UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
      One)T
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September 30, 2009





OR





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





For the
transition period from _____________ to _____________





Commission
file number:  001-13003





SILVERLEAF
RESORTS, INC.


(Exact
name of registrant as specified in its charter)





TEXAS
            75-2259890(State
      of incorporation)
            (I.R.S.
      Employer Identification No.)








1221
RIVER BEND DRIVE, SUITE 120


DALLAS,
TEXAS  75247


(Address
of principal executive offices, including zip code)





214-631-1166


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes T    No
£





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes £    No
£





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):


Large
      accelerated filer   £
            Accelerated
      filer   £


Non-accelerated
      filer   T
            Smaller
      reporting company   £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes £    No
T





As of
November 12, 2009, 38,146,943 shares of the registrant’s common stock, $0.01 par
value, were outstanding.










SILVERLEAF RESORTS, INC.





INDEX








PagePART
      I. FINANCIAL INFORMATIONItem
      1.
            Condensed Consolidated Statements of Operations for the three
      months and nine months ended September 30, 2009 and
    2008
            2Condensed Consolidated Balance Sheets as of September 30, 2009
      and December 31, 2008
            3Condensed Consolidated Statement of Shareholders' Equity for
      the nine months ended September 30, 2009
            4Condensed Consolidated Statements of Cash Flows for the nine
      months ended September 30, 2009 and 2008
            5Notes to Condensed Consolidated Financial
      Statements
            6Item
      2.
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            17Item
      3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            26Item
      4T.
            Controls and Procedures
            27PART
      II. OTHER INFORMATIONItem
      1.
            Legal Proceedings
            28Item
      1A.
            Risk Factors
            29Item
      6.
            Exhibits
            29Signatures
            30


1
 Index


PART
I: FINANCIAL INFORMATION


Item
1. Financial Statements


SILVERLEAF RESORTS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except share and per share amounts)


(Unaudited)





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Revenues:Vacation
      Interval sales
            
            $
            70,427
            
            
            $
            66,849
            
            
            $
            194,217
            
            
            $
            199,889Estimated
      uncollectible revenue
            
            
            (36,741
            )
            
            
            (16,645
            )
            
            
            (68,216
            )
            
            
            (47,205
            )Net
      sales
            
            
            33,686
            
            
            
            50,204
            
            
            
            126,001
            
            
            
            152,684Interest
      income
            
            
            16,591
            
            
            
            15,710
            
            
            
            48,148
            
            
            
            45,527Management
      fee income
            
            
            930
            
            
            
            780
            
            
            
            2,791
            
            
            
            2,340Other
      income
            
            
            1,578
            
            
            
            1,687
            
            
            
            6,777
            
            
            
            3,924Total
      revenues
            
            
            52,785
            
            
            
            68,381
            
            
            
            183,717
            
            
            
            204,475Costs
      and Operating Expenses:Cost
      of Vacation Interval sales
            
            
            5,125
            
            
            
            8,024
            
            
            
            18,882
            
            
            
            20,654Sales
      and marketing
            
            
            33,293
            
            
            
            35,938
            
            
            
            97,024
            
            
            
            103,415Operating,
      general and administrative
            
            
            11,797
            
            
            
            10,235
            
            
            
            35,673
            
            
            
            29,751Depreciation
            
            
            1,641
            
            
            
            1,284
            
            
            
            4,594
            
            
            
            3,608Interest
      expense and lender fees:Related
      to receivables-based credit facilities
            
            
            5,362
            
            
            
            6,404
            
            
            
            16,604
            
            
            
            15,882Related
      to other indebtedness
            
            
            2,026
            
            
            
            1,740
            
            
            
            5,242
            
            
            
            4,731Total
      costs and operating expenses
            
            
            59,244
            
            
            
            63,625
            
            
            
            178,019
            
            
            
            178,041Income
      (loss) before benefit (provision) for income taxes
            
            
            (6,459
            )
            
            
            4,756
            
            
            
            5,698
            
            
            
            26,434Benefit
      (provision) for income taxes
            
            
            2,584
            
            
            
            (1,831
            )
            
            
            (2,258
            )
            
            
            (10,177
            )Net
      income (loss)
            
            $
            (3,875
            )
            
            $
            2,925
            
            
            $
            3,440
            
            
            $
            16,257Basic
      net income (loss) per share
            
            $
            (0.10
            )
            
            $
            0.08
            
            
            $
            0.09
            
            
            $
            0.43Diluted
      net income (loss) per share
            
            $
            (0.10
            )
            
            $
            0.07
            
            
            $
            0.09
            
            
            $
            0.41Weighted
      average basic common shares outstanding
            
            
            38,146,943
            
            
            
            38,065,780
            
            
            
            38,146,943
            
            
            
            38,019,401Weighted
      average diluted common shares outstanding
            
            
            38,146,943
            
            
            
            39,199,503
            
            
            
            39,027,021
            
            
            
            39,220,272





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2
 Index


SILVERLEAF RESORTS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share and per share amounts)





September 30,
            
            
            December 31,ASSETS
            
            2009
            
            
            2008(Unaudited)Cash
      and cash equivalents
            
            $
            13,096
            
            
            $
            11,431Restricted
      cash
            
            
            22,694
            
            
            
            22,623Notes
      receivable, net of allowance for uncollectible notes of $99,132 and
      $76,696, respectively
            
            
            343,923
            
            
            
            320,306Accrued
      interest receivable
            
            
            4,747
            
            
            
            4,154Investment
      in special purpose entity
            
            
            5,563
            
            
            
            4,908Amounts
      due from affiliates
            
            
            4,866
            
            
            
            1,738Inventories
            
            
            196,556
            
            
            
            190,318Land,
      equipment, buildings, and leasehold improvements, net
            
            
            52,531
            
            
            
            55,393Prepaid
      and other assets
            
            
            28,902
            
            
            
            33,951TOTAL
      ASSETS
            
            $
            672,878
            
            
            $
            644,822LIABILITIES
      AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
      payable and accrued expenses
            
            $
            10,768
            
            
            $
            12,701Accrued
      interest payable
            
            
            2,157
            
            
            
            2,380Other
      unearned revenues
            
            
            7,050
            
            
            
            6,247Income
      taxes payable
            
            
            891
            
            
            
            1,942Deferred
      income taxes
            
            
            33,815
            
            
            
            35,114Notes
      payable and capital lease obligations
            
            
            402,207
            
            
            
            369,071Senior
      subordinated notes
            
            
            17,956
            
            
            
            23,121Total
      Liabilities
            
            
            474,844
            
            
            
            450,576COMMITMENTS
      AND CONTINGENCIES (Note 9)SHAREHOLDERS'
      EQUITYPreferred
      stock, 10,000,000 shares authorized, none issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, par value $0.01 per share, 100,000,000 shares authorized,
      38,146,943 shares issued and outstanding at September 30, 2009 and
      December 31, 2008
            
            
            381
            
            
            
            381Additional
      paid-in capital
            
            
            113,324
            
            
            
            112,976Retained
      earnings
            
            
            84,329
            
            
            
            80,889Total
      Shareholders' Equity
            
            
            198,034
            
            
            
            194,246TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            672,878
            
            
            $
            644,822





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3
 Index


SILVERLEAF RESORTS, INC.


CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


(in
thousands, except share amounts)


(Unaudited)





Common StockNumber of Shares Issued
            
            
            $0.01 Par Value
            
            
            Additional Paid-in Capital
            
            
            Retained Earnings
            
            
            TotalJanuary
      1, 2009
            
            
            38,146,943
            
            
            $
            381
            
            
            $
            112,976
            
            
            $
            80,889
            
            
            $
            194,246Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            348
            
            
            
            -
            
            
            
            348Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,440
            
            
            
            3,440September
      30, 2009
            
            
            38,146,943
            
            
            $
            381
            
            
            $
            113,324
            
            
            $
            84,329
            
            
            $
            198,034





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4
 Index


SILVERLEAF RESORTS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





Nine
      Months EndedSeptember 30,2009
            
            
            2008OPERATING
      ACTIVITIES:Net
      income
            
            $
            3,440
            
            
            $
            16,257Adjustments
      to reconcile net income to net cash used in operating
      activities:Estimated
      uncollectible revenue
            
            
            68,216
            
            
            
            47,205Deferred
      income taxes
            
            
            (1,299
            )
            
            
            4,708Depreciation
            
            
            4,594
            
            
            
            3,608Debt
      discount amortization
            
            
            2,116
            
            
            
            1,229Gain
      on early extinguishment of debt
            
            
            (316
            )
            
            
            -Loss
      on disposal of property and equipment, net
            
            
            183
            
            
            
            -Stock-based
      compensation
            
            
            348
            
            
            
            150Cash
      effect from changes in operating assets and liabilities:Restricted
      cash
            
            
            1,625
            
            
            
            (3,065
            )Notes
      receivable
            
            
            (91,833
            )
            
            
            (74,529
            )Accrued
      interest receivable
            
            
            (593
            )
            
            
            (441
            )Investment
      in special purpose entity
            
            
            (655
            )
            
            
            1,925Amounts
      due from/to affiliates
            
            
            (3,128
            )
            
            
            (2,725
            )Inventories
            
            
            (6,238
            )
            
            
            (7,185
            )Prepaid
      and other assets
            
            
            5,049
            
            
            
            (5,049
            )Accounts
      payable and accrued expenses
            
            
            (1,841
            )
            
            
            (6,857
            )Accrued
      interest payable
            
            
            (223
            )
            
            
            290Unearned
      Vacation Interval sales
            
            
            -
            
            
            
            (296
            )Other
      unearned revenues
            
            
            803
            
            
            
            (244
            )Income
      taxes payable
            
            
            (1,051
            )
            
            
            284Net
      cash used in operating activities
            
            
            (20,803
            )
            
            
            (24,735
            )INVESTING
      ACTIVITIES:Additions
      to land, equipment, buildings, and leasehold improvements
            
            
            (2,007
            )
            
            
            (16,371
            )Net
      cash used in investing activities
            
            
            (2,007
            )
            
            
            (16,371
            )FINANCING
      ACTIVITIES:Proceeds
      from borrowings of debt
            
            
            216,631
            
            
            
            284,843Payments
      of debt and capital leases
            
            
            (190,460
            )
            
            
            (241,981
            )Restricted
      cash reserved for payments of debt
            
            
            (1,696
            )
            
            
            (7,233
            )Proceeds
      from exercise of stock options
            
            
            -
            
            
            
            81Purchases
      of treasury shares
            
            
            -
            
            
            
            (108
            )Net
      cash provided by financing activities
            
            
            24,475
            
            
            
            35,602Net
      change in cash and cash equivalents
            
            
            1,665
            
            
            
            (5,504
            )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
            
            
            11,431
            
            
            
            13,170End
      of period
            
            $
            13,096
            
            
            $
            7,666SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid, net of amounts capitalized
            
            $
            15,825
            
            
            $
            16,337Income
      taxes paid
            
            $
            4,880
            
            
            $
            4,248Income
      tax refund
            
            $
            -
            
            
            $
            1,646SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
      ACTIVITIES:Inventories
      acquired through financing
            
            $
            1,852
            
            
            $
            -Land,
      equipment, buildings, and leasehold improvements acquired under capital
      leases
            
            $
            -
            
            
            $
            1,072





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


5
 Index


SILVERLEAF RESORTS, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)








Note
1 – Background





The
primary business of Silverleaf Resorts, Inc. (the “Company,” “Silverleaf,” “we,”
or “our”) is marketing and selling vacation intervals (“Vacation Intervals”)
related to our 13 owned resorts.  The condensed consolidated financial
statements should be read in conjunction with our audited consolidated financial
statements and notes included in our Form 10-K for the year ended December 31,
2008, as filed with the Securities and Exchange Commission (“SEC”), as well as
all financial information contained in interim and other reports filed with the
SEC since then.  The accounting policies used in preparing these
condensed consolidated financial statements are consistent with those described
in such Form 10-K.  In addition, operating results for the nine months
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2009.





Note
2 – Significant Accounting Policies Summary





Basis of Presentation —The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting policies generally accepted in the United States of
America for interim financial information and in accordance with the rules and
regulations of the SEC.  Accordingly, these financial statements do
not include certain information and disclosures required by GAAP for complete
financial statements.  However, in the opinion of management, all
adjustments, consisting of normal recurring adjustments and accruals, considered
necessary for a fair presentation have been included.  We have
evaluated the impact on these condensed consolidated financial statements of all
subsequent events through November 12, 2009, the date the financial statements
were issued.





Use of Estimates — The
preparation of these condensed consolidated financial statements requires the
use of management’s estimates and assumptions in determining the carrying values
of certain assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements, and
the reported amounts for certain revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant management
estimates include the allowance for uncollectible notes, estimates for income
taxes, valuation of our investment in Silverleaf Finance III, LLC (“SF-III”),
our wholly-owned off-balance-sheet qualified special purpose finance subsidiary,
and the future sales plan and estimated recoveries used to allocate certain
costs to inventory phases and cost of sales.





Principles of Consolidation —The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, excluding SF-III. All significant
intercompany accounts and transactions have been eliminated in the condensed
consolidated financial statements.





