UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934





For the quarterly period ended September 30, 2010





OR


oTRANSITION 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)





TEXAS75-2259890(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 x No o





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 o No o





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 fileroAccelerated fileroNon-accelerated filerxSmaller reporting companyo





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


Yes o No x





As of November 10, 2010 , 37,768,652 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, 2010 and 20092Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 20093Condensed Consolidated Statement of Shareholders' Equity for the nine months ended September 30, 20104Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 20095Notes to Condensed Consolidated Financial Statements6Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations18Item 3.Quantitative and Qualitative Disclosures about Market Risk27Item 4T.Controls and Procedures28PART II. OTHER INFORMATIONItem 1.Legal Proceedings28Item 1A.Risk Factors30Item 2.Unregistered Sales of Equity Securities and Use of Proceeds30Item 5.Exhibits31Signatures32








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 EndedSeptember 30,Nine Months EndedSeptember 30,2010200920102009Revenues:Vacation Interval sales$53,162$70,427$157,557$194,217Estimated uncollectible revenue(15,072)(36,741)(44,668)(68,216)Net sales38,09033,686112,889126,001Interest income17,26716,59151,63948,148Management fee income6309301,8912,791Other income2,4891,5785,3376,777Total revenues58,47652,785171,756183,717Costs and Operating Expenses:Cost of Vacation Interval sales5,7195,12513,77718,882Sales and marketing28,16133,29385,28397,024Operating, general and administrative10,88211,79730,96735,673Depreciation1,6291,6414,8754,594Interest expense and lender fees:Related to receivables-based credit facilities7,8355,36220,81616,604Related to other indebtedness1,6502,0265,3075,242Total costs and operating expenses55,87659,244161,025178,019Income (loss) before benefit (provision) for income taxes2,600(6,459)10,7315,698Benefit (provision) for income taxes(975)2,584(4,099)(2,258)Net income (loss)$1,625$(3,875)$6,632$3,440Basic net income (loss) per share$0.04$(0.10)$0.17$0.09Diluted net income (loss) per share$0.04$(0.10)$0.17$0.09Weighted average basic common shares outstanding37,864,79238,146,94337,973,61938,146,943Weighted average diluted common shares outstanding38,718,29138,146,94338,853,86539,027,021





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)





ASSETSSeptember 30, 2010December 31, 2009(Unaudited)Cash and cash equivalents (including from VIEs of $10 and $11, respectively)$8,414$13,905Restricted cash (including from VIEs of $24,608 and $18,903, respectively)26,35720,668Notes receivable, net of allowance for uncollectible notes of $95,826 and $94,585, respectively (including from VIEs of $209,617 and $204,813, respectively)362,222354,659Accrued interest receivable (including from VIEs of $2,483 and $2,427, respectively)4,5114,686Amounts due from affiliates (including from VIEs of ($183) and ($192), respectively)14,1651,587Inventories183,208196,010Land, equipment, buildings, and leasehold improvements, net47,87151,117Prepaid and other assets (including from VIEs of $10,115 and $9,420, respectively)28,14923,856TOTAL ASSETS$674,897$666,488LIABILITIES AND SHAREHOLDERS' EQUITYLIABILITIESAccounts payable and accrued expenses (including from VIEs of $20 and $22, respectively)$9,732$8,527Accrued interest payable (including from VIEs of $1,369 and $813, respectively)2,5572,264Unearned samplers7,3046,501Income taxes payable712706Deferred income taxes37,53935,342Notes payable and capital lease obligations (including from VIEs of $212,412 and $191,395, respectively)401,496395,017Senior subordinated notes8,85517,956Total Liabilities468,195466,313COMMITMENTS 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 37,768,652 shares outstanding at September 30, 2010 and 38,146,943 shares issued and outstanding at December 31, 2009381381Additional paid-in capital113,769113,447Retained earnings92,97986,347Treasury stock, at cost, 378,291 shares at September 30, 2010 and none at December 31, 2009(427)—Total Shareholders' Equity206,702200,175TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$674,897$666,488





The abbreviation "VIEs" above represents Variable Interest Entities.





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$0.01 ParAdditional Paid-inRetainedTreasury StockIssuedValueCapitalEarningsSharesCostTotalJanuary 1, 201038,146,943$381$113,447$86,347—$—$200,175Stock-based compensation——322———322Treasury stock purchases————378,291(427)(427)Net income———6,632——6,632September 30, 201038,146,943$381$113,769$92,979378,291$(427)$206,702





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 30,20102009OPERATING ACTIVITIES:Net income$6,632$3,440Adjustments to reconcile net income to net cash provided by (used in) operating activities:Estimated uncollectible revenue44,66868,216Deferred income taxes2,197(1,299)Depreciation4,8754,594Debt discount amortization2,2152,116Gain on early extinguishment of debt—(316)Loss on disposal of property and equipment, net—183Gain on sale of water utility assets(77)—Stock-based compensation322348Cash effect from changes in operating assets and liabilities:Restricted cash161,625Notes receivable(52,231)(91,833)Accrued interest receivable175(593)Investment in special purpose entity—(655)Amounts due from affiliates(12,578)(3,128)Inventories10,889(6,238)Prepaid and other assets(4,293)5,049Accounts payable and accrued expenses1,205(1,841)Accrued interest payable293(223)Unearned samplers803803Income taxes payable6(1,051)Net cash provided by (used in) operating activities5,117(20,803)INVESTING ACTIVITIES:Purchases of land, equipment, buildings, and leasehold improvements(1,629)(2,007)Proceeds from sale of water utility assets1,990—Net cash provided by (used in) investing activities361(2,007)FINANCING ACTIVITIES:Proceeds from borrowings of debt305,831216,631Payments of debt and capital leases(310,668)(190,460)Restricted cash reserved for payments of debt(5,705)(1,696)Purchases of treasury shares(427)—Net cash (used in) provided by financing activities(10,969)24,475Net change in cash and cash equivalents(5,491)1,665CASH AND CASH EQUIVALENTS:Beginning of period13,90511,431End of period$8,414$13,096SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid, net of amounts capitalized$19,518$15,825Income taxes paid$1,914$4,880Income tax refund$17$—SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Inventories acquired through financing$—$1,852





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, 2009 , 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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.





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 condensed consolidated 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.





Adoption of ASC “Consolidation of Variable Interest Entities” — Effective January 1, 2010, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) “Consolidation of Variable Interest Entities,” which resulted in enhanced disclosures regarding our variable interest entities (“VIEs”). See parenthetical disclosures on our Condensed Consolidated Balance Sheets that show the amounts of consolidated assets and liabilities associated with our VIEs and Note 10.





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, 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 Silverleaf Finance III, LLC (“SF-III”), our former wholly-owned off-balance-sheet qualified special purpose finance subsidiary, which we dissolved in the fourth quarter of 2009 . 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 FASB 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, 2010 , 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 canceled without a refund, deposits forfeited are recognized as other income and the interest portion is recognized as interest income.





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





The allowance for uncollectible notes is reduced by actual credit losses experienced. The three types of credit losses are 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 portion of a customer’s note obligation is relieved.




