UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
      One)S
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934
 
 
 For the
quarterly period ended March 31, 2008
 
 OR
 
 
 £
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
transition period from _____________ to _____________
 
 Commission
file number:  001-13003
 
 
 SILVERLEAF
RESORTS, INC.
 (Exact
name of registrant as specified in its charter)
 
 TEXAS
              75-2259890(State
      of incorporation)
              (I.R.S.
      Employer
                Identification
      No.)
 
 
 1221
RIVER BEND DRIVE, SUITE 120
 DALLAS,
TEXAS  75247
 (Address
of principal executive offices, including zip code)
 
 
 214-631-1166
 (Registrant’s
telephone number, including area code)
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes S    No
£
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):
 Large
      accelerated filer   £
                Accelerated
      filer   SNon-accelerated
      filer   £
                Smaller
      reporting company   £
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes £    No
S
 
 As of May
7, 2008, 38,068,154 shares of the registrant’s common stock, $0.01 par value,
were issued and outstanding.
 
 SILVERLEAF
RESORTS, INC.
 
 INDEX
 
 PagePART I.
      FINANCIAL INFORMATIONItem
      1.
              Condensed Consolidated Statements of Operations for the three
      months ended March 31, 2008 and 2007
              2Condensed Consolidated Balance Sheets as of March 31, 2008 and
      December 31, 2007
              3Condensed Consolidated Statement of Shareholders' Equity
      for the three months ended March 31, 2008
              4Condensed Consolidated Statements of Cash Flows for the three
      months ended March 31, 2008 and 2007
              5Notes to the Condensed Consolidated Financial
      Statements
              6Item
      2.
              Management's Discussion and Analysis of Financial
      Condition and Results of Operations
              15Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              20Item
      4.
              Controls and Procedures
              21PART
      II. OTHER INFORMATIONItem
      1.
              Legal Proceedings
              22Item
      1A.
              Risk Factors
              22Item
      6.
              Exhibits
              23Signatures
              24
 
 1
 Index
 
 PART
1:  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 EndedMarch 31,2008
              
              
              2007Revenues:Vacation
      Interval sales
              
              $
              65,081
              
              
              $
              53,365Estimated
      uncollectible revenue
              
              
              (14,318
              )
              
              
              (8,541
              )Net
      sales
              
              
              50,763
              
              
              
              44,824Interest
      income
              
              
              14,507
              
              
              
              12,547Management
      fee income
              
              
              780
              
              
              
              615Other
      income
              
              
              976
              
              
              
              840Total
      revenues
              
              
              67,026
              
              
              
              58,826Costs
      and Operating Expenses:Cost
      of Vacation Interval sales
              
              
              4,874
              
              
              
              5,770Sales
      and marketing
              
              
              33,537
              
              
              
              27,449Operating,
      general and administrative
              
              
              9,292
              
              
              
              8,423Depreciation
              
              
              1,114
              
              
              
              858Interest
      expense and lender fees
              
              
              6,102
              
              
              
              5,651Total
      costs and operating expenses
              
              
              54,919
              
              
              
              48,151Income
      before provision for income taxes
              
              
              12,107
              
              
              
              10,675Provision
      for income taxes
              
              
              (4,661
              )
              
              
              (4,110
              )Net
      income
              
              $
              7,446
              
              
              $
              6,565Basic
      net income per share
              
              $
              0.20
              
              
              $
              0.17Diluted
      net income per share
              
              $
              0.19
              
              
              $
              0.17Weighted
      average basic common shares issuedand
      outstanding
              
              
              37,926,835
              
              
              
              37,808,154Weighted
      average diluted common shares issuedand
      outstanding
              
              
              39,377,595
              
              
              
              39,362,485
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  2
 Index
  SILVERLEAF
RESORTS, INC.
 CONDENSED
CONSOLIDATED BALANCESHEETS
 (in
thousands, except share and per share amounts)
 
 March 31,
              
              
              December 31,ASSETS
              
              2008
              
              
              2007(Unaudited)Cash
      and cash equivalents
              
              $
              10,471
              
              
              $
              13,170Restricted
      cash
              
              
              12,935
              
              
              
              12,816Notes
      receivable, net of allowance for uncollectible notes of $70,401 and
      $69,128, respectively
              
              
              304,320
              
              
              
              289,907Accrued
      interest receivable
              
              
              3,741
              
              
              
              3,744Investment
      in special purpose entity
              
              
              6,693
              
              
              
              7,315Amounts
      due from affiliates
              
              
              1,971
              
              
              
              1,358Inventories
              
              
              183,091
              
              
              
              179,188Land,
      equipment, buildings, and leasehold improvements, net
              
              
              45,897
              
              
              
              41,565Land
      held for sale
              
              
              509
              
              
              
              509Prepaid
      and other assets
              
              
              29,309
              
              
              
              31,487TOTAL
      ASSETS
              
              $
              598,937
              
              
              $
              581,059LIABILITIES
      AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
      payable and accrued expenses
              
              $
              18,170
              
              
              $
              21,071Accrued
      interest payable
              
              
              2,755
              
              
              
              2,470Unearned
      Vacation Interval sales
              
              
              205
              
              
              
              296Unearned
      samplers
              
              
              6,997
              
              
              
              6,921Income
      taxes payable
              
              
              855
              
              
              
              782Deferred
      income taxes
              
              
              33,501
              
              
              
              30,463Notes
      payable and capital lease obligations
              
              
              326,047
              
              
              
              316,198Senior
      subordinated notes
              
              
              26,817
              
              
              
              26,817Total
      Liabilities
              
              
              415,347
              
              
              
              405,018COMMITMENTS
      AND CONTINGENCIES (Note 8)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,
      38,048,154 and 37,818,154 shares issued and outstanding at March 31,2008
      and December 31, 2007, respectively
              
              
              380
              
              
              
              378Additional
      paid-in capital
              
              
              112,801
              
              
              
              112,700Retained
      earnings
              
              
              70,409
              
              
              
              62,963Total
      Shareholders' Equity
              
              
              183,590
              
              
              
              176,041TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              598,937
              
              
              $
              581,059
 
 
 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
              
              
              $0.01
              
              
              AdditionalShares
              
              
              Par
              
              
              Paid-in
              
              
              RetainedIssued
              
              
              Value
              
              
              Capital
              
              
              Earnings
              
              
              TotalJanuary 1,
      2008
              
              
              37,818,154
              
              
              $
              378
              
              
              $
              112,700
              
              
              $
              62,963
              
              
              $
              176,041Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              35
              
              
              
              -
              
              
              
              35Exercise
      of stock options
              
              
              230,000
              
              
              
              2
              
              
              
              66
              
              
              
              -
              
              
              
              68Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,446
              
              
              
              7,446March 31,
      2008
              
              
              38,048,154
              
              
              $
              380
              
              
              $
              112,801
              
              
              $
              70,409
              
              
              $
              183,590
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  4
 Index
  SILVERLEAF
RESORTS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASHFLOWS
 (in
thousands)
 (Unaudited)
  Three
      Months EndedMarch
      31,2008
              
              
              2007OPERATING
      ACTIVITIES:Net
      income
              
              $
              7,446
              
              
              $
              6,565Adjustments
      to reconcile net income to net cash used inoperating
      activities:Estimated
      uncollectible revenue
              
              
              14,318
              
              
              
              8,541Deferred
      income taxes
              
              
              3,038
              
              
              
              2,811Depreciation
              
              
              1,114
              
              
              
              858Stock-based
      compensation
              
              
              35
              
              
              
              36Cash
      effect from changes in operating assets and liabilities:Restricted
      cash
              
              
              (18
              )
              
              
              (4
              )Notes
      receivable
              
              
              (28,731
              )
              
