UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

For The Fiscal Year Ended December 31, 2003

or

FOR THE TRANSITION PERIOD FROM _________ TO _________

Commission File Number 001-13003

Silverleaf Resorts, Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, Including Area Code: 214-631-1166

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

Securities Registered Pursuant to Section 12(g) of the Act:

None

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

     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.[   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ] No [X]

     The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the last sales price of the Common Stock on June 30, 2003 as reported by the Electronic Quotation Service of Pink Sheets LLC, was approximately $4,239,463

(based on 13,675,687 shares held by non-affiliates). There were 36,826,906 shares of the Registrant’s Common Stock, $.01 par value, outstanding at June 30, 2003.

     As of March 29, 2004 there were 36,843,572 shares of the Registrant’s Common Stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, which will be held within 120 days after the end of the fiscal year, are incorporated by reference into Part III hereof.

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FORM 10-K INDEX

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     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” 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.

PART I

ITEM 1. BUSINESS

Overview

     The principal business of Silverleaf Resorts, Inc. (“Silverleaf,” the “Company,” or “we”) is the development, marketing, and operation of “drive-to” and “destination” timeshare resorts. We currently own eight “drive-to resorts” in Texas, Missouri, Illinois, and Georgia (the “Drive-to Resorts”). We also own four “destination resorts” in Texas, Missouri, and Massachusetts (the “Destination Resorts”).

     The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable accommodations in locations convenient to their residences and are located near major metropolitan areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent “short-stay” getaways. We believe such short-stay getaways are growing in popularity as a vacation trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation environment. We believe our resorts offer our customers an economical alternative to commercial vacation lodging. The average price for an annual one-week vacation ownership (“Vacation Interval”) for a two-bedroom unit at the Existing Resorts was $9,510 for 2003 and $9,846 for 2002.

     Owners of Silverleaf Vacation Intervals at the Existing Resorts (“Silverleaf Owners”) enjoy benefits which are uncommon in the timeshare industry. These benefits include (i) use of vacant lodging facilities at the Existing Resorts through our “Bonus Time” Program; (ii) year-round access to the Existing Resorts’ non-lodging amenities such as fishing, boating, horseback riding, 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 at a different Existing Resort through our internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the Vacation Interval exchange network operated by Resort Condominiums International (“RCI”). Prior to October 2003, Oak N’ Spruce Resort was not under contract with RCI; however it was under contract with Interval International, a competitor of RCI. Since October 2003, Oak N’ Spruce Resort has been under contract with RCI instead of Interval International.

     Certain Significant 2003 Events

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Due to the results of operations during the first quarter of 2003, we were in default under certain financial covenants in our senior credit facilities throughout the first nine months of 2003. During the fourth quarter of 2003, we obtained waivers of these defaults, we obtained amendments to the credit facilities to cure the defaults, and we obtained extensions of maturity dates under two of our senior revolving facilities. See “Debt Structure” on page 6 of this report and “Description of Our Senior Credit Facilities” beginning on page 18 of this report for further details.

•

Due to the results of operations during the first quarter of 2003, Silverleaf Finance I, Inc., our wholly-owned special purpose entity (“SPE”), was in default of financial covenants with its lender. The lender subsequently waived the defaults and modified its agreement with the SPE in June 2003. We also obtained an extension of our SPE’s existing revolving credit facility through March 2006. In connection with the two-year extension of this facility, however, we agreed to reduce the principal amount of the facility from $100 million to $85 million. See “Amended DZ Bank Facility” on page 21 of this report for further details.

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•

We closed a $66.4 million conduit term loan transaction through a newly-formed wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”) during the fourth quarter of 2003, the results of which are consolidated and included in our consolidated financial statements. We used the proceeds from the sale of the receivables to SF-II to pay down approximately $65.5 million of amounts outstanding under our two senior revolving credit facilities. The new conduit loan to SF-II will mature in 2014 and bears interest at a fixed annual rate of 7.035%. See “Debt Structure” on page 6 of this report for further details.

•

We retired the remaining $8.8 million balance of our $60 million loan agreement with a senior lender due in August 2003 at a discount during the first quarter of 2003, which resulted in a gain of $1.3 million.

•

We retired $7.6 million of our 10 1/2% senior subordinated notes due 2008 at a discount this year, which resulted in a gain of $5.1 million.

•

We sold property in Las Vegas in the first quarter of 2003 and property in Kansas City during the fourth quarter of 2003. We also sold our management rights under “Crown Club” during 2003. These sales collectively resulted in net proceeds of $4.7 million, which were paid to our senior lenders to reduce our debt, and net gains of $454,000.

     Operations

     Our primary business is marketing and selling Vacation Intervals from our inventory to individual consumers. Our principal activities in this regard include:

	¡		acquiring and developing timeshare resorts;
	¡		marketing and selling one-week annual and biennial Vacation Intervals to prospective first-time owners;
	¡		marketing and selling upgraded Vacation Intervals to existing Silverleaf Owners;
	¡		financing the purchase of Vacation Intervals; and
	¡		managing timeshare resorts.

     We have in-house capabilities which enable us to coordinate all aspects of development and expansion of the Existing Resorts and the potential development of any future resorts, including site selection, design, and construction pursuant to standardized plans and specifications.

     We perform substantial marketing and sales functions internally. We have made significant investments in operating technology, including telemarketing and computer systems and proprietary software applications. We identify potential purchasers through internally developed marketing techniques and through cooperative arrangements with outside vendors. We sell Vacation Intervals through on-site sales offices located at certain of our resorts which are located near major metropolitan areas. This practice provides us an alternative to marketing costs of subsidized airfare and lodging, which are typically associated with the timeshare industry.

     As part of the Vacation Interval sales process, we offer potential purchasers financing of up to 90% of the purchase price over a seven-year to ten-year period. We have historically financed our operations by borrowing from third-party lending institutions at an advance rate of 75% to 85% of eligible customer receivables. At December 31, 2003 and 2002, we had a portfolio of approximately 32,056 and 33,022 customer promissory notes, respectively, totaling approximately $242.3 and $262.1 million, respectively, with an average yield of 14.9% and 14.4% per annum, respectively, which compares favorably to our weighted average cost of borrowings of 6.3% per annum at December 31, 2003. We cease recognition of interest income when collection is no longer deemed probable. At December 31, 2003 and 2002, approximately $3.9 million and $4.7 million in principal, or 1.6% and 1.8%, respectively, of our loans to Silverleaf Owners were 61 to 120 days past due. As of December 31, 2003 and 2002, no loans were over 120 days past due. However, we continue collection efforts with regard to all notes deemed uncollectible until all collection techniques that we utilize have been exhausted. We provide for uncollectible notes by reserving an estimated amount which our management believes is sufficient to cover anticipated losses from customer defaults.

