotiated two-year revolving, three-year term out
arrangements for $214 million with its three principal secured lenders, which
were closed at the same time as of the Exchange Offer. In addition, the Company
amended its $100 million off-balance-sheet credit facility through the Company's
SPE. Under these revised credit arrangements, two of the three creditors
converted $42.1 million of existing debt to a subordinated Tranche B. Tranche A
is secured by a first lien on currently pledged notes receivable. Tranche B is
secured by a second lien on the notes, a lien on resort assets, an assignment of
the Company's management contracts with the Clubs, a portfolio of unpledged
receivables currently ineligible for pledge under the existing facility, and a
security interest in the stock of Silverleaf Finance I, Inc., the Company's
special purpose entity ("SPE"). Among other aspects of these revised
arrangements, the Company will be required to operate within certain parameters
of a revised business model and satisfy the financial covenants set forth in the
Amended Senior Credit Facilities, including maintaining a minimum tangible net
worth of $100 million or greater, as defined, sales and marketing expenses as a
percentage of sales below 55.0% for the last three quarters of 2002 and below
52.5% thereafter, notes receivable delinquency rate below 25%, a minimum
interest coverage ratio of 1.1 to 1.0 (increasing to 1.25 to 1 in 2003), and
positive net income. However, compliance with the terms of these financial
covenants cannot be assured.

As long as the Company is able to comply with the financial covenants in its
agreements with its senior lenders, the Company believes it will have adequate
financing to operate for the two-year revolving term of the proposed financing
with the senior lenders. At that time, management will be required to replace or
renegotiate the revolving arrangements subject to availability.

GOING CONCERN ISSUES. As previously described, the Company has completed
refinancing and restructuring transactions related to its debt designed to
return it to a liquid financial condition. However, the Company experienced
significant losses in 2000 and 2001. The Company has also reported a loss for
the first quarter of 2002 but reported net income for the second quarter of
2002. The Company's results for the first and second quarter of 2002 have not
been audited. Under the terms of the proposed debt refinancing

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and restructuring, future results must be within certain parameters of a revised
business model, which assumes significant improvements over 2000 and 2001
results, and the results reported for the quarters ended June 30 and March 31,
2002.

The principal changes in operations necessary to accomplish the results in
the business model are sustained Vacation Interval sales at reduced levels,
reduced sales and marketing expense as a percentage of sales, reduced operating,
general and administrative expense, and improved customer credit quality which
the Company believes will result in a reduced provision for uncollectible notes.
During the second and third quarters of 2001, the Company closed three outside
sales offices, closed three telemarketing centers, and reduced headcount in
sales, marketing, and general and administrative functions. As a result of these
reductions, management believes that the necessary operating changes needed to
achieve the desired sales, sales and marketing expense, and operating, general
and administrative expense are substantially complete. However, there can be no
assurance that the Company will be able to achieve the financial results
necessary to comply with the financial covenants contained in the Amended Senior
Credit Facilities and the Amended DZ Bank Facility.

Due to the 2000 increase in the Company's provision for uncollectible notes
and the high level of defaults experienced in customer receivables throughout
2001, its provision for uncollectible notes represent approximately 46.3% of
Vacation Interval sales for the year ended December 31, 2000 and 25.2% for the
year ended December 31, 2001. The significant increase in the 2000 provision was
due to a substantial reduction by the Company in two programs that were
previously used to bring delinquent notes receivable current, and the
deterioration of the general U.S. economy that came to public awareness in late
2000. Had neither of the two discontinued programs been in place in 1998 and
1999, the provision for uncollectible notes as a percentage of sales would have
been significantly higher. Management believes the high provision percentage
remained necessary in 2001 because overall consumer confidence in the economy
continued to decline in 2001 and customers concerned about the Company's
liquidity issues began defaulting on their notes after the Company's liquidity
announcement in February 2001.

Since the third quarter of 2001, the Company has been operating under new
sales practices whereby no sales are permitted unless the touring customer has
represented a minimum income level beyond that previously required by each
market, has a valid major credit card, and, further, the marketing division is
employing a program, which should facilitate marketing to customers more likely
to be better credit risks. The Company believes it has made the improvements in
its sales practices necessary to achieve the provision for uncollectible notes
assumed in its revised business model. However, should the economy continue to
deteriorate, and if enhanced sales practices do not result in sufficiently
improved collections, the Company may not realize the improvements contemplated
in its revised business model. If the Company is unable to significantly reduce
the existing levels of defaults on customer receivables (and thereby reduce its
allowance for doubtful accounts), it may not be able to comply with the
financial covenants in its Amended Senior Credit Facilities, which would have a
material adverse effect on the Company and its operations.

While the Company announced the completion of its restructuring and
refinancing transactions on May 2, 2002, the Company's ability to continue as a
going concern is dependent on other factors as well, including the achievement
of the improvements to the Company's operations described above. In addition,
the Amended Senior Credit Facilities require the Company to satisfy certain
financial covenants. Management believes that if the improvements to its
operations are successful, the Company will be able to improve its operating
results to achieve compliance with the financial covenants during the term of
the Amended Senior Credit Facilities. However, the Company's plan to utilize
certain of its assets, predominantly inventory, extends for periods of up to
fifteen years. Accordingly, the Company will need to either extend the Amended
Senior Credit Facilities or obtain new sources of financing through the issuance
of other debt, equity, or collateralized mortgage-backed securities, the
proceeds of which would be used to refinance the debt under the Amended Senior
Credit Facilities, finance mortgages receivable, or for other purposes. The
Company may not have these additional sources of financing available to it at
the times when such financings are necessary.

PROPERTIES

At December 31, 2001, the Company owned and/or managed a total of 19
timeshare resorts. Principal developmental activity which occurred during 2001
is summarized below.