Investment in Special Purpose Entity — In 2005, we consummated a securitization transaction with SF-III, which was a qualified special purpose entity (“QSPE”) 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 QSPE which was dissolved in 2005. This transaction qualified as a sale for accounting purposes. In October 2009, we exercised a cleanup call on the balance of the Series 2005-A Notes 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 the cleanup call. We did not record a gain or loss as a result of the dissolution as our investment in SF-III was carried on our books at fair value. The Series 2005-A Notes were secured by timeshare receivables we sold to SF-III, without recourse, except for breaches of certain representations and warranties at the time of sale. Pursuant to the terms of an agreement, we continued to service these timeshare receivables and received fees for our services. As such fees approximated 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 accounted for and evaluated the investment in our QSPE 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 QSPE and the activity in the investment in our QSPE during 2009 .





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, 2010 , the estimated costs not yet incurred but expected to complete promised amenities was $685,000. 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.





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 2010 and 2009 .





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.


8


---

Index





Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to temporary differences between the basis of assets and liabilities as recognized by tax laws and their carrying value as reported in the condensed consolidated financial statements. A provision or benefit is recognized for deferred income taxes relating to such temporary differences, and is measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be settled or recovered. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The effect of income tax positions are recorded only if those positions are “more likely than not” of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although we do not currently have any material charges related to interest and penalties, such costs, if incurred, are reported within the provision for income taxes. Our federal tax return includes all items of income, gain, loss, expense, and credit of SF-III, which was a non-consolidated subsidiary for reporting purposes and a disregarded entity for federal income tax purposes. We had 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 2005, although carryforward attributes that were generated prior to 2005 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 2005. In the state of Texas, we are no longer subject to franchise tax examinations for years prior to 2004.





As of September 30, 2010 , 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, 2010 , 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. 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 based on accounting guidance for these instruments. The amounts recognized for such derivatives for the nine months ended September 30, 2010 and 2009 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 due to the loss for the quarter.





Stock-Based Compensation — We account for stock-based compensation expense in accordance with FASB ASC “Compensation – Stock.” We recognize stock-based compensation expense for all stock options granted 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.





For the nine months ended September 30, 2010 and 2009 , we recognized stock-based compensation expense of $322,000 and $348,000, respectively. As of September 30, 2010 , unamortized stock-based compensation expense was $1.2 million, which will be fully recognized by the third quarter of 2013.





9


---

Index


The following table summarizes our outstanding stock options for the nine months ended September 30, 2010 and 2009 :





20102009Options outstanding, January 13,638,8073,790,307Granted—75,000Exercised——Expired(77,000)(5,000)Forfeited(175,000)(80,000)Options outstanding, September 303,386,8073,780,307Options exercisable, September 302,303,0572,176,557





Stock Repurchase Program — During the first quarter of 2010 , our Board of Directors approved the extension of our stock repurchase program which authorized the repurchase of up to two million shares of our common stock. This stock repurchase program, which was originally scheduled to expire in July 2010, will now expire in July 2011. We repurchased 157,767 treasury shares during the third quarter of 2010 and 378,291 treasury shares during the nine months ended September 30, 2010.  As of September 30, 2010 , over 1.5 million shares remain available for repurchase under this program.





Recent Accounting Pronouncements —





Accounting for Transfers of Financial Assets – We adopted FASB ASC “Accounting for Transfers of Financial Assets” on January 1, 2010. This accounting standard (i) eliminated the concept of a qualified special purpose entity, (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 QSPEs (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. The adoption of this accounting standard on January 1, 2010 did 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.





Consolidation of Variable Interest Entities – We adopted FASB ASC “Amendments to FASB ASC - Consolidation of Variable Interest Entities” on January 1, 2010. This amendment changes the consolidation guidance applicable to variable interest entities. It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE and therefore required to consolidate the VIE 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, who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE, and whether a variable interest in a VIE exists. This accounting standard further requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE, whereas such reassessments were previously required only when specific events had occurred. In addition, QSPEs, which were previously exempt from the application of FASB ASC “Consolidation of Variable Interest Entities,” are subject to the provisions of this amendment. The amendment also requires enhanced disclosures about an enterprise’s involvement with a VIE. The adoption of this accounting standard on January 1, 2010 did not impact our consolidated financial position, results of operations, and cash flows as we have 100% ownership in our fully-consolidated VIEs (Silverleaf Finance II, Inc. (“SF-II”), Silverleaf Finance IV, LLC (“SF-IV”), Silverleaf Finance V,  L.P. (“SF-V”), Silverleaf Finance VI, LLC (“SF-VI”), and Silverleaf Finance VII, LLC (“SF-VII”). In addition, as noted above, we exercised a cleanup call on the balance of the Series 2005-A Notes previously sold to SF-III, our QSPE, effective October 30, 2009, which resulted in the dissolution of SF-III.  Lastly, we determined our management fee is not a variable financial interest and we hold no other financial interests in Silverleaf Club and Orlando Breeze Resort Club; therefore consolidation of these entities is not required. See the parenthetical disclosures on our condensed consolidated balance sheets regarding the assets and liabilities of our VIEs that are consolidated therein and Note 10 for additional disclosures regarding our VIEs.





Fair Value Measurements and Disclosures – In January 2010, the FASB issued amended guidance to FASB ASC “Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements.” The amendment requires an entity to


10


---

Index


disclose separately the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, and the reasons for the transfers. In addition, companies will be required to disclose quantitative information about the inputs used in determining fair values for Level 2 and Level 3 inputs. The updated standard will also require additional disclosure regarding purchases, sales, issuances and settlements of Level 3 measurements. This accounting standard update is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of the amended requirements for Level 1 and Level 2 fair value measurements, in the first quarter of 2010 , did not impact our consolidated financial position, results of operations, or cash flows as it only amends required disclosures.  See additional disclosure regarding the inputs used to determine the fair value of our interest rate cap derivative in Note 7 . The adoption of the additional disclosure requirements for Level 3 fair value measurements, effective January 1, 2011, is not expected to impact our consolidated financial position, results of operations, or cash flows, nor will it require additional disclosures, as we no longer have assets or liabilities that fall into the Level 3 fair value hierarchy.





Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses – In July 2010, the FASB issued FASB ASC "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses."  This standard  amends existing guidance by requiring more robust and disaggregated disclosures by an entity about the credit quality of its financing receivables and its allowance for credit losses. These disclosures will provide financial statement users with additional information about the nature of credit risks inherent in our financing receivables, how we analyze and assess credit risk in determining our allowance for credit losses, and the reasons for any changes we may make in our allowance for credit losses. This update is generally effective for interim and annual reporting periods ending on or after December 15, 2010, which for us is the 2010 fourth quarter; however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010, which for us is the 2011 first quarter. We believe the adoption of this update will primarily result in increased notes receivable disclosures, but will not have any other impact on our financial statements.





Note 3 – Earnings 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, 2010 and 2009 :





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2010200920102009Weighted average shares outstanding - basic37,864,79238,146,94337,973,61938,146,943Issuance of shares from stock options exercisable1,294,807—1,294,8071,294,807Repurchase of shares from stock options proceeds(441,308)—(414,561)(414,729)Weighted average shares outstanding - diluted38,718,29138,146,94338,853,86539,027,021





Outstanding stock options totaling 1.3 million were dilutive securities that were included in the computation of diluted earnings per share for the three months ended September 30, 2010 .  For the three months ended September 30, 2009 , the weighted average shares outstanding assuming dilution was anti-dilutive due to the quarterly loss. 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 2.1 million and 2.5 million were not dilutive at September 30, 2010 and 2009 , 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, 2010 and 2009 , respectively.