     Each timeshare resort has a timeshare owners’ association (a “Club”). Each Club operates through a centralized organization to manage its respective resort on a collective basis. This centralized organization is Silverleaf Club, a Texas not-for-profit corporation. Silverleaf Club is under contract with each Club for each of the Existing Resorts to manage their operations. In turn, we have a contract with Silverleaf Club, under which we perform the supervisory, management, and maintenance functions of all the Existing Resorts on a collective basis. All costs of operating the timeshare resorts, including management fees payable to us under the management agreements, 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.

     We only managed certain resorts (“Crown Club”) until the third quarter of 2003, when we sold our management rights and unsold timeshare inventory in the seven timeshare resorts we had managed since we originally acquired them from Crown Resorts Co., LLC

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in May 1998. Crown Club was not a separate entity, but consisted of several individual management agreements, which had terms of two to five years.

Debt Structure

     In February 2001, we disclosed significant liquidity issues, which resulted in the violation of various financial covenants with our senior credit facilities. In negotiations with our senior lenders to restructure the credit facilities and to enable us to continue in business, it was determined that the senior lenders would not accept our proposals to make necessary amendments to the existing credit facilities, unless we were able to (i) substantially reduce the annual interest payment obligations to the holders of the 10 ½% senior subordinated notes, (ii) convert a substantial portion of the debt represented by the 10 ½% senior subordinated notes into our common stock, and (iii) substantially modify the indenture which secures the 10 ½% senior subordinated notes by the consent of the holders. Therefore, the underlying purpose of the restructuring was to reorganize our capital structure in such a manner as to induce the senior lenders to restructure the credit facilities. We completed the restructuring (“Exchange Offer”) in May 2002, which reduced the existing debt and provided liquidity to finance our operations.

     As of December 31, 2002, we were in compliance with all of our operating covenants. However, due to the results of the quarter ended March 31, 2003, we were not in compliance with three of our financial covenants. First, sales and marketing expense for the quarter ended March 31, 2003 was 56.1% of sales, compared to a maximum threshold of 52.5%. Second, the interest coverage ratio for the twelve months ended March 31, 2003 was 1.02 to 1.0, compared to a minimum requirement of 1.25 to 1.0. And third, net loss for the two consecutive quarters ended March 31, 2003 was $24.9 million, compared to a minimum requirement of $1.00 net income. Also, due to the results for the six months ended June 30, 2003, we were in default of two of our financial covenants. First, the interest coverage ratio for the twelve months ended June 30, 2003 was 0.13 to 1.0, compared to a minimum requirement of 1.25 to 1.0. Second, net loss for the two consecutive quarters ended June 30, 2003 was $23.1 million, compared to a minimum requirement of $1.00 net income. In addition, due to the results for the nine months ended September 30, 2003, we were in default of one of our financial covenants. The interest coverage ratio for the twelve months ended September 30, 2003 was 0.40 to 1.0, compared to a minimum requirement of 1.25 to 1.0.

     In addition, as a result of the loss for the quarter ended March 31, 2003, our SPE was in default of financial covenants with its lender. The lender subsequently waived the defaults as of March 31, 2003 and modified its agreement with the SPE whereby there were no defaults for the quarter ended June 30, 2003 or September 30, 2003.

     In November 2003, we entered into agreements with our three senior lenders to amend our senior credit facilities to modify our financial covenants under which we had been in default since the first quarter of 2003. The amended covenants increased from 52.5% to 55% the maximum permitted ratio of sales and marketing expenses to total sales for each quarter beginning with the quarter ended March 31, 2003. They also exclude our $28.7 million increase in our allowance for uncollectible notes in the quarter ended March 31, 2003 from the calculation of our minimum required consolidated net income, and from the calculation of our minimum required interest coverage ratio of 1.25 to 1.0. In addition to the above amendments, we also received waivers under our senior credit facilities of covenant defaults which occurred in the first quarter of 2003 due to our increase in our allowance for uncollectible notes and our failure to maintain a ratio of sales and marketing expense to total sales of no more than 52.5%. As a result of these amendments and waivers we are now in full compliance with all of the financial covenants to our credit facilities with our senior lenders.

     In December 2003, we closed a $66.4 million conduit term loan transaction through a newly-formed wholly-owned financing subsidiary, Silverleaf Finance II, Inc. (“SF-II”). This conduit loan was arranged through one of our existing senior lenders. Under the terms of the new conduit loan, we sold approximately $78.1 million of our Vacation Interval receivables to our subsidiary SF-II for an amount equal to the aggregate principal balances of the receivables. The purchase of these receivables was financed by the existing senior lender through a one-time advance to SF-II of $66.4 million, which is approximately 85% of the outstanding balance of the receivables SF-II purchased from us. All customer receivables we transferred to SF-II have been pledged as security to the senior lender. The senior lender has also received as additional collateral a pledge of all of our equity interest in SF-II and a $15.7 million demand note from us to SF-II under which payment may be demanded if SF-II defaults on its loan from the lender. We used the proceeds from the sale of the receivables to SF-II to pay down approximately $65.5 million of amounts outstanding under two of our senior revolving credit facilities. The senior lender’s new conduit loan to SF-II will mature in 2014 and bears interest at a fixed annual rate of 7.035%.

     As a result of the closing of the $66.4 million conduit loan, we obtained a two-year extension of our senior revolving credit facilities with two of our senior lenders. The revolving period on these two facilities are now extended through March 31, 2006. Additionally, we obtained an extension of our existing revolving credit facility through our SPE through March 31, 2006. In order to obtain the two-year extension of this facility, however, we agreed to reduce the principal amount of the facility from $100 million to $85 million.

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Marketing and Sales

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

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

     Sales. We sell our Vacation Intervals primarily through on-site salespersons at certain Existing Resorts. Upon arrival at an Existing Resort for a scheduled tour, the prospect is met by a member of our sales force who leads the prospect on a 90-minute tour of the resort and its amenities. At the conclusion of the tour, the sales representative explains the benefits and costs of becoming a Silverleaf Owner. The presentation also includes a description of the financing alternatives that we offer. Prior to the closing of any sale, a verification officer interviews each prospect to ensure our compliance with sales policies and regulatory agency requirements. The verification officer also plays a Bonus Time video for the customer to explain the limitations on the Bonus Time Program. No sale becomes final until a statutory waiting period (which varies from state to state) of three to fifteen calendar days has passed. In addition, we also sell our Vacation Intervals as upgraded sales of higher priced units to existing owners and additional week sales to existing owners.

     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 4.0% and are subject to commission chargebacks in the event the purchaser fails to make the first required payment. Sales directors also receive commissions of 1.0% to 3.5%, which are also subject to chargebacks.