Timeshare Accounting Practices —We follow industry specific guidance established by the Financial
Accounting Standards Board (the “FASB”) Accounting Standards Codification
(“ASC”) as required by the topic “Real Estate – Timesharing
Activities.”  In general, this accounting standard provides guidance
on determining revenue recognition for timeshare transactions, evaluation of
uncollectibility of Vacation Interval receivables, accounting for costs of
Vacation Interval sales, accounting for operations during holding periods (or
incidental operations), and other accounting transactions specific to timeshare
operations.





Revenue and Expense Recognition
(including Cost of Sales) —Vacation Interval sales are primarily
consummated in exchange for installment notes receivable secured by deeds of
trust on each Vacation Interval sold.  If development costs related to
a particular project or phase are complete, we recognize related Vacation
Interval sales under the full accrual method after a binding sales contract has
been executed, the buyer has made a down payment of at least 10%, and the
statutory rescission period has expired.  If all such criteria are met
yet significant development costs remain to complete the project or phase,
revenues are recognized on the percentage-of-completion basis.  Under
this method, once the sales criteria are met, revenues are recognized
proportionate to costs already incurred relative to total costs expected for the
project or phase.  As of September 30, 2009, no sales were deferred
related to the percentage-of-completion method.


6
 Index


Both of
these revenue recognition methods employ the relative sales value method in
determining related costs of sales and inventory applicable to each Vacation
Interval sale recognized. Under the relative sales value method, a cost of sales
percentage is used to apply costs to related sales as follows:





·
            Total
      revenues to be recognized over an entire project or phase, considering
      both revenues recognized to date plus estimated revenues to be recognized
      over future periods (considering an estimate of uncollectibility and
      subsequent resale of recovered Vacation Intervals), are
      determined.


·
            Total
      costs of a project or phase, considering both costs already incurred plus
      estimated costs to complete the phase, if any, are determined. Common
      costs, including amenities, are included in total estimated costs and
      allocated to inventory phases that such costs are expected to
      benefit.


·
            The
      cost of sales ratio applied to each sale represents total estimated costs
      as a percentage of total estimated revenues, which is specific to each
      inventory phase.  Generally, each building type is considered a
      separate phase.





The
estimate of total revenue for a particular phase also considers factors such as
trends in uncollectibles, changes in sales mix and unit sales prices,
repossessions of Vacation Intervals, effects of upgrade programs, and past and
expected sales programs to sell slow-moving inventory units.  At least
quarterly, we evaluate the estimated cost of sales percentage applied to each
sale using updated information for total estimated phase revenue and total
estimated phase costs.  The effects of changes in estimates are
accounted for in the period in which such changes first become known on a
retrospective basis, such that the balance sheet at the end of the period of
change and the accounting in subsequent periods reflect the revised estimates as
if such estimates had been the original estimates.





As
mentioned, certain Vacation Interval sales transactions are deferred until the
minimum down payment has been received.  We account for these
transactions utilizing the deposit method.  Under this method, the
sale is not recognized, a receivable is not recorded, and inventory is not
relieved.  Any cash received is carried as a deposit until the sale
can be recognized.  When these types of sales are cancelled without a
refund, deposits forfeited are recognized as other income and the interest
portion is recognized as interest income.  This income is not
significant.





We also
sell additional and upgraded Vacation Intervals to existing
owners.  Revenues are recognized on an additional Vacation Interval
sale, which represents a new Vacation Interval sale treated as a separate
transaction from the original Vacation Interval sale, when the buyer makes a
down payment of at least 10%, excluding any equity from the original Vacation
Interval purchased.  Revenues are recognized on an upgrade Vacation
Interval sale, which is a modification and continuation of the original sale, by
including the buyer’s equity from the original Vacation Interval towards the
down payment of at least 10%.  Revenue recognized on upgrade Vacation
Interval sales represents the difference between the upgrade sales price and
traded-in sales price, while related cost of sales represents the incremental
increase in the cost of the Vacation Interval purchased.





Interest
income is recognized as earned.  Interest income is accrued on notes
receivable, net of an estimated amount that will not be collected, until the
individual notes become 90 days delinquent.  Once a note becomes 90
days delinquent, the accrual of interest income ceases until collection is
deemed probable.





Management
fees for services provided to Silverleaf Club and Orlando Breeze Resort Club are
recognized in the period such services are provided if collection is deemed
probable.





Services
and other income are recognized in the period such services are
provided.





Sales and
marketing costs are recognized in the period incurred.  Commissions,
however, are recognized in the period the related revenues are
recognized.





Cash and Cash Equivalents —Cash and cash equivalents consist of all highly liquid investments with
an original maturity at the date of purchase of three months or
less.  Cash and cash equivalents include cash, certificates of
deposit, and money market funds.





Restricted Cash — Restricted
cash consists of certificates of deposit, collateral for construction bonds,
surety bonds, and cash reserved for payments of debt.





Allowance for Uncollectible Notes —Estimated uncollectible revenue is recorded at an amount sufficient to
maintain the allowance for uncollectible notes at a level management considers
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes.  The
allowance for uncollectible notes is adjusted based upon a periodic static-pool
analysis of the notes receivable portfolio, which tracks uncollectible notes for
each year’s sales over the lives of the notes.  Other factors
considered in the assessment of uncollectibility include the aging of notes
receivable, historical collection experience and credit losses, customer credit
scores (FICO® scores), and current economic factors.


7
 Index


Credit
losses represent three varieties as follows:





·
            A
      full cancellation, whereby a customer is relieved of the note obligation
      and we recover the underlying
inventory,


·
            A
      deemed cancellation, whereby we record the cancellation of all notes that
      become 90 days delinquent, net of notes that are no longer 90 days
      delinquent, and


·
            A
      note receivable reduction that occurs when a customer trades a higher
      value product for a lower value product or when a small portion of a
      customer’s note obligation is
relieved.





The
allowance for uncollectible notes is reduced by actual cancellations and losses
experienced, including losses related to previously sold notes receivable which
became delinquent and were reacquired pursuant to certain recourse obligations.
Recourse on sales of customer notes receivable is governed by agreements between
us and the purchasers of said notes, though we typically do not have an
obligation to repurchase defaulted notes held by our financing
subsidiaries.





Investment in Special Purpose
Entity — In 2005, we consummated a securitization transaction with
SF-III, which is a qualified special purpose entity (“SPE”) formed for the
purpose of issuing $108.7 million of Timeshare Loan-Backed Notes Series 2005-A
(“Series 2005-A Notes”) in a private placement.  In connection with
this transaction, we sold SF-III $132.8 million in timeshare receivables that
were previously pledged as collateral under revolving credit facilities with our
senior lenders and Silverleaf Finance I, Inc. (“SF-I”), our former qualified SPE
which was dissolved in 2005.  This transaction qualified as a sale for
accounting purposes.  The Series 2005-A Notes are secured by timeshare
receivables we sold to SF-III.  The timeshare receivables we sold to
SF-III are without recourse, except for breaches of certain representations and
warranties at the time of sale.  Pursuant to the terms of an
agreement, we continue servicing these timeshare receivables and receive fees
for our services.  As such fees approximate both our internal cost of
servicing such timeshare receivables and fees a third party would charge to
service such receivables, the related servicing asset or liability was estimated
to be insignificant.





We
account for and evaluate the investment in our SPE in accordance with the
following FASB ASC topics, as applicable: “Transfers and Servicing,” “Beneficial
Interests in Securitized Assets,” “Investments – Debt and Equity Securities,”
and “Fair Value Measurements and Disclosures.”  See Note 7 for
disclosures regarding the fair value measurement of the investment in our
SPE.





In
accordance with FASB ASC “Transfers and Servicing,” our bases for classifying
SF-III as a qualified SPE are (i) SF-III is demonstrably distinct from the
transferor as dissolution of the SPE would require an affirmative vote of 100%
of the SPE’s Board of Directors, one of which is independent, (ii) prescribed
restrictions on permitted activities sufficiently limit the SPE’s authority, and
(iii) financial assets transferred to the SPE are passive in
nature.





The fair
value of the investment in our SPE is estimated based on the present value of
future cash flows we expect to receive from the notes receivable
sold.  We utilized the following key assumptions to estimate the fair
value of such cash flows: customer prepayment rate (including expected accounts
paid in full as a result of upgrades) – 15.9% to 23.9%; expected credit losses –
16.2%; discount rate – 0% to 44.9%; base interest rate – 5.37%; and loan
servicing fees – 1.75%.  Our assumptions are based on experience with
our notes receivable portfolio, available market data, estimated prepayments,
the cost of servicing, and net transaction costs.  Such assumptions
are assessed quarterly and, if necessary, adjustments are made to the carrying
value of the investment in our SPE on a prospective basis as a change in
accounting estimate, with the amount of periodic interest accretion adjusted
over the remaining life of the beneficial interest.  The carrying
value of the investment in our SPE represents our maximum exposure to loss
regarding our involvement with our SPE.  We periodically review the
carrying value of the investment in our SPE for impairment to ensure that the
carrying value does not exceed market value.





Inventories —Inventories are
stated at the lower of cost or market value less cost to sell.  Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, taxes, and capitalized interest incurred in the
construction or through the acquisition of resort dwellings held for timeshare
sale.  At September 30, 2009, the estimated costs not yet incurred but
expected to complete promised amenities was $697,000.  Inventory costs
are allocated to cost of Vacation Interval sales using the relative sales value
method, as described above.  We periodically review the carrying value
of our inventory on an individual project basis for impairment to ensure that
the carrying value does not exceed market value.


8
 Index


Vacation
Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu of
foreclosure) or (ii) trade-in associated with the purchase of an upgraded or
downgraded Vacation Interval.  Vacation Intervals reacquired are
recorded in inventory at the lower of their original cost or market
value.





Land, Equipment, Buildings, and
Leasehold Improvements — Land, equipment (including equipment under
capital lease), buildings, and leasehold improvements are stated at
cost.  When assets are disposed of, the cost and related accumulated
depreciation are removed, and any resulting gain or loss is reflected in income
for the period.  Maintenance and repairs are charged to expense as
incurred.  Significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized.  Depreciation is
calculated for all fixed assets, other than land, using the straight-line method
over the estimated useful life of the assets, which range from 3 to 20
years.





Valuation of Long-Lived
Assets — We assess potential impairments to our long-lived assets,
including land, equipment, buildings, and leasehold improvements, whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  If circumstances require a long-lived asset
be tested for possible impairment, we compare undiscounted cash flows expected
to be generated by an asset to the carrying value of the asset.  If
the carrying value of the long-lived asset is not recoverable on an undiscounted
cash-flow basis, an impairment is recognized to the extent that the carrying
value exceeds its fair value.  Fair value is determined through
various valuation techniques including discounted cash-flow models, quoted
market values, and third-party independent appraisals, as considered
necessary.  We did not recognize any impairments for our long-lived
assets in the first nine months of 2009 and 2008.  On January 1, 2009,
we adopted the FASB ASC “Fair Value Measurements and Disclosures,” which
resulted in additional disclosures for land, equipment, buildings, and leasehold
improvements.  See Note 7.





Prepaid and Other Assets —
Prepaid and other assets consist primarily of prepaid insurance, prepaid
postage, commitment fees, debt issuance costs, deferred commissions, novelty
inventories, deposits, collected cash in senior lender lock boxes which has not
yet been applied to related loan balances, and miscellaneous
receivables.  Commitment fees and debt issuance costs are amortized
over the lives of the related debt.





Income Taxes —Deferred
income taxes are recorded for temporary differences between the basis of assets
and liabilities as recognized by tax laws and their carrying values as reported
in the condensed consolidated financial statements. A provision or benefit is
recognized for deferred income taxes relating to such temporary
differences.  To the extent a deferred tax asset does not meet the
"more likely than not" criteria for realization, a valuation allowance is
recorded.  We classify interest and penalties within the provision for
income taxes.  However, for the nine months ended September 30, 2009
and 2008, such charges have not been material.  Our federal tax return
includes all items of income, gain, loss, expense, and credit of SF-III, which
is a non-consolidated subsidiary for reporting purposes and a disregarded entity
for federal income tax purposes.  We have a tax sharing agreement with
SF-III.





We file
U.S. federal income tax returns as well as income tax returns in various
states.  We are no longer subject to income tax examinations by the
Internal Revenue Service for years prior to 2004, although carryforward
attributes that were generated prior to 2004 may still be subject to
examination.  For the majority of state tax jurisdictions, we are no
longer subject to income tax examinations for years prior to 2004.  In
the state of Texas, we are no longer subject to franchise tax examinations for
years prior to 2003.





As of
September 30, 2009, we had no unrecognized tax benefits and, as a result, no
benefits that would affect our effective income tax rate.  We do not
anticipate any significant changes related to unrecognized tax benefits in the
next 12 months.  As of September 30, 2009, we did not require an
accrual for interest and penalties related to unrecognized tax
benefits.





Derivative Financial Instruments —All derivatives, whether designed as hedging relationships or not, are
required to be recorded on the balance sheet at fair
value.  Accounting for changes in the fair value of derivatives
depends on the intended use of the derivative and the resulting
designation.  Derivatives used to hedge exposure to changes in the
fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges.  Derivatives used to hedge exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered
cash flow hedges.