CONTINUED DEVELOPMENT OF OAK N' SPRUCE RESORT. Oak N' Spruce Resort, located
134 miles west of Boston, Massachusetts, has 224 existing units. Silverleaf
intends to develop approximately 240 additional units (12,480 Vacation
Intervals) at this resort in the future. During 2001, the Company added 20 units
at this resort. The Company currently has land use applications pending before
local planning and zoning authorities for approximately 240 additional units. If
for any reason the Company is unsuccessful in obtaining authorizations to build
additional units at Oak N' Spruce Resort it may materially and adversely affect
the Company's ability to develop this resort and to sustain sales of Vacation
Intervals at Oak N' Spruce at existing levels.

9

CONTINUED DEVELOPMENT OF HOLIDAY HILLS RESORT. Holiday Hills Resort, located
two miles east of Branson, Missouri, in Taney County, has 326 existing units.
Silverleaf intends to develop in the future approximately 462 additional units
(23,996 Vacation Intervals) at this resort as of December 31, 2001. During 2001,
the Company added 42 units at the resort.

CONTINUED DEVELOPMENT OF PINEY SHORES RESORT. Piney Shores Resort, located
near Conroe, Texas, north of Houston, has 166 existing units. Silverleaf intends
to develop in the future approximately 126 additional units (6,552 Vacation
Intervals) at this resort. During 2001, the Company added 6 units at this
resort.

CONTINUED DEVELOPMENT OF SILVERLEAF'S SEASIDE RESORT. Silverleaf's Seaside
Resort, located in Galveston, Texas, has 72 existing units. Silverleaf intends
to develop in the future approximately 210 additional units (10,920 Vacation
Intervals) at this resort as of December 31, 2001. During 2001, the Company
added 12 units at this resort.

POSSIBLE DEVELOPMENT OF NEW RESORTS. In December 1998, the Company purchased
1,940 acres of undeveloped land near Philadelphia, Pennsylvania, for
approximately $1.9 million. The property may be developed as a Drive-to Resort
(i.e., Beech Mountain Resort). At December 31, 2001, the Company had received
regulatory approval to develop 408 units (21,216 Vacation Intervals), but had
not scheduled target dates for construction, completion of initial units, or
commencement of marketing and sales efforts.

DISCONTINUED DEVELOPMENT OF CERTAIN RESORTS. As a result of its liquidity
problems announced during 2001, the Company discontinued its development plans
for its undeveloped timeshare resorts in Kansas City, Missouri and Las Vegas,
Nevada and has placed each property for sale. All net sales proceeds, if any,
will be used exclusively to retire outstanding debt to certain of the Company's
senior lenders. As of August 17, 2002, the Las Vegas property was under contract
to sell for $3.15 million; however, there can be no assurance that the sale will
close.

FUTURE GROWTH STRATEGY

Because of various limitations placed on the Company by the terms and
conditions of its Amended Credit Facilities, it will be very difficult for the
Company to significantly increase beyond existing levels its revenues from sales
of Vacation Intervals. Silverleaf intends to capitalize on its significant
expansion capacity at the Existing Owned Resorts by maintaining marketing,
sales, and development activities in accordance with its downsized business
model. Furthermore, Silverleaf continues to emphasize its secondary products,
such as biennial (alternate year) intervals, which are designed to broaden
Silverleaf's potential market with a wider price range of product. The Company
also intends to concentrate more on marketing to existing members including
sales of upgraded Vacation Intervals, second weeks, and existing owner referral
programs.

COMPETITIVE ADVANTAGES

Silverleaf believes the following characteristics of its business afford it
certain competitive advantages:

CONVENIENT DRIVE-TO LOCATIONS. Silverleaf's Owned Drive-to Resorts are
located within a two-hour drive of a majority of the target customers'
residences, which accommodates the growing demand for shorter, more frequent,
close-to-home vacations. This proximity facilitates use of Silverleaf's Bonus
Time Program, allowing Silverleaf Owners to use vacant units, subject to
availability and certain limitations. Silverleaf believes it is the only
timeshare operator in the industry which offers its customers these benefits.
Silverleaf Owners can also conveniently enjoy non-lodging resort amenities
year-round on a "country-club" basis.

SUBSTANTIAL INTERNAL GROWTH CAPACITY. At December 31, 2001, Silverleaf had
an inventory of 20,913 Vacation Intervals and a master plan to construct new
units which will result in up to 101,060 additional Vacation Intervals at the
Existing Owned Resorts. Silverleaf's master plan for construction of new units
is contingent upon future sales at the Existing Owned Resorts and the
availability of financing, granting of governmental permits, and future
land-planning and site-layout considerations.

IN-HOUSE OPERATIONS. Silverleaf has in-house marketing, sales, financing,
development, and property management capabilities. While Silverleaf utilizes
outside contractors to supplement internal resources, when appropriate, the
breadth of Silverleaf's internal capabilities allows greater control over all
phases of its operations and helps maintain operating standards and reduce
overall costs.

LOWER CONSTRUCTION AND OPERATING COSTS. Silverleaf has developed and
generally employs standard architectural designs and operating procedures which
it believes significantly reduce construction and operating expenses.
Standardization and integration also allow Silverleaf to rapidly develop new
inventory in response to demand. Weather permitting, new units at Existing Owned
Resorts can normally be constructed on an "as needed" basis within 180 to 270
days.

CENTRALIZED PROPERTY MANAGEMENT. Silverleaf presently operates all of the
Existing Owned Resorts on a centralized and collective basis, with operating and
maintenance costs paid from Silverleaf Owners' monthly dues. Silverleaf believes
that consolidation of resort operations benefits Silverleaf Owners by providing
them with a uniform level of service, accommodations, and amenities on a
standardized, cost-effective basis. Integration also facilitates Silverleaf's
internal exchange program, and the Bonus Time Program.