              
              (21,082
              )Accrued
      interest receivable
              
              
              3
              
              
              
              (60
              )Investment
      in special purpose entity
              
              
              622
              
              
              
              1,202Amounts
      due from/to affiliates
              
              
              (613
              )
              
              
              (378
              )Inventories
              
              
              (3,903
              )
              
              
              (638
              )Prepaid
      and other assets
              
              
              2,178
              
              
              
              (2,735
              )Accounts
      payable and accrued expenses
              
              
              (2,121
              )
              
              
              (4,118
              )Accrued
      interest payable
              
              
              285
              
              
              
              261Unearned
      Vacation Interval sales
              
              
              (91
              )
              
              
              75Unearned
      samplers
              
              
              76
              
              
              
              6Income
      taxes payable
              
              
              73
              
              
              
              1,409Net
      cash used in operating activities
              
              
              (6,289
              )
              
              
              (7,251
              )INVESTING
      ACTIVITIES:Purchases
      of land, equipment, buildings, and leasehold improvements
              
              
              (6,212
              )
              
              
              (3,815
              )Net
      cash used in investing activities
              
              
              (6,212
              )
              
              
              (3,815
              )FINANCING
      ACTIVITIES:Proceeds
      from borrowings of debt
              
              
              51,888
              
              
              
              49,036Payments
      of debt and capital leases
              
              
              (42,053
              )
              
              
              (26,821
              )Restricted
      cash reserved for payments of debt
              
              
              (101
              )
              
              
              286Proceeds
      from exercise of stock options
              
              
              68
              
              
              
              -Net
      cash provided by financing activities
              
              
              9,802
              
              
              
              22,501Net
      change in cash and cash equivalents
              
              
              (2,699
              )
              
              
              11,435CASH AND CASH
      EQUIVALENTS:Beginning
      of period
              
              
              13,170
              
              
              
              11,450End
      of period
              
              $
              10,471
              
              
              $
              22,885SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid, net of amounts capitalized
              
              $
              5,009
              
              
              $
              4,631
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 5
 Index
  SILVERLEAF
RESORTS, INC.
 NOTESTO 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 footnotes included in our Form 10-K for the year ended December
31, 2007 as filed with the Securities and Exchange Commission (“SEC”), as well
as all the 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 three
months ended March 31, 2008 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008.
 
 Note
2 – Significant Accounting Policies Summary
 
 Basis of Presentation —The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting policies generally accepted in the United States of
America for interim financial information and in accordance with the rules and
regulations of the SEC.  Accordingly, these financial statements do
not include certain information and disclosures required by GAAP for complete
financial statements.  However, in the opinion of management, all
adjustments, consisting of normal recurring adjustments and accruals, considered
necessary for a fair presentation have been included.
 
 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 estimated. Significant management
estimates include the allowance for uncollectible notes, estimates for income
taxes, valuation of our investment in Silverleaf Finance III, LLC (“SF-III”),
our wholly-owned off-balance-sheet qualified special purpose finance subsidiary,
and the future sales plan and estimated recoveries used to allocate certain
costs to inventory phases and cost of sales.
 
 Principles of Consolidation —The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, excluding SF-III. All significant
intercompany accounts and transactions have been eliminated in the condensed
consolidated financial statements.
 
 SFAS No. 152 —We follow
industry specific guidance established by Statement of Financial Accounting
Standards No. 152, “Accounting for Real Estate Time-Sharing Transactions” (“SFAS
No. 152”).  In general, SFAS No. 152 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) —A substantial portion of Vacation Interval
sales are 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.  We had $205,000 in deferred Vacation Interval sales at March
31, 2008 related to the percentage-of-completion method.
 
 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.
  6
 Index
  ·
              Total
      costs of a project or phase, considering both costs already incurred plus
      estimated costs to complete the phase, if any, is determined. Common
      costs, including amenities, are included in total estimated costs and
      allocated to inventory phases that such costs are expected to
      benefit.
 ·
              The
      cost of sales ratio applied to each sale represents total estimated costs
      as a percentage of total estimated revenues, which is specific to each
      inventory phase.  Generally, each building type is considered a
      separate phase.
 
 The
estimate of total revenue for a particular phase also considers factors such as
trends in uncollectibles, changes in sales mix and unit sales prices,
repossessions of Vacation Intervals, effects of upgrade programs, and past and
expected sales programs to sell slow moving inventory units.  At least
quarterly, we evaluate the estimated cost of sales percentage applied to each
sale using updated information for total estimated phase revenue and total
estimated phase costs. The effects of changes in estimates are accounted for in
the period in which such changes first become known on a retrospective basis,
such that the balance sheet at the end of the period of change and the
accounting in subsequent periods reflect the revised estimates as if such
estimates had been the original estimates.
 
 As
mentioned, certain Vacation Interval sales transactions are deferred until the
minimum down payment has been received.  We account for these
transactions utilizing the deposit method. Under this method, the sale is not
recognized, a receivable is not recorded, and inventory is not relieved. Any
cash received is carried as a deposit until the sale can be recognized. When
these types of sales are cancelled without a refund, deposits forfeited are
recognized as income and the interest portion is recognized as interest income.
This income is not significant.
 
 We also
sell additional and upgraded Vacation Intervals to existing owners. Revenues are
recognized on an additional Vacation Interval sale, which represents a new
Vacation Interval sale treated as a separate transaction from the original
Vacation Interval sale, when the buyer makes a down payment of at least 10%,
excluding any equity from the original Vacation Interval
purchased.  Revenues are recognized on an upgrade Vacation Interval
sale, which is a modification and continuation of the original sale, by
including the buyer’s equity from the original Vacation Interval towards the
down payment of at least 10%.  Revenue recognized on upgrade Vacation
Interval sales represents the difference between the upgrade sales price and
traded-in sales price, while related cost of sales represents the incremental
increase in the cost of the Vacation Interval purchased.
 
 We
recognize interest income as earned.  Interest income is accrued on
notes receivable, net of an estimated amount that will not be collected, until
the individual notes become 90 days delinquent.  Once a note becomes
90 days delinquent, the accrual of interest income ceases until collection is
deemed probable.
 
 We
receive fees for management services provided to Silverleaf Club and Orlando
Breeze Resort Club. These revenues are recognized on an accrual basis in the
period the services are provided if collection is deemed probable.
 
 Services
and other income are recognized on an accrual basis in the period such services
are provided.
 
 Sales and
marketing costs are charged to expense in the period
incurred.  Commissions, however, are recognized in the same 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 that serve as collateral for
construction bonds and cash reserved for payments of debt.
 
 Allowance for Uncollectible Notes —Estimated uncollectible revenue is recorded at an amount sufficient to
maintain the allowance for uncollectible notes at a level management considers
adequate to provide for anticipated losses resulting from customers' failure to
fulfill their obligations under the terms of their notes. The allowance for
uncollectible notes is adjusted based upon a periodic static-pool analysis of
the notes receivable portfolio, which tracks uncollectible notes for each year’s
sales over the lives of the notes. Other factors considered in the assessment of
uncollectibility include the aging of notes receivable, historical collection
experience and credit losses, customer credit scores (FICO® scores), and current
economic factors.
  7
 Index
  Credit
losses represent three varieties as follows:
 
 ·
              A
      full cancellation of the note, whereby the customer is relieved of the
      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.
 
 The
allowance for uncollectible notes is reduced by actual cancellations and losses
experienced, including losses related to previously sold notes receivable which
became delinquent and were reacquired pursuant to the recourse obligations
discussed herein. Recourse on sales of customer notes receivable is governed by
agreements between the purchasers of said notes and the Company.
 