For
derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are recognized in
earnings.  For derivatives designated as cash flow hedges, the
effective portion of changes in the fair value of the derivative is initially
reported in other comprehensive income (outside of earnings) and subsequently
reclassified to earnings when the hedged transaction affects earnings, while the
ineffective portion of changes in the fair value of the derivative is recognized
directly in earnings.  We assess the effectiveness of each hedging
relationship by comparing the changes in fair value or cash flows of the
derivative hedging instrument with the changes in fair value or cash flows of
the designated hedged item or transaction.  For derivatives not
designated as hedges, changes in the fair value are recognized in
earnings.


9
 Index


Our
objective in using derivatives is to increase stability related to interest
expense and to manage our exposure to interest rate movements or other
identified risks.  To accomplish this objective, we primarily use
interest rate swaps and caps within our cash-flow hedging
strategy.  Interest rate swaps involve the receipt of variable-rate
amounts in exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount.  Interest rate
caps provide interest rate protection above the strike rate on the cap and
result in our receipt of interest payments when actual rates exceed the cap
strike.  We recognize changes in fair value of our derivatives in
earnings.  The amounts recognized for such derivatives for the nine
months ended September 30, 2009 and 2008 were not significant.





Earnings (Loss) Per Share —
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average common shares outstanding during the
period.  Earnings (loss) per share assuming dilution is computed by
dividing net income (loss) by the weighted average number of common shares and
potentially dilutive shares outstanding during the period.  The number
of potentially dilutive shares is computed using the treasury stock method,
which assumes that the increase in the number of common shares resulting from
the exercise of stock options is reduced by the number of common shares that we
could have repurchased with the proceeds from the exercise of stock
options.  For the three months ended September 30, 2009, the weighted
average shares outstanding assuming dilution was anti-dilutive.





Stock-Based Compensation— We
adopted FASB ASC “Compensation – Stock,” effective January 1, 2006, using the
modified prospective method for all stock options granted on or prior to
December 31, 2005 that were outstanding as of that date.  Under this
transition method, compensation cost was recognized for the unvested portion of
stock option grants outstanding at December 31, 2005 over the remaining
requisite service period using the fair value for these options as estimated at
the date of grant using the Black-Scholes option-pricing model under the
original provisions of these accounting standards for pro-forma disclosure
purposes.  We recognize stock-based compensation for all stock options
granted after the adoption of FASB ASC topic “Compensation – Stock” over the
requisite service period using the fair value for these options as estimated at
the date of grant using the Black-Scholes option-pricing model.





During
August 2009, a member of our Board of Directors resigned resulting in the
forfeiture of 75,000 nonqualified stock options.  Such stock options
were granted to a newly appointed director who filled the vacancy on our Board
of Directors.  These stock options have a fair value of
$1.13.  The fair value of the stock options granted is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility ranging from 53.5%
to 73.2%, a risk-free interest rate of 3.4%, expected life of 7 years, and no
distribution yield.  All options granted to our directors under the
2008 Stock Option Plan vest in equal increments over a four-year
period.  The forfeiture and subsequent grant of the aforementioned
75,000 nonqualified stock options did not have a material impact on stock-based
compensation recognized in the third quarter of 2009.





For the
nine months ended September 30, 2009 and 2008, we recognized stock-based
compensation expense of $348,000 and $150,000, respectively.  As of
September 30, 2009, unamortized stock-based compensation expense was $1.8
million, which will be fully recognized by the third quarter of
2013.





The
following table summarizes our outstanding stock options for the nine months
ended September 30, 2009 and 2008:





2009
            
            
            2008Options
      outstanding, January 1
            
            
            3,790,307
            
            
            
            2,513,807Granted
            
            
            75,000
            
            
            
            2,000,000Exercised
            
            
            —
            
            
            
            (270,000
            )Expired
            
            
            (5,000
            )
            
            
            (338,500
            )Forfeited
            
            
            (80,000
            )
            
            
            —Options
      outstanding, September 30
            
            
            3,780,307
            
            
            
            3,905,307Options
      exercisable, September 30
            
            
            2,176,557
            
            
            
            1,905,307





For the
270,000 stock options exercised during the first nine months of 2008, the
weighted average exercise price was $0.30 per share and the intrinsic value was
$628,000.





Stock Repurchase Program— On
July 29, 2008, we authorized the repurchase of up to two million shares of our
common stock to be acquired from time to time in the open market or in
negotiated transactions.  This stock repurchase program expires in
July 2010.  We did not repurchase any treasury shares in the first
nine months of 2009.  As of September 30, 2009, 1,943,789 shares
remain available for repurchase under this program.


10
 Index


Other Recent Accounting
Pronouncements—





Fair Value Measurements and
Disclosures– FASB ASC
“Fair Value Measurements and Disclosures” defines fair value, establishes a
market-based framework or hierarchy for measuring fair value, and expands
disclosures about fair value measurements.  This accounting standard
is applicable whenever another accounting pronouncement requires or permits
assets and liabilities to be measured at fair value. It does not expand or
require any new fair value measures.  In February 2008, the FASB
deferred the effective date of FASB ASC “Fair Value Measurements and
Disclosures” for one year, from January 1, 2008 to January 1, 2009, relative to
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring
basis.  Accordingly, our adoption of this standard on January 1, 2008
was limited to financial assets and liabilities, which primarily affected the
disclosures for the investment in our SPE and our derivative contracts as shown
in Note 7.  This adoption did not impact our consolidated financial
position, results of operations, or cash flows.  On January 1, 2009,
we adopted the remaining aspects of the accounting standard, which apply to our
non-financial long-lived assets (land, equipment, buildings, and leasehold
improvements) which are measured at fair value based on a periodic impairment
assessment.  This adoption resulted in additional disclosures for
land, equipment, buildings, and leasehold improvements, which are included
herein; however the adoption of this accounting standard for these assets did
not impact our consolidated financial position, results of operations, or cash
flows.





In April
2009, the FASB provided additional guidance for estimating fair value in
accordance with FASB ASC “Fair Value Measurements and Disclosures” when there is
no active market or where the price inputs being used represent distressed
sales.    This guidance reaffirms the objective of fair
value measurement, which is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale).  It also reaffirms the need to use
judgment to determine if a formerly active market has become inactive, as well
as to determine fair values when markets have become inactive.  This
update to FASB ASC “Fair Value Measurements and Disclosures” was effective
prospectively for reporting periods ending after June 15, 2009.  The
adoption of this update in the second quarter of 2009 did not impact our
consolidated financial position, results of operations, or cash
flows.





Derivatives and Hedging– We
adopted the amendment to FASB ASC “Derivatives and Hedging” on January 1,
2009.  This amendment expands the disclosure requirements for
derivative instruments and hedging activities.  Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under FASB ASC “Derivatives and Hedging,” and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  The adoption of this
accounting standard on January 1, 2009 did not impact our consolidated financial
position, results of operations, or cash flows.  Disclosures regarding
our derivative instruments and hedging activities are included in Note 2 and in
disclosures related to interest rate risk and market risk.





Interim Disclosures – Fair Value of
Financial Instruments–We adopted the amendment to FASB ASC “Interim Disclosures about Fair
Value of Financial Instruments” in the second quarter of 2009.  This
amendment requires the existing disclosure requirements related to the fair
value of financial instruments be extended to interim periods that were
previously only required in annual financial statements.  The adoption
of this accounting standard in the second quarter of 2009 did not impact our
consolidated financial position, results of operations, or cash
flows.  See Note 6 for additional disclosures.





Subsequent Events–We adopted FASB ASC
“Subsequent Events” in the second quarter of 2009.  This accounting
standard establishes the accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date; that is, whether that date represents the date the
financial statements were issued or were available to be issued. Consistent with the
requirements of this accounting standard for public entities, we evaluate
subsequent events through the date the financial statements are
issued.  FASB ASC “Subsequent Events” should not result in significant
changes in the subsequent events that an entity reports, either through
recognition or disclosure, in its financial statements.  The adoption
of this accounting standard in the second quarter of 2009 did not impact our
consolidated financial position, results of operations, or cash
flows.  See Note 2, under “Basis of Presentation,” for the related
disclosure.





Accounting for Transfers of
Financial Assets–In June 2009, the FASB
issued FASB ASC “Accounting for Transfers of Financial Assets,” which (i)
eliminated the concept of a qualified SPE, (ii) clarified the derecognition
criteria for a transfer to be accounted for as a sale, (iii) clarified the unit
of account eligible for sale accounting, and (iv) required that a transferor
initially measure at fair value and recognize all assets obtained (for example
beneficial interests) and liabilities incurred as a result of a transfer of an
entire financial asset or group of financial assets accounted for as a
sale.  Additionally, on and after the effective date, existing
qualified SPEs (as defined under previous accounting standards) must be
evaluated for consolidation by reporting entities in accordance with the
applicable consolidation guidance.  FASB ASC “Accounting for Transfers
of Financial Assets” further requires enhanced disclosures, including a
transferor’s continuing involvement with transfers of financial assets accounted
for as sales, the risks inherent in the transferred financial assets that have
been retained, and the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the statement of financial
position.  This accounting standard will be effective as of the
beginning of interim and annual reporting periods that begin after November 15,
2009.  The adoption of this standard will not impact our consolidated
financial position, results of operations, and cash flows as we exercised a
cleanup call on the balance of the Series 2005-A Notes previously sold by SF-III
effective October 30, 2009.  The cleanup call resulted in the
dissolution of SF-III.


11
 Index


Consolidation of Variable Interest
Entities–In June 2009, the FASB
issued FASB ASC “Amendments to FASB ASC - Consolidation of Variable Interest
Entities.”  This amendment changes the consolidation guidance
applicable to SPEs.  It also amends the guidance governing the
determination of whether an enterprise is the primary beneficiary of an SPE and
therefore required to consolidate the SPE by requiring a qualitative analysis
rather than a quantitative analysis.  The qualitative analysis
includes, among other things, consideration of who has the power to direct the
activities of the entity that most significantly impact the entity’s economic
performance and who has the obligation to absorb losses or the right to receive
benefits of the SPE that could potentially be significant to the
SPE.  This accounting standard further requires continuous
reassessments of whether an enterprise is the primary beneficiary of an SPE,
whereas such reassessments were previously required only when specific events
had occurred.  In addition, qualified SPEs, which were previously
exempt from the application of FASB ASC “Consolidation of Variable Interest
Entities,” will be subject to the provisions of this amendment.  The
amendment also requires enhanced disclosures about an enterprise’s involvement
with an SPE.  This accounting standard will be effective as of the
beginning of interim and annual reporting periods that begin after November 15,
2009.  We are currently assessing the financial impact the adoption of
the amended FASB ASC “Consolidation of Variable Interest Entities” will have on
our consolidated financial position, results of operations, and cash
flows.




FASB Accounting Standards
Codification–In June 2009, the FASB
issued FASB ASC “The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles.”  The FASB Accounting
Standards Codification has become the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in accordance with GAAP.  All
existing accounting standard documents are superseded by the FASB ASC and any
accounting literature not included in the FASB ASC will not be
authoritative.  However, rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be
sources of authoritative GAAP for SEC registrants.  This accounting
standard is effective for interim and annual reporting periods ending after
September 15, 2009.  Therefore, beginning with this quarterly report
on Form 10-Q, all references made to GAAP in our consolidated financial
statements now reference the new FASB ASC.  This accounting standard
does not change or alter existing GAAP and, therefore, did not impact our
consolidated financial position, results of operations, or cash
flows.





Note
3 – Earnings (Loss) Per Share





The
following table illustrates the reconciliation between basic and diluted
weighted average common shares outstanding for the three and nine-month periods
ended September 30, 2009 and 2008:





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted
      average shares outstanding - basic
            
            
            38,146,943
            
            
            
            38,065,780
            
            
            
            38,146,943
            
            
            
            38,019,401Issuance
      of shares from stock options exercisable
            
            
            —
            
            
            
            1,703,058
            
            
            
            1,294,807
            
            
            
            2,085,001Repurchase
      of shares from stock options proceeds
            
            
            —
            
            
            
            (569,335
            )
            
            
            (414,729
            )
            
            
            (884,130
            )Weighted
      average shares outstanding - diluted
            
            
            38,146,943
            
            
            
            39,199,503
            
            
            
            39,027,021
            
            
            
            39,220,272





For the
three months ended September 30, 2009, the weighted average shares outstanding
assuming dilution was anti-dilutive.  Outstanding stock options
totaling 1.3 million at September 30, 2009 were excluded from the computation of
diluted earnings (loss) per share for this period because including such stock
options would have been anti-dilutive.  Outstanding stock options
totaling 1.7 million were dilutive securities that were included in the
computation of diluted earnings per share for the three months ended September
30, 2008.  Outstanding stock options totaling 2.5 million and 2.2
million were not dilutive at September 30, 2009 and 2008, respectively, because
the exercise price for such options exceeded the average market price for our
common shares for the three-month periods ended September 30, 2009 and 2008,
respectively.