EXPERIENCED MANAGEMENT. The Company's senior management has extensive
experience in the acquisition, development, and operation of timeshare resorts.
The Company's senior officers have an average of seventeen years of experience
in the timeshare industry.

10

RESORTS SUMMARY

The following tables set forth certain information regarding each of the
Existing Owned Resorts at December 31, 2001, unless otherwise indicated.

EXISTING OWNED RESORTS

11

(a) These totals do not reflect sales of upgraded Vacation Intervals to
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, 2001, upgrade sales at the
Existing Owned Resorts were as follows:

The average sales price for the 10,576 upgraded Vacation Intervals sold was
$4,254 for the year ended December 31, 2001.

(b) Represents units included in the Company's master plan. This plan is subject
to change based upon various factors, including consumer demand, the
availability of financing, grant of governmental land-use permits, and
future land-planning and site layout considerations. The following chart
reflects the status of certain planned units at December 31, 2001:

"Land-Use Process Pending" means that the Company has commenced the
process which the Company believes is required under current law in order to
obtain the necessary land-use authorizations from the applicable local
governmental authority with jurisdiction, including submitting for approval
any architectural drawings, preliminary plats, or other attendant items as
may be required.

"Land-Use Process Complete" means either that (i) the Company believes
that it has obtained all necessary land-use authorizations under current law
from the applicable local governmental authority with jurisdiction,
including the approval and filing of any required preliminary or final plat
and the issuance of building permit(s), in each case to the extent
applicable, or (ii) upon payment of any required filing or other fees, the
Company believes that it will under current law obtain such necessary
authorizations without further process.

"Shell Complete" units are currently devoted to such uses as a general
store, registration office, sales office, activity center, construction
office, or pro shop. The Company anticipates that these units will continue
to be used for such purposes during 2002.

(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) The Company has management rights with respect to these resorts and
presently has no ability to expand the resorts. In 2000, the Company
discontinued plans to sell Vacation Intervals at these resorts and the
Company's costs associated with its unsold inventory of Vacation Intervals
at these resorts were written off.

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(f) Boating is available near the resort.

(g) Includes three units which have not been finished-out for accommodations and
which are currently used for other purposes.

(h) Engineering, architectural, and construction estimates have not been
completed by the Company, and there can be no assurance that the Company
will develop these properties at the unit numbers currently projected.

FEATURES COMMON TO EXISTING OWNED RESORTS

Owned Drive-to 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. Owned Destination Resorts are
located in or near areas with national tourist appeal. Features common to the
Existing Owned Resorts include the following:

BONUS TIME PROGRAM. The Company's Bonus Time Program offers Silverleaf Club
members a benefit not typically enjoyed by many other timeshare owners. In
addition to the right to use a unit one week per year, the Bonus Time Program
allows Silverleaf Club members to also use vacant units at any of the Company's
owned resorts. The Bonus Time Program is limited based on the availability of
units. 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 the owned Vacation Interval. The Company believes this program is
important as many vacationers prefer shorter two to three day vacations.

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 Owned 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
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 different interval is of an
equal or lower rating; or (ii) exchange an interval for the same interval (week)
at any other of the Existing Owned Resorts. These intra-company exchange rights
are a convenience Silverleaf provides its members as an accommodation to them,
and are conditioned upon availability of the desired interval or resort.
Approximately 2,629 intra-company exchanges occurred in 2001. Silverleaf Owners
pay an exchange fee of $75 to the Silverleaf Club for each such internal
exchange. In addition, for an annual fee of approximately $84, most Silverleaf
Owners may join the exchange program administered by RCI. Silverleaf Owners at
Oak N' Spruce Resort may pay an annual fee of $79 to join the exchange program
administered by Interval International. Both RCI and Interval International also
charge an additional exchange fee for each exchange.

DEEDED OWNERSHIP. The Company typically sells a Vacation Interval which
entitles the owner to use a specific unit for a designated one-week interval
each year. The Vacation Interval purchaser receives a recorded deed which grants
the purchaser a percentage interest in a specific unit for a designated week.
The Company also sells a biennial (alternate year) Vacation Interval, which
allows the owner to use a unit for a one-week interval every other year with
reduced dues.

MANAGEMENT CLUBS. Each of the Existing Owned Resorts and the Existing
Managed Resorts has a Club for the benefit of the timeshare owners. The Clubs
operate under either Silverleaf Club or Crown Club to manage the Existing Owned
Resorts on a centralized and collective basis. Silverleaf Club and Crown Club
have contracted with the Company to perform the supervisory, management, and
maintenance 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.

ON-SITE SECURITY. Each of the Resorts is patrolled by security personnel who
are either employees of the Management Clubs or personnel of independent
security service companies which have contracted with the Clubs.

DESCRIPTION OF TIMESHARE RESORTS OWNED AND OPERATED BY THE COMPANY

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

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and timeshare units with other third-party developers. The Company owns
approximately 2,740 acres within Holly Lake, of which approximately 2,667 acres
may not be developed due to deed restrictions. At December 31, 2001,
approximately 27 acres were developed. The Company has no future development
plans.

At December 31, 2001, 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, wood 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 and restaurant, country store, indoor rodeo arena and
stables, five tennis courts (four lighted), two different lakes (one with sandy
swimming beach and swimming dock, one with boat launch for water-skiing), three
outdoor swimming pools with bathhouses, and pavilion, recently completed
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, 2001, the resort contained 6,500 Vacation Intervals, of
which 1,305 intervals remained available for sale. The Company has no plans to
build additional units. Vacation Intervals at the resort are currently priced
from $7,400 to $11,300 for one-week stays. During 2001, 496 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, 2001, approximately 181 acres were developed
and 18 acres are currently planned by the Company to be used for future
development.