     Prospects who are interested in a lower priced product are offered biennial (alternate year) intervals or other low priced products that entitle the prospect to sample a resort for a specified number of nights. The prospect may apply the cost of a lower priced product against the down payment on a Vacation Interval if purchased by a certain date. In addition, we actively market both on-site and off-site upgraded Vacation Intervals to existing Silverleaf Owners. Although most upgrades are sold by our in-house sales staff, we have contracted with a third party to assist in offsite marketing of upgrades at the Destination Resorts. These upgrade programs have been well received by Silverleaf Owners and accounted for approximately 26.4% and 34.1% of the Company’s gross revenues from Vacation Interval sales for the years ended December 31, 2003 and 2002, respectively. By offering lower priced products and upgraded Vacation Intervals, we believe we offer an affordable product for all prospects in our target market. Also, by offering products with a range of prices, we attempt to broaden our market with lower-priced products and gradually upgrade such purchasers over time.

     Our sales representatives are a critical component of our sales and marketing effort. We continually strive to attract, train, and retain a dedicated sales force. We provide intensive sales instruction and training, which assists the sales representatives in acquainting prospects with the resort’s benefits. Each sales representative is our employee and receives some employment benefits. At December 31, 2003, we employed 337 sales representatives at our Existing Resorts.

Customer Financing

     We offer financing to buyers of Vacation Intervals at our resorts. These buyers typically make down payments of at least 10% of the purchase prices and deliver promissory notes for the balances. The promissory notes generally bear interest at a fixed rate, are generally payable over a seven-year to ten-year period, and are secured by a first mortgage on the Vacation Interval. We bear the risk of defaults on these promissory notes, and this risk is heightened inasmuch as we generally do not verify the credit history of our customers prior to purchase and will provide financing if the customer is presently employed and meets certain income and buyer profile criteria. There are a number of risks associated with financing customers purchases of Vacation Intervals. For an explanation of these risks, please see “Cautionary Statements” beginning on page 22 of this report.

     In 2003 we accrued 20% of the purchase price of Vacation Intervals as a provision for uncollectible notes. We also accrued an additional $28.7 million of the purchase price of Vacation Intervals as a provision for uncollectible notes during the first quarter of 2003. Management observed that cancellations in the first quarter significantly exceeded the level expected under its estimate for the December 31, 2002 allowance for uncollectible notes. Accordingly, the estimate was revised in the first quarter of 2003 as follows:

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the basis of the estimate of future cancellations was changed from Vacation Interval sales to incremental amounts financed, resulting in an increase of $1.6 million,

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certain historical cancellations from 2000 and 2001 that were previously excluded from predictive cancellations, as such cancellations were assumed to be uncharacteristically large as a result of the Company’s class action notices to all customers and announcements about its liquidity and possible bankruptcy issues in the first half of 2001, were included in predictive cancellations, resulting in an increase of $5.6 million,

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the estimate of cancellations in years 7, 8, and 9 after a sale were increased, resulting in an increase of $1.6 million,

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the estimate of inventory recoveries resulting from cancellations was revised, resulting in an increase of $300,000,

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the ratio of the excess of cancellations in the first quarter over the estimated cancellations for the same period based on the weighted average rate of cancellations divided by the incremental amounts financed for the period 1997 through 2002, was applied to all future estimated cancellations, resulting in an increase of $15.0 million, and

•

an estimate was added for current notes with customers who received payment or term concessions that would have been deemed cancellations were it not for the concessions, resulting in an increase of $4.6 million.

     The result of these revisions to the estimate was a $28.7 million increase from the original estimate for the provision for uncollectible notes in the first quarter of 2003. A further result of the revision to the estimate is that the allowance for doubtful accounts was 20.0% of gross notes receivable as of December 31, 2003 compared to 10.9% at December 31, 2002. Management will continue its current collection programs and seek new programs to reduce note defaults and improve the credit quality of its customers. However, there can be no assurance that these efforts will be successful.

     In addition, for the year ended December 31, 2003, the Company decreased sales by $4.0 million for customer returns (cancellations of sales transactions in which the customer fails to make the first installment payment). If a buyer of a Vacation Interval defaults, we generally must foreclose on the Vacation Interval and attempt to resell it; the associated marketing, selling, and administrative costs from the original sale are not recovered; and sales and marketing costs must be incurred again to resell the Vacation Interval. Although, in many cases, we may have recourse against a Vacation Interval buyer for the unpaid price, certain states have laws which limit or hinder our ability to recover personal judgments against customers who have defaulted on their loans. For example, under Texas law, if we pursue a post-foreclosure deficiency claim against a customer, the customer may file a court proceeding to determine the fair market value of the property foreclosed upon. In such event, we may not recover a personal judgment against the customer for the full amount of the deficiency, but may recover only to the extent that the indebtedness owed to the Company exceeds the fair market value of the property. Accordingly, we do not generally pursue this remedy because we have not found it to be cost effective.

     At December 31, 2003, we had notes receivable (including notes unrelated to Vacation Intervals) in the approximate principal amount of $241.8 million with an allowance for uncollectible notes of approximately $48.4 million.

     Additionally, at December 31, 2003, the SPE held notes receivable totaling $101.4 million, with related borrowings of $81.3 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, we are not obligated to repurchase defaulted or any other contracts sold to the SPE. As the Servicer of the notes receivable sold to the SPE, we are obligated by the terms of the conduit facility to foreclose upon the Vacation Interval securing a defaulted note receivable. We may, but are not obligated to, purchase in a public sale the foreclosed Vacation Interval for an amount equal to the net fair market value of the Vacation Interval if the net fair market value is no less than fifteen percent of the original acquisition price that the customer paid for the Vacation Interval. We anticipate that we will place bids to repurchase the Vacation Intervals securing the defaulted contracts to facilitate the re-marketing of those Vacation Intervals. For the years ended December 31, 2002 and 2003, we paid approximately $171,000 and $3.5 million, respectively, to repurchase such Vacation Intervals. Total investment in our SPE was valued at $6.1 million at December 31, 2003.

     We recognize interest income as earned. Interest income is not recognized on notes receivable that are four-plus payments late. The Company reserves 75% of accrued interest income for notes that are three payments late, 50% for notes that are two payments late, 25% for notes that are one payment late, and 10% for all current notes. 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.

     We intend to borrow additional funds under our existing revolving credit facilities and sell notes to our SPE to finance our operations. At December 31, 2003, we had borrowings under our senior credit facilities in the approximate principal amount of $212.3 million, of which $194.6 million of such facilities are receivable based and thus currently permit, or permitted, borrowings of 75% to 85% of the principal amount of performing notes. Payments from Silverleaf Owners on such notes are credited directly to the lender and applied against our loan balance. At December 31, 2003, we had a portfolio of approximately 32,056 Vacation Interval customer

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promissory notes in the approximate principal amount of $242.3 million, of which approximately $3.9 million in principal amount was 61 days or more past due and therefore ineligible as collateral.