Outstanding stock options totaling 1.3 million were dilutive securities that were included in the computation of diluted earnings per share for each of the nine -month-periods ended September 30, 2010 and 2009 , respectively. Outstanding stock options totaling 2.1 million and 2.5 million were not dilutive at September 30, 2010 and 2009 , 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, 2010 and 2009 , respectively.


11


---

Index





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 was 16.7% and 16.8% at September 30, 2010 and 2009 , respectively, with individual rates ranging from 0% to 17.5%. As of September 30, 2010 , $4.9 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 at both September 30, 2010 and 2009 , and are non-interest bearing.





We consider accounts over 60 days past due to be delinquent. As of September 30, 2010 , $6.4 million of notes receivable, net of accounts charged off, were considered delinquent. An additional $54.8 million of notes receivable, of which $42.9 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, 2010 (in thousands):





For the 12-Month Period Ending September 30,2011$57,381201254,532201360,168201463,552201566,054Thereafter156,506Notes receivable, gross458,193Less allowance for uncollectible notes(95,826)Less discount on notes receivable(145)Notes receivable, net$362,222





The activity in gross notes receivable is as follows for the three and nine -month periods ended September 30, 2010 and September 30, 2009 (in thousands):





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2010200920102009Balance, beginning of period$454,133$423,571$449,407$397,002Sales40,76356,616121,635154,537Collections(24,412)(20,939)(69,422)(62,633)Receivables charged off(12,291)(16,122)(43,427)(45,780)Balance, end of period$458,193$443,126$458,193$443,126





12


---

Index


The activity in the allowance for uncollectible notes is as follows for the three and nine -month periods ended September 30, 2010 and 2009 (in thousands):





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2010200920102009Balance, beginning of period$93,045$78,513$94,585$76,696Estimated uncollectible revenue15,07236,74144,66868,216Receivables charged off(12,291)(16,122)(43,427)(45,780)Balance, end of period$95,826$99,132$95,826$99,132





The provision for estimated uncollectible revenue as a percentage of Vacation Interval sales was 28.3% for the third quarter of 2010 and 52.2% for the third quarter of 2009. The ratio was substantially higher in the third quarter of 2009 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. Considering an increase in future cancels beyond that previously estimated, we increased our allowance for uncollectible notes by $18.5 million in the third quarter of 2009 above the 25.9% provision rate we had estimated in the second quarter of 2009. The allowance for uncollectible notes was 20.9% of our gross notes receivable portfolio as of September 30, 2010 compared to 21.0% as of December 31, 2009 .


13


---

Index





Note 5 – Debt





The following table summarizes our notes payable, capital lease obligations, and senior subordinated notes at September 30, 2010 and December 31, 2009 (in thousands):





September 30, 2010December 31, 2009RevolvingTermMaturity$75 million receivables-based revolver ($75 million maximum combined receivable, inventory, and acquisition commitments, see inventory/acquisition component below)$30,118$29,0351/31/11 (a)1/31/13$20 million receivables-based revolver16,43916,8866/30/116/30/11$50 million receivables-based revolver35,76628,4398/31/118/31/14$75 million receivables-based revolver (limited in funded amounts to $40 million, pending a new participating lender)35,21152,6966/09/126/09/15$100 million receivables-based revolver32,259111,8242/12/112/12/13$66.4 million receivables-based non-revolving conduit loan—2,021—3/22/14$26.3 million receivables-based non-revolving conduit loan—1,621—9/22/11$128.1 million receivables-based non-revolver16,22624,163—7/16/18$115.4 million receivables-based non-revolver, including a total remaining discount of approximately $1.9 million37,10851,767—3/16/20$151.5 million receivables-based non-revolver, including a total remaining discount of approximately $5.0 million126,818——7/15/22Inventory / acquisition loan agreement (see $75 million receivables-based revolver above)14,51824,674— (a)1/31/12$50 million inventory loan agreement49,22845,1984/30/114/30/13Various notes, due from September 2011 through August 2016, collateralized by various assets7,2415,700—variousTotal notes payable400,932394,024Capital lease obligations564993—variousTotal notes payable and capital lease obligations401,496395,0178.0% senior subordinated notes—7,956—4/01/1010.0% senior subordinated notes8,85510,000—4/01/12Total senior subordinated notes8,85517,956Total$410,351$412,973





|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The revolving period of the inventory / acquisition component of our $75.0 million consolidated receivables, inventory, and acquisition commitment expired on January 31, 2010. The revolving period for the receivables component of such credit facility will expire on January 31, 2011.




At September 30, 2010 , our senior credit facilities provided for loans of up to $501.6 million, of which $107.9 million was available for future advances. Our weighted average cost of borrowings for the nine months ended September 30, 2010 was 7.0% compared to 6.0% for the nine months ended September 30, 2009 .





Our fixed-to-floating debt ratio at September 30, 2010 was 46% fixed to 54% floating. However, the majority of our floating-rate debt is subject to interest-rate floors between 6.00% and 8.00%. The credit facilities that bear interest at variable rates are tied to the Prime rate or LIBOR. At September 30, 2010 , the annual Prime rate on our senior credit facilities was 3.25% and the one-month LIBOR rate on these facilities was 0.26%.





In February 2010, we extended our receivables-based revolving credit facility through SF-IV, our wholly-owned and fully consolidated VIE. The initial maximum commitment amount of the variable funding note (“VFN”) was decreased to $106 million, which commitment amount was further decreased to $100 million on September 30, 2010 . The scheduled funding period under


14


---

Index


the VFN initially ended in September 2009, but was reinstated and extended to February 2011. The scheduled maturity date was extended from September 2011 to February 2013. The interest rate was increased from Prime to LIBOR plus 5.00% with a floor of 6.00%.





In February 2010, in accordance with the terms of the first amendment to the inventory facility dated June 2008, we extended our $50 million inventory line of credit with one of our senior lenders. Both the revolving period and the maturity date of the facility were extended one year to April 2011 and April 2013, respectively. The commitment on the line remained the same at $50 million.





In April 2010, in accordance with the terms of the fourth amendment to the receivables-based revolving credit facility dated June 2008, we extended our $20 million receivables-based line of credit with one of our senior lenders. The revolving term and maturity date of the facility were extended one year to June 2011. The commitment on the line will remain the same at $20 million.





In April 2010, we paid off the two conduit loans with SF-II. The total payment of $1.7 million consisted of the principal balance of the conduit loans, plus accrued and unpaid interest and other fees through April 27, 2010. We dissolved SF-II simultaneously with the execution of the loan payout. We did not record a gain or loss as a result of the dissolution.