 Investment in Special Purpose
Entity — In 2005, we consummated a securitization transaction with
SF-III, which is a qualified special purpose entity formed for the purpose of
issuing $108.7 million of Timeshare Loan-Backed Notes Series 2005-A (“Series
2005-A Notes”) in a private placement.  In connection with this
transaction, we sold SF-III $132.8 million in timeshare receivables that were
previously pledged as collateral under revolving credit facilities with our
senior lenders and Silverleaf Finance I, Inc., (“SF-I”), our former qualified
special purpose entity which was dissolved in 2005.  This transaction
qualified as a sale for accounting purposes. The Series 2005-A Notes are secured
by timeshare receivables we sold to SF-III. The proceeds from the sale of the
timeshare receivables to SF-III were used to fully pay off the credit facility
of SF-I and to pay down amounts we owed under our senior credit facilities. The
timeshare receivables we sold to SF-III are without recourse, except for
breaches of certain representations and warranties at the time of sale. Pursuant
to the terms of an agreement, we are responsible for servicing these timeshare
receivables and receive fees for our services. As such fees approximate both our
internal cost of servicing such timeshare receivables and fees a third party
would charge to service such receivables, the related servicing asset or
liability was estimated to be insignificant.
 
 We
account for and evaluate the investment in our special purpose entity in
accordance with Statement of Financial Accounting Standards No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS No. 140”), EITF 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” and
Statement of Financial Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” as applicable. Effective January 1,
2007, SFAS No. 140 was amended by Statement of Financial Accounting Standards
No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”), which
did not affect the manner in which we account for our investment in our special
purpose entity.  On January 1, 2008, we adopted the provisions of
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS No. 157”), which also amended SFAS No. 140.  The adoption of
SFAS No. 157 did not impact the method in which we calculate the fair value of
the investment in our special purpose entity.  However, we have
expanded our disclosures about the fair value measurement.  See Note 6
– “Fair Value Measurement.”  The gain or loss on the sale of notes
receivable is determined based on the proceeds received, the fair value assigned
to the investment in our special purpose entity, and the recorded value of notes
receivable sold. The fair value of the investment in our special purpose entity
is estimated based on the present value of future cash flows we expect to
receive from the notes receivable sold.  We utilized the following key
assumptions to estimate the fair value of such cash flows related to SF-III:
customer prepayment rate (including expected accounts paid in full as a result
of upgrades) – 15.9% to 23.4%; expected credit losses – 16.8%; discount rate –
0% to 21.5%; base interest rate – 5.37%; and loan servicing fees – 1.75%. Our
assumptions are based on experience with our notes receivable portfolio,
available market data, estimated prepayments, the cost of servicing, and net
transaction costs. Such assumptions are assessed quarterly and, if necessary,
adjustments are made to the carrying value of the investment in our special
purpose entity on a prospective basis as a change in accounting estimate, with
the amount of periodic interest accretion adjusted over the remaining life of
the beneficial interest. The carrying value of the investment in our special
purpose entity represents our maximum exposure to loss regarding our involvement
with our special purpose entity.  We periodically review the carrying
value of our investment in special purpose entity for impairment to ensure that
the carrying value does not exceed market value.
 
 Inventories —Inventories are
stated at the lower of cost or market value less cost to sell.  Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, an estimate for the value of future recoveries,
taxes, and capitalized interest incurred in the construction or through the
acquisition of resort dwellings held for timeshare sale.  At March 31,
2008, the estimated costs not yet incurred but expected to complete promised
amenities was $1.3 million.  Inventory costs are allocated to cost of
Vacation Interval sales using the relative sales value method, as described
above.  We periodically review the carrying value of our inventory on
an individual project basis for impairment to ensure that the carrying value
does not exceed market value.
  8
 Index
  Vacation
Intervals may be reacquired as a result of (i) foreclosure (or deed in lieu of
foreclosure) or (ii) trade-in associated with the purchase of an upgraded or
downgraded Vacation Interval. Vacation Intervals reacquired are recorded in
inventory at the lower of their original cost or market value.
 
 Land, Equipment, Buildings, and
Leasehold Improvements — Land, equipment (including equipment under
capital lease), buildings, and leasehold improvements are stated at cost. When
assets are disposed of, the cost and related accumulated depreciation are
removed, and any resulting gain or loss is reflected in income for the
period.  Maintenance and repairs are charged to expense as
incurred.  Significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over the
estimated useful life of the assets, which range from 3 to 20
years.
 
 Valuation of Long-Lived
Assets — In accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we
assess potential impairments to our long-lived assets, including land,
equipment, buildings, and leasehold improvements, when there is evidence that
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 quarters of 2008 and 2007.
 
 Prepaid and Other Assets —
Prepaid and other assets consist primarily of prepaid insurance, prepaid
postage, commitment fees, debt issuance costs, deferred commissions, novelty
inventories, deposits, collected cash in senior lender lock boxes which has not
yet been applied to related loan balances, and miscellaneous receivables.
Commitment fees and debt issuance costs are amortized over the lives of the
related debt.
 
 Income Taxes —Deferred
income taxes are recorded for temporary differences between the basis of assets
and liabilities as recognized by tax laws and their carrying values as reported
in the condensed consolidated financial statements. A provision or benefit is
recognized for deferred income taxes relating to such temporary
differences.  To the extent a deferred tax asset does not meet the
criteria of "more likely than not" for realization, a valuation allowance is
recorded. 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 is a
non-consolidated subsidiary for reporting purposes and a disregarded entity for
federal income tax purposes.  We have a tax sharing agreement with
SF-III.
 
 We file
U.S. federal income tax returns as well as income tax returns in various
states.  We are no longer subject to income tax examinations by the
Internal Revenue Service for years prior to 2004, although carryforward
attributes that were generated prior to 2004 may still be subject to
examination.  For the majority of state tax jurisdictions, we are no
longer subject to income tax examinations for years prior to 2004.  In
the state of Texas, we are no longer subject to franchise tax examinations for
years prior to 2003.
 
 Derivative Financial Instruments —Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”), as amended,
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts and hedging activities.  All derivatives, whether designed
as hedging relationships or not, are required to be recorded on the balance
sheet at fair value.  Accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and the resulting
designation.  Derivatives used to hedge exposure to changes in the
fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value
hedges.  Derivatives used to hedge exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered
cash flow hedges.
  For
derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are recognized in
earnings.  For derivatives designated as cash flow hedges, the
effective portion of changes in the fair value of the derivative is initially
reported in other comprehensive income (outside of earnings) and subsequently
reclassified to earnings when the hedged transaction affects earnings, while the
ineffective portion of changes in the fair value of the derivative is recognized
directly in earnings.  We assess the effectiveness of each hedging
relationship by comparing the changes in fair value or cash flows of the
derivative hedging instrument with the changes in fair value or cash flows of
the designated hedged item or transaction.  For derivatives not
designated as hedges, changes in the fair value are recognized in
earnings.
  9
 Index
  Our
objective in using derivatives is to increase stability related to interest
expense and to manage our exposure to interest rate movements or other
identified risks.  To accomplish this objective, we primarily use
interest rate swaps and caps within our cash flow hedging
strategy.  Interest rate swaps designated as cash flow hedges 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 designated as cash flow hedges 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 interest rate swaps
in earnings.  The amounts recognized for such interest rate swaps for
the periods ending March 31, 2008 and 2007 were not significant.
 
 Earnings Per Share — Basic
earnings per share is computed by dividing net income by the weighted average
common shares outstanding during the period.  Earnings per share
assuming dilution is computed by dividing net income 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 the stock options is reduced by the
number of common shares that we could have repurchased with the proceeds from
the exercise of the stock options.
 