     At December 31, 2003, our portfolio of customer notes receivable had an average yield of 14.9%. At such date, our borrowings, which bear interest at variable rates, had a weighted average cost of 6.3%. We have historically derived net interest income from our financing activities because the interest rates we charge our customers who finance the purchase of their Vacation Intervals exceed the interest rates we pay our lenders. Because our existing indebtedness currently bears interest at variable rates and our customer notes receivable bear interest at fixed rates, increases in interest rates would erode the spread in interest rates that we have historically experienced and could cause our interest expense on borrowings to exceed our interest income on our portfolio of customer loans. We have not engaged in interest rate hedging transactions. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on our 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 we finance, and (ii) reduced demand if we are unable to provide financing to purchasers of Vacation Intervals. We ordinarily receive only 10% of the purchase price on the sale of a Vacation Interval but must pay in full the costs of developing, marketing, and selling the Vacation Interval. Maximum borrowings available under our current credit agreements may not be sufficient to cover these costs, thereby straining capital resources, liquidity, and capacity to grow. In addition, to the extent interest rates decrease generally on loans available to our customers, we face an increased risk that customers will pre-pay their loans and reduce our income from financing activities.

     We typically provide financing to customers over a seven-year to ten-year period. Our customer notes had an average maturity of 5.9 years at December 31, 2003. Our revolving credit facilities have scheduled maturities between August 2004 (extended to February 2006 in early 2004) and March 2007. Additionally, our revolving credit facilities could be declared immediately due and payable as a result of any default by us. Although it appears that we have adequate liquidity to meet our needs in 2004 and 2005, we are continuing to identify additional financing arrangements into 2006 and beyond.

Development and Acquisition Process

     As part of our current business model, we intend to develop at our Existing Resorts and/or acquire new resorts only to the extent the capital markets and the covenants of our existing credit facilities permit.

     If we are able to develop or acquire new resorts, we will do so under our established development policies. Before committing capital to a site, we test the market using certain marketing techniques and explore the zoning and land-use laws applicable to the potential site and the regulatory issues pertaining to licenses and permits for timeshare sales and operations. We will also contact various governmental entities and review applications for necessary governmental permits and approvals. If we are satisfied with our market and regulatory review, we will prepare a conceptual layout of the resort, including building site plans and resort amenities. After we apply our standard lodging unit design and amenity package, we prepare a budget that estimates the cost of developing the resort, including costs of lodging facilities, infrastructure, and amenities, as well as projected sales, marketing, and general and administrative costs. We typically perform additional due diligence, including obtaining an environmental report by an environmental consulting firm, a survey of the property, and a title commitment. We employ legal counsel to review these documents and pertinent legal issues. If we are satisfied with the site after the environmental and legal review, we will complete the purchase of the property.

     We manage all construction activities internally. We typically complete the development of a new resort’s basic infrastructure and models within one year, with additional units to be added within 180 to 270 days based on demand, weather permitting. A normal part of the development process is the establishment of a functional sales office at the new resort.

Clubs / Management Clubs

     We have the right to appoint the directors of the Silverleaf Club. However, we did not have this right related to the Crown Club. 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 673 in 2003 and 269 in 2002. Typically, we purchase at foreclosure all Vacation Intervals that are the subject of foreclosure proceedings instituted by the Club because of delinquent dues.

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     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 Resorts are owned by either that resort’s Club or the Silverleaf Club, rather than by us.

     At December 31, 2003, Silverleaf Club, the sole remaining Management Club, had 626 full-time employees, and is solely responsible for their salaries. The Management Clubs are also responsible for the direct expenses of operating the Existing Resorts, while we are responsible for the direct expenses of new development and all marketing and sales activities. To the extent the Management Clubs provide payroll, administrative, and other services that directly benefit the Company, we reimburse 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, and generate income by the operation of certain amenities at the Existing Resorts. Silverleaf Club dues are currently $54.98 per month ($27.49 for biennial owners), except for certain members of Oak N’ Spruce Resort, who prepay dues at an annual rate of approximately $350. Crown Club dues ranged from $285 to $390 annually. Such amounts are used by the Management Clubs to pay the costs of operating the Existing Resorts and the management fees due to the Company pursuant to Management Agreements. 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 20% of dues collected for Clubs within Crown Club, but our 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 years, subject again to the net income limitation. Due to anticipated refurbishment of units at the Existing Resorts, together with the operational and maintenance expenses associated with the Company’s current expansion and development plans, our 2003 management fees were subject to the net income limitation. Accordingly, for the year ended December 31, 2003, management fees recognized were $1.5 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 whether Silverleaf Club will consistently generate positive net income. Therefore, future income to the Company could be limited. Crown Club consisted of several individual Club agreements which had terms of two to five years. At December 31, 2003, there were approximately 82,000 Vacation Interval owners who pay dues to Silverleaf Club. If we develop new resorts, their respective Clubs are expected to be added to the Silverleaf Club Management Agreement.

     As mentioned previously, we sold our management rights and unsold timeshare inventory in the seven Crown resorts in July 2003. We had managed these resorts since acquiring them from Crown Resorts Co., LLC in May 1998.

Other Operations

     Operation of Amenities. We own, operate, and receive the revenues from the marina at The Villages, the golf course and pro shop at Holiday Hills, and the golf course and pro shop at Apple Mountain. Although we own the golf course at Holly Lake, a homeowners’ association in the development operates the golf course. In general, the Management Clubs receive revenues from the various amenities which require a usage fee, such as watercraft rentals, horseback rides, and restaurants.

     Unit Leasing. We also recognize revenues from sales of Samplers, which allow prospective Vacation Interval purchasers to sample a resort for a specified number of nights. A five-night Sampler package currently sells for between $595 and $995. For the years ended December 31, 2003 and 2002, we recognized $1.8 million and $3.6 million, respectively, in revenues from Sampler sales.

     Utility Services. We own the water supply facilities at Piney Shores, The Villages, Hill Country, Holly Lake, Ozark Mountain, Holiday Hills, Timber Creek, and Fox River resorts. We also own the waste-water treatment facilities at The Villages, Piney Shores, Ozark Mountain, Holly Lake, Timber Creek, and Fox River resorts. We are currently applying for permits to build expanded water supply and waste-water facilities at the Timber Creek and Fox River resorts. We have permits to supply and charge third parties for the water supply facilities at The Villages, Holly Lake, Holiday Hills, Ozark Mountain, Hill Country, Piney Shores, and Timber Creek resorts, and the waste-water facilities at the Ozark Mountain, Holly Lake, Piney Shores, Hill Country, and The Villages resorts.

     Other Property. We own approximately 11 acres in Mississippi, and we are entitled to 85% of any profits from this land. An affiliate of a director of the Company owns a 10% net profits interest in this land.