At December 31, 2001, 334 units were completed at The Villages and 64 units
were completed at Lake O' The Woods. An additional 96 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 (1,255
square feet), 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 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 jet skis, 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, 2001, The Villages contained 16,960 total Vacation
Intervals, of which 3,832 remained available for sale. The Company plans to
build 96 additional units at The Villages, which would yield an additional 4,992
Vacation Intervals available for sale. At December 31, 2001, Lake O' The Woods
contained 3,200 total Vacation Intervals, of which 871 remained available for
sale. The Company has no plans to build additional units at Lake O' The Woods.
Vacation Intervals at The Villages and Lake O' The

14

Woods are currently priced from $7,000 to $12,300 for one-week stays (and start
at $5,000 for biennial intervals), while one-week "Presidents Harbor" intervals
are priced at $8,900 to $19,500 depending on the value rating of the interval.
During 2001, 1,383 and 135 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, 2001, approximately 72 acres were
developed and 11 acres are currently planned by the Company to be used for
future development.

At December 31, 2001, 166 units were completed and 126 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.
President's Cove units feature a larger, more spacious floor plan (1255 square
feet) with a back veranda, washer and dryer, and a more elegant decor.

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 with two spas, 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 for swimming, 4,626-square foot activity center with
big-screen television, 32-seat theatre room with big screen television), covered
wagon rides, and facilities for horseshoes, archery, shuffleboard, and
basketball.

At December 31, 2001, the resort contained 8,440 Vacation Intervals, of
which 1,804 remained available for sale. The Company intends to build 126
additional units, which would yield an additional 6,552 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,000 to $12,300 for one-week stays (and start at $5,000 for biennial
intervals). During 2001, 1,080 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, 2001, approximately 38 acres
were developed and 19 acres are currently planned by the Company to be used for
future development.

At December 31, 2001, 254 units were completed and 258 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. 134
units feature the Company's new "lodge style." 32 "Presidents Villas" units
feature a larger, more spacious floor plan (1,255 square feet), 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, newly-constructed 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, and the San Antonio Zoo.

At December 31, 2001, the resort contained 12,836 Vacation Intervals, of
which 1,709 remained available for sale. The Company plans to build 258
additional units, which collectively would yield 13,416 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $7,000 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals), while one-week "Presidents Villas" intervals are priced at
$8,900 to $21,500 depending on the value rating of the interval. During 2001,
1,396 Vacation Intervals were sold.

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, 2001, the resort contained approximately 116
acres. The Company has no future development plans.

At December 31, 2001, 136 units were completed and no additional units are
planned for development. 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

15

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 (1,255
square feet), 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 developed by the Company
in the past are also entitled to use these amenities pursuant to use agreements
with the Company. Similarly, owners of Vacation Intervals are entitled to use
certain amenities of these condominium developments, including a wellness center
featuring a small pool, hot tub, sauna, and exercise equipment.

At December 31, 2001, the resort contained 6,848 Vacation Intervals, of
which 697 remained available for sale. The Company has no plans to build
additional units. Vacation Intervals at the resort are currently priced from
$8,500 to $13,500 for one-week stays, while one-week "Presidents View" intervals
are priced at $9,500 to $21,500 depending on the value rating of the interval.
During 2001, 181 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 405 acres, including a
91-acre golf course. At December 31, 2001, approximately 296 acres were
developed and 68 acres are currently planned by the Company to be used for
future development.

At December 31, 2001, 326 units were completed and an additional 462 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 will 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 (1,255 square feet), back veranda, washer and
dryer, and a more elegant decor.

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, and a 2,800
square foot outdoor swimming pool. Lot and condominium unit owners are also
entitled to use these amenities pursuant to use agreements between the Company
and certain homeowners' associations.

At December 31, 2001, the resort contained 16,816 Vacation Intervals, of
which 2,339 remained available for sale. The Company plans to build 462
additional units, which would yield an additional 23,996 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,800 to $14,500 for one-week stays (and start at $6,500 for biennial
intervals), while one-week "Presidents Fairways" intervals are priced at $9,500
to $21,500 depending on the value rating of the interval. During 2001, 712
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, 2001, approximately 180 acres were
developed and 6 acres are currently planned by the Company to be used for future
development.

At December 31, 2001, 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,

16

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.
The Company is obligated to maintain and provide campground facilities for
members of the previous owner's campground system.

At December 31, 2001, the resort contained 3,744 Vacation Intervals and
1,255 Vacation Intervals remained available for sale. The Company plans 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 $7,000 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals). During 2001, 521 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, 2001, approximately 156 acres were
developed and 26 acres are currently planned by the Company to be used for
future development.

At December 31, 2001, 174 units are completed and 276 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.

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 court, outdoor pavilion, and playgrounds. The Company also offers
winter recreational activities at this resort, including ice-skating,
snowmobiling, and cross-country skiing. The Company is obligated to maintain and
provide campground facilities for members of the previous owner's campground
system.

At December 31, 2001, the resort contained 9,048 Vacation Intervals and
1,241 Vacation Intervals remained available for sale. The Company plans to build
276 additional units, which would collectively yield 14,352 additional Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $6,900 to $12,300 for one-week stays (and start at $5,000 for
biennial intervals). During 2001, 1,985 Vacation Intervals were sold.

OAK N' SPRUCE RESORT. In December 1997, the Company acquired the Oak N'
Spruce Resort in the Berkshire mountains of western Massachusetts. The resort is
located approximately 134 miles west of Boston, 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, 2001, approximately 37 acres were developed and 10 acres
are currently planned by the Company to be used for future development. The
Company currently has land use applications pending before local planning and
zoning authorities for approximately 240 additional timeshare units. If for any
reason the Company is unsuccessful in obtaining authorizations to build
additional units at Oak N' Spruce Resort, it may materially and adversely affect
the Company's ability to develop this resort and to sustain sales of Vacation
Intervals at Oak N' Spruce at existing levels.