12
 Index


Outstanding
stock options totaling 1.3 million and 3.7 million were dilutive securities that
were included in the computation of diluted earnings per share for the nine
months ended September 30, 2009 and 2008, respectively.  Outstanding
stock options totaling 2.5 million and 229,000 were not dilutive at September
30, 2009 and 2008, respectively, because the exercise price for such options
exceeded the average market price for our common shares for the nine-month
periods ended September 30, 2009 and 2008, respectively.





Note 4–Notes Receivable





We
provide financing to the purchasers of Vacation Intervals in the form of notes
receivable, which are collateralized by their interest in such Vacation
Intervals.  Such notes receivable generally have initial terms of
seven to ten years.  The weighted average yield on outstanding notes
receivable at September 30, 2009 and 2008 was 16.8% and 16.7%, respectively,
with individual rates ranging from 0% to 17.5%.  As of September 30,
2009, $2.3 million of timeshare notes receivable have interest rates below
10%.  In connection with the sampler program, we routinely enter into
notes receivable with terms of 10 months.  Notes receivable from
sampler sales were $3.3 million and $2.6 million at September 30, 2009 and 2008,
respectively, and are non-interest bearing.





We
consider accounts over 60 days past due to be delinquent.  As of
September 30, 2009, $8.7 million of notes receivable, net of accounts charged
off, were considered delinquent.  An additional $36.9 million of notes
receivable, of which $29.3 million is pledged to senior lenders, would have been
considered to be delinquent had we not granted payment concessions to the
customers, which brings a delinquent note current and extends the maturity date
once a payment is made.





Notes
receivable are scheduled to mature as follows at September 30, 2009 (in
thousands):





For
      the 12-Month Period Ending September 30,2010
            
            $
            47,8872011
            
            
            48,9322012
            
            
            55,9302013
            
            
            59,4352014
            
            
            61,735Thereafter
            
            
            169,207Notes
      receivable, gross
            
            
            443,126Less
      allowance for uncollectible notes
            
            
            (99,132
            )Less
      discount on notes receivable
            
            
            (71
            )Notes
      receivable, net
            
            $
            343,923





The
activity in gross notes receivable is as follows for the three and nine-month
periods ended September 30, 2009 and 2008 (in thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance,
      beginning of period
            
            $
            423,571
            
            
            $
            391,331
            
            
            $
            397,002
            
            
            $
            359,035Sales
            
            
            56,616
            
            
            
            43,434
            
            
            
            154,537
            
            
            
            143,127Collections
            
            
            (20,939
            )
            
            
            (23,790
            )
            
            
            (62,633
            )
            
            
            (68,598
            )Receivables
      charged off
            
            
            (16,122
            )
            
            
            (14,925
            )
            
            
            (45,780
            )
            
            
            (37,514
            )Balance,
      end of period
            
            $
            443,126
            
            
            $
            396,050
            
            
            $
            443,126
            
            
            $
            396,050





The
activity in the allowance for uncollectible notes is as follows for the three
and nine-month periods ended September 30, 2009 and 2008 (in
thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance,
      beginning of period
            
            $
            78,513
            
            
            $
            77,099
            
            
            $
            76,696
            
            
            $
            69,128Estimated
      uncollectible revenue
            
            
            36,741
            
            
            
            16,645
            
            
            
            68,216
            
            
            
            47,205Receivables
      charged off
            
            
            (16,122
            )
            
            
            (14,925
            )
            
            
            (45,780
            )
            
            
            (37,514
            )Balance,
      end of period
            
            $
            99,132
            
            
            $
            78,819
            
            
            $
            99,132
            
            
            $
            78,819





The
provision for estimated uncollectible revenue as a percentage of Vacation
Interval sales increased substantially in the third quarter of 2009 to 52.2%
compared to 24.9% for the third quarter of 2008.  As cancellations
during the first nine months of 2009, and most notably during the third quarter
of 2009, have exceeded cancellations projected under our static-pool analysis of
our notes receivable portfolio, which tracks uncollectible notes for each year’s
sales over the lives of the notes, we projected this trend to continue for the
near term.  Considering an increase in future cancels beyond that
previously estimated, we increased our allowance for uncollectible notes by
$18.5 million above the 25.9% provision rate we had estimated in recent
months.  This resulted in an allowance for uncollectible notes of
22.4% of our notes receivable portfolio as of September 30,
2009.


13
 Index


Note
5 – Debt





The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at September 30, 2009 and December 31, 2008 (in
thousands):





September 30,
            
            
            December 31,
            
            
            Revolving2009
            
            
            2008
            
            
            Term
            
            Maturity$80
      million receivables-based revolver ($80 million maximum combined
      receivable, inventory, and acquisition commitments, see inventory /
      acquisition component below)
            
            $
            24,001
            
            
            $
            31,284
            
            
            1/31/11
            
            1/31/13$20
      million receivables-based revolver
            
            
            11,494
            
            
            
            9,746
            
            
            6/29/10
            
            6/29/10$50
      million receivables-based revolver
            
            
            7,994
            
            
            
            5,789
            
            
            8/31/11
            
            8/31/14$72.5
      million receivables-based revolver
            
            
            45,915
            
            
            
            43,504
            
            
            7/02/10
            
            7/02/13$150
      million receivables-based non-revolver
            
            
            143,427
            
            
            
            70,183
            
            
            
            —
            
            9/03/11$66.4
      million receivables-based non-revolving conduit loan
            
            
            2,874
            
            
            
            6,549
            
            
            
            —
            
            3/22/14$26.3
      million receivables-based non-revolving conduit loan
            
            
            2,090
            
            
            
            4,140
            
            
            
            —
            
            9/22/11$128.1
      million receivables-based non-revolver
            
            
            27,958
            
            
            
            43,526
            
            
            
            —
            
            7/16/18$115.4
      million receivables-based non-revolver, including a total remaining
      discount of approximately $3.7 million
            
            
            58,092
            
            
            
            84,885
            
            
            
            —
            
            3/15/20Inventory
      / acquisition loan agreement (see $80 million receivables-based revolver
      above)
            
            
            23,287
            
            
            
            28,407
            
            
            1/31/10
            
            1/31/12$50
      million inventory loan agreement
            
            
            47,890
            
            
            
            34,464
            
            
            4/29/10
            
            4/29/12Various
      notes, due from November 2009 through August 2016, collateralized by
      various assets
            
            
            6,020
            
            
            
            4,684
            
            
            
            —
            
            variousTotal
      notes payable
            
            
            401,042
            
            
            
            367,161Capital
      lease obligations
            
            
            1,165
            
            
            
            1,910
            
            
            
            —
            
            variousTotal
      notes payable and capital lease obligations
            
            
            402,207
            
            
            
            369,0718.0%
      senior subordinated notes
            
            
            7,956
            
            
            
            23,121
            
            
            
            —
            
            4/01/1010.0%
      senior subordinated notes
            
            
            10,000
            
            
            
            —
            
            
            
            —
            
            4/01/12Total
      senior subordinated notes
            
            
            17,956
            
            
            
            23,121Total
            
            $
            420,163
            
            
            $
            392,192





At
September 30, 2009, our senior credit facilities provided for loans of up to
$485.0 million, of which $90.0 million was available for future
advances.  Our weighted average cost of borrowings for the nine months
ended September 30, 2009 was 6.0% compared to 6.7% for the nine months ended
September 30, 2008.





In
September 2009, in accordance with the terms of the agreement, the revolving
term of our $150 million receivables-based credit facility expired and the
interest rate on the outstanding balance increased from one-month LIBOR plus
1.25% to Prime.





During
the first nine months of 2009, we retired $1.7 million of 8.0% senior
subordinated notes, due April 2010, for $1.4 million in open-market
transactions, which resulted in gains of $316,000.  Additionally, in
June 2009, we completed an exchange transaction involving $10.0 million in
principal of our 8.0% senior subordinated notes due 2010 (the “Old Notes”) for
$10.0 million in principal of our new class of 10.0% senior subordinated notes
due 2012 (the “Exchange Notes”) and paid accrued, unpaid interest from April 1,
2009 through June 29, 2009 related to the retired Old Notes of
$198,000.  The primary purpose of this exchange transaction was to
extend the maturity of $10.0 million principal of debt from April 1, 2010 to
April 1, 2012.  Concurrently with the exchange transaction, we retired
an additional $3.5 million in principal of our Old Notes at par and paid
accrued, unpaid interest from April 1, 2009 through June 25, 2009 related to
such Old Notes of $66,000.  The remaining $8.0 million in principal of
Old Notes not included in the exchange transaction retained its original terms
with semiannual interest-only payments through maturity at April 1, 2010, at
which time the remaining principal will be paid.  Payment terms
related to the Exchange Notes require semiannual interest-only payments through
July 2010, at which time principal and interest payments of approximately $1.4
million will be paid quarterly through maturity at April 1, 2012.





In May
2009, we amended our $100 million consolidated receivables, inventory, and
acquisition revolving line of credit.  The revolving loan term of the
receivables component was extended from January 2010 to January
2011.  The maximum aggregate commitment under the facility was reduced
from $100 million to $80 million effective July 8, 2009, and further reduced to
$75 million effective December 31, 2009.  The commitment under the
receivables financing arrangement is the same as the total aggregate commitment,
provided we have no borrowings under either of the inventory or acquisition
financing arrangements.  The total availability under the inventory
financing arrangement and the maximum aggregate combined commitment for the
inventory and acquisition financing arrangements was reduced from $50 million to
$30 million effective July 8, 2009, and will be further reduced to $25 million
effective December 31, 2009.  The commitment on the acquisition line
will remain the same at $10 million.  The total availability under the
facility will continue to be reduced by (a) the aggregate outstanding principal
owned by this senior lender of the Series 2008-A Notes related to Silverleaf
Finance VI, LLC (“SF-VI”), which was $21.4 million at September 30, 2009, and
(b) an amount equal to 10.5% of the outstanding principal of the two conduit
loan facilities provided by this senior lender to Silverleaf Finance II, Inc.
(“SF-II”), which was $521,000 at September 30, 2009.  The maturity
dates and interest rates for all three components remained the
same.


14
 Index


Our
senior credit facilities provide certain financial covenants that we must
satisfy.  Any failure to comply with the financial covenants in any
single loan agreement will result in a cross default under the various
facilities.  Such financial covenants include:





·
            a
      profitable operations covenant which requires our consolidated net income
      (i) for any fiscal year to not be less than $1.00, (ii) for any two
      consecutive fiscal quarters (reviewed on an individual rather than on an
      aggregate basis) to not be less than $1.00, and (iii) for any rolling
      12-month period to not be less than $1.00,
and





·
            a
      debt service covenant which requires our ratio of (i) earnings before
      interest, income taxes, depreciation, and amortization, less capital
      expenditures as determined in accordance with generally accepted
      accounting principles, to (ii) the interest expense minus all non-cash
      items constituting interest expense to not be less than 1.25 to 1 as of
      the last day of each fiscal quarter, for the latest rolling 12 months then
      ending, or for the average of the last four
  quarters.





Despite
the $18.5 million increase to the allowance for uncollectible notes during the
third quarter of 2009, discussed in Note 4, we remain in compliance with these
covenants as of September 30, 2009.  However, there can be no
assurance that we will continue to meet these or other financial covenants
contained in our debt agreements with our senior lenders.





Note
6 – Fair Value of Financial Instruments





The
carrying value of cash and cash equivalents, other receivables, amounts due from
or to affiliates, and accounts payable and accrued expenses approximates fair
value due to the relatively short-term nature of the financial
instruments.  The carrying value of the notes receivable approximates
fair value because the weighted average interest rate on the portfolio of notes
receivable approximates current interest rates charged on similar current notes
receivable.  The carrying value of notes payable and capital lease
obligations approximates their fair value because the interest rates on these
instruments are adjustable or approximate current interest rates charged on
similar current borrowings.





Our 8.0%
senior subordinated notes of $8.0 million and $23.1 million at September 30,
2009 and December 31, 2008, respectively, had estimated fair values of
approximately $6.6 million and $19.1 million, respectively, based on recent
early retirements of these notes.  At September 30, 2009, the fair
value of our 10.0% senior subordinated notes approximates its carrying value of
$10.0 million as these notes were exchanged in the market on June 30,
2009.





Considerable
judgment is required to interpret market data to develop estimates of fair
value.  Accordingly, the estimates presented herein are not
necessarily indicative of the amounts we could realize in a current market
exchange.  The use of different market assumptions and estimation
methodologies may have a material effect on the estimated fair value
amounts.





Note
7 – Fair Value Measurements





We follow
FASB ASC “Fair Value Measurements and Disclosures” which established a fair
value hierarchy to increase consistency and comparability in fair value
measurements and related disclosures.  The fair value hierarchy is
based on inputs to valuation techniques that are used to measure fair value that
are either observable or unobservable.  Observable inputs reflect
assumptions market participants would use in pricing an asset or liability based
on market data obtained from independent sources while unobservable inputs
reflect a reporting entity’s pricing based upon its own market
assumptions.  The fair value hierarchy consists of the following three
levels:





Level
      1  -
            Inputs
      are quoted prices in active markets for identical assets or
      liabilities.