 Stock-Based Compensation— We
adopted Statement of Financial Accounting Standards No. 123R, “Share Based
Payment” (“SFAS No. 123R”), as of January 1, 2006, using the modified
prospective method. Under this transition method, for all stock options granted
on or prior to December 31, 2005 that were outstanding as of that date,
compensation cost is recognized for the unvested portion over the remaining
requisite service period, using the fair value for these options as estimated at
the date of grant using the Black-Scholes option-pricing model under the
original provisions of SFAS No. 123 for pro-forma disclosure
purposes.  Accordingly, we recognized stock-based compensation of
$35,000 and $36,000 for the three months ended March 31, 2008 and 2007,
respectively.  At March 31, 2008, unamortized compensation expense
related to stock options granted prior to 2006 was $53,000, which will be fully
recognized by August 31, 2008.
 
 The
following table summarizes our outstanding stock options for the three months
ended March 31, 2008 and 2007:
 
 2008
              
              
              2007Options
      outstanding, January 1
              
              
              2,513,807
              
              
              
              2,823,807Granted
              
              
              —
              
              
              
              —Exercised
              
              
              (230,000
              )
              
              
              —Expired
              
              
              (40,000
              )
              
              
              —Forfeited
              
              
              —
              
              
              
              —Options
      outstanding, March 31
              
              
              2,243,807
              
              
              
              2,823,807Exercisable,
      March 31
              
              
              2,154,807
              
              
              
              2,645,807
   For the
three months ended March 31, 2008, the weighted average exercise price of the
230,000 stock options exercised was $0.30 per share, and the intrinsic value was
$555,000.  There were no stock options exercised during the first
three months of 2007.
 
 Other Recent Accounting
Pronouncements—
 
 SFAS No. 157 – We
adopted the provisions of Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” on January 1, 2008.  SFAS No. 157
defines fair value, establishes a market-based framework or hierarchy for
measuring fair value, and expands disclosures about fair value
measurements.  SFAS No. 157 is applicable whenever another accounting
pronouncement requires or permits assets and liabilities to be measured at fair
value.  SFAS No. 157 does not expand or require any new fair value
measures.  However, the application of this statement may change
current practice.  In February 2008, the FASB decided that an entity
need not apply this standard to non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis until 2009.  Accordingly, our adoption of this
standard in 2008 was limited to financial assets and liabilities, which
primarily affected the disclosures for the investment in our special purpose
entity and our derivative contracts.  The adoption of SFAS No. 157 did
not impact our financial position, results of operations, or cash flows. We are
still in the process of evaluating this standard with respect to its effect on
non-financial assets and liabilities and therefore have not yet determined the
impact that it will have on our financial statements upon full adoption in
2009.  Non-financial assets and liabilities for which we have not
applied the provisions of SFAS No. 157 include those measured at fair value in
impairment testing.
  10
 Index
  SFAS No. 159–In February 2007, the
FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which
allows an irrevocable election to measure certain financial assets and financial
liabilities at fair value on an instrument-by-instrument basis, with unrealized
gains and losses recognized currently in earnings. Under SFAS No. 159, the fair
value option may only be elected at the time of initial recognition of a
financial asset or financial liability or upon the occurrence of certain
specified events. Additionally, SFAS No. 159 provides that application of the
fair value option must be based on the fair value of an entire financial asset
or financial liability and not selected risks inherent in those assets or
liabilities. SFAS No. 159 requires that assets and liabilities which are
measured at fair value pursuant to the fair value option be reported in the
financial statements in a manner that separates those fair values from the
carrying amounts of similar assets and liabilities which are measured using
another measurement attribute. SFAS No. 159 also provides expanded disclosure
requirements regarding the effects of electing the fair value option on the
financial statements.  We adopted the provisions of SFAS No. 159 on
January 1, 2008. The adoption of SFAS No. 159 did not impact our consolidated
financial position, results of operations, or cash flows.
 
 SFAS No. 141R–In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”), which
changes the accounting for business combinations including the following: i) the
measurement of acquirer shares issued in consideration for a business
combination, ii) the recognition of contingent consideration, iii) the
accounting for preacquisition gain and loss contingencies, iv) the recognition
of capitalized in-process research and development, v) the accounting for
acquisition-related restructuring cost accruals, vi) the treatment of
acquisition related transaction costs, and vii) the recognition of changes in
the acquirer’s income tax valuation allowance.  SFAS No. 141R is
effective prospectively for fiscal years beginning after December 15,
2008.  Early adoption is not permitted.  We are currently
assessing the financial impact the adoption of SFAS No. 141R will have on our
consolidated financial position, results of operations, and cash
flows.
 
 SFAS No. 160 –In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No.
160”).  SFAS No. 160 amends Accounting Research Bulletin No. 51
“Consolidated Financial Statements,” and Financial Accounting Standards Board
Statement No. 128, “Earnings Per Share.”  A noncontrolling interest is
defined in SFAS No. 160 as the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent.  SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  SFAS No. 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations.  SFAS No.
160 is effective prospectively for fiscal years beginning after
December 15, 2008.  We are currently assessing the financial impact
the adoption of SFAS No. 160 will have on our consolidated financial position,
results of operations, and cash flows.
 
 SFAS No. 161 –In March 2008,
the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.
161”).  SFAS No. 161 amends and expands the disclosure requirements of
SFAS No. 133.  SFAS No. 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.  SFAS No. 161 applies to all entities that prepare
consolidated financial statements and to all derivative instruments, including
bifurcated derivative instruments (and nonderivative instruments that are
designated and qualify as hedging instruments as defined in SFAS No. 133) and
related hedged items accounted for under SFAS No. 133 and its related
interpretations.  SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008.  Early adoption is encouraged.  We are currently
assessing the financial impact the adoption of SFAS No. 161 will have on our
consolidated financial position, results of operations, and cash
flows.
 11
 Index
  Note
3 – Earnings Per Share
 
 The
following table illustrates the reconciliation between basic and diluted
weighted average common shares outstanding for the three months ended March 31,
2008 and 2007:
 
 2008
                
                
                2007Weighted
      average shares outstanding - basic
                
                
                37,926,835
                
                
                
                37,808,154Issuance
      of shares from stock options exercisable
                
                
                1,839,389
                
                
                
                2,031,807Repurchase
      of shares from stock options proceeds
                
                
                (388,629
                )
                
                
                (477,476
                )Weighted
      average shares outstanding - diluted
                
                
                39,377,595
                
                
                
                39,362,485
 
 Outstanding
stock options totaling 1.7 million and 2.0 million were dilutive securities that
were included in the computation of diluted earnings per share at March 31, 2008
and 2007, respectively. Outstanding stock options totaling 527,000 and 792,000
were not dilutive at March 31, 2008 and 2007, respectively, because the exercise
price for such options exceeded the market price for our common
shares.
 
 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 average yield on outstanding notes receivable
at March 31, 2008 and 2007 was 16.4% and 15.9%, respectively, with individual
rates ranging from 0% to 17.9%.  Notes receivable with an interest
rate of 0%, originated primarily between 1997 and 2003, have an outstanding
balance at March 31, 2008 of $89,000.  In connection with the sampler
program, we routinely enter into notes receivable with terms of 10
months.  Notes receivable from sampler sales were $3.4 million and
$2.9 million at March 31, 2008 and 2007, respectively, and are non-interest
bearing.
 
 We
consider accounts over 60 days past due to be delinquent.  As of March
31, 2008, $4.2 million of notes receivable, net of accounts charged off, were
considered delinquent. An additional $26.0 million of notes receivable, of which
$22.9 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 if two consecutive
payments are made.
 