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     In January 2003, we sold two acres of undeveloped land in Las Vegas, Nevada, and in October 2003, we sold 260 acres of land near Kansas City, Missouri. These sales collectively resulted in net proceeds of $4.7 million, which were paid to our senior lenders to reduce our debt.

     In December 1998, we purchased 1,940 acres of undeveloped land near Philadelphia, Pennsylvania, for approximately $1.9 million. The property was intended to be developed as a Drive-to Resort (i.e., Beech Mountain Resort). We received regulatory approval to develop 408 units (21,216 Vacation Intervals), but we did not schedule dates for construction, completion of initial units, or commencement of marketing and sales efforts. In 2003, we determined that we would not develop this property as initially planned and thus we currently intend to sell this property.

Policies with Respect to Certain Activities

     Our board of directors sets policies with regard to all aspects of our business operations without a vote of security holders. In some instances the power to set certain policies may be delegated by the board of directors to a committee comprised of its members, or to the officers of the Company. As set forth herein under the headings “Customer Financing” and “Description of Certain Indebtedness,” we borrow money to finance all of our operations and we make loans to our customers to finance the purchase of our Vacation Intervals.

     We do not:

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invest in the securities of unaffiliated issuers for the purpose of exercising control;

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underwrite securities of other issuers;

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engage in the purchase and sale (or turnover) of investments sponsored by other issuers; or

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offer securities in exchange for property.

     Nor do we propose to engage in any of the above activities. In the past we have from time to time repurchased or otherwise reacquired our own common stock and other securities. In May 2002 we reacquired $56.9 million in principal amount of our 10 ½% senior subordinated notes in exchange for $28.5 million of our 6% senior subordinated notes and 23.9 million shares of our common stock. See “Debt Structure” on page 6 above. In July 2003 we reacquired $7.6 million in principal amount of our 10 ½% senior subordinated notes for approximately $2.4 million of cash, which resulted in a one-time gain of approximately $5.1 million. We have no policy or proposed policy with respect to future repurchases or re-acquisitions of our common stock or other securities; however, our board of directors may approve such repurchase activities if it finds these activities to be in the best interests of the Company and its shareholders.

Investment Policies

     Our board of directors also determines all of our policies concerning investments, including the percentage of assets, which we may invest in any one type of investment, and the principles and procedures we will employ in connection with the acquisition of assets. The board of directors both determines our policies with regard to investment matters and may change these policies without a vote of security holders. We do not propose to invest in any investments or activities not related directly or indirectly to (i) the timeshare business, (ii) the acquisition, development, marketing, selling or financing of Vacation Intervals, or (iii) the management of timeshare resorts. We currently have no policies limiting the geographic areas in which we might engage in investments in the timeshare business, or limiting the percentage of our assets invested in any specific timeshare related property. We primarily acquire assets for income and not to hold for possible capital gain.

Participation in Vacation Interval Exchange Networks

     Internal Exchanges. As a convenience to Silverleaf Owners, each purchaser of a Silverleaf Vacation Interval has certain exchange privileges which may be used to: (i) exchange an interval for a different interval (week) at the same resort so long as the desired interval is of an equal or lower rating; and (ii) exchange an interval for the same interval of equal or lower rating at any other Existing Resort. These intra-company exchange rights are conditioned upon availability of the desired interval or resort.

     Exchanges. We believe that our Vacation Intervals are made more attractive by our participation in a Vacation Interval exchange network operated by RCI. The Existing Resorts are registered with RCI, and approximately one-third of Silverleaf Owners participate

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in RCI’s exchange network. Prior to October 2003, Oak N’ Spruce Resort was not under contract with RCI; however it was under contract with Interval International, a competitor of RCI. Since October 2003, Oak N’ Spruce Resort has been under contract with RCI instead of Interval International. Membership in RCI allows participating Silverleaf Owners to exchange their occupancy right in a unit in a particular year for an occupancy right at the same time or a different time of the same or lower color rating in another participating resort, based upon availability and the payment of a variable exchange fee. A member may exchange a Vacation Interval for an occupancy right in another participating resort by listing the Vacation Interval as available with the exchange organization and by requesting occupancy at another participating resort, indicating the particular resort or geographic area to which the member desires to travel, the size of the unit desired, and the period during which occupancy is desired.

     RCI assigns a rating of “red,” “white,” or “blue” to each Vacation Interval for participating resorts based upon a number of factors, including the location and size of the unit, the quality of the resort, and the period during which the Vacation Interval is available, and attempts to satisfy exchange requests by providing an occupancy right in another Vacation Interval with a similar rating. For example, an owner of a red Vacation Interval may exchange his interval for a red, white, or blue interval. An owner of a white Vacation Interval may exchange only for a white or blue interval, and an owner of a blue interval may exchange only for a blue interval. Currently, the Company’s composition of red, white, and blue Vacation Intervals is approximately 65%, 19%, and 15%, respectively. If RCI is unable to meet the member’s initial request, it suggests alternative resorts based on availability. The annual membership fees in RCI, which are at the option and expense of the owner of the Vacation Interval, are currently $89. Exchange rights with RCI require an additional fee of approximately $139 for domestic exchanges and $179 for foreign exchanges. Silverleaf Club charges an exchange fee of $75 for each exchange through its internal exchange program. Resorts participating in the exchange networks are required to adhere to certain minimum standards regarding available amenities, safety, security, décor, unit supplies, maid service, room availability, and overall ambiance. See “Cautionary Statements” for a description of risks associated with the exchange programs.

Competition

     The timeshare industry is highly fragmented and includes a large number of local and regional resort developers and operators. However, some of the world’s most recognized lodging, hospitality, and entertainment companies, such as Marriott Ownership Resorts (“Marriott”), The Walt Disney Company (“Disney”), Hilton Hotels Corporation (“Hilton”), Hyatt Corporation (“Hyatt”), and Four Seasons Resorts (“Four Seasons”) have entered the industry. Other companies in the timeshare industry, including Sunterra Corporation (“Sunterra”), Fairfield Resorts, Inc. (“Fairfield”), Starwood Hotels & Resorts Worldwide Inc. (“Starwood”), Ramada Vacation Suites (“Ramada”), TrendWest Resorts, Inc. (“TrendWest”), and Bluegreen Corporation (“Bluegreen”) are, or are subsidiaries of, public companies with enhanced access to capital and other resources that public ownership implies.

     Fairfield, Sunterra, and Bluegreen own timeshare resorts in or near Branson, Missouri, which compete with our Holiday Hills and Ozark Mountain resorts, and to a lesser extent with our Timber Creek Resort. Sunterra also owns a resort which is located near and competes with Piney Shores Resort. Additionally, we believe there are a number of public or privately-owned and operated timeshare resorts in most states in which we own resorts that compete with the Existing Resorts.