At December 31, 2001, the resort had 224 units and the above described
additional 240 units are planned for development. There are seven 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 President's style units. There is also a
21-room hotel at the resort which 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, three-hole pitch and putt
golf course, 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, 2001, the resort contained 11,648 Vacation Intervals, of
which 1,245 remained available for sale. The Company plans to build 240
additional "lodge-style" units, which would yield an additional 12,480 Vacation
Intervals available for sale. Vacation Intervals at the resort are currently
priced from $8,150 to $14,500 for one-week stays (and start at $4,200 for
biennial intervals). During 2001, 1,376 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, 2001, approximately 191
acres were developed and 16 acres are currently planned by the Company to be
used for future development.

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At December 31, 2001, 60 units are completed and 192 units are planned for
development at Apple Mountain Resort. The "Lodge Get-A-Way" 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, snack area, and movie
theatre. 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 approximately 900 square feet and 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, 2001, the resort contained 3,120 Vacation Intervals, of
which 852 remained available for sale. The Company plans to build 192 additional
"lodge-style" units, which would yield an additional 9,984 Vacation Intervals
available for sale. Vacation Intervals at the resort are currently priced from
$7,000 to $12,300 for one-week stays (and start at $4,500 for biennial
intervals). During 2001, 444 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, 2001, approximately 45 acres
were developed and 42 acres are currently planned by the Company to be used for
future development.

At December 31, 2001, the resort had 72 units and an additional 210 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 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. The Company is obligated to maintain and provide campground
facilities for members of the previous owner's campground system.

At December 31, 2001, the resort contained 3,744 Vacation Intervals of which
1,183 remained available for sale. The Company plans to build 138 additional
units which would yield an additional 7,176 Vacation Intervals for sale.
Vacation Intervals at the resort are currently priced from $8,500 to $20,500 for
one-week stays. During 2001, 32 Vacation Intervals were sold.

DESCRIPTION OF TIMESHARE RESORTS MANAGED BY THE COMPANY

The management rights and an inventory of unsold Vacation Intervals to the
following resorts were acquired by the Company via the acquisition of Crown
Resort Co., LLC in May 1998. The Company manages each of these resorts for a
fee; however, the Company determined during 2001 that there will be no further
sales efforts related to the unsold inventory of Vacation Intervals at these
resorts, and has therefore written off all associated inventory costs.

ALPINE BAY RESORT. Alpine Bay Resort is located in Talledega County,
Alabama, near Lake Logan Martin and is approximately 50 miles east of
Birmingham. The resort contains 54 units and includes a golf course, pro shop
lounge, outdoor pool, and tennis courts. During 2001, no Vacation Intervals were
sold. No further development or sales are planned at this resort.

HICKORY HILLS RESORT. Hickory Hills is located in Jackson County,
Mississippi, near the Pascagoula River and is approximately 20 miles east of
Biloxi. The resort contains 80 units and has a golf course, restaurant/lounge,
outdoor pool, clubhouse, fitness center, miniature golf course, tennis courts,
and playground. During 2001, no Vacation Intervals were sold. No further
development or sales are planned at this resort.

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BEECH MOUNTAIN LAKES RESORT. Beech Mountain Lakes is located in Butler
Township, Luzerne County, Pennsylvania, and is approximately 30 miles south of
Wilkes Barre-Scranton. The resort contains 54 units and has a restaurant/lounge,
indoor pool/sauna, clubhouse, fitness center and tennis courts. During 2001, no
Vacation Intervals were sold. No further development or sales are planned at
this resort.

TREASURE LAKE RESORT. Treasure Lake is located in Sandy Township, Clearfield
County, Pennsylvania, and is approximately 160 miles northeast of Pittsburgh.
The resort contains 145 units and has two golf courses, two lakes, four beaches,
campground, two restaurant/lounges, indoor pool/sauna, outdoor pool, clubhouse,
four playgrounds, tennis courts, and pontoon boat. During 2001, no Vacation
Intervals were sold. No further development or sales are planned at this resort.

FOXWOOD HILLS RESORT. Foxwood Hills is located in Oconee County, South
Carolina, near Lake Hartwell, and is approximately 100 miles northeast of
Atlanta. The resort contains 114 units and has a golf course, restaurant/lounge,
indoor pool/sauna, outdoor pool, clubhouse, miniature golf course, tennis
courts, pontoon boat, and playground. During 2001, no Vacation Intervals were
sold. No further development or sales are planned at this resort.

TANSI RESORT. Tansi Resort is located in Cumberland County, Tennessee, and
is approximately 75 miles west of Knoxville. The resort contains 124 units and
has a golf course, restaurant/lounge, indoor pool/sauna, outdoor pool,
clubhouse, fitness center, miniature golf course, tennis courts, and playground.
During 2001, no Vacation Intervals were sold. No further development or sales
are planned at this resort.

WESTWIND MANOR RESORT. Westwind Manor is located in Wise County, Texas, on
Lake Bridgeport and is approximately 65 miles northwest of the Dallas-Fort Worth
metroplex. The resort contains 37 units and has a golf course,
restaurant/lounge, outdoor pool, clubhouse, miniature golf course, tennis
courts, and playground. During 2001, no Vacation Intervals were sold. No further
development or sales are planned at this resort.

POTENTIAL NEW RESORT

BEECH MOUNTAIN RESORT. In December 1998, the Company acquired 1,998 acres of
undeveloped land near Philadelphia, Pennsylvania, which could be developed as a
Drive-to Resort. The primary recreational amenity available at this site is a
fishing lake. The Company has received regulatory approval to develop 408 units,
which would yield 21,216 Vacation Intervals for sale. The Company has not
scheduled target dates for construction, completion of initial units, or
commencement of marketing and sales efforts for this location.