Level
      2  -
            Inputs
      are quoted prices for similar assets or liabilities in an active market,
      quoted prices for identical or similar assets or liabilities in markets
      that are not active, inputs other than quoted prices that are observable,
      and market-corroborated inputs derived principally from or corroborated by
      observable market data.


Level
      3  -
            Inputs
      are derived from valuation techniques in which one or more significant
      inputs or value drivers are
unobservable.


15
 Index


The
following table represents our assets measured at fair value on a recurring
basis as of September 30, 2009 and the basis for that measurement (in
thousands):





Fair
      Value Measurements at Reporting Date UsingDescription
            
            September 30,
              2009
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Investment
      in special purpose entity
            
            $
            5,563
            
            
            $
            —
            
            
            $
            —
            
            
            $
            5,563Interest
      rate cap derivative
            
            
            205
            
            
            
            —
            
            
            
            205
            
            
            
            —Total
            
            $
            5,768
            
            
            $
            —
            
            
            $
            205
            
            
            $
            5,563





The
activity in the investment in our SPE measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) is as follows for the
three and nine-month periods ended September 30, 2009 and 2008 (in
thousands):





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance,
      beginning of period
            
            $
            4,988
            
            
            $
            5,975
            
            
            $
            4,908
            
            
            $
            7,315Net
      investment appreciation / (returns)
            
            
            575
            
            
            
            (585
            )
            
            
            655
            
            
            
            (1,925
            )Balance,
      end of period
            
            $
            5,563
            
            
            $
            5,390
            
            
            $
            5,563
            
            
            $
            5,390





Assets Measured at Fair Value on a
Non-Recurring Basis— We assess potential impairments to our long-lived
assets, including land, equipment, buildings, and leasehold improvements,
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  For these assets, measurement at
fair value in periods subsequent to their initial recognition is applicable if
one or more is determined to be impaired.  During the nine months
ended September 30, 2009 and 2008, we had no impairments related to these
assets.  See Note 2 for an additional disclosure regarding our
long-lived assets.





Note
8 – Subsidiary Guarantees





All
subsidiaries of the Company, except SF-II, SF-III, Silverleaf Finance IV, LLC
(“SF-IV”), Silverleaf Finance V, L.P. (“SF-V”), and SF-VI, have guaranteed our
8.0% and 10.0% senior subordinated notes with balances of $8.0 million and $10.0
million at September 30, 2009, respectively.  Separate financial
statements and other disclosures concerning these guarantor subsidiaries are not
presented herein because such guarantees are full and unconditional and joint
and several, and such subsidiaries represent wholly-owned subsidiaries of the
Company.  In addition, these subsidiaries had nominal balance sheets
at September 30, 2009 and December 31, 2008, and no operations for the nine
months ended September 30, 2009 and 2008.





Note 9–Commitments and
Contingencies





Litigation –We
are currently subject to litigation arising in the normal course of our
business.  From time to time, such litigation includes claims
regarding employment, tort, contract, truth-in-lending, the marketing and sale
of Vacation Intervals, and other consumer protection
matters.  Litigation has been initiated from time to time by persons
seeking individual recoveries for themselves, as well as, in some instances,
persons seeking recoveries on behalf of an alleged class.  In our
judgment, none of the lawsuits currently pending against us, either individually
or in the aggregate, is expected to have a material adverse effect on our
business, results of operations, or financial position.





Various
legal actions and claims may be instituted or asserted in the future against us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements.  Some of these matters may
involve claims, which, if granted, could be materially adverse to our financial
position.





As
litigation is subject to many uncertainties, the outcome of individual litigated
matters is not predictable with assurance. We will establish reserves from time
to time when deemed appropriate under generally accepted accounting principles.
However, the outcome of a claim for which we have not deemed a reserve to be
necessary may be decided unfavorably against us and could require us to pay
damages or incur other expenditures that could be materially adverse to our
business, results of operations, or financial position.


16
 Index


Insurance Losses — On
September 13, 2008, Hurricane Ike caused property damage and business
interruption related to our Seaside Resort in Galveston, Texas, and our Piney
Shores Resort just north of Houston, Texas.  As a result, Seaside
Resort was closed from September 10 through October 17, 2008, at which time we
began taking reservations and gradually opening units.  The resort was
fully operational by December 12, 2008.  Piney Shores Resort was
closed from September 13 to September 25, 2008.  We maintain insurance
that covers both physical damage and business-interruption losses.  In
2008, we accrued $291,000 related to this incident, which represented our
insurance deductibles and expenditures deemed uncollectible.  No
additional expenses related to this incident were incurred in the first nine
months of 2009.  In addition, we received $1.5 million and $879,000 in
business-interruption proceeds in February 2009 and April 2009, respectively,
which were recorded in other income at the time of receipt.  The April
proceeds were received upon completion of our assessment of the full extent of
business-interruption losses related to this hurricane.





Terminated Land Acquisition -
In June 2009, we wrote-off $2.7 million of predevelopment costs associated with
the termination of a potential land acquisition.  Such write-off is
recorded in operating, general and administrative expense.




Note 10–Subsequent
Events





In
October 2009, we exercised a cleanup call on the balance of the Series 2005-A
Notes previously sold by SF-III, our wholly-owned off-balance sheet special
purpose finance subsidiary, and paid off the SF-III credit
facility.  The total payment of $10.2 million, consisted of the
principal balance of the Series 2005-A Notes, plus accrued and unpaid interest
and other fees through October 30, 2009.  We dissolved SF-III
simultaneously with the execution of this transaction.





Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Forward-Looking
Statements





The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere herein. This report contains
forward-looking statements within the meaning of applicable federal securities
laws.  Silverleaf Resorts, Inc. (the “Company” or “we” or “our” or
“us”) cautions investors that any forward-looking statements presented herein,
or which management may express orally or in writing from time to time, are
based on management’s beliefs and assumptions at that
time.  Throughout this report, words such as “anticipate,” “believe,”
“expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,”
“will,” “result,” and other similar expressions, which do not relate solely to
historical matters, are intended to identify forward-looking
statements.  Such statements are subject to risks, uncertainties, and
assumptions and are not guarantees of future performance, which may be affected
by known and unknown risks, trends, uncertainties, and factors beyond our
control.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or
projected.  We caution investors that while forward-looking statements
reflect our good-faith beliefs at the time such statements are made, such
statements are not guarantees of future performance and are affected by actual
events that occur after said statements are made.  We expressly
disclaim any responsibility to update forward-looking statements, whether as a
result of new information, future events, or otherwise.  Accordingly,
investors should use caution in relying on past forward-looking statements,
which were based on results and trends existing when those statements were made,
to anticipate future results or trends.





Some
risks and uncertainties that may cause our actual results, performance, or
achievements to differ materially from those expressed or implied by
forward-looking statements include, among others, those discussed in our Form
10-K as filed with the Securities and Exchange Commission on March 10,
2009.  These risks and uncertainties continue to be relevant to our
performance and financial condition.  Moreover, we operate in a very
competitive and rapidly changing environment where new risk factors emerge from
time to time.  It is not possible for management to predict all such
risk factors, nor can management assess the impact of all such risk factors on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.  Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements as
indicators of actual results.





Executive
Overview





As of
September 30, 2009, we own and operate 13 timeshare resorts in various stages of
development in Texas, Missouri, Illinois, Georgia, Massachusetts, and Florida,
and a hotel near the Winter Park recreational area in Colorado.  Our
resorts offer a wide array of country club-like amenities, such as golf, an
indoor water park, swimming, horseback riding, boating, and many organized
activities for children and adults.  We have a Vacation Interval
ownership base of over 112,000 members.  Our condensed consolidated
financial statements include the accounts of Silverleaf Resorts, Inc. and its
subsidiaries, with the exception of SF-III, all of which are
wholly-owned.


17
 Index


Results
of Operations





The
following table summarizes key ratios from our condensed consolidated statements
of operations for the three and nine-month periods ended September 30, 2009 and
2008:





Three
      Months Ended
            
            
            Nine
      Months EndedSeptember 30,
            
            
            September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008As
      a percentage of total revenues:Vacation
      Interval sales
            
            
            133.4
            %
            
            
            97.7
            %
            
            
            105.7
            %
            
            
            97.8
            %Estimated
      uncollectible revenue
            
            
            -69.6
            %
            
            
            -24.3
            %
            
            
            -37.1
            %
            
            
            -23.1
            %Net
      sales
            
            
            63.8
            %
            
            
            73.4
            %
            
            
            68.6
            %
            
            
            74.7
            %Interest
      income
            
            
            31.4
            %
            
            
            23.0
            %
            
            
            26.2
            %
            
            
            22.3
            %Management
      fee income
            
            
            1.8
            %
            
            
            1.1
            %
            
            
            1.5
            %
            
            
            1.1
            %Other
      income
            
            
            3.0
            %
            
            
            2.5
            %
            
            
            3.7
            %
            
            
            1.9
            %Total
      revenues
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %As
      a percentage of Vacation Interval sales:Cost
      of Vacation Interval sales
            
            
            7.3
            %
            
            
            12.0
            %
            
            
            9.7
            %
            
            
            10.3
            %Sales
      and marketing
            
            
            47.3
            %
            
            
            53.8
            %
            
            
            50.0
            %
            
            
            51.7
            %As
      a percentage of total revenues:Operating,
      general and administrative
            
            
            22.3
            %
            
            
            15.0
            %
            
            
            19.4
            %
            
            
            14.5
            %Depreciation
            
            
            3.1
            %
            
            
            1.9
            %
            
            
            2.5
            %
            
            
            1.8
            %As
      a percentage of interest income:Interest
      expense and lender fees
            
            
            44.5
            %
            
            
            51.8
            %
            
            
            45.4
            %
            
            
            45.3
            %





Results
of Operations for the Three Months Ended September 30, 2009 and
2008





Revenues





Revenues
for the quarter ended September 30, 2009 were $52.8 million, representing a
$15.6 million, or 22.8%, decrease compared to revenues for the quarter ended
September 30, 2008.  As discussed below, the decrease is primarily
attributable to a $20.1 million increase in estimated uncollectible revenue
offset by a $3.6 million increase in Vacation Interval sales and an $881,000
increase in interest income during the quarter ended September 30,
2009.





The
following table summarizes our Vacation Interval sales for the three months
ended September 30, 2009 and 2008 (dollars in thousands, except average
price):





2009
            
            
            2008Sales
            
            
            Intervals
            
            
            Average
              Price
            
            
            Sales
            
            
            Intervals
            
            
            Average
              PriceInterval
      Sales to New Customers
            
            $
            26,629
            
            
            
            2,579
            
            
            $
            10,325
            
            
            $
            27,021
            
            
            
            2,590
            
            
            $
            10,433Upgrade
      Interval Sales to Existing Customers
            
            
            32,284
            
            
            
            3,670
            
            
            
            8,797
            
            
            
            25,798
            
            
            
            2,708
            
            
            
            9,527Additional
      Interval Sales to Existing Customers
            
            
            11,514
            
            
            
            1,148
            
            
            
            10,030
            
            
            
            14,030
            
            
            
            1,358
            
            
            
            10,332Total
            
            $
            70,427
            
            
            
            
            
            
            
            
            
            
            $
            66,849





Vacation
Interval sales increased 5.4% during the third quarter of 2009 versus the same
period of 2008.  The increase is primarily attributable to a 10.2%
increase in tours during the third quarter of 2009.  The number of
interval sales to new customers decreased 0.4% and average prices decreased
1.0%, which resulted in a 1.5% decrease in sales to new customers in the third
quarter of 2009 versus the same period of 2008.  The number of upgrade
interval sales to existing customers increased 35.5% but average prices
decreased 7.7%, resulting in a 25.1% net increase in upgrade interval sales to
existing customers during the third quarter of 2009 compared to the same period
of 2008.  The number of additional interval sales to existing
customers decreased 15.5% and average prices decreased 2.9% resulting in a 17.9%
decrease in additional interval sales to existing customers during the third
quarter of 2009 versus the same period of 2008.  Vacation Interval
sales to existing owners comprised 62.2% and 59.6% of total Vacation Interval
sales in the third quarters of 2009 and 2008, respectively, which maintains our
favorable sales-mix trend toward upgrades and second-week sales to existing
customers as such sales have relatively lower associated sales and marketing
costs.


18
 Index


On
September 13, 2008, Hurricane Ike struck the Texas Coast near our Seaside Resort
in Galveston, Texas, causing property damage and business-interruption losses at
this resort and, to a lesser extent, our Piney Shores Resort just north of
Houston, Texas.  Seaside Resort was fully operational by December 12,
2008.  Piney Shores Resort reopened September 25, 2008.





Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $36.7 million for the third quarter of 2009 versus $16.6
million for the same period of 2008.  The provision for estimated
uncollectible revenue as a percentage of Vacation Interval sales increased
substantially in the third quarter of 2009 to 52.2% compared to 24.9% for the
third quarter of 2008.  As cancellations during the first nine months
of 2009, and most notably during the third quarter of 2009, exceeded
cancellations projected under our static-pool analysis of our notes receivable
portfolio, which tracks uncollectible notes for each year’s sales over the lives
of the notes, we projected this trend to continue for the near
term.  Considering an increase in future cancels beyond that
previously estimated, we increased our allowance for uncollectible notes by
$18.5 million above the 25.9% provision rate we had estimated in recent
months.  This resulted in an allowance for uncollectible notes of
22.4% of our notes receivable portfolio as of September 30,
2009.  Factors considered in the assessment of uncollectibility
include the aging of notes receivable, historical collection experience and
credit losses, customer credit scores (FICO® scores), and current economic
factors.  We believe our notes receivable are adequately reserved at
this time, however, there can be no assurance that defaults have stabilized or
that they will not increase further.  We review the allowance for
uncollectible notes quarterly and make adjustments as necessary.





Interest
income increased $881,000, or 5.6%, to $16.6 million for the third quarter of
2009 from $15.7 million for the third quarter of 2008.  The increase
primarily resulted from a higher average notes receivable balance during the
third quarter of 2009 versus the same period of 2008 and an increase in the
weighted average yield on our outstanding notes receivable to 16.8% at September
30, 2009 from 16.7% at September 30, 2008.





Management
fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net
income.  Management fee income increased $150,000 to $930,000 for the
third quarter of 2009 versus $780,000 for the same period of 2008 primarily due
to increased profitability of the resorts’ management clubs.





Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items.  Other income
remained fairly constant at $1.6 million for the third quarter of 2009 compared
to $1.7 million for the third quarter of 2008.





Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including both costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including revenues already recognized and estimated future
revenues.  Common costs, including amenities, are allocated to
inventory cost among the phases that those costs are expected to
benefit.  The estimate of total revenue for a phase considers factors
such as trends in uncollectibles, changes in sales mix and unit sales prices,
repossessions of Vacation Intervals, effects of upgrade programs, and past and
expected future sales programs to sell slow-moving inventory units.





Cost of
Vacation Interval sales decreased to 7.3% of Vacation Interval sales for the
third quarter of 2009 compared to 12.0% in the 2008 comparable
period.  This decrease primarily resulted from revisions made to our
future relative sales value for the third quarters of both 2009 and 2008 which
had a greater impact on decreasing cost of sales in the third quarter of
2009.





Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales decreased to 47.3%
for the third quarter of 2009 versus 53.8% for the comparable prior-year
period.  The decrease in sales and marketing expense as a percentage
of Vacation Interval sales is primarily attributable to cost reductions in
outside marketing programs in the third quarter of 2009 compared to the third
quarter of 2008 and an increase in sales to existing customers, which have
relatively lower related sales and marketing costs compared to new customer
sales.  In the third quarter of 2009, 62.2% of our sales were to
existing customers versus 59.6% in the third quarter of 2008.





In
accordance with the FASB ASC “Real Estate – Timesharing Activities,” sampler
sales and related costs are accounted for as incidental operations, whereby
incremental costs in excess of related incremental revenues are charged to
expense as incurred.  Since our sampler sales primarily function as a
marketing program, providing us additional opportunities to sell Vacation
Intervals to prospective customers, the incremental costs of our sampler sales
typically exceed incremental sampler revenues.  Accordingly, $1.1
million and $901,000 of sampler revenues were recorded as a reduction to sales
and marketing expense for the quarters ended September 30, 2009 and 2008,
respectively.


19
 Index


Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues increased
to 22.3% in the third quarter of 2009 from 15.0% for the same period of
2008.  Overall, operating, general and administrative expenses
increased by $1.6 million for the third quarter of 2009 compared to the same
period of 2008, primarily due to a $1.4 million increase in legal and
professional fees.





Depreciation





Depreciation
expense as a percentage of total revenues increased to 3.1% for the quarter
ended September 30, 2009 versus 1.9% for the same quarter of
2008.  Overall, depreciation expense increased $357,000 for the third
quarter of 2009 compared to the same period of 2008 due to capital expenditures
of $5.2 million since September 30, 2008.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income decreased to 44.5%
for the third quarter of 2009 compared to 51.8% for the same period of
2008.  Overall, interest expense and lender fees decreased $756,000
for the third quarter of 2009 versus the same period of 2008 primarily due to a
decrease in our weighted average cost of borrowings to 5.6% for the third
quarter of 2009 from 7.4% for the third quarter of 2008, partially offset by a
larger average debt balance outstanding during the third quarter of 2009, which
was $414.3 million compared to $383.3 million for the prior-year comparative
period.





Income (Loss) before Benefit
(Provision) for Income Taxes





Income
(loss) before benefit (provision) for income taxes was a loss of $6.5 million
for the quarter ended September 30, 2009 compared to income of $4.8 million for
the quarter ended September 30, 2008 as a result of the above-mentioned
operating results.





Benefit (Provision) for
Income Taxes





Benefit
(provision) for income taxes as a percentage of income (loss) before benefit
(provision) for income taxes was a benefit of 40.0% for the third quarter of
2009 compared to a provision of 38.5% for the third quarter of
2008.





Net Income
(Loss)





Net
income (loss) was a loss of $3.9 million for the quarter ended September 30,
2009 compared to income of $2.9 million for the quarter ended September 30, 2008
as a result of the above-mentioned operating results.





Results
of Operations for the Nine Months Ended September 30, 2009 and 2008





Revenues





Revenues
for the nine months ended September 30, 2009 were $183.7 million, representing a
$20.8 million, or 10.2%, decrease compared to revenues for the nine months ended
September 30, 2008.  As discussed below, the decrease is primarily
attributable to a $21.0 million increase in estimated uncollectible revenue and
a $5.7 million decrease in Vacation Interval sales, offset by a $2.9 million
increase in other income and a $2.6 million increase in interest income during
the first nine months of 2009.


20
 Index


The
following table summarizes our Vacation Interval sales for the nine months ended
September 30, 2009 and 2008 (dollars in thousands, except average
price):





2009
            
            
            2008Sales
            
            
            Intervals
            
            
            Average
              Price
            
            
            Sales
            
            
            Intervals
            
            
            Average
              PriceInterval
      Sales to New Customers
            
            $
            73,406
            
            
            
            7,219
            
            
            $
            10,168
            
            
            $
            80,606
            
            
            
            7,442
            
            
            $
            10,831Upgrade
      Interval Sales to Existing Customers
            
            
            89,397
            
            
            
            9,990
            
            
            
            8,949
            
            
            
            69,375
            
            
            
            7,300
            
            
            
            9,503Additional
      Interval Sales to Existing Customers
            
            
            31,414
            
            
            
            3,043
            
            
            
            10,323
            
            
            
            49,908
            
            
            
            5,218
            
            
            
            9,565Total
            
            $
            194,217
            
            
            
            
            
            
            
            
            
            
            $
            199,889





Vacation
Interval sales decreased 2.8% during the first nine months of 2009 versus the
same period of 2008.  The decrease is primarily attributable to
promotional pricing offered during the first nine months of 2009 on select
products and a 0.5% decrease in the closing ratio, partially offset by a
favorable sales mix of higher-end products on additional interval sales to
existing customers.  The number of interval sales to new customers
decreased 3.0% and average prices decreased 6.1%, which resulted in an 8.9%
decrease in sales to new customers in the first nine months of 2009 versus the
same period of 2008.  The number of upgrade interval sales to existing
customers increased 36.8% but average prices decreased 5.8%, resulting in a
28.9% net increase in upgrade interval sales to existing customers during the
first nine months of 2009 compared to the same period of 2008.  The
number of additional interval sales to existing customers decreased 41.7% but
average prices increased 7.9%, resulting in a 37.1% net decrease in additional
interval sales to existing customers during the first nine months of 2009 versus
the same period of 2008.  In addition, Vacation Interval sales to
existing owners comprised 62.2% and 59.7% of total Vacation Interval sales in
the first nine months of 2009 and 2008, respectively, which continues our
favorable sales-mix trend toward sales with relatively lower associated sales
and marketing costs.





Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $68.2 million for the first nine months of 2009 versus
$47.2 million for the same period of 2008.  The provision for
estimated uncollectible revenue as a percentage of Vacation Interval sales
increased substantially in the first nine months of 2009 to 35.1% compared to
23.6% for the first nine months of 2008.  As cancellations during the
first nine months of 2009, and most notably during the third quarter of 2009,
exceeded cancellations projected under our static-pool analysis of our notes
receivable portfolio, which tracks uncollectible notes for each year’s sales
over the lives of the notes, we projected this trend to continue for the near
term.  Considering an increase in future cancels beyond that
previously estimated, we increased our allowance for uncollectible notes by
$18.5 million above the 25.9% provision rate we had estimated in recent
months.  This resulted in an allowance for uncollectible notes of
22.4% of our notes receivable portfolio as of September 30,
2009.  Factors considered in the assessment of uncollectibility
include the aging of notes receivable, historical collection experience and
credit losses, customer credit scores (FICO® scores), and current economic
factors.  We believe our notes receivable are adequately reserved at
this time, however, there can be no assurance that defaults have stabilized or
that they will not increase further.  We review the allowance for
uncollectible notes quarterly and make adjustments as necessary.





Interest
income increased $2.6 million, or 5.8%, to $48.1 million during the first nine
months of 2009 from $45.5 million during the same period of 2008.  The
increase primarily resulted from a higher average notes receivable balance
during the first nine months of 2009 versus the same period of 2008 and an
increase in the weighted average yield on our outstanding notes receivable to
16.8% at September 30, 2009 from 16.7% at September 30, 2008.





Management
fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net
income.  Management fee income increased $451,000 to $2.8 million for
the first nine months of 2009 versus $2.3 million for the same period of 2008
primarily due to increased profitability of the resorts’ management
clubs.





Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items.  Other income was
$6.8 million for the first nine months of 2009 compared to $3.9 million for the
same period in 2008.  The increase is primarily attributable to the
receipt of $2.4 million in business-interruption proceeds related to Hurricane
Ike and a $316,000 gain on the early extinguishment of senior subordinated debt,
both recorded in other income in the first nine months of 2009.




Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including amounts already recognized and estimated future
revenues.  Common costs, including amenities, are allocated to
inventory cost among the phases that those costs are expected to
benefit.  The estimate of total revenue for a phase considers factors
such as trends in uncollectibles, changes in sales mix and unit sales prices,
repossessions of Vacation Intervals, effects of upgrade programs, and past and
expected future sales programs to sell slow-moving inventory
units.


21
 Index


Cost of
Vacation Interval sales decreased to 9.7% of Vacation Interval sales for the
first nine months of 2009 compared to 10.3% in the 2008 comparable
period.  This decrease primarily resulted from quarterly revisions to
our future relative sales value for the first three quarters of both 2009 and
2008 which had a greater impact on decreasing cost of sales in
2009.





Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales decreased to 50.0%
for the nine-month period ended September 30, 2009 versus 51.7% for the
comparable prior-year period.  The decrease in sales and marketing
expense as a percentage of Vacation Interval sales is primarily attributable to
cost reductions in outside marketing programs in the first nine months of 2009
compared to the first nine months of 2008 and an increase in sales to existing
customers, which have relatively lower related sales and marketing costs
compared to new customer sales.  In the first nine months of 2009,
62.2% of our sales were to existing customers versus 59.7% in the first nine
months of 2008.





In
accordance with the FASB ASC “Real Estate – Timesharing Activities,” sampler
sales and related costs are accounted for as incidental operations, whereby
incremental costs in excess of related incremental revenues are charged to
expense as incurred.  Since our sampler sales primarily function as a
marketing program, providing us additional opportunities to sell Vacation
Intervals to prospective customers, the incremental costs of our sampler sales
typically exceed incremental sampler revenues.  Accordingly, $3.0
million and $2.6 million of sampler revenues were recorded as a reduction to
sales and marketing expense for the nine months ended September 30, 2009 and
2008, respectively.





Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues increased
to 19.4% for the first nine months of 2009 versus 14.5% for the same period of
2008.  Overall, operating, general and administrative expenses
increased by $5.9 million for the first nine months of 2009 compared to the same
period of 2008, primarily due to the write-off of $2.7 million predevelopment
costs associated with the termination of a potential land acquisition in June
2009, an increase in legal and professional fees of $1.2 million, an increase in
recording fees of $572,000 related to increased pledging of notes receivable and
new inventory with our senior lenders, and $368,000 of fees related to the
senior subordinated debt exchange transaction that occurred in June
2009.





Depreciation





Depreciation
expense as a percentage of total revenues increased to 2.5% for the nine months
ended September 30, 2009 versus 1.8% for the same period of
2008.  Overall, depreciation expense increased $986,000 for the first
nine months of 2009 compared to the same period of 2008 due to capital
expenditures of $5.2 million since September 30, 2008.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income remained fairly
constant at 45.4% for the first nine months of 2009 compared to 45.3% for the
same period of 2008.  Overall, interest expense and lender fees
increased $1.2 million for the first nine months of 2009 versus the same period
of 2008 primarily due to a larger average debt balance outstanding during the
first nine months of 2009, which was $406.2 million compared to $365.1 million
for the prior-year comparative period, and to a lesser extent an increase in
lender fees related to our SF-VI securitization which closed in June of 2008,
partially offset by a decrease in our weighted average cost of borrowings to
6.0% for the first nine months of 2009 from 6.7% for the same period of
2008.