Effective June 8, 2010, we executed a term securitization transaction through a newly-formed, wholly-owned and fully consolidated VIE, Silverleaf Finance VII, LLC. SF-VII was formed for the purpose of issuing approximately $151.5 million of its Timeshare Loan-Backed Notes Series 2010-A (“Series 2010-A Notes”) in a private offering and sale through certain financial institutions. The Series 2010-A Notes were issued in three classes with a blended coupon rate of 7.366% and at discounts totaling approximately $6.0 million. These discounts are amortized as an adjustment to interest expense over the terms of the related loans using the effective interest method, which generates a blended effective interest rate on these notes of approximately 9.5% as of September 30, 2010 . The Series 2010-A Notes have a final maturity date of July 2022.





The Series 2010-A Notes are secured by customer notes receivable sold to SF-VII by SF-IV and Silverleaf. The customer notes receivable sold to SF-VII were previously sold to SF-IV or pledged as collateral by Silverleaf under revolving credit facilities with senior lenders. The cash proceeds from the sale of the customer notes receivable to SF-VII were primarily used to repay approximately $142.1 million in consolidated indebtedness to senior lenders. All customer notes receivable purchased by SF-VII were acquired without recourse, except in the case of breaches of customary representations and warranties made in connection with the sale of the notes. Pursuant to the terms of an agreement, we continue to service these customer notes receivable and receive fees for our services. These servicing fees are eliminated in consolidation and are therefore not reflected in our condensed consolidated financial statements.





In June 2010, we amended our $72.5 million receivables-based revolver to increase availability to $75.0 million, limited in funded amounts to $40.0 million until a new participating lender joins the credit agreement. Upon execution of the amendment, we prepaid in full the balances owed to two lenders who were participants in $32.5 million of the aggregate maximum amount. The revolving period was extended from July 2010 to June 2012 and the maturity date was extended from July 2013 to June 2015. The interest rate was increased from LIBOR plus 2.40% with a floor of 5.25% to LIBOR plus 5.00% with a floor of 6.25%. In addition, we established a depository account with the senior lender for an initial amount of $250,000 with increases to $500,000 and $750,000 on July 1, 2011 and December 1, 2011, respectively.





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 approximates fair value because the interest rates on these instruments are adjustable or approximate current interest rates charged on similar current borrowings.





The fair value of our 10.0% senior subordinated notes approximates its carrying value of $8.9 million at September 30, 2010 as these notes were issued in a private transaction in June 2009 in a one-for-one exchange for our 8.0% senior subordinated notes.





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.


15


---

Index





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. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy is based on inputs to valuation techniques 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.





The following table represents our assets measured at fair value on a recurring basis as of September 30, 2010 and the basis for that measurement (in thousands):





Level 1Level 2Level 3Interest rate cap derivative$—$57$—Total$—$57$—





We estimate the fair value of our interest rate cap derivative using quoted market prices for similar assets in an active market.





Prior to the dissolution of SF-III in the fourth quarter of 2009 , the investment in our QSPE was measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The activity in the investment in our QSPE is as follows for the three and nine -month periods ended September 30, 2009 (in thousands):





ThreeMonthsEndedSeptember 30,2009NineMonthsEndedSeptember 30,2009Balance, beginning of period$4,988$4,908Net investment appreciation575655Balance, end of period$5,563$5,563





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, 2010 and 2009 , 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-IV, SF-V, SF-VI, and SF-VII, have guaranteed our 10.0% senior subordinated notes with a balance of $8.9 million at September 30, 2010 . 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, 2010 and December 31, 2009 , and no operations for the nine months ended September 30, 2010 and 2009 .


16


---

Index





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, 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 these matters may involve claims, which, if granted, could be materially adverse to our financial position.





Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. We will establish reserves from time to time when deemed appropriate under generally 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.





Note 10 – Consolidation of Variable Interest Entities





We sell customer notes receivable originated in connection with the sale of Vacation Intervals to our variable interest entities (SF-IV, SF-V, SF-VI, and SF-VII). The primary purpose for which these entities were created was to provide Silverleaf with access to liquidity for the origination of notes receivable in the sale of its timeshare intervals. These entities have no equity investment at risk, making them variable interest entities. The debt securities that our four VIEs issue are collateralized by the customer notes receivable sold and transferred to these entities. We continue to service the notes receivable and transfer all proceeds collected to these VIEs. These servicing fees are eliminated in consolidation and are therefore not reflected in our consolidated financial statements. As the servicer, we manage the delinquent loans and determine which loss mitigation strategy will maximize recoveries on a particular loan. We have consolidated these VIEs in our condensed consolidated financial statements since their inception as we have 100% ownership in them and are the primary beneficiary.





At September 30, 2010 , the carrying amount of the consolidated assets included within our condensed consolidated balance sheet for these variable interest entities totaled $246.6 million, comprised of $209.6 million of notes receivable, net of allowance for uncollectible notes, $24.6 million of restricted cash for payments of debt, $10.1 million of prepaid and other assets, $2.5 million of accrued interest receivable, $10,000 of cash and cash equivalents, and $183,000 of amounts due to affiliates. At September 30, 2010 , the carrying amount of the consolidated liabilities included within our condensed consolidated balance sheet for these variable interest entities totaled $213.8 million, comprised of $212.4 million of notes payable, $1.4 million of accrued interest payable, and $20,000 of other accounts payable and accrued expenses.





Note 11 – Subsequent Events





In October 2010, we amended our $75 million consolidated receivables, inventory and acquisition revolving line of credit.  The  maximum aggregate commitment under the facility, which was $75 million at September 30, 2010, will be $60 million effective January 31, 2011, $50 million effective July 31, 2011, and $40 million effective January 31, 2012. The revolving period of the receivables component was extended one year from January 31, 2011 to January 31, 2012, provided that if the maximum amount outstanding exceeds the maximum aggregate commitment on any of the respective dates on which the maximum aggregate commitment is reduced, the revolving term shall end on that date. The maturity date will remain at January 31, 2013. The interest rate for the receivables component will remain at the prime rate with an increase in the floor interest rate from 6.00% to 6.25%. The terms of the inventory and acquisition components remained the same.





In November 2010, we entered into a note modification agreement to amend our 10% senior subordinated notes ("Notes") issued in June 2009 with an original principal balance of $10.0 million.  Under the terms of the note modification agreement, the interest rate on the Notes will be increased to 12% effective October 1, 2010, and quarterly principal payments will be eliminated.  Quarterly interest payments will continue through maturity with the next such interest payment due on January 1, 2011.  The remaining $7.7 million in outstanding principal balance will be due at maturity on April 1, 2012.  The note modification agreement is subject to customary closing conditions.