MARKETING AND SALES

Marketing is the process by which the Company attracts potential customers
to visit and tour an Existing Resort or attend a sales presentation. Sales is
the process by which the Company seeks to sell a Vacation Interval to a
potential customer once he arrives for a tour at an Existing Resort or attends a
sales presentation.

MARKETING. The Company's in-house marketing staff creates databases of new
prospects which are principally developed through cooperative arrangements with
outside vendors to identify prospects who meet the Company's marketing criteria.
Using the Company's automated dialing and bulk mailing equipment, in-house
marketing specialists conduct coordinated telemarketing and direct mail
procedures which invite prospects to tour one of the Company's resorts and
receive an incentive, such as a free gift. On a limited basis, the Company
retains outside vendors to arrange tours at the Company's resorts.

SALES. The Company actively sells its Vacation Intervals primarily through
on-site salespersons at certain Existing Owned Resorts. Upon arrival at an
Existing Owned Resort for a scheduled tour, the prospect is met by a member of
the Company's on-site sales force who conducts the prospect on a 90 minute tour
of the resort and its related amenities. At the conclusion of the tour, the
sales representative explains the benefits and costs of becoming a Silverleaf
Owner. The presentation also includes a description of the financing
alternatives offered by the Company. Prior to the closing of any sale, a
verification officer interviews each prospect to ensure compliance with Company
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.

Sales representatives receive commissions ranging from 2% to 14% of the
sales price depending on established guidelines. Sales managers also receive
commissions of 1.5% to 3.5% 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.

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Prospects who are interested in a lower priced product are offered biennial
(alternate year) intervals or other low priced products, which 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 later fixed date. In addition, the Company actively
markets both on-site and off-site upgraded Vacation Intervals to existing
Silverleaf Owners. Although most upgrades are sold by the Company's in-house
sales staff, the Company has contracted with a third party to assist in offsite
marketing of upgrades at the Owned Destination Resorts. These upgrade programs
have been well received by Silverleaf Owners and accounted for approximately
32.3% and 32.5% of the Company's gross revenues from Vacation Interval sales for
the years ended December 31, 2001 and 2000, respectively. By offering lower
price products and upgraded Vacation Intervals, the Company believes it offers
an affordable product for all prospects in its target market. Also, by offering
products with a range of prices, the Company attempts to broaden its market with
its lower-priced products and gradually upgrade such purchasers over time.

Because the Company's sales representatives are a critical component of the
sales and marketing effort, the Company continually strives to attract, train,
and retain a dedicated sales force. The Company provides intensive sales
instruction and training which, coupled with the representative's valuable local
knowledge, assists the sales representatives in acquainting prospects with the
resort's benefits. Each sales representative is an employee of the Company and
receives some employment benefits. At December 31, 2001, the Company employed
approximately 317 sales representatives at its Existing Owned Resorts.

As a result of the Company's aforementioned liquidity concerns, the Company
closed three outside sales offices, closed three telemarketing centers, and
reduced headcount in sales and marketing functions during the second and third
quarters of 2001. Since the third quarter of 2001, the Company has been
operating under new sales practices whereby no sales are permitted unless the
touring customer has a minimum income level beyond that previously required and
has a valid major credit card. Further, the marketing division is employing a
program, which should facilitate marketing to customers more likely to be better
credit risks. As a result of these changes, the standardized FICO ("Fair Isaac
Credit Opinion") score for weekly sales has improved from below 620 on a
850-point scale in February 2001 to over 640 in December 2001.

CUSTOMER FINANCING

The Company offers financing to the buyers of Vacation Intervals at the
Company's resorts. These buyers typically make down payments of at least 10% of
the purchase prices and deliver promissory notes to the Company 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. The Company bears the risk of defaults
on these promissory notes, and this risk is heightened inasmuch as the Company
generally does not verify the credit history of its customers prior to purchase
and will provide financing if the customer is presently employed and meets
certain income and buyer profile criteria.

The Company's credit experience is such that in 2001 it provided 25.2% of
the purchase price of Vacation Intervals as a provision for uncollectible notes.
In addition, for the year ended December 31, 2001, the Company decreased sales
by $9.1 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, the Company generally must foreclose on the Vacation
Interval and attempt to resell it; the associated marketing, selling, and
administrative costs from the original sale are not recovered; and sales and
marketing costs must be incurred again to resell the Vacation Interval. Although
the Company, in many cases, may have recourse against a Vacation Interval buyer
for the unpaid price, certain states have laws which limit or hinder the
Company's ability to recover personal judgments against customers who have
defaulted on their loans. For example, under Texas law, if the Company were to
pursue a post-foreclosure deficiency claim against a customer, the customer may
file a court proceeding to determine the fair market value of the property
foreclosed upon. In such event, the Company may not recover a personal judgment
against the customer for the full amount of the deficiency, but may recover only
to the extent that the indebtedness owed to the Company exceeds the fair market
value of the property. Accordingly, the Company has generally not pursued this
remedy because the Company has not found it to be cost effective.

At December 31, 2001, the Company had notes receivable (including notes
unrelated to Vacation Intervals) in the approximate principal amount of $333.3
million, was contingently liable with respect to approximately $366,000
principal amount of customer notes sold with recourse, and had an allowance for
uncollectible notes of approximately $54.7 million.

Effective October 30, 2000, the Company entered into a $100 million
revolving credit agreement to finance Vacation Interval notes receivable through
a wholly-owned off-balance-sheet SPE, formed on October 16, 2000. The agreement
presently has a term of 5 years. However, on the second anniversary date of the
amended facility, the SPE's lender under the credit agreement shall have the
right to put, transfer, and assign to the SPE all of its rights, title, and
interest in and to all of the assets securing the facility at a price equal to
the then outstanding principal balance under the facility. During 2000, the
Company sold $74 million of notes receivable to the SPE, which the Company
services for a fee. The SPE funded these purchases through advances under a
credit agreement arranged

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for this purpose. In conjunction with these sales, the Company received cash
consideration of $62.9 million, which was used to pay down borrowings under its
revolving loan facilities. During 2001, the Company made no sales of notes
receivable to the SPE.