 Notes
receivable are scheduled to mature as follows at March 31, 2008 (in
thousands):
 
 For
      the 12-Month Period Ending March 31,2009
              
              $
              41,7802010
              
              
              42,0482011
              
              
              46,3762012
              
              
              50,7832013
              
              
              53,910Thereafter
              
              
              139,824374,721Less
      allowance for uncollectible notes
              
              
              (70,401
              )Notes
      receivable, net
              
              $
              304,320
   The
activity in gross notes receivable is as follows for the three months ended
March 31, 2008 and 2007 (in thousands):
 
 2008
              
              
              2007Balance,
      beginning of period
              
              $
              359,035
              
              
              $
              297,835Sales
              
              
              50,456
              
              
              
              40,125Collections
              
              
              (21,725
              )
              
              
              (19,043
              )Receivables
      charged off
              
              
              (13,045
              )
              
              
              (8,308
              )Balance,
      end of period
              
              $
              374,721
              
              
              $
              310,609
   The
activity in the allowance for uncollectible notes is as follows for the three
months ended March 31, 2008 and 2007 (in thousands):
 
 2008
              
              
              2007Balance,
      beginning of period
              
              $
              69,128
              
              
              $
              68,118Estimated
      uncollectible revenue
              
              
              14,318
              
              
              
              8,541Receivables
      charged off
              
              
              (13,045
              )
              
              
              (8,308
              )Balance,
      end of period
              
              $
              70,401
              
              
              $
              68,351
 12
 Index
  Note
5 – Debt
 
 The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at March 31, 2008 and December 31, 2007 (in
thousands):
 
 
 March 31,
                
                
                December 31,
                
                
                Revolving2008
                
                
                2007
                
                
                Term
                
                Maturity$100
      million receivable-based revolver ($100 million maximum combined
      receivable, inventory and acquisition commitments, see inventory /
      acquisition component below)
                
                $
                68,568
                
                
                $
                63,119
                
                
                1/31/10
                
                1/31/13$50
      million
      receivable-based revolver
                
                
                12,477
                
                
                
                14,122
                
                
                4/29/08
                
                4/29/08$35
      million receivable-based revolver
                
                
                6,803
                
                
                
                8,044
                
                
                12/31/08
                
                12/31/11$150
      million receivable-based revolver
                
                
                64,878
                
                
                
                59,268
                
                
                9/3/09
                
                9/3/11$37.5
      million receivable-based revolver
                
                
                22,258
                
                
                
                9,860
                
                
                9/28/09
                
                9/28/12$66.4
      million receivable-based non-revolving conduit loan
                
                
                11,396
                
                
                
                13,489
                
                
                —
                
                3/22/14$26.3
      million receivable-based non-revolving conduit loan
                
                
                6,622
                
                
                
                7,765
                
                
                —
                
                9/22/11$128.1
      million receivable-based non-revolver
                
                
                61,225
                
                
                
                68,761
                
                
                —
                
                7/16/18Inventory
      / acquisition loan agreement (see receivable-based revolver
      above)
                
                
                27,224
                
                
                
                30,005
                
                
                1/31/10
                
                1/31/12$30
      million inventory loan agreement
                
                
                23,761
                
                
                
                20,091
                
                
                4/29/09
                
                4/29/11$15
      million inventory loan agreement
                
                
                12,702
                
                
                
                12,982
                
                
                12/31/08
                
                12/31/10Various
      notes, due from January 2009 through August 2016, collateralized by
      various assets
                
                
                6,579
                
                
                
                6,970
                
                
                —
                
                variousTotal
      notes payable
                
                
                324,493
                
                
                
                314,476Capital
      lease obligations
                
                
                1,554
                
                
                
                1,722
                
                
                —
                
                variousTotal
      notes payable and capital lease obligations
                
                
                326,047
                
                
                
                316,198101⁄2%
      senior subordinated notes, due 2008
                
                
                2,146
                
                
                
                2,146
                
                
                —
                
                4/1/088.0%
      senior subordinated notes, due 2010
                
                
                24,671
                
                
                
                24,671
                
                
                —
                
                4/1/10Total
      senior subordinated notes
                
                
                26,817
                
                
                
                26,817Total
                
                $
                352,864
                
                
                $
                343,015
 
 
 At March
31, 2008, our senior credit facilities provided for loans of up to $496.7
million, of which $178.8 million was available for future
advances.  Our weighted average cost of borrowings for the quarter
ended March 31, 2008 was 6.4% compared to 7.8% for the quarter ended March 31,
2007.
 
 Note
6 – Fair Value Measurement
 
 As
discussed in Note 2, we adopted SFAS No. 157 on January 1, 2008, which
among other things, requires enhanced disclosures about assets and liabilities
measured at fair value.  Our adoption of SFAS No. 157 was limited to
financial assets and liabilities, which primarily relate to the investment in
our special purpose entity and a derivative contract.
 
 SFAS No.
157 includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures.  The
fair value hierarchy is based on inputs to valuation techniques that are used to
measure fair value that are either observable or
unobservable.  Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on market data
obtained from independent sources while unobservable inputs reflect a reporting
entity’s pricing based upon its own market assumptions.  The fair
value hierarchy consists of the following three levels:
 
 Level
      1  -
              Inputs
      are quoted prices in active markets for identical assets or
      liabilities.
 Level
      2  -
              Inputs
      are quoted prices for similar assets or liabilities in an active market,
      quoted prices for identical or similar assets or liabilities in markets
      that are not active, inputs other than quoted prices that are observable
      and market-corroborated inputs which are 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.
 13
 Index
  The
following table represents our assets measured at fair value on a recurring
basis as of March 31, 2008 and the basis for that measurement (in
thousands):
 
 Fair Value Measurements at Reporting Date
      UsingDescription
              
              March 31,
                2008
              
              
              Quoted
      Prices in
                Active
      Markets for
                Identical
      Assets
                (Level 1)
              
              
              Significant
      Other
                Observable
      Inputs
                (Level 2)
              
              
              Significant
                Unobservable
      Inputs
                (Level 3)Investment
      in special purpose entity
              
              $
              6,693
              
              
              $
              —
              
              
              $
              —
              
              
              $
              6,693Interest
      rate cap derivative
              
              
              40
              
              
              
              —
              
              
              
              40
              
              
              
              —Total
              
              $
              6,733
              
              
              $
              —
              
              
              $
              40
              
              
              $
              6,693
 
 The
following table is a rollforward of the investment in our special purpose entity
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) (in thousands):
 
 Beginning
      balance – December 31, 2007
              
              $
              7,315Net
      investment returns
              
              
              (622
              )Ending
      balance – March 31, 2008
              
              $
              6,693
  Note
7 – Subsidiary Guarantees
 
 All
subsidiaries of the Company, except Silverleaf Finance II, Inc. (“SF-II”),
SF-III, Silverleaf Finance IV, LLC (“SF-IV”), and Silverleaf Finance V, L.P.
(“SF-V”), have guaranteed our senior subordinated notes of $26.8 million at
March 31, 2008. Separate financial statements and other disclosures concerning
these guaranteeing 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 March 31, 2008 and December 31, 2007,
and no operations for the three months ended March 31, 2008 and
2007.
 
 Note 8–Commitments and
Contingencies
 
 We are
currently subject to litigation arising in the normal course of our business.
From time to time, such litigation includes claims regarding employment, tort,
contract, truth-in-lending, the marketing and sale of Vacation Intervals, and
other consumer protection matters.  Litigation has been initiated from
time to time by persons seeking individual recoveries for themselves, as well
as, in some instances, persons seeking recoveries on behalf of an alleged class.
In our judgment, none of the lawsuits currently pending against us, either
individually or in the aggregate, is expected to have a material adverse effect
on our business, results of operations, or financial position.
 
 Various
legal actions and claims may be instituted or asserted in the future against us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements.  Some of these matters may
involve claims, which, if granted, could be materially adverse to our financial
position.
 