17


---

Index





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





Forward-Looking Statements





Throughout this report and any documents incorporated herein by reference, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including in particular, statements about our plans, objectives, expectations, and prospects. You can identify these statements by forward-looking words such as “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seeks,” and similar expressions. Although we believe that the plans, objectives, expectations, and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations, and prospects will be achieved. You should understand that the following important factors could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:





|  |                                                                  
|- | -----------------------------------------------------------------
|• | adverse developments in general business and economic conditions;




|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
|• | our inability to access the capital markets and/or the asset-backed securitization markets on a favorable basis;




|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|• | our substantial amount of outstanding indebtedness which requires us to operate as a highly-leveraged company;




|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|• | our future operating results could impact our ability to service our debt and meet our debt obligations as they come due;




|  |                                                                       
|- | ----------------------------------------------------------------------
|• | our ability to comply with the covenants relating to our indebtedness;




|  |                                                                 
|- | ----------------------------------------------------------------
|• | an increase in interest rates on our variable rate indebtedness;




|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
|• | the global credit market crisis and economic weakness that may adversely affect our customers and suppliers;




|  |                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our failure to comply with laws and regulations and any changes in laws and regulations, including timeshare-related regulations, consumer protection laws, employment and labor laws, environmental laws, telemarketing regulations, privacy policy regulations, and state and federal tax laws;




|  |                                                
|- | -----------------------------------------------
|• | seasonal fluctuation in the timeshare business;




|  |                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------
|• | local and regional economic conditions that affect the travel and tourism industry in the areas where we operate;




|  |                                              
|- | ---------------------------------------------
|• | the loss of any of our senior management; and




|  |                                                                                      
|- | -------------------------------------------------------------------------------------
|• | competition in the timeshare industry and the financial resources of our competitors.




Other factors not identified above, include, among others, those discussed in our 2009 Form 10-K as filed with the Securities and Exchange Commission on March 8, 2010. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. In addition, forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information known to us at the time such statements are made. These beliefs, assumptions, and expectations can change as a result of many potential events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations, plans, and other objectives may vary materially from those expressed in our forward-looking statements. 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.


18


---

Index








Executive Overview





As of September 30, 2010 , 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 115,000 members. Our condensed consolidated financial statements include the accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are wholly-owned and consolidated.





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, 2010 and 2009 :





Three Months EndedSeptember 30,Nine Months EndedSeptember 30,2010200920102009As a percentage of total revenues:Vacation Interval sales90.9%133.4%91.7%105.7%Estimated uncollectible revenue(25.8)%(69.6)%(26.0)%(37.1)%Net sales65.1%63.8%65.7%68.6%Interest income29.5%31.4%30.1%26.2%Management fee income1.1%1.8%1.1%1.5%Other income4.3%3.0%3.1%3.7%Total revenues100.0%100.0%100.0%100.0%As a percentage of Vacation Interval sales:Cost of Vacation Interval sales10.8%7.3%8.7%9.7%Sales and marketing53.0%47.3%54.1%50.0%As a percentage of total revenues:Operating, general and administrative18.6%22.3%18.0%19.4%Depreciation2.8%3.1%2.8%2.5%As a percentage of interest income:Interest expense and lender fees54.9%44.5%50.6%45.4%





Results of Operations for the Three Months Ended  September 30, 2010 and September 30, 2009





Revenues





Revenues for the quarter ended September 30, 2010 were $58.5 million, representing a $5.7 million, or 10.8%, increase compared to revenues for the quarter ended September 30, 2009 . As discussed below, the increase is primarily attributable to a $21.7 million decrease in estimated uncollectible revenue, offset by a $17.3 million decrease in Vacation Interval sales during the quarter ended September 30, 2010 .





19


---

Index


The following table summarizes our Vacation Interval sales for the three months ended September 30, 2010 and 2009 (dollars in thousands, except average price):





20102009SalesIntervalsAveragePriceSalesIntervalsAveragePriceInterval Sales to New Customers$21,9422,012$10,906$26,6292,579$10,325Upgrade Interval Sales to Existing Customers20,9192,7337,65432,2843,6708,797Additional Interval Sales to Existing Customers10,30189211,54811,5141,14810,030Total$53,162$70,427





Vacation Interval sales decreased 24.5% during the third quarter of 2010 compared to the same period of 2009 primarily due to a reduction in marketing to existing customers which resulted in lower sales of upgrade intervals. We implemented more stringent underwriting policies at the end of 2009 to improve the collection of notes receivable. The number of interval sales to new customers decreased 22.0% but average prices increased 5.6%, resulting in a 17.6% net decrease in sales to new customers in the third quarter of 2010 compared to the same period of 2009 . The number of upgrade interval sales to existing customers decreased 25.5%, while average prices decreased 13.0%, resulting in a 35.2% decrease in upgrade interval sales to existing customers during the third quarter of 2010 compared to the same period of 2009 . The number of additional interval sales to existing customers decreased 22.3% but average prices increased 15.1% resulting in a 10.5% net decrease in additional interval sales to existing customers during the third quarter of 2010 compared to the same period of 2009 . Vacation Interval sales to existing owners comprised 58.7% and 62.2% of total Vacation Interval sales in the third quarters of 2010 and 2009 , 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.





Estimated uncollectible revenue, which represents estimated future gross cancellations of notes receivable, was $15.1 million for the third quarter of 2010 compared to $36.7 million for the same period of 2009 . The provision for estimated uncollectible revenue as a percentage of Vacation Interval sales was 28.3% in the third quarter of 2010 compared to 52.2% for the third quarter of 2009 and 33.3% for the full year of 2009 . The ratio was substantially higher in the third quarter of 2009 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. Considering an increase in future cancels beyond that previously estimated, we increased our allowance for uncollectible notes by $18.5 million in the third quarter of 2009 above the 25.9% provision rate we had estimated in the second quarter of 2009. The allowance for uncollectible notes was 20.9% of our gross notes receivable portfolio as of September 30, 2010 compared to 21.0% as of December 31, 2009 . Our receivables charged off as a percentage of beginning of period gross notes receivable was 2.7% for the third quarter of 2010 compared to 3.8% for the same period of 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, 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 $676,000, or 4.1%, to $17.3 million for the third quarter of 2010 from $16.6 million for the third quarter of 2009 . The increase primarily resulted from a higher average notes receivable balance during the third quarter of 2010 compared to the same period of 2009 , partially offset by a decrease in the weighted average yield on our outstanding notes receivable to 16.7% from 16.8% for the third quarters of 2010 and 2009, respectively.





Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income decreased $300,000 to $630,000 for the third quarter of 2010 compared to $930,000 for the same period of 2009 , due primarily to an anticipated decrease in 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 increased to $2.5 million for the third quarter of 2010 from $1.6 million for the third quarter of 2009 primarily due to an increase in forfeited deposits during the third quarter of 2010.





20


---

Index


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 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 increased to 10.8% of Vacation Interval sales for the third quarter of 2010 compared to 7.3% in the 2009 comparable period. This increase primarily resulted from revisions made to our future relative sales value for the third quarters of both 2010 and 2009 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 increased to 53.0% for the third quarter of 2010 compared to 47.3% for the same period of 2009 . The increase in sales and marketing expense as a percentage of Vacation Interval sales is primarily due to the decrease in sales to existing customers, which have relatively lower related sales and marketing costs compared to new customer sales. In the third quarter of 2010 , 58.7% of our sales were to existing customers compared to 62.2% in the third quarter of 2009 .





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, $797,000 and $1.1 million of sampler revenues were recorded as a reduction to sales and marketing expense for the quarters ended September 30, 2010 and 2009 , respectively.





Operating, General and Administrative





Operating, general and administrative expenses as a percentage of total revenues was 18.6% in the third quarter of 2010 compared to 22.3% for the same period of 2009 . Overall, operating, general and administrative expenses decreased $915,000 for the third quarter of 2010 compared to the same period of 2009 , primarily due to a $952,000 decrease in legal fees and a $509,000 decrease in professional fees, which resulted from legal and professional fees in 2009 for a possible securitization which did not occur, partially offset by an increase in the costs of collections of our notes receivable of $360,000.