At December 31, 2001, the SPE held notes receivable totaling $50.4 million,
with related borrowings of $43.6 million. Except for the repurchase of notes
that fail to meet initial eligibility requirements, the Company is not obligated
to repurchase defaulted or any other contracts sold to the SPE. It is
anticipated, however, that the Company will place bids in accordance with the
terms of the conduit agreement to repurchase some defaulted contracts in public
auctions to facilitate the re-marketing of the underlying collateral. The
investment in the SPE was valued at $4.8 million at December 31, 2001.

Effective April 30, 2002, the Company and its SPE entered into amendments to
the DZ Bank Facility and the Company received $48.5 million in May 2002, in cash
proceeds from the sale of Vacation Interval notes receivable to its SPE with
financing supplied by DZ Bank. All of these cash proceeds were used to pay down
the revolving credit facilities with two of the Company's senior lenders.

It is vitally important to the Company's liquidity plan that this credit
facility, or another new facility, continue beyond the two-year period. In
addition, the Company's business model assumes that expanded off-balance-sheet
financing will be available to the Company in 2003 and 2004. Such an expanded
facility will be necessary to reduce outstanding balances on non-revolving
credit facilities and to finance future sales. Factors that could affect the
Company's ability to obtain additional off-balance-sheet financing are as
follows:

o Capital market credit facilities may not be available to fund
off-balance-sheet financings; and

o The Company's customer notes receivable may not meet capital market
requirements.

Management believes that the expanded facilities necessary in 2003 and 2004 will
require enhanced eligibility requirements for customer notes receivable.
Management has implemented revised sales practices that it believes will result
in higher quality notes receivable by 2003 and 2004. If the quality of the notes
receivable portfolio does not improve significantly by 2003, it is unlikely that
the Company will be able to secure additional off-balance-sheet facilities. In
this case, the Company will attempt to secure additional secured credit
facilities.

The Company recognizes 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 receivable become 90 days delinquent. Once a note
receivable becomes 90 days delinquent, the accrual of additional interest income
ceases until collection is deemed probable. When inventory is returned to the
Company, any unpaid note receivable balances are charged against the allowance
for uncollectible notes net of the amount at which the Vacation Interval is
restored to inventory.

The Company intends to borrow additional funds under its existing revolving
credit facilities and sell notes to its SPE to finance its operations. At
December 31, 2001, the Company had borrowings under credit facilities in the
approximate principal amount of $266.7 million. These facilities permit
borrowings up to 85% of the principal amount of performing notes, and payments
from Silverleaf Owners on such notes are credited directly to the lender and
applied against the Company's loan balance. At December 31, 2001, the Company
had a portfolio of approximately 39,684 Vacation Interval customer promissory
notes in the approximate principal amount of $335.7 million, of which
approximately $6.7 million in principal amount was 61 days or more past due and
therefore ineligible as collateral.

At December 31, 2001, the Company's portfolio of customer notes receivable
had an average yield of 13.7%. At such date, the Company's borrowings, which
bear interest at variable rates, had a weighted average cost of 8.1%. The
Company has historically derived net interest income from its financing
activities because the interest rates it charges its customers who finance the
purchase of their Vacation Intervals exceed the interest rates the Company pays
to its lenders. Because the Company's existing indebtedness currently bears
interest at variable rates and the Company's customer notes receivable bear
interest at fixed rates, increases in interest rates would erode the spread in
interest rates that the Company has historically experienced and could cause the
interest expense on the Company's borrowings to exceed its interest income on
its portfolio of customer loans. The Company has not engaged in interest rate
hedging transactions. Therefore, any increase in interest rates, particularly if
sustained, could have a material adverse effect on the Company's results of
operations, liquidity, and financial position.

Limitations on availability of financing would inhibit sales of Vacation
Intervals due to (i) the lack of funds to finance the initial negative cash flow
that results from sales that are financed by the Company, and (ii) reduced
demand if the Company is unable to provide financing to purchasers of Vacation
Intervals. The Company ordinarily receives only 10% of the purchase price on the
sale of a Vacation Interval but must pay in full the costs of development,
marketing, and sale of the Vacation Interval. Maximum borrowings available under
the Company's current credit agreements may not be sufficient to cover these
costs, thereby straining capital resources,

21

liquidity, and capacity to grow. In addition, to the extent interest rates
decrease generally on loans available to the Company's customers, the Company
faces an increased risk that customers will pre-pay their loans and reduce the
Company's income from financing activities.

The Company typically provides financing to customers over a seven-year to
ten-year period, and customer notes had an average maturity of 6.2 years at
December 31, 2001. Considering the Exchange Offer completed May 2, 2002, the
Company's revolving credit facilities have scheduled maturities between August
2003 and March 2007. Additionally, the Company's revolving credit facilities
could be declared immediately due and payable as a result of a default by the
Company. Accordingly, there could be a mismatch between the Company's cash
receipts and the Company's cash disbursements obligations in 2002 and subsequent
periods. Although the Company has historically been able to secure financing
sufficient to fund its operations, it does not presently have agreements with
its lenders to extend the term of its existing funding commitments or to replace
such commitments upon their expiration. Failure to obtain such refinancing
facilities would require the Company to seek other alternatives to enable it to
continue in business. Due to the uncertainties inherent in the Company's current
financial condition, as well as capital market uncertainties, the Company may
not have viable alternatives available if its current lenders are unwilling to
extend refinancing to replace existing credit facilities.