     We believe Marriott, Disney, Hilton, Hyatt, and Four Seasons generally target consumers with higher annual incomes than our target market. Our other competitors target consumers with similar income levels as our target market. Our competitors may possess significantly greater financial, marketing, personnel, and other resources than we do. We cannot be certain that such competitors will not significantly reduce the price of their Vacation Intervals or offer greater convenience, services, or amenities than we do.

     While our principal competitors are developers of timeshare resorts, we are also subject to competition from other entities engaged in the commercial lodging business, including condominiums, hotels, and motels; others engaged in the leisure business; and, to a lesser extent, from campgrounds, recreational vehicles, tour packages, and second home sales. A reduction in the product costs associated with any of these competitors, or an increase in the Company’s costs relative to such competitors’ costs, could have a material adverse effect on our results of operations, liquidity, and financial position.

     Numerous businesses, individuals, and other entities compete with us in seeking properties for acquisition and development of new resorts. Some of these competitors are larger and have greater financial and other resources. Such competition may result in a higher cost for properties we wish to acquire or may cause us to be unable to acquire suitable properties for the development of new resorts.

Governmental Regulation

     General. Our marketing and sales of Vacation Intervals and other operations are subject to extensive regulation by the federal government and the states and jurisdictions in which the Existing Resorts are located and in which Vacation Intervals are marketed

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and sold. On a federal level, the Federal Trade Commission has taken the most active regulatory role through the Federal Trade Commission Act, which prohibits unfair or deceptive acts or competition in interstate commerce. Other federal legislation to which the Company is or may be subject includes the Truth-in-Lending Act and Regulation Z, the Equal Opportunity Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer Credit Protection Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Civil Rights Acts of 1964 and 1968, and the Americans with Disabilities Act.

     In response to certain fraudulent marketing practices in the timeshare industry in the 1980’s, various states enacted legislation aimed at curbing such abuses. Certain states in which we operate have adopted specific laws and regulations regarding the marketing and sale of Vacation Intervals. The laws of most states require us to file a detailed offering statement and supporting documents with a designated state authority, which describe the Company, the project, and the promotion and sale of Vacation Intervals. The offering statement must be approved by the appropriate state agency before we may solicit residents of such state. The laws of certain states require the Company to deliver an offering statement (or disclosure statement), together with certain additional information concerning the terms of the purchase, to prospective purchasers of Vacation Intervals who are residents of such states, even if the resort is not located in such state. The laws of Missouri generally only require certain disclosures in sales documents for prospective purchasers. There are also laws in each state where we sell Vacation Intervals which grant the purchaser the right to cancel a contract of purchase at any time within three to fifteen calendar days following the sale.

     We market and sell our Vacation Intervals to residents of certain states adjacent or proximate to the states where our resorts are located. Many of these neighboring states also regulate the marketing and sale of Vacation Intervals to their residents. Most states have additional laws which regulate our activities and protect purchasers, such as real estate licensure laws; travel sales licensure laws; anti-fraud laws; consumer protection laws; telemarketing laws; prize, gift, and sweepstakes laws; and other related laws. We do not register all of our resorts in each of the states where we register certain resorts.

     Most of the states where we currently operate have enacted laws and regulations which limit our ability to market our resorts through telemarketing activities. These states have enacted “do not call” lists that permit consumers to block telemarketing activities by registering their telephone numbers for a period of years for a nominal fee. We purchase these lists from the various states quarterly and do not contact those telephone numbers listed. Additionally, the federal “Do-Not-Call Implementation Act” (the “DNC Act”), which was enacted on March 11, 2003, provided for the establishment of a National Do Not Call Registry administered by the United States Federal Trade Commission (“FTC”) under its Telemarketing Sales Rule (“TSR”) and the Federal Communications Commission. The FTC began enforcement actions in October 2003 for violations of the TSR by telemarketers. Violations could result in penalties up to $11,000 per violation. The FTC recently reported that approximately 57% of adults living in the United States had registered their telephone numbers on the National Do Not Call Registry by the end of 2003, which represented approximately 56 million telephone numbers. Limitations on our telemarketing practices could cause our sales to decline.

     We believe we are in material compliance with applicable federal and state laws and regulations relating to the sales and marketing of Vacation Intervals in the jurisdictions in which we currently do business. However, we are normally and currently the subject of a number of consumer complaints and regulatory inquiries generally relating to our marketing or sales practices. We always attempt to resolve all such complaints or inquiries directly with the consumer or the regulatory authority involved. We cannot be certain that all of these complaints and inquiries by regulators can be resolved without adverse regulatory actions or other consequences, such as class action lawsuits or rescission offers. We expect some level of consumer complaints in the ordinary course of business as we aggressively market and sell Vacation Intervals to households, which may include individuals who may not be financially sophisticated. We cannot be certain that the costs of resolving consumer complaints, regulatory inquiries, or of qualifying under Vacation Interval ownership regulations in all jurisdictions in which we conduct sales or wish to conduct sales in the future will not be significant, that we are in material compliance with applicable federal and state laws and regulations, or that violations of law will not have adverse implications, including negative public relations, potential litigation, and regulatory sanctions. The expense, negative publicity, and potential sanctions associated with the failure to comply with applicable laws or regulations could have a material adverse effect on our results of operations, liquidity, or financial position. Further, we cannot be certain that either the federal government or states having jurisdiction over our business will not adopt additional regulations or take other actions which would adversely affect our results of operations, liquidity, and financial position.

     During the 1980’s and continuing through the present, the timeshare industry has been and continues to be afflicted with negative publicity and prosecutorial attention due to, among other things, marketing practices which were widely viewed as deceptive or fraudulent. Among the many timeshare companies which have been the subject of federal, state, and local enforcement actions and investigations in the past were certain of the partnerships and corporations that were merged into the Company prior to 1996 (the “Merged Companies,” or individually “Merged Company”). Some of the settlements, injunctions, and decrees resulting from litigation and enforcement actions (the “Orders”) to which certain of the Merged Companies consented purport to bind all successors and assigns, and accordingly binds the Company. In addition, at that time the Company was directly a party to one such Order issued in

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Missouri. No past or present officers, directors, or employees of the Company or any Merged Company were named as subjects or respondents in any of these Orders; however, each Order purports to bind generically unnamed “officers, directors, and employees” of certain Merged Companies. Therefore, certain of these Orders may be interpreted to be enforceable against the present officers, directors, and employees of the Company even though they were not individually named as subjects of the enforcement actions which resulted in these Orders. These Orders require, among other things, that all parties bound by the Orders, including the Company, refrain from engaging in deceptive sales practices in connection with the offer and sale of Vacation Intervals. In one particular case in 1988, a Merged Company pled guilty to deceptive uses of the mails in connection with promotional sales literature mailed to prospective timeshare purchasers and agreed to pay a judicially imposed fine of $1.5 million and restitution of $100,000. The requirements of the Orders are substantially what applicable state and federal laws and regulations mandate, but the consequence of violating the Orders may be that sanctions (including possible financial penalties and suspension or loss of licensure) may be imposed more summarily and may be harsher than would be the case if the Orders did not bind the Company. In addition, the existence of the Orders may be viewed negatively by prospective regulators in jurisdictions where the Company does not now do business, with attendant risks of increased costs and reduced opportunities.