 Litigation
is subject to many uncertainties, and the outcome of individual litigated
matters is not predictable with assurance. We will establish reserves from time
to time when deemed appropriate under generally acceptable accounting
principles. However, the outcome of a claim for which we have not deemed a
reserve to be necessary may be decided unfavorably against us and could require
us to pay damages or incur other expenditures that could be materially adverse
to our business, results of operations, or financial position.
 
 Note
9 – Subsequent Events
 
 On April
1, 2008, we entered into an amendment with one of our senior lenders to decrease
the availability of an existing receivables-based, revolving line of credit from
$50 million to $20 million and extend the revolving term and maturity date from
April 29, 2008 to June 30, 2008.
 14
 Index
  Item
2.  Management’sDiscussion and Analysis of
Financial Condition and Results of Operations
 
 Forward-Looking
Statements
 
 The
following discussion should be read in conjunction with the financial statements
and notes thereto appearing elsewhere herein. This report contains
forward-looking statements within the meaning of applicable federal securities
laws.  Silverleaf Resorts, Inc. (the “Company” or “we” or “our” or
“us”) cautions investors that any forward-looking statements presented herein,
or which management may express orally or in writing from time to time, are
based on management’s beliefs and assumptions at that time. Throughout this
report, words such as “anticipate,” “believe,” “expect,” “intend,” “may,”
“might,” “plan,” “estimate,” “project,” “should,” “will,” “result,” and other
similar expressions, which do not relate solely to historical matters, are
intended to identify forward-looking statements. Such statements are subject to
risks, uncertainties, and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends,
uncertainties, and factors beyond our control. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected.  We caution investors that while forward-looking statements
reflect our good-faith beliefs at the time such statements are made, such
statements are not guarantees of future performance and are affected by actual
events that occur after said statements are made. We expressly disclaim any
responsibility to update forward-looking statements, whether as a result of new
information, future events, or otherwise. Accordingly, investors should use
caution in relying on past forward-looking statements, which were based on
results and trends existing when those statements were made, to anticipate
future results or trends.
 
 Some
risks and uncertainties that may cause our actual results, performance, or
achievements to differ materially from those expressed or implied by
forward-looking statements include, among others, those discussed in our Form
10-K as filed with the Securities and Exchange Commission on March 12, 2008.
These risks and uncertainties continue to be relevant to our performance and
financial condition. Moreover, we operate in a very competitive and rapidly
changing environment where new risk factors emerge from time to time. It is not
possible for management to predict all such risk factors, nor can management
assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as indicators of actual results.
 
 Executive
Overview
 
 As of
March 31, 2008, 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,
swimming, horseback riding, boating, and many organized activities for children
and adults. We have a Vacation Interval ownership base of over 107,000
members.  Our condensed consolidated financial statements include the
accounts of Silverleaf Resorts, Inc. and its subsidiaries, with the exception of
SF-III, all of which are wholly-owned.
 
  15
 Index
  Results
of Operations
 
 The
following table sets forth certain operating information for the Company for the
three months ended March 31, 2008 and 2007:
 
 2008
              
              
              2007As
      a percentage of total revenues:Vacation
      Interval sales
              
              
              97.1
              %
              
              
              90.7
              %Estimated
      uncollectible revenue
              
              
              (21.4
              )%
              
              
              (14.5
              )%Net
      sales
              
              
              75.7
              %
              
              
              76.2
              %Interest
      income
              
              
              21.6
              %
              
              
              21.3
              %Management
      fee income
              
              
              1.2
              %
              
              
              1.1
              %Other
      income
              
              
              1.5
              %
              
              
              1.4
              %Total
      revenues
              
              
              100.0
              %
              
              
              100.0
              %As
      a percentage of Vacation Interval sales:Cost
      of Vacation Interval sales
              
              
              7.5
              %
              
              
              10.8
              %Sales
      and marketing
              
              
              51.5
              %
              
              
              51.4
              %As
      a percentage of total revenues:Operating,
      general and administrative
              
              
              13.9
              %
              
              
              14.3
              %Depreciation
              
              
              1.7
              %
              
              
              1.5
              %As
      a percentage of interest income:Interest
      expense and lender fees
              
              
              42.1
              %
              
              
              45.0
              %
  Results
of Operations for the Three Months Ended March 31, 2008 and 2007
 
 Revenues
 
 Revenues
for the quarter ended March 31, 2008 were $67.0 million, representing an $8.2
million, or 13.9%, increase compared to revenues of $58.8 million for the
quarter ended March 31, 2007.  As discussed below, the increase is
primarily attributable to an $11.7 million increase in Vacation Interval sales
during the first quarter of 2008.
 
 The
following table summarizes our Vacation Interval sales for the three months
ended March 31, 2008 and 2007 (dollars in thousands, except average
price):
 
 2008
                
                
                2007Average
                
                
                
                
                
                
                
                
                AverageSales
                
                
                Intervals
                
                
                Price
                
                
                Sales
                
                
                Intervals
                
                
                PriceInterval
      Sales to New Customers
                
                $
                27,035
                
                
                
                2,502
                
                
                $
                10,805
                
                
                $
                23,267
                
                
                
                1,917
                
                
                $
                12,137Upgrade
      Interval Sales to Existing Customers
                
                
                21,473
                
                
                
                2,314
                
                
                
                9,280
                
                
                
                19,402
                
                
                
                2,262
                
                
                
                8,577Additional
      Interval Sales to Existing Customers
                
                
                16,573
                
                
                
                1,966
                
                
                
                8,430
                
                
                
                10,696
                
                
                
                1,098
                
                
                
                9,741Total
                
                $
                65,081
                
                
                
                
                
                
                
                
                
                
                $
                53,365
 
 
 Vacation
Interval sales increased 22.0% during the first quarter of 2008 versus the same
period of 2007 due to increased interval sales to both new and existing
customers as a result of an overall growth in customer tours and continued high
closing percentages on our sales to both new and existing customers. The number
of interval sales to new customers increased 30.5% offset by a decrease in
average prices of 11.0% (due to promotional pricing we offered during the first
quarter of 2008 on select products), which resulted in a 16.2% net increase in
sales to new customers in the first quarter of 2008 versus the same period of
2007. The number of upgrade interval sales to existing customers increased 2.3%
and average prices increased 8.2%, resulting in a 10.7% increase in upgrade
interval sales to existing customers during the first quarter of 2008 compared
to the same period of 2007. The number of additional interval sales to existing
customers increased 79.1% and average prices decreased 13.5% (due to promotional
pricing on additional interval sales) resulting in a 54.9% net increase in
additional interval sales to existing customers during the first quarter of 2008
versus the same period of 2007.  In addition, Vacation Interval sales
to existing owners comprised 58.5% and 56.4% of total Vacation Interval sales in
the first quarters of 2008 and 2007, respectively, which continues a favorable
sales mix trend toward sales with relatively lower related sales and marketing
costs.
 
 Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $14.3 million for the first quarter of 2008 versus $8.5
million for the same period of 2007.  Our estimated uncollectible
revenue as a percentage of Vacation Interval sales was 22.0% during the quarter
ended March 31, 2008 and 16.0% during the same period of 2007.  Our
receivables charged off as a percentage of beginning of period gross notes
receivable was 3.6% for the first quarter of 2008 compared to 2.8% for the same
period of 2007.  Since the second quarter of 2007, we have increased
the provision for estimated uncollectible revenue each successive quarter as
follows: 17.5% for the third quarter of 2007, 18.5% for the fourth quarter of
2007, and 22.0% for the first quarter of 2008.  By doing so, we have
maintained the allowance for uncollectible notes at a level management considers
adequate to provide for anticipated losses resulting from customer
defaults.  We will review the allowance each quarter and make such
additional adjustments as necessary.
  16
 Index
  
 Interest
income increased $2.0 million, or 15.6%, to $14.5 million for the first quarter
of 2008 from $12.5 million for the first quarter of 2007. The increase primarily
resulted from a higher average notes receivable balance during the first quarter
of 2008 versus the same period of 2007, and an increase in the average yield on
our outstanding notes receivable to 16.4% at March 31, 2008 from 15.9% at March
31, 2007.
 