Income before Provision for
Income Taxes





Income
before provision for income taxes decreased to $5.7 million for the nine months
ended September 30, 2009 compared to $26.4 million for the nine months ended
September 30, 2008 as a result of the above-mentioned operating
results.


22
 Index


Provision for Income
Taxes





Provision
for income taxes as a percentage of income before provision for income taxes was
39.6% for the nine months ended September 30, 2009 compared to 38.5% for the
same period of 2008.





Net
Income





Net
income was $3.4 million for the nine months ended September 30, 2009 compared to
$16.3 million for the nine months ended September 30, 2008 as a result of the
above-mentioned operating results.





Liquidity
and Capital Resources





At
September 30, 2009, our senior credit facilities provided for loans of up to
$485.0 million, of which $395.0 million of principal related to advances under
the credit facilities was outstanding and $90.0 million was available for future
advances. The following table summarizes our credit agreements with our senior
lenders, our wholly-owned and consolidated special purpose finance subsidiaries,
our senior subordinated debt and other debt, and our credit agreement with our
off-balance-sheet qualified SPE, SF-III, as of September 30, 2009 (in
thousands):





Maximum
      Amount Available
            
            
            Outstanding
      BalanceReceivables-Based
      Revolvers
            
            $
            177,275
            
            
            $
            89,404Receivables-Based
      Non-Revolvers
            
            
            234,441
            
            
            
            234,441Inventory
      Loans
            
            
            73,287
            
            
            
            71,177Subtotal
      Senior Credit Facilities
            
            
            485,003
            
            
            
            395,022Senior
      Subordinated Debt
            
            
            17,956
            
            
            
            17,956Other
      Debt
            
            
            7,185
            
            
            
            7,185Subtotal
      On-Balance-Sheet
            
            
            510,144
            
            
            
            420,163Off-Balance-Sheet
      Receivables-Based Term Loan
            
            
            10,789
            
            
            
            10,789Grand
      Total
            
            $
            520,933
            
            
            $
            430,952





We use
these credit agreements to finance the sale of Vacation Intervals, to finance
construction, and for working capital needs.





Our
senior credit facilities mature between June 2010 and March 2020 and are
collateralized (or cross-collateralized) by customer notes receivable,
inventory, construction in process, land, improvements, and related equipment at
certain of our resorts.  Our fixed-to-floating debt ratio at September
30, 2009 was 23% fixed to 77% floating.  However, the majority of our
floating-rate debt is subject to interest-rate floors between 5.25% and
8.00%.  The credit facilities that bear interest at variable rates are
tied to the Prime rate or LIBOR.  At September 30, 2009, the annual
Prime rate on our senior credit facilities was 3.25% and the one-month LIBOR
rate on these facilities was 0.25%.  For the nine months ended
September 30, 2009, the weighted average cost of funds for all borrowings was
6.0%.  The credit facilities secured by customer notes receivable
allow advances of 75% to 80% of eligible customer notes
receivable.  Customer defaults have a significant impact on our cash
available from financing customer notes receivable in that notes more than 60
days past due are not eligible as collateral.  As a result, we must
repay borrowings against such delinquent notes.  As of September 30,
2009, $8.7 million of notes, net of accounts charged off, were more than 60 days
past due.




In
addition, we have $8.0 million of 8.0% senior subordinated notes due April 2010
and $10.0 million of 10.0% senior subordinated notes due April 2012 which are
guaranteed by all of our present and future domestic restricted
subsidiaries.  During the first nine months of 2009, we retired $1.7
million of our 8.0% senior subordinated notes for $1.4 million, which resulted
in a gain of $316,000.  In June 2009, we completed an exchange
transaction involving $10.0 million in principal of our 8.0% senior subordinated
notes due 2010 for $10.0 million in principal of our new class of 10.0% senior
subordinated notes due 2012.  The primary purpose of this exchange
transaction was to extend the maturity of $10.0 million principal of senior
subordinated notes from April 1, 2010 to April 1, 2012.  Concurrently
with the exchange transaction, we retired an additional $3.5 million in
principal of our 8.0% senior subordinated notes at par.  The remaining
$8.0 million in principal of our 8.0% senior subordinated notes not included in
the exchange transaction retained its original terms with semiannual
interest-only payments through maturity at April 1, 2010, at which time the
remaining principal will be paid.  Payment terms related to the new
notes require semiannual interest-only payments through July 2010, at which time
principal and interest payments of approximately $1.4 million will be paid
quarterly through maturity at April 1, 2012.





We
anticipate a continuation of the difficult economic environment we experienced
throughout 2008 and the first nine months of 2009.  These economic
weaknesses present formidable challenges related to constrained consumer
spending, collection of customer receivables, access to capital markets, and
ability to manage inventory levels.  As a result, we anticipate
somewhat of a decline in our Vacation Interval sales during the fourth quarter
of 2009 and beyond, thus our success in collecting payments due on customers’
loans in this challenging environment is heightened and will continue to
pressure our operating results.  However, we believe that conservative
business decisions and cash flow management into 2010, along with other measures
in the coming year, will allow us to maintain adequate liquidity into 2010,
including the payment of the $8.0 million of the 8.0% senior subordinated notes
due April 1, 2010.  These other measures include continuing to focus
on improving the credit quality of our notes receivable, a continued favorable
sales-mix trend toward upgrades and second-week sales to existing customers as
such sales have relatively lower associated sales and marketing costs,
reductions in capital expenditures for expansion at existing resorts, including
construction of lodging units and additional amenities, reductions in staff and
related overhead, negotiation of extension of our existing credit facilities,
and the management of our liquidity through business
efficiencies.  However, there can be no assurance that economic
conditions will not deteriorate further, which could increase customer loan
delinquencies and defaults.  Increases in loan delinquencies and
defaults could impair our ability to pledge or sell such loans to lenders in
order to obtain sufficient cash advances to meet our obligations through 2010,
including payment of the aforementioned 8.0% senior subordinated
notes.


23
 Index


Although
we have no immediate growth plans, to finance our future operations,
development, and any potential expansion plans, we may at some time be required
to consider the issuance of other debt, equity, or collateralized
mortgage-backed securities.  Any debt we incur or issue may be secured
or unsecured, have fixed or variable rate interest, and may be subject to such
terms as we deem prudent.  In addition, certain existing debt
agreements include restrictions on our ability to pay dividends based on minimum
levels of net income and cash flow.  Our ability to pay dividends
might also be restricted by the Texas Business Corporation Act.





Our
senior credit facilities provide certain financial covenants that we must
satisfy.  Any failure to comply with the financial covenants in any
single loan agreement will result in a cross default under the various
facilities.  Such financial covenants include:





·
            a
      profitable operations covenant which requires our consolidated net income
      (i) for any fiscal year to not be less than $1.00, (ii) for any two
      consecutive fiscal quarters (reviewed on an individual rather than on an
      aggregate basis) to not be less than $1.00, and (iii) for any rolling
      12-month period to not be less than $1.00,
and





·
            a
      debt service covenant which requires our ratio of (i) earnings before
      interest, income taxes, depreciation, and amortization, less capital
      expenditures as determined in accordance with generally accepted
      accounting principles, to (ii) the interest expense minus all non-cash
      items constituting interest expense to not be less than 1.25 to 1 as of
      the last day of each fiscal quarter, for the latest rolling 12 months then
      ending, or for the average of the last four
  quarters.





Despite
the $18.5 million increase to the allowance for uncollectible notes during the
third quarter of 2009, discussed in Item 2 of this Form 10-Q, we remain in
compliance with these covenants as of September 30, 2009.  However,
there can be no assurance that we will continue to meet these or other financial
covenants contained in our debt agreements with our senior lenders.





Net Cash Used in
Operating Activities.We generate cash primarily from down payments
received from the sale of Vacation Intervals, the financing and collection of
customer notes receivable from Vacation Interval owners, the sale of notes
receivable to our special purpose entities, management fees, sampler sales,
marina income, golf course and pro shop income, water park income, and hotel
income.  We typically receive a 10% to 15% down payment on sales of
Vacation Intervals and finance the remainder with the issuance of a
seven-to-ten-year customer promissory note.  We generate cash from
customer notes receivable (i) by borrowing at an advance rate of 75% to 80% of
eligible customer notes receivable, (ii) by selling notes receivable, and (iii)
from the spread between interest received on customer notes receivable and
interest paid on related borrowings.  Because we use significant cash
in the development and marketing of Vacation Intervals but collect cash on
customer notes receivable over a seven-to-ten-year period, borrowing against
receivables has historically been a necessary part of normal
operations.





During
the nine months ended September 30, 2009, cash used in operating activities was
$20.8 million compared to $24.7 million during the same period of
2008.  This $3.9 million decrease in cash used in operating activities
during the first nine months of 2009 versus the comparable 2008 period primarily
resulted from the timing of payments on accounts payable, accrued expenses,
income taxes, and prepaid and other assets, partially offset by an increase in
the growth of our gross notes receivable in the first nine months of
2009.





Net Cash Used in
Investing Activities.During the first nine months of 2009, cash used in
investing activities, which represents purchases of equipment, leasehold
improvements, and other general capital expenditures, was $2.0 million compared
to $16.4 million during the first nine months of 2008.  The reduction
in capital expenditures is consistent with our business plan in effect for
2009.  The $16.4 million cash used for investing activities in the
first nine months of 2008 resulted primarily from the construction or expansion
of member services buildings at six of our existing resorts and completion of
construction on the water park at The Villages Resort which opened in January
2008.  The $2.0 million cash used for investing activities in the
first nine months of 2009 consisted primarily of additional expenditures to
complete construction or expansion of member services buildings at two of our
existing resorts.


24
 Index


Net Cash Provided
by Financing Activities.During the first nine months of 2009, financing
activities provided $24.5 million of net cash compared to $35.6 million in the
comparable 2008 period.  Net cash provided of $24.5 million in 2009
was primarily the result of $216.6 million of proceeds received from borrowings
against pledged notes receivable and inventory loans, offset by $190.5 million
of payments on borrowings against pledged notes receivable and inventory loans
and $1.7 million restricted cash reserved for payments of debt.  Net
cash provided of $35.6 million in 2008 was primarily the result of $284.8
million of proceeds received from borrowings against pledged notes receivable
and inventory loans, partially offset by $242.0 million of payments on
borrowings against pledged notes receivable and inventory loans and $7.2 million
restricted cash reserved for payments of debt.  The securitization
transaction we closed in June 2008 through our newly-formed, wholly-owned and
fully consolidated special purpose finance subsidiary, SF-VI, generated $107.4
million of the $284.9 million of proceeds received from borrowings and $93.8
million of the $242.0 million of payments on borrowings for the nine months
ended September 30, 2008.





Off-Balance-Sheet
Arrangements.  In 2005, we consummated a securitization
transaction with our wholly-owned off-balance-sheet qualified special purpose
finance subsidiary, SF-III, which was formed for the purpose of issuing $108.7
million of its Series 2005-A Notes in a private placement.  In
connection with this transaction, we sold SF-III $132.8 million in timeshare
receivables that were previously pledged as collateral under revolving credit
facilities with our senior lenders and SF-I, our former qualified SPE which was
dissolved in 2005.  The Series 2005-A Notes are secured by timeshare
receivables we sold to SF-III.  The timeshare receivables we sold to
SF-III are without recourse to us, except for breaches of certain
representations and warranties at the time of sale.  Pursuant to the
terms of an agreement, we continue servicing these timeshare receivables and
receive fees for our services equal to 1.75% of eligible timeshare receivables
held by the facility.  Such fees were $221,000 and $393,000 for the
nine months ended September 30, 2009 and 2008, respectively.





At
September 30, 2009, SF-III held notes receivable totaling $12.9 million with
related borrowings of $10.8 million.  Except for the repurchase of
notes that fail to meet initial eligibility requirements, we are not obligated
to repurchase defaulted or any other contracts sold to SF-III.  As the
servicer of notes receivable sold to SF-III, we are obligated to foreclose upon
Vacation Intervals securing defaulted note receivables.  Although we
are not obligated, we may purchase foreclosed Vacation Intervals for net fair
market value, which may not be less than fifteen percent of the original
acquisition price that the customer paid for the Vacation
Interval.  For the nine months ended September 30, 2009, we paid $1.1
million to repurchase Vacation Intervals securing defaulted notes receivable to
facilitate the re-marketing of those Vacation Intervals.  The carrying
value of our investment in SF-III was $5.6 million at September 30, 2009, which
represents our maximum exposure to loss regarding our investment in
SF-III.  See Note 10 regarding the dissolution of SF-III in October
2009.





In
accordance with FASB ASC “Transfers and Servicing,” our bases for classifying
SF-III as a qualified SPE are (i) SF-III is demonstrably distinct from the
transferor as dissolution of the SPE would require an affirmative vote of 100%
of the SPE’s Board of Directors, one of which is independent, (ii) prescribed
restrictions on permitted activities sufficiently limit the SPE’s authority, and
(iii) financial assets transferred to the SPE are passive in
nature.





Our
special purpose entities provide us with additional credit availability under
our facilities with our current senior lenders.  As we require credit
facilities to provide liquidity necessary to fund our costs and expenses, it is
vitally important to our liquidity plan to have financing available to us in
order to continue to finance the majority of our timeshare sales over seven to
ten years.