     In early 1997, we were the subject of some consumer complaints which triggered governmental investigations into the Company’s affairs. In March 1997, we entered into an Assurance of Voluntary Compliance with the Texas Attorney General, in which we agreed to make additional disclosure to purchasers of Vacation Intervals regarding the limited availability of its Bonus Time Program during certain periods. We paid $15,200 for investigatory costs and attorneys’ fees of the Attorney General in connection with this matter. Also, in March 1997, we entered into an agreed order (the “Agreed Order”) with the Texas Real Estate Commission requiring that we comply with certain aspects of the Texas Timeshare Act, Texas Real Estate License Act, and Rules of the Texas Real Estate Commission, with which we had allegedly been in non-compliance until mid-1995. The allegations included (i) our admitted failure to register the Missouri Destination Resorts in Texas (due to our misunderstanding of the reach of the Texas Timeshare Act); (ii) payment of referral fees for Vacation Interval sales, the receipt of which was improper on the part of the recipients; and (iii) miscellaneous other actions alleged to violate the Texas Timeshare Act, which we denied. While the Agreed Order acknowledged that we independently resolved ten consumer complaints referenced in the Agreed Order, discontinued the practices complained of, and registered the Missouri Destination Resorts during 1995 and 1996, the Texas Real Estate Commission ordered us to cease these discontinued practices and enhance our disclosure to purchasers of Vacation Intervals. In the Agreed Order, we agreed to make a voluntary donation of $30,000 to the State of Texas. The Agreed Order also directed that we revise our training manual for timeshare salespersons and verification officers. While the Agreed Order resolved all of the alleged violations contained in complaints received by the Texas Real Estate Commission through December 31, 1996, we have encountered and expect to encounter some level of additional consumer complaints, regulatory scrutiny, and periodic remedial action in the ordinary course of our business. In this regard, we are currently negotiating to renew our timeshare offering plan in the state of New York, which we allowed to lapse in 2001. In order for us to renew our New York timeshare offering plan, we intend to offer to rescind approximately $1.1 million in sales to New York residents that were made in 2001 after our timeshare offering plan lapsed. The New York customers who purchased these interests in 2001 have not complained to us, and we do not believe that the rescission offer will be accepted by a material number of customers.

     We employ the following methods in training sales and marketing personnel as to legal requirements. With regard to direct mailings, a designated compliance employee reviews all mailings to determine if they comply with applicable state legal requirements. With regard to telemarketing, our marketing management prepares a script for telemarketers based upon applicable state legal requirements. All telemarketers receive training which includes, among other things, directions to adhere strictly to the approved script. Telemarketers are also monitored by their supervisors to ensure that they do not deviate from the approved script. With regard to sales functions, we distribute sales manuals which summarize applicable state legal requirements. Additionally, such sales personnel receive training as to such applicable legal requirements. We have a salaried employee at each sales office who reviews the sales documents prior to closing a sale to review compliance with legal requirements. Periodically, we are notified by regulatory agencies to revise our disclosures to consumers and to remedy other alleged inadequacies regarding the sales and marketing process. In such cases, we revise our direct mailings, telemarketing scripts, or sales disclosure documents, as appropriate, to comply with such requests.

     Environmental Matters. Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and tort liability and for investigation and clean-up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigation, remediation, or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner’s ability to sell such property or to borrow using such property as collateral. Persons who arrange for the

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disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removal or remediation of a release of hazardous or toxic substances at such disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site or from environmental regulatory violations. In connection with its ownership and operation of its properties, the Company may be potentially liable for such claims.

     Certain federal, state, and local laws, regulations, and ordinances govern the removal, encapsulation, or disturbance of asbestos-containing materials (“ACMs”) when such materials are in poor condition or in the event of construction, remodeling, renovation, or demolition of a building. Such laws may impose liability for release of ACMs and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with its ownership and operation of its properties, the Company may be potentially liable for such costs. In 1994, the Company conducted a limited asbestos survey at each of the Existing Resorts, which surveys did not reveal material potential losses associated with ACMs at certain of the Existing Resorts.

     In addition, recent studies have linked radon, a naturally-occurring substance, to increased risks of lung cancer. While there are currently no state or federal requirements regarding the monitoring for, presence of, or exposure to radon in indoor air, the EPA and the Surgeon General recommend testing residences for the presence of radon in indoor air, and the EPA further recommends that concentrations of radon in indoor air be limited to less than 4 picocuries per liter of air (Pci/L) (the “Recommended Action Level”). The presence of radon in concentrations equal to or greater than the Recommended Action Level in one or more of the Company’s properties may adversely affect the Company’s ability to sell Vacation Intervals at such properties and the market value of such property. The Company has not tested its properties for radon. Recently-enacted federal legislation will eventually require the Company to disclose to potential purchasers of Vacation Intervals at the Company’s resorts that were constructed prior to 1978 any known lead-paint hazards and will impose treble damages for failure to so notify.

     Electric transmission lines are located in the vicinity of some of the Company’s properties. Electric transmission lines are one of many sources of electromagnetic fields (“EMFs”) to which people may be exposed. Research into potential health impacts associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric transmission lines, while others have required transmission facilities to measure for levels of EMFs. In addition, the Company understands that lawsuits have, on occasion, been filed (primarily against electric utilities) alleging personal injuries resulting from exposure as well as fear of adverse health effects. In addition, fear of adverse health effects from transmission lines has been a factor considered in determining property value in obtaining financing and in condemnation and eminent domain proceedings brought by power companies seeking to construct transmission lines. Therefore, there is a potential for the value of a property to be adversely affected as a result of its proximity to a transmission line and for the Company to be exposed to damage claims by persons exposed to EMFs.