Depreciation





Depreciation expense as a percentage of total revenue was 2.8% for the quarter ended September 30, 2010 compared to 3.1% for the same quarter of 2009.





Interest Expense and Lender Fees





Interest expense and lender fees as a percentage of interest income increased to 54.9% for the third quarter of 2010 compared to 44.5% for the same period of 2009 . Overall, interest expense and lender fees increased $2.1 million for the third quarter of 2010 compared to the same period of 2009 primarily due to an increase in lender fees related to our SF-VII securitization which closed in June 2010 , and amendments to our other senior loan agreements since September 2009 . In addition, the weighted average cost of borrowings increased to 7.8% for the three months ended September 30, 2010 from 5.6% for the three months ended September 30, 2009 which was primarily related to SF-VII.





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





Income (loss) before benefit (provision) for income taxes was income of $2.6 million for the quarter ended September 30, 2010 compared to a loss of $6.5 million for the quarter ended September 30, 2009 as a result of the above-mentioned operating results.





21


---

Index


Benefit (Provision) for Income Taxes





Benefit (provision) for income taxes as a percentage of income (loss) before benefit (provision) for income taxes was a provision of 37.5% for the third quarter of 2010 compared to a benefit of 40.0% for the third quarter of 2009 . Our effective rates differ from the statutory federal rate of 35% for certain items, such as state and local taxes, and non-deductible expenses.





Net Income (Loss)





Net income (loss) was income of $1.6 million for the quarter ended September 30, 2010 compared to a loss of $3.9 million for the quarter ended September 30, 2009 as a result of the above-mentioned operating results.





Results of Operations for the Nine Months Ended September 30, 2010 and 2009





Revenues





Revenues for the nine months ended September 30, 2010 were $171.8 million, representing a $12.0 million, or 6.5%, decrease compared to revenues for the nine months ended September 30, 2009 . As discussed below, the decrease is primarily attributable to a $36.7 million decrease in Vacation Interval sales, partially offset by a $23.5 million decrease in estimated uncollectible revenue.





The following table summarizes our Vacation Interval sales for the nine months ended September 30, 2010 and 2009 (dollars in thousands, except average price):





20102009SalesIntervalsAveragePriceSalesIntervalsAveragePriceInterval Sales to New Customers$66,7476,855$9,737$73,4067,219$10,168Upgrade Interval Sales to Existing Customers59,0718,5246,93089,3979,9908,949Additional Interval Sales to Existing Customers31,7392,91310,89631,4143,04310,323Total$157,557$194,217





Vacation Interval sales decreased 18.9% during the first nine months of 2010 compared to the same period of 2009 primarily due to a reduction in marketing to existing customers which resulted in lower sales of upgrade intervals. We implemented more stringent underwriting policies at the end of 2009 to improve the collection of notes receivable. The number of interval sales to new customers decreased 5.0% while average prices decreased 4.2%, resulting in a 9.1% decrease in sales to new customers in the first nine months of 2010 compared to the same period of 2009 . The number of upgrade interval sales to existing customers decreased 14.7%, while average prices decreased 22.6%, resulting in a 33.9% decrease in upgrade interval sales to existing customers during the first nine months of 2010 compared to the same period of 2009 . The number of additional interval sales to existing customers decreased 4.3% but average prices increased 5.6%, resulting in a 1.0% net increase in additional interval sales to existing customers during the first nine months of 2010 compared to the same period of 2009 . Vacation Interval sales to existing owners comprised 57.6% and 62.2% of total Vacation Interval sales in the first nine months of 2010 and 2009 , 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.





Estimated uncollectible revenue, which represents estimated future gross cancellations of notes receivable, was $44.7 million for the first nine months of 2010 compared to $68.2 million for the same period of 2009 . The provision for estimated uncollectible revenue as a percentage of Vacation Interval sales decreased to 28.3% for the first nine months of 2010 compared to 35.1% for the first nine months of 2009 and 33.3% for the full year of 2009 . 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. Considering an increase in future cancels beyond that previously estimated, we increased our allowance for uncollectible notes by $18.5 million in the third quarter of 2009 above the 25.9% provision rate we had estimated in the second quarter of 2009. The allowance for uncollectible notes was 20.9% of our gross notes receivable portfolio as of September 30, 2010 compared to 21.0% as of December 31, 2009 . Our receivables charged off as a percentage of beginning of period gross notes receivable was 9.7% for the nine months ended September 30, 2010 compared to 11.5% for the same period of 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, 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.


22


---

Index





Interest income increased $3.5 million, or 7.2%, to $51.6 million during the first nine months of 2010 from $48.1 million during the same period of 2009 . The increase primarily resulted from a higher average notes receivable balance during the first nine months of 2010 compared to the same period of 2009 .





Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income decreased $900,000 to $1.9 million for the first nine months of 2010 compared to $2.8 million for the same period of 2009 , due primarily to an anticipated decrease in 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 decreased to $5.3 million for the first nine months of 2010 from $6.8 million for the first nine months of 2009 . The decrease is primarily attributable to the receipt during 2009 of $2.4 million in business-interruption proceeds related to Hurricane Ike, which struck our Seaside Resort in Galveston, Texas in September 2008, and a $316,000 gain on the early extinguishment of senior subordinated debt in 2009, partially offset by an increase in forfeited deposits during the first nine months of 2010.





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 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 8.7% of Vacation Interval sales for the first nine months of 2010 compared to 9.7% in the 2009 comparable period. This decrease primarily resulted from increased sales of lower cost-basis inventory during the first nine months of 2010 compared to the first nine months of 2009 . In addition, the sale of the water and sewer assets at Seaside Resort in the first quarter of 2010 resulted in a one-time $544,000 decrease in cost of sales.





Sales and Marketing





Sales and marketing expense as a percentage of Vacation Interval sales increased to 54.1% for the nine -month period ended September 30, 2010 compared to 50.0% for the comparable prior-year period. The increase in sales and marketing expense as a percentage of Vacation Interval sales is primarily due to the decrease 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 2010 , 57.6% of our sales were to existing customers compared to 62.2% in the first nine months of 2009 .





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, $2.3 million and $3.0 million of sampler revenues were recorded as a reduction to sales and marketing expense for the nine months ended September 30, 2010 and 2009 , respectively.





Operating, General and Administrative





Operating, general and administrative expenses as a percentage of total revenues decreased to 18.0% for the first nine months of 2010 compared to 19.4% for the same period of 2009 . Overall, operating, general and administrative expenses decreased $4.7 million for the first nine months of 2010 compared to the same period of 2009 , primarily due to the write-off of $2.7 million predevelopment costs associated with the termination of a potential land acquisition in June 2009 . Other contributing factors are a decrease in legal fees of $1.4 million and a decrease in professional fees of $949,000, which primarily resulted from legal and professional fees in the second and third quarters of 2009 for a possible securitization which did not occur, and a decrease in recording fees of $974,000, partially offset by an increase in the costs of collections of our notes receivable of $1.1 million.





23


---

Index


Depreciation





Depreciation expense as a percentage of total revenues increased to 2.8% for the nine months ended September 30, 2010 compared to 2.5% for the same period of 2009 . Overall, depreciation expense increased $281,000 for the first nine months of 2010 compared to the same period of 2009 due to capital expenditures of $1.8 million since September 30, 2009 .





Interest Expense and Lender Fees





Interest expense and lender fees as a percentage of interest income increased to 50.6% for the first nine months of 2010 compared to 45.4% for the same period of 2009 . Overall, interest expense and lender fees increased $4.3 million for the first nine months of 2010 compared to the same period of 2009 primarily due to an increase in lender fees related to our SF-VII securitization which closed in June of 2010 , and amendments to our other senior loan agreements since June 2009 . In addition, the weighted average cost of borrowings increased to 7.0% for the nine months ended September 30, 2010 from 6.0% for the nine months ended September 30, 2009 .





Income before Provision for Income Taxes





Income before provision for income taxes increased to $10.7 million for the nine months ended September 30, 2010 compared to $5.7 million for the nine months ended September 30, 2009 as a result of the above-mentioned operating results.





Provision for Income Taxes





Provision for income taxes as a percentage of income before provision for income taxes was 38.2% for the nine months ended September 30, 2010 compared to 39.6% for the same period of 2009 .





Net Income





Net income was $6.6 million for the nine months ended September 30, 2010 compared to $3.4 million for the nine months ended September 30, 2009 as a result of the above-mentioned operating results.





Liquidity and Capital Resources





At September 30, 2010 , our senior credit facilities provided for loans of up to $501.6 million, of which $393.7 million of principal related to advances under the credit facilities was outstanding and $107.9 million was available for future advances. The following table summarizes our credit agreements with our senior lenders, our wholly-owned and consolidated variable interest entities, and our senior subordinated debt and other debt, as of September 30, 2010 (in thousands):





Maximum AmountAvailableOutstandingBalanceReceivables-Based Revolvers$256,956$149,793Receivables-Based Non-Revolvers180,152180,152Inventory Loans64,51863,746Subtotal Senior Credit Facilities501,626393,691Senior Subordinated Debt8,8558,855Other Debt7,8057,805Grand Total$518,286$410,351





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 2011 and July 2022 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, 2010 was 46% fixed to 54% floating. However, the majority of our floating-rate debt is subject to interest-rate floors between 6.00% and 8.00%. The credit facilities that bear interest at variable rates are tied to the Prime rate or LIBOR. At September 30, 2010 , the annual Prime rate on our senior credit facilities was 3.25% and the one-month LIBOR rate on these facilities was 0.26%. For the nine months ended September 30, 2010 , the weighted average cost of funds for all borrowings was 7.0%. The credit facilities secured by customer notes receivable allow advances of 75% to 80% of eligible customer


24


---

Index


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, 2010 , $6.4 million of notes, net of accounts charged off, were more than 60 days past due.





In addition, we have $8.9 million of 10.0% senior subordinated notes due April 2012 which are guaranteed by all of our present and future domestic restricted subsidiaries. Payment terms related to these notes require quarterly principal and interest payments of approximately $1.4 million through maturity at April 1, 2012.





We anticipate a continuation of the difficult economic environment we experienced the last two years. 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. Our customers may be more vulnerable to deteriorating economic conditions than consumers in the luxury or upscale timeshare markets. Additionally, significant increases in the cost of transportation may limit the number of potential customers who travel to our resorts for a sales presentation. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could also cause an increase in the number of our customers who become delinquent, file for protection under bankruptcy laws, or default on their loans. This could result in further increases in our provision for estimated uncollectible revenue in 2010 . However, we believe that conservative business decisions and cash flow management during 2010 , along with other measures in the coming year, will allow us to maintain adequate liquidity through mid-2011. 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, negotiation of extensions to 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 mid-2011.





Since 2009 , we have extended certain of our existing senior credit facilities (see Note 5 for further information). In connection with such extensions, we have in certain cases, agreed to pay higher interest rates and fees. In June 2010 , we executed a new term securitization transaction through our newly-formed, wholly-owned and fully consolidated VIE, SF-VII. The Series 2010 -A Notes which were issued at a discount of approximately $6.0 million, have a blended coupon rate of 7.366% and a blended effective interest rate of approximately 9.5%. In addition, current conditions in the commercial credit markets are such that an increase in interest rates is likely on new debt we may obtain in the future. Any such increased interest rates would increase our expenses and could adversely impact our results of operations.





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, include warrants or other equity component, 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 Organizations Code.





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, determined on an individual rather than 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.




We are in compliance with these covenants as of September 30, 2010 . 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.





One of our senior lenders, Textron Financial Corporation (“Textron”), and other timeshare industry lenders have announced that they will cease or modify their commercial lending activities in the future. While we have received no notice from any of our other lenders that our current financing arrangements will be impacted by these decisions, our ability to obtain financing in the


25


---

Index


future to replace these facilities may be limited by a lack of commercial lenders. At September 30, 2010 , our senior credit facilities provided for loans of up to $501.6 million, of which $75.0 million, or 15.0%, was related to Textron. In addition, our availability for future advances at September 30, 2010 , under these senior credit facilities was $107.9 million, of which $16.8 million, or 15.6%, was related to our Textron senior credit facility. While we do not currently anticipate a material impact to our liquidity as a result of Textron’s announcement about its future as a timeshare lender, we will continue to monitor the effect of this announcement on our operations.





Cash Flows from 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 variable interest 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, 2010 , cash provided by operating activities was $5.1 million compared to cash used of $20.8 million during the same period of 2009 . The favorable spread of $25.9 million primarily resulted from a decrease in the growth of our gross notes receivable in the first nine months of 2010 , partially offset by an increase in the amounts due from affiliates of $12.6 million.





Cash Flows from Investing Activities. During the first nine months of 2010 , net cash provided by investing activities was $361,000 compared to cash used of $2.0 million during the first nine months of 2009 . Net cash provided of $361,000 in 2010 was primarily the result of $2.0 million of proceeds received from the sale of water utility assets at our Seaside Resort, partially offset by $1.6 million of purchases of equipment, leasehold improvements, and other general capital expenditures. The gain resulting from the sale of the water utility assets was $77,000. The $2.0 million cash used in investing activities in the first nine months of 2009 represents purchases of equipment, leasehold improvements, and other general capital expenditures. The reduction in capital expenditures is consistent with our business plan in effect for 2010 .





Cash Flows from Financing Activities. During the first nine months of 2010 , net cash used in financing activities was $11.0 million compared to cash provided by financing activities of $24.5 million in the comparable 2009 period. Net cash used of $11.0 million in 2010 was primarily the result of $305.8 million of proceeds received from borrowings against pledged notes receivable and inventory loans, offset by $310.7 million of payments on borrowings against pledged notes receivable and inventory loans, $5.7 million restricted cash reserved for payments of debt, and $427,000 for the purchase of treasury shares. The securitization transaction we closed in June 2010 through our newly-formed, wholly-owned and fully consolidated variable interest entity, SF-VII, generated $145.5 million of the $305.8 million of proceeds received from borrowings and $142.1 million of the $310.7 million of payments on borrowings for the nine months ended September 30, 2010 . 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.





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.