Income Taxes.  For
regular federal income tax purposes, we report substantially all of the Vacation
Interval sales we finance under the installment method.  Under this
method, income on sales of Vacation Intervals is not recognized until cash is
received, either in the form of a down payment or as installment payments on
customer notes receivable.  The deferral of income tax liability
conserves cash resources on a current basis.  Interest is imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the payment is
received.  If we are not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year.  The condensed consolidated financial statements do not
contain an accrual for any interest expense that would be paid on the deferred
taxes related to the installment method as the interest expense is not
reasonably estimable.  As we expect to realize our deferred tax assets
on a “more likely than not” basis, we do not currently have a valuation reserve
for deferred taxes.


25
 Index


In
addition, we are subject to current alternative minimum tax ("AMT") as a result
of the deferred income that results from the installment sales
treatment.  Payment of AMT creates a deferred tax asset in the form of
a minimum tax credit, which, unless otherwise limited, reduces the future
regular tax liability attributable to Vacation Interval sales.  This
deferred tax asset has an unlimited carryover period.  The AMT credit
can be utilized to the extent regular tax exceeds AMT tax liability for a given
year.  Due to AMT losses in certain years prior to 2003, which offset
all AMT income for years prior to 2003, no minimum tax credit exists for years
prior to 2003.  However, AMT has been paid in subsequent years and is
anticipated in future periods.





Federal
net operating losses (“NOLs”) of $143.3 million existing at December 31, 2008
expire between 2020 and 2021. Realization of the deferred tax assets arising
from NOLs is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards.





Due to a
2002 corporate restructuring, an ownership change within the meaning of Section
382(g) of the Internal Revenue Code (the “Code”) occurred.  As a
result, a portion of our NOL is subject to an annual limitation for the current
and future taxable years.  This annual limitation may be increased for
any recognized built-in gain to the extent allowed in Section 382(h) of the
Code.  The current annual limitation of $768,000 represents the value
of our stock immediately before the ownership change multiplied by the
applicable long-term tax-exempt rate.  We believe that $15.0 million
of our net operating loss carryforwards as of December 31, 2008 were subject to
the Section 382 limitations.





Item
3.  Quantitativeand Qualitative Disclosures About
Market Risk





General— Interest on our
notes receivable portfolio, senior subordinated debt, capital leases, and
miscellaneous notes is fixed, whereas interest on our primary loan agreements,
which had a total facility amount of $485.0 million at September 30, 2009, have
a fixed-to-floating debt ratio of 23% fixed to 77% floating.  However,
the majority of our floating-rate debt is subject to interest-rate floors
between 5.25% and 8.00%.  The impact of a one-point effective interest
rate change on the $304.0 million balance of variable-rate financial instruments
at September 30, 2009 would be approximately $662,000 on our results of
operations, after taxes, for the nine months ended September 30, 2009, or
approximately $0.02 per diluted share.





At
September 30, 2009, the carrying value of our notes receivable portfolio
approximates fair value because the weighted average interest rate on the
portfolio approximates current interest rates received on similar
notes.  Our fixed-rate notes receivable are subject to interest rate
risk and will decrease in fair value if market rates increase, which may
negatively impact our ability to sell our fixed-rate notes in the
marketplace.  A hypothetical one-point interest rate increase in the
marketplace at September 30, 2009 would result in a fair value decrease of
approximately $14.3 million on our notes receivable portfolio.





Credit Risk — We are exposed
to on-balance-sheet credit risk related to our notes receivable. We are exposed
to off-balance-sheet credit risk related to notes sold.





We offer
financing to the buyers of Vacation Intervals at our resorts.  These
buyers generally make a down payment of 10% to 15% of the purchase price and
deliver a promissory note to us for the balance.  The promissory notes
generally bear interest at a fixed rate, are payable over a seven to ten year
period, and are secured by a deed of trust on the Vacation
Interval.  We bear the risk of defaults on these promissory
notes.  Although we prescreen prospects via credit scoring techniques
in the early stages of the marketing and sales process, we generally do not
perform a detailed credit history review of our customers.  Due to the
state of the economy in general, and related deterioration of the residential
real estate market and sub-prime mortgage markets, the risk of Vacation Interval
defaults has heightened.  Because we use various mass-marketing
techniques, a certain percentage of our sales are generated from customers who
may be considered to have marginal credit quality.  In addition, we
have experienced an increase in defaults in our loan portfolio as compared to
historical rates.  Due to existing economic conditions, there can be
no assurance that defaults have stabilized or will not increase
further.  Customer default levels, other adverse changes in the credit
markets, and related uncertain economic conditions may eliminate or reduce the
availability or increase the cost of significant sources of funding for us in
the future.  We increased our estimated uncollectible revenue as a
percentage of Vacation Interval sales to 35.1% for the first nine months of 2009
from 23.6% for the comparable period of 2008.  However, if default
rates for our borrowers were to continue to rise, it may require an additional
increase in our estimated uncollectible revenue.  We will continue to
evaluate our collections process and marketing programs with a view toward
establishing procedures aimed at reducing note defaults and improving the credit
quality of our customers.  However, there can be no assurance that
these efforts will be successful.


26
 Index


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 such
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 note balance, certain states have laws
that limit our ability to recover personal judgments against customers who have
defaulted on their loans.  Accordingly, we have generally not pursued
this remedy.





Interest Rate Risk —We have
historically derived net interest income from our financing activities because
the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceed the interest rates we pay to our senior
lenders.  As 77% of our senior indebtedness bears interest at variable
rates and our customer notes receivable bear interest at fixed rates, increases
in interest rates will 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.  Although interest rates declined throughout 2008 and remained
fairly constant through the first nine months of 2009, any increase in interest
rates above applicable floor rates, particularly if sustained, could have a
material adverse effect on our results of operations, cash flows, and financial
position.





To
partially offset potential increases in interest rates, we have executed two
interest rate swaps related to our conduit loan with SF-II, with fixed rates of
7.04% and 7.90%, for a total notional amount of $3.7 million at September 30,
2009.  Such interest rate swaps relate to agreements that expire
between September 2011 and March 2014.  Our variable funding note with
SF-IV also acts as an interest rate hedge since it contains a provision for an
interest rate cap.  The balance outstanding under this line of credit
at September 30, 2009 was $143.4 million.  Such variable funding note
will mature in September 2011.





In
addition, the Series 2005-A Notes related to our off-balance-sheet special
purpose finance subsidiary, SF-III, with a balance of $10.8 million at September
30, 2009, bear interest at a blended fixed rate of 5.4%.





Availability of Funding Sources —We fund substantially all of our notes receivable, timeshare inventories,
and land inventories which we originate or purchase with borrowings through our
financing facilities, sales of notes receivable, internally generated funds, and
proceeds from public debt and equity offerings.  Borrowings are in
turn repaid with the proceeds we receive from collections on such notes
receivable.  To the extent that we are not successful in maintaining
or replacing existing financings, we would have to curtail our operations or
sell assets, which would have a material adverse effect on our results of
operations, cash flows, and financial position.





Geographic Concentration —Our notes receivable and Vacation Interval inventories are primarily
originated in Texas, Missouri, Illinois, Massachusetts, Georgia, and
Florida.  Risks inherent in such concentrations are:





·
            regional
      and general economic stability, which affects property values and the
      financial stability of the borrowers,
and


·
            the
      continued popularity of our resort destinations, which affects the
      marketability of our products and the collection of notes
      receivable.





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this quarterly report on Form 10-Q, as required by
Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”),
we have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act).  Management necessarily applied
its judgment in assessing the cost-benefit relationship of such controls and
procedures, which, by their nature, can provide only reasonable assurance
regarding management’s control objectives.  We believe that a controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.  Based upon the
foregoing evaluation as of September 30, 2009, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective and operating as of September 30, 2009, to provide reasonable
assurance that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the SEC,
and to provide reasonable assurance that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.


27
 Index


Changes
in Internal Control over Financial Reporting





During
our most recent fiscal quarter, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





PART
II: OTHER INFORMATION





Item1.Legal Proceedings





We are
currently subject to litigation arising in the normal course of our business.
From time to time, such litigation includes claims regarding employment, tort,
contract, truth-in-lending, the marketing and sale of Vacation Intervals, and
other consumer protection matters.  Litigation has been initiated from
time to time by persons seeking individual recoveries for themselves, as well
as, in some instances, persons seeking recoveries on behalf of an alleged
class.  In our judgment, none of the lawsuits currently pending
against us, either individually or in the aggregate, is expected to have a
material adverse effect on our business, results of operations, liquidity, or
financial position.





Various
legal actions and claims may be instituted or asserted in the future against us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements.  Some of the matters may
involve claims, which, if granted, could be materially adverse to our financial
position.





As
litigation is subject to many uncertainties, the outcome of individual litigated
matters is not predictable with assurance.  We will establish reserves
from time to time when deemed appropriate under generally accepted accounting
principles.  However, the outcome of a claim for which we have not
deemed a reserve to be necessary may be decided unfavorably against us and could
require us to pay damages or incur other expenditures that could be materially
adverse to our business, results of operations, or financial
position.





We are a
co-plaintiff with one other party in two related matters brought in the Land
Court Department of the Trial Court of the Commonwealth of Massachusetts, each
styled as Silverleaf Resorts,
Inc., et al. v. Zoning Board of Appeals of the Town of Lanesborough, et al.,Civil Action No. 07 MISC 351155 and Civil Action No. 09 MISC
393464.  In these actions, we and the co-plaintiff challenged the
validity of a special permit issued in June 2004 by the Lanesborough Zoning
Board of Appeals to Berkshire Wind Power Cooperative Corporation’s (the “Wind
Cooperative”) predecessor-in-interest for construction and use of a private
access road that runs from Brodie Mountain Road in Lanesborough to Sheep’s
Heaven Mountain that the Wind Cooperative needs to access the property on the
ridge line of Brodie Mountain in Hancock, Massachusetts, where it is
constructing a wind farm.  We initiated these lawsuits in 2007 because
the Wind Cooperative’s predecessor-in-interest had plans to construct a
multi-turbine wind farm directly adjacent (in part) to the property line of a
500-acre tract of land we own in Berkshire County, Massachusetts.  Our
concern was that if the Wind Cooperative were ultimately successful in
developing this neighboring site in accordance with its plans, the proximity of
such a wind farm facility to our property line could adversely affect our
property’s development.  Our suit sought a court decree that the
special permit had expired from non-use and is therefore no longer valid, and
also, that the road was not built as permitted.  The cases were tried in
August 2009, and we are awaiting the final decision of the Land
Court.  In the interim, the Land Court granted our motion for a
preliminary injunction, finding that we are likely to prevail on the merits of
the suit and that we would suffer irreparable injury if the Wind Cooperative
uses the access road to continue construction of the wind farm while we are
awaiting a final judgment from the Land Court.  The Wind Cooperative
filed an interlocutory appeal of the preliminary injunction to the Massachusetts
Appeals Court, but no action has been taken on that appeal.  We cannot
predict when the Land Court will issue a final decision resolving the merits of
the suits or when or if the Massachusetts Appeals Court will rule on the Wind
Cooperative’s appeal of the outstanding preliminary
injunction.





In a
related matter, in September 2009, we filed an action against the Massachusetts
Municipal Wholesale Electric Cooperative (the “Electric Cooperative”) in the
Berkshire Superior Court, styled Silverleaf Resorts, Inc. et al v.
Massachusetts Municipal Wholesale Electric Cooperative,Cause No.
09-267.  The action was brought on our behalf and on behalf of the
former owners.  We allege that the Electric Cooperative, an affiliate
of the Wind Cooperative, acted in an ultra vires manner when it
condemned approximately fifty acres that we now own at the top of Brodie
Mountain for use by the Wind Cooperative in building and operating its wind
farm.  The Electric Cooperative filed a counterclaim alleging abuse of
process as a result of our filing this suit.  The Electric Cooperative
seeks unspecified damages.  We have filed a special motion with the
court to dismiss the counterclaim filed by the Electric Cooperative as we
believe that we are protected under Massachusetts law from counterclaims filed
by entities such as the Electric Cooperative as a result of our challenging the
taking of the property by the Electric Cooperative.  No date has been
set by the court to hear our motion.  We cannot predict the final
outcome of our original claim against the Electric Cooperative or of its
counterclaim against us.


28
 Index


Item
1A.Risk Factors





No
changes.





Item
6.Exhibits





(a)
            Exhibits
      filed herewith:





31.1
            Certification
      of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002





31.2
            Certification
      of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002





32.1
            Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002





32.2
            Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002


29
 Index


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





Dated:  November
      12, 2009
            By:
            /s/  ROBERT E.
    MEADRobert
      E. MeadChairman
      of the Board andChief
      Executive OfficerDated:  November
      12, 2009
            By:
            /s/  ROBERT M.
      SINNOTTRobert
      M. SinnottChief
      Financial Officer


30
 Index


INDEX
TO EXHIBITS





Exhibit No.
            
            Description31.1
            
            Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            
            Certification
      of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            
            Certification
      of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002






31