 Management
fee income, which consists of management fees collected from the resorts’
management clubs, cannot exceed the management clubs’ net income. Management fee
income increased $165,000 to $780,000 for the first three months of 2008 versus
$615,000 for the same period of 2007, due primarily to increased profitability
of the resorts’ management clubs.
 
 Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items. Other income was $976,000
for the first quarter of 2008 compared to $840,000 for the first quarter of
2007.  The increase is primarily attributable to income from our water
park at The Villages Resort which opened in January 2008 and an increase in
hotel income during the first quarter of 2008 versus the comparable prior year
period.
 
 Cost of Vacation Interval
Sales
 
 Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including amounts already recognized and estimated future revenues.
Common costs, including amenities, are allocated to inventory cost among the
phases that those costs are expected to benefit. The estimate of total revenue
for a phase considers factors such as trends in uncollectibles, changes in sales
mix and unit sales prices, repossessions of Vacation Intervals, effects of
upgrade programs, and past and expected future sales programs to sell slow
moving inventory units.
 
 Cost of
Vacation Interval sales decreased to 7.5% of Vacation Interval sales for the
first quarter of 2008 compared to 10.8% in the 2007 comparable
period.  Although our estimated inventory cost did not decrease during
the first quarter of 2008, cost of sales decreased due to expected increases in
our future relative sales value related to an increase in repossession and
resale of timeshare intervals and an increase in expected future sales price on
some of our higher-end products.
 
 Sales and
Marketing
 
 Sales and
marketing expense as a percentage of Vacation Interval sales remained fairly
constant at 51.5% for the first quarter of 2008 versus 51.4% for the comparable
prior year period.  The $6.1 million increase in sales and marketing
expense is primarily attributable to our increased volume of Vacation Interval
sales as well as increased costs related to new and existing promotional
programs used to generate tours.  These promotional programs were a
primary factor in providing us with a 20.7% growth in tours to potential new
purchasers and a 22.0% increase in Vacation Interval sales during the first
quarter of 2008 versus the first quarter of 2007.  Although the sales
mix has shifted slightly towards higher margin sales to existing customers in
the first quarter of 2008 compared to the first quarter of 2007, a decrease in
average sales price to new customers offset this improvement.
 
 In
accordance with SFAS No. 152, 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, allowing us additional opportunities
to sell Vacation Intervals to prospective customers, the incremental costs of
our sampler sales typically exceed incremental sampler revenues. Accordingly,
$988,000 and $866,000 of sampler revenues were recorded as a reduction to sales
and marketing expense for the quarters ended March 31, 2008 and 2007,
respectively.
 
  17
 Index
  Operating, General and
Administrative
 
 Operating,
general and administrative expenses as a percentage of total revenues decreased
to 13.9% for the first quarter of 2008 versus 14.3% for the same period of
2007.  Overall, operating, general and administrative expenses
increased by $869,000 for the first quarter of 2008 compared to the same period
of 2007, primarily due to an increase in
professional fees of $205,000, an increase in salaries of $133,000, an increase
in utilities of $112,000, and an increase in bank fees of $108,000 (resulting
from higher credit card processing fees related to increased sales
volume).
 
 Depreciation
 
 Depreciation
expense as a percentage of total revenues increased to 1.7% for the quarter
ended March 31, 2008 versus 1.5% for the same quarter of 2007. Overall,
depreciation expense was $1.1 million for the first quarter of 2008 compared to
$858,000 for the same period of 2007, an increase of $256,000 due to capital
expenditures of $19.4 million since March 31, 2007.
 
 Interest Expense and Lender
Fees
 
 Interest
expense and lender fees as a percentage of interest income decreased to 42.1%
for the first quarter of 2008 compared to 45.0% for the same period of
2007.  Overall, interest expense and lender fees increased $451,000
for the first quarter of 2008 versus the same period of 2007 primarily due to a
larger average debt balance outstanding during the first quarter of 2008, which
was $347.0 million in the first quarter of 2008 compared to $290.6 million for
the prior year comparative period, partially offset by a decrease in our
weighted average cost of borrowings to 6.4% for the quarter ended March 31, 2008
compared to 7.8% for the quarter ended March 31, 2007.
 
 Income before Provision for
Income Taxes
 
 Income
before provision for income taxes increased to $12.1 million for the quarter
ended March 31, 2008 compared to $10.7 million for the quarter ended March 31,
2007 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
38.5% for the quarters ended March 31, 2008 and 2007. As of January 1, 2008, we
had no unrecognized tax benefits, and as a result, no benefits that would affect
the effective income tax rate. We do not anticipate any significant changes
related to unrecognized tax benefits in the next 12 months. As of December 31,
2007 and March 31, 2008, we did not require an accrual for interest and
penalties related to unrecognized tax benefits.
 
 Net
Income
 
 Net
income was $7.4 million for the quarter ended March 31, 2008 compared to $6.6
million for the quarter ended March 31, 2007 as a result of the above-mentioned
operating results.
 
 Liquidity
and Capital Resources
 
 Sources of Cash.We generate cash primarily from the cash received on the sale of Vacation
Intervals, the financing and collection of customer notes receivable from
Vacation Interval owners, the sale of notes receivable to our special purpose
entities, management fees, sampler sales, marina income, golf course and pro
shop income, 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
amounts of 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 three months ended March 31, 2008, cash used in operating activities was
$6.3 million compared to $7.3 million during the same period of
2007.  This $1.0 million decrease in cash used in operating activities
during the first three months of 2008 versus the comparable 2007 period
primarily resulted from the timing of operational payments.
  18
 Index
  
 Although
it appears we have adequate liquidity to meet our needs through 2009, we
continue to identify additional financing arrangements.  To finance
our growth, development, and any future expansion plans, we may at some time be
required to consider the issuance of other debt, equity, or collateralized
mortgage-backed securities.  Any debt we incur or issue may be secured
or unsecured, have fixed or variable rate interest, and may be subject to such
terms as we deem prudent.
 
 Uses of Cash.During the first three months of 2008, investing activities used $6.2
million of cash compared to $3.8 million during the first three months of
2007.  The total cash used in both of these periods included purchases
of equipment, leasehold improvements, and construction of the water park at The
Villages Resort, as well as other general capital expenditures.
 
 During
the first quarter of 2008, net cash provided by financing activities was $9.8
million compared to $22.5 million for the comparable 2007 period.  The
net cash of $9.8 million provided by financing activities during the first three
months of 2008 was primarily the result of $51.9 million of proceeds received
from borrowings against pledged notes receivable and our inventory loans,
partially offset by $42.1 million of payments on borrowings against pledged
notes receivable and our inventory loans.  The net cash of $22.5
million provided by financing activities during the first quarter of 2007 was
primarily the result of $49.0 million of proceeds received from borrowings
against pledged notes receivable and our inventory loans, partially offset by
$26.8 million of payments on borrowings against pledged notes
receivable.
 
 At March
31, 2008, our senior credit facilities provided for loans of up to $496.7
million, of which $317.9 million of principal related to advances under the
credit facilities was outstanding.  As of March 31, 2008, the weighted
average cost of funds for all borrowings was 6.4%. 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 March 31, 2008, $4.2 million of notes were
more than 60 days past due.
 
 Certain
debt agreements include restrictions on our ability to pay dividends based on
minimum levels of net income and cash flow. Our ability to pay dividends might
also be restricted by the Texas Business Corporation Act.
 