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.





26


---

Index


Federal net operating losses (“NOLs”) of $146.0 million existing at December 31, 2009 expire between 2020 and 2029. 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 $10.9 million of our net operating loss carryforwards as of December 31, 2009 were subject to the Section 382 limitations .





Item 3.  Quantitative and 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, with an outstanding balance of $393.7 million at September 30, 2010 , have a fixed-to-floating debt ratio of 46% fixed to 54% floating. However, the majority of our floating-rate debt is subject to interest-rate floors between 6.00% and 8.00%.





At September 30, 2010 , 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.





Credit Risk — We are exposed to credit risk related to our notes receivable. 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, during 2009 we 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. Our estimated uncollectible revenue as a percentage of Vacation Interval sales was 28.3% for the first nine months of 2010 compared to 35.1% for the same period of 2009 , and 33.3% for the year ended December 31, 2009 . See Note 4 "Notes Receivable" for a discussion of the higher provision rate in 2009, which resulted primarily from a provision of 52.2% in the third quarter of 2009.  If default rates for our borrowers were to continue to rise, it may require an 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.





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 54% 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 have remained fairly constant the last two years, 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.





A hypothetical one-point interest rate increase in the marketplace at September 30, 2010 would result in a fair value decrease of approximately $14.9 million on our notes receivable portfolio. The impact of a one-point effective interest rate change on the $213.5 million balance of variable-rate debt instruments at September 30, 2010 would be approximately $39,000 on our results


27


---

Index


of operations, after income taxes, for the nine months ended September 30, 2010 .





Our variable funding note with SF-IV acts as an interest rate hedge to partially offset potential increases in interest rates, since it contains a provision for an interest rate cap. The principal balance of the SF-IV line of credit was $32.3 million at September 30, 2010. Such variable funding note will mature in February 2013.





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, 2010 , our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and operating as of September 30, 2010 , 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.





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





Item 1.  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 these matters may involve claims, which, if granted, could be materially adverse to our financial position.





28


---

Index


Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. We will establish reserves from time to time when deemed appropriate under generally 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 have been 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 while we were awaiting the final decision of the Land Court, the Land Court granted our motion for a preliminary injunction, finding that we were likely to prevail on the merits of the suit and that we would suffer irreparable injury if the Wind Cooperative used the access road to continue construction of the wind farm. The Wind Cooperative filed an interlocutory appeal of the preliminary injunction to the Massachusetts Appeals Court, but no action was ever taken on that appeal.





On April 7, 2010, the Land Court issued a decision in these cases. In the case in which we claimed that the special permit had expired, the Land Court ruled in our favor, set aside the decision of the Lanesborough Zoning Board of Appeals and entered a permanent injunction barring the Wind Cooperative from using the private access road for any purpose related to or in connection with the construction of the Wind Farm, including servicing and maintaining it. In the companion case, the Court concluded that no decision was needed but indicated a willingness to make a decision if we asked for it to do so. We asked the Court not to act on the second claim while we explore settlement with the Wind Cooperative. The Wind Cooperative appealed the Decision but no action was taken on that appeal.





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 alleged that the Electric Cooperative, an affiliate of the Wind Cooperative, acted in an ultra vires manner when it condemned approximately 50 acres that we own at the top of Brodie Mountain for use by the Wind Cooperative in building and operating its wind farm. We acquired the 50 acres in question in an arms-length transaction with an unrelated third party. Our acquisition cost attributable to this tract is approximately $100,000. 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 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. In addition, we believe that we are entitled to compensation under Massachusetts law at least equal to our original investment in this tract. No date was set by the court to hear our motion.





We have been actively engaged in settlement discussions with both the Electric Cooperative and the Wind Cooperative since October 2009 and agreed with the Electric Cooperative to stay proceedings in the action related to the condemned 50 acres while we continued to explore a comprehensive settlement of all claims by and against the Electric Cooperative and the Wind Cooperative. With regard to our actions against the Wind Cooperative, we concluded that we would be able to reach an agreement with the Wind Cooperative that would allow us to fully develop the property in the manner that we originally intended while minimizing the visual impact to our property from the development of the proposed wind farm. Our pending action against the Electric Cooperative regarding the condemned acres has also been discussed as part of the overall settlement, and we were confident that we would be fully reimbursed for our original purchase price for this acreage in the event of a settlement with the Electric Cooperative. We do not believe a loss is reasonably possible for either of these two matters.





During July and August, 2010, we negotiated a comprehensive settlement of all outstanding issues involving the Wind Cooperatives' proposed wind farm. A Settlement Agreement (together with related implementing agreements) was then executed dated as of August 30, 2010, between us and the Wind Cooperative. It was joined in by the Electric Cooperative for the limited purposes set out in that Agreement. The Wind Cooperative agreed in the Settlement Agreement to move the three turbines located closest to


29


---

Index


our property line to locations where their visual impact on our project will be minimized. The Wind Cooperative also agreed not to construct any further wind turbines in the land being used for its wind farm in the easements it holds for this purpose on top of Brodie Mountain. We agreed not to oppose the Wind Cooperative's application for a new road permit or for its further construction or for its operation of the wind farm.





In a separate agreement, entered into by us, the Wind Cooperative and the Electrical Cooperative, we agreed to give up our claim of title to the disputed fifty acres and to deed that property to the Electrical Cooperative. The Electrical Cooperative agreed in turn to reimburse us the $100,000 we paid to acquire that property.





Finally, all parties to the outstanding suits and appeals agreed to dismiss those actions with prejudice and with all parties to bear their own fees and costs.





The various actions required by the Settlement Agreement and the related implementing agreements are in the process of being completed.





Item 1A. Risk Factors





No changes.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





ISSUER PURCHASES OF EQUITY SECURITIES (1)





PeriodTotal NumberOf SharesPurchasedAverage PricePaid per ShareTotal Number of SharesPurchased as Part Of PubliclyAnnounced PlanMaximumNumber of Shares that May YetBe PurchasedUnder the PlanJuly 1 through July 31—$——1,723,265August 1 through August 31111,2001.04111,2001,612,065September 1 through September 3046,5671.0446,5671,565,498Total157,767157,767





_________________________





(1) During the first quarter of 2010 , our Board of Directors approved the extension of our stock repurchase program which authorized the repurchase of up to two million shares of our common stock. This stock repurchase program, which was originally scheduled to expire in July 2010, will now expire in July 2011.


30


---

Index





Item 5.  Exhibits





(a)Exhibits filed herewith:10.1Note Modification Agreement dated November 10, 2010 by and between Grace Brothers, Ltd., Bradford Whitmore and Silverleaf Resorts, Inc. for the Registrant's 10% Senior Subordinated Notes due 201210.2Third Amendment to Amended and Restated Sale and Servicing Agreement dated as of August 6, 2010 , by and among Silverleaf Finance IV, LLC, Silverleaf Resorts, Inc. and Wells Fargo Bank, National Association31.1Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 200231.2Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 200232.1Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002


31


---

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 10, 2010By:/s/ ROBERT E. MEADRobert E. MeadChairman of the Board andChief Executive Officer








Dated:November 10, 2010By:/s/ HARRY J. WHITE, JR.Harry J. White, Jr.Chief Financial Officer





32