     In 2001, the Company conducted Phase I environmental assessments at each of the Company-owned resorts in order to identify potential environmental concerns. These Phase I assessments were carried out in accordance with accepted industry practices and consisted of non-invasive investigations of environmental conditions at the properties, including a preliminary investigation of the sites and identification of publicly known conditions concerning properties in the vicinity of the sites, physical site inspections, review of aerial photographs and relevant governmental records where readily available, interviews with knowledgeable parties, investigation for the presence of above ground and underground storage tanks presently or formerly at the sites, and the preparation and issuance of written reports. The Company’s Phase I assessments of the properties did not reveal any environmental liability that the Company believes would have a material adverse effect on the Company’s business, assets, or results of operations taken as a whole; nor is the Company aware of any such material environmental liability. Nevertheless, it is possible that the Company’s Phase I assessments did not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, there can be no assurance that (i) future laws, ordinances, or regulations will not impose any material environmental liability or (ii) the current environmental condition of the properties will not be affected by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks) or by third parties unrelated to the Company. The Company does not believe that compliance with applicable environmental laws or regulations will have a material adverse effect on the Company’s results of operations, liquidity, or financial position.

     The Company believes that its properties are in compliance in all material respects with all federal, state, and local laws, ordinances, and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental authority or any third party, and is not otherwise aware, of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties.

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     Utility Regulation. We own the water supply and waste-water treatment facilities at several of the Existing Resorts, which are regulated by various governmental agencies. The Texas Natural Resource Conservation Commission is the primary state umbrella agency regulating utilities at the resorts in Texas; and the Missouri Department of Natural Resources and Public Service Commission of Missouri are the primary state umbrella agencies regulating utilities at the resorts in Missouri. The Environmental Protection Agency, division of Water Pollution Control, and the Illinois Commerce Commission are the primary state agencies regulating water utilities in Illinois. These agencies regulate the rates and charges for the services (allowing a reasonable rate of return in relation to invested capital and other factors), the size and quality of the plants, the quality of water supplied, the efficacy of waste-water treatment, and many other aspects of the utilities’ operations. The agencies have approval rights regarding the entity owning the utilities (including its financial strength) and the right to approve a transfer of the applicable permits upon any change in control of the entity holding the permits. Other federal, state, regional, and local environmental, health, and other agencies also regulate various aspects of the provision of water and waste-water treatment services.

     Other Regulation. Under various state and federal laws governing housing and places of public accommodation, we are required to meet certain requirements related to access and use by disabled persons. Many of these requirements did not take effect until after January 1, 1991. Although we believe that our facilities are generally in compliance with present requirements of such laws, we are aware of certain of our properties that are not in full compliance with all aspects of such laws. We are presently responding, and expect to respond in the future, to inquiries, claims, and concerns from consumers and regulators regarding its compliance with existing state and federal regulations affording the disabled access to housing and accommodations. It is our practice to respond positively to all such inquiries, claims and concerns and to work with regulators and consumers to resolve all issues arising under existing regulations concerning access and use of our properties by disabled persons. We believe that we will incur additional costs of compliance and/or remediation in the future with regard to the requirements of such existing regulations. Future legislation may also impose new or further burdens or restrictions on owners of timeshare resort properties with respect to access by the disabled. The ultimate cost of compliance with such legislation and/or remediation of conditions found to be non-compliant is not currently ascertainable, and while such costs are not expected to have a material effect on our business, such costs could be substantial. Limitations or restrictions on the completion of certain renovations may limit application of our growth strategy in certain instances or reduce profit margins on our operations.

Employees

     At December 31, 2003, we had 1,321 employees, and the Clubs collectively had 626 employees. Our employee relations are good, both at the Company and at the Clubs. None of our employees are represented by a labor union.

Insurance

     We carry comprehensive liability, fire, hurricane, and storm insurance with respect to our resorts, with policy specifications, insured limits, and deductibles customarily carried for similar properties which the Company believes are adequate. There are, however, certain types of losses (such as losses arising from floods and acts of war) that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose the capital invested in a resort, as well as the anticipated future revenues from such resort, and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on our results of operations, liquidity, or financial position. We self-insure for employee medical claims reduced by certain stop-loss provisions. We also self-insure for property damage to certain vehicles and heavy equipment.

Description of Certain Indebtedness

     Existing Indebtedness. The following table summarizes our credit agreements with our senior lenders and our off balance sheet SPE as of December 31, 2003 (in thousands):

* Represents the Company’s SPE, discussed in detail under the heading “Amended DZ Bank Facility” on page 21 of this report

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     We use these credit agreements to finance the sale of Vacation Intervals, to finance construction, and for working capital needs. The loans mature between August 2004 (subsequently extended to February 2006 in early 2004) and March 2007, and are collateralized (or cross-collateralized) by customer notes receivable, construction in process, land, improvements, and related equipment at certain of the Existing Resorts. These credit facilities bear interest at variable rates tied to the prime rate, LIBOR, or the corporate rate charged by certain banks. The credit facilities secured by customer notes receivable allow advances from 75% to 85% of the unpaid balance of certain eligible customer notes receivable. In addition, we had $28.5 million of senior subordinated notes due 2007 and $2.1 million of senior subordinated notes due 2008, with interest payable semi-annually on April 1 and October 1, guaranteed by all of our present and future domestic restricted subsidiaries.

     Certain of our credit facilities include restrictions on our ability to pay dividends based on minimum levels of net income and cash flow. The debt agreements contain covenants including requirements that we (i) preserve and maintain the collateral securing the loans; (ii) pay all taxes and other obligations relating to the collateral; and (iii) refrain from selling or transferring the collateral or permitting any encumbrances on the collateral. The debt agreements also contain restrictive covenants which include (i) restrictions on liens against and dispositions of collateral, (ii) restrictions on distributions to affiliates and prepayments of loans from affiliates, (iii) restrictions on changes in control and management of the Company, (iv) restrictions on sales of substantially all of the assets of the Company, and (v) restrictions on mergers, consolidations, or other reorganizations of the Company. Under certain credit facilities, a sale of all or substantially all of the assets of the Company, a merger, consolidation, or reorganization of the Company, or other changes of control of the ownership of the Company, would constitute an event of default and permit the lenders to accelerate the maturity thereof.

     Our credit facilities also contain operating covenants requiring us to maintain a minimum tangible net worth of $100 million or greater, as defined, maintain sales and marketing expenses as a percentage of sales below 55.0% for the latest rolling 12 months, maintain notes receivable delinquency rate below 25%, maintain a minimum interest coverage ratio of 1.25 to 1 for the latest rolling 12 months, and maintain positive net income for each year end, and for any two consecutive fiscal quarters. In addition, our senior lenders have provided us with waivers and amended financial covenants whereby we exclude the $28.7 million increase in our allowance for uncollectable notes during the first quarter of 2003 from the calculation of our minimum required consolidated net income, and from the calculation of our minimum required interest coverage ratio of 1.25 to 1.0. We were also given a waiver for our failure to maintain our ratio of sales and marketing expense below the required standard in the first quarter of 2003. As of December 31, 2003, the Company was in compliance with these operating covenants. However, such future results cannot be assured.

     The following table summarizes our notes payable, capital lease obligations, and senior subordinated notes at December 31, 2002 and 2003 (in thousands):

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