 Off-Balance-Sheet Arrangements.In 2005, we consummated a securitization transaction with our
wholly-owned off-balance-sheet qualified special purpose finance subsidiary,
SF-III, which was formed for the purpose of issuing $108.7 million of its Series
2005-A Notes in a private placement through UBS Securities LLC.  In
connection with this transaction, we sold SF-III $132.8 million in timeshare
receivables that were previously pledged as collateral under revolving credit
facilities with our senior lenders and SF-I, our former qualified special
purpose entity which was dissolved in 2005.  The Series 2005-A Notes
are secured by timeshare receivables we sold to SF-III pursuant to a transfer
agreement between us and SF-III.  The proceeds from the sale of the
timeshare receivables to SF-III of $108.7 million were primarily used to fully
pay off the credit facility of SF-I and to pay down amounts we owed under credit
facilities with our senior lenders. The timeshare receivables we sold to SF-III
are without recourse to us, except for breaches of certain representations and
warranties at the time of sale. In accordance with the agreement, we are
responsible for servicing the timeshare receivables purchased by SF-III and
receive fees for our services equal to 1.75% of eligible timeshare receivables
held by the facility. Such fees were $150,000 and $261,000 for the three months
ended March 31, 2008 and 2007, respectively.
 
 At March
31, 2008, SF-III held notes receivable totaling $32.8 million, with related
borrowings of $26.0 million. Except for the repurchase of notes that fail to
meet initial eligibility requirements, we are not obligated to repurchase
defaulted or any other contracts sold to SF-III. As the servicer of notes
receivable sold to SF-III, we are obligated to foreclose upon Vacation Intervals
securing defaulted note receivables. We may, but are not obligated to, purchase
foreclosed Vacation Intervals for an amount equal to the net fair market value
of such Vacation Intervals, which may not be less than fifteen percent of the
original acquisition price that the customer paid for the Vacation Interval. For
the three months ended March 31, 2008, we paid $201,000 to repurchase Vacation
Intervals securing defaulted notes receivable to facilitate the re-marketing of
those Vacation Intervals.  The carrying value of our investment in
SF-III was $6.7 million at March 31, 2008, which represents our maximum exposure
to loss regarding our obligation with SF-III.
 
 Our
special purpose entities provide us with additional credit availability under
our facilities with our current senior lenders.  As we require credit
facilities to provide liquidity necessary to fund our costs and expenses, it is
vitally important to our liquidity plan to have financing available to us in
order to finance future sales, since we finance the majority of our timeshare
sales over seven to ten years.
 
 Income Taxes.For regular
federal income tax purposes, we report substantially all of the Vacation
Interval sales we finance under the installment method.  Under this
method, income on sales of Vacation Intervals is not recognized until cash is
received, either in the form of a down payment or as installment payments on
customer notes receivable.  The deferral of income tax liability
conserves cash resources on a current basis.  Interest is imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the payment is
received.  If we are not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year. The condensed consolidated financial statements do not contain an
accrual for any interest expense that would be paid on the deferred taxes
related to the installment method as the interest expense is not reasonably
estimable.  We do not currently have a valuation reserve for deferred
taxes.
  19
 Index
  In
addition, we are subject to current alternative minimum tax ("AMT") as a result
of the deferred income that results from the installment sales
treatment.  Payment of AMT creates a deferred tax asset in the form of
a minimum tax credit, which, unless otherwise limited, reduces the future
regular tax liability attributable to Vacation Interval sales. 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. Nevertheless, we had
significant AMT in 2007 and for the three months ended March 31, 2008, and
anticipate that we will pay significant AMT in future periods.
 
 Federal
net operating losses (“NOLs”) of $155.5 million existing at December 31, 2007
expire between 2020 and 2021. Realization of the deferred tax assets arising
from NOLs is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards.
 
 Due to a
restructuring that occurred in 2002, an ownership change within the meaning of
Section 382(g) of the Internal Revenue Code (the “Code”) occurred.  As
a result, 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.  There is an annual limitation of $768,000, which was the value
of our stock immediately before the ownership change, multiplied by the
applicable long-term tax exempt rate.  We believe that $22.7 million
of our net operating loss carryforwards as of December 31, 2007 were subject to
the Section 382 limitations.
 
 Item
3.  Quantitativeand Qualitative Disclosures About
Market Risk
 
 General— Interest on our
notes receivable portfolio, senior subordinated debt, capital leases, and
miscellaneous notes is fixed, whereas interest on our primary loan agreements,
which had a total facility amount of $496.7 million at March 31, 2008, have a
fixed-to-floating debt ratio of 25% fixed-rate debt to 75% floating-rate
debt.  The impact of a one-point effective interest rate change on the
$238.7 million balance of variable-rate financial instruments at March 31, 2008
would be approximately $367,000 on our results of operations, after taxes, for
the three months ended March 31, 2008, or approximately $0.01 per diluted
share.
 
 At March
31, 2008, the carrying value of our notes receivable portfolio approximates fair
value because the weighted average interest rate on the portfolio approximates
current interest rates received on similar notes. Our fixed-rate notes
receivable are subject to interest rate risk and will decrease in fair value if
market rates increase, which may negatively impact our ability to sell our
fixed-rate notes in the marketplace.  A hypothetical one-point
interest rate increase in the marketplace at March 31, 2008 would result in a
fair value decrease of approximately $12.3 million on our notes receivable
portfolio.
 
 Credit Risk — We are exposed
to on-balance-sheet credit risk related to our notes receivable. We are exposed
to off-balance-sheet credit risk related to notes sold.
 
 We offer
financing to the buyers of Vacation Intervals at our resorts. These buyers
generally make a down payment of 10% to 15% of the purchase price and deliver a
promissory note to us for the balance. The promissory notes generally bear
interest at a fixed rate, are payable over a seven to ten year period, and are
secured by a deed of trust on the Vacation Interval. We bear the risk of
defaults on these promissory notes. Although we prescreen prospects via credit
scoring techniques in the early stages of the marketing and sales process, we
generally do not perform a detailed credit history review of our
customers.  Due to the state of the economy in general, and recent
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.  During the first quarters
of 2008 and 2007, approximately 22.7% and 21.2%, respectively, of our sales were
made to customers with FICO® scores below 600.  In addition, we have
experienced an increase in defaults in our loan portfolio as compared to
historical rates.  Due to deteriorating economic conditions, there can
be no assurance that defaults have stabilized or that they will not
worsen.  These and other recent adverse changes in the credit markets
and related uncertain economic conditions may eliminate or reduce the
availability or increase the cost of significant sources of funding for us in
the future.  We increased our estimated uncollectible revenue as a
percentage of Vacation Interval sales to 22.0% during the first quarter of 2008
from 18.5% in the previous quarter.  However, if default rates for our
borrowers were to continue to rise, it may require an additional increase in our
estimated uncollectible revenue.  We will continue to evaluate our
collections procedures 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.
  20
 Index
  If a
buyer of a Vacation Interval defaults, we generally must foreclose on the
Vacation Interval and attempt to resell it; the associated marketing, selling,
and administrative costs from the original sale are not recovered; and such
costs must be incurred again to resell the Vacation Interval. Although in many
cases we may have recourse against a Vacation Interval buyer for the unpaid note
balance, certain states have laws that limit our ability to recover personal
judgments against customers who have defaulted on their loans. Accordingly, we
have generally not pursued this remedy.
 
 Interest Rate Risk —We have
historically derived net interest income from our financing activities because
the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceed the interest rates we pay to our senior lenders.
Because 75% of our 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 recently been trending downward, any increase in interest rates,
particularly if sustained, could have a material adverse effect on our results
of operations, cash flows, and financial position.
 
 To
partially offset potential increases in interest rates, we have executed two
interest rate swaps related to our conduit loan with SF-II, with fixed rates of