DEVELOPMENT AND ACQUISITION PROCESS

As part of its current business model, the Company intends to develop at its
Existing Owned Resorts and/or acquire new resorts only to the extent the capital
markets and the covenants of its existing facilities permit.

Assuming the Company is successful in implementing its revised business
model, it would only consider developing or acquiring new resorts under its
established development policies. Before committing capital to a site, the
Company tests the market using certain marketing techniques developed by the
Company. The Company also explores the zoning and land-use laws applicable to
the potential site and the regulatory issues pertaining to licenses and permits
for timeshare sales and operations. The Company will also contact various
governmental entities and review applications for necessary governmental permits
and approvals. If the Company is satisfied with its market and regulatory
review, it will prepare a conceptual layout of the resort, including building
site plans and resort amenities. After the Company applies its standard lodging
unit design and amenity package, the Company prepares a budget which estimates
the cost of developing the resort, including costs of lodging facilities,
infrastructure, and amenities, as well as projected sales, marketing, and
general and administrative costs. Purchase contracts typically provide for
additional due diligence by the Company, including obtaining an environmental
report by an environmental consulting firm, a survey of the property, and a
title commitment. The Company employs legal counsel to review such documents and
to also review pertinent legal issues. If the Company continues to be satisfied
with the site after the environmental and legal review, the Company will
complete the purchase of the property.

All construction activities are managed internally by the Company. The
Company typically completes 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 / MANAGEMENT CLUBS

The Company has the right to appoint the directors of the Silverleaf Club.
However, the Company does not have this right related to the Crown Club. The
Silverleaf Club and the Crown Club are collectively sometimes referred to as the
"Management Clubs." The Silverleaf Owners are obligated to pay monthly dues to
their respective Clubs, which obligation is secured by a lien on their Vacation
Interval in favor of the Club. If a Silverleaf Owner fails to pay his monthly
dues, the Club may 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 were 1,258 in 2001
and 556 in 2000. Typically, the Company purchases at foreclosure all Vacation
Intervals that are the subject of foreclosure proceedings instituted by the Club
because of delinquent dues.

Each timeshare resort has a Club that operates through a centralized
organization to manage the resorts on a collective basis. The consolidation of
resort operations through the Management Clubs 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 Owned Resorts are owned by
either that resort's Club or the Silverleaf Club, rather than the Company.

22

At December 31, 2001, the Management Clubs had 613 full-time employees, and
are solely responsible for their salaries. The Management Clubs are also
responsible for the direct expenses of operating the Existing Owned Resorts,
while the Company is responsible for the direct expenses of new development and
all marketing and sales activities. To the extent the Management Clubs provide
payroll, administrative, and other services that directly benefit the Company,
the Company reimburses the Management Clubs for such services and vice versa.

The Management Clubs collect dues from Silverleaf Owners, plus certain other
amounts assessed against the Silverleaf Owners from time to time, together with
all income generated by the operation of certain amenities at the Existing Owned
Resorts. Silverleaf Club dues are currently $49.98 per month ($24.99 for
biennial owners), except for certain members of Oak N' Spruce Resort which
prepay dues at an annual rate of approximately $350. Crown Club dues range from
$285 to $390 annually. Such amounts are used by the Management Clubs to pay the
costs of operating the Existing Owned Resorts and the management fees due to the
Company pursuant to Management Agreements between the Company and the Management
Clubs. These Management Agreements authorize the Company to manage and operate
the resorts and provide for a maximum management fee equal to 15% of gross
revenues for Silverleaf Club or 10% to 15% of dues collected for Clubs within
Crown Club, but the Company's right to receive such fee on an annual basis is
limited to the amount of each Management Club's net income. However, if the
Company does not receive the maximum fee, such deficiency is deferred for
payment to succeeding year(s), subject again to the net income limitation. Due
to anticipated refurbishment of units at the Existing Owned Resorts, together
with the operational and maintenance expenses associated with the Company's
current expansion and development plans, the Company's 2001 management fees were
subject to the net income limitation. Accordingly, for the year ended December
31, 2001, management fees recognized were $2.5 million. For financial reporting
purposes, management fees from the Management Clubs are recognized based on the
lower of (i) the aforementioned maximum fees or (ii) each Management 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 performance of the Silverleaf Club it is uncertain
when the Silverleaf Club will be able to generate positive net income.
Therefore, future income to the Company could be limited. Additionally, in 2000
the Company determined that the receivable from Silverleaf Club for certain
expenses advanced by the Company was not collectible and was therefore written
off resulting in a charge to expense of $7.5 million. Crown Club consists of
several individual Club agreements which have terms of two to five years with a
minimum of two renewal options remaining. At December 31, 2001, there were
approximately 96,000 and 24,000 Vacation Interval owners who pay dues to
Silverleaf Club and Crown Club, respectively. As the Company develops new
resorts, their respective Clubs are expected to be added to the Silverleaf Club
Management Agreement.

OTHER OPERATIONS

OPERATION OF AMENITIES. The Company owns, operates, and receives 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 the
Company owns the golf course at Holly Lake, a homeowners association in the
development operates the golf course. In general, the Management Clubs receive
revenues from the various amenities which require a usage fee, such as
watercraft rentals, horseback rides, and restaurants.

UNIT LEASING. The Company also recognizes revenues from sales of Samplers
which allow prospective Vacation Interval purchasers to sample a resort for a
specified number of nights. A five night Sampler package currently sells for
$595. For the years ended December 31, 2001 and 2000, the Company recognized
$3.9 million and $3.6 million, respectively, in revenues from Sampler sales.

UTILITY SERVICES. The Company owns its own water supply facilities at Piney
Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills,
Timber Creek, and Fox River resorts. The Company also currently owns its own
waste-water treatment facilities at The Villages, Piney Shores, Ozark Mountain,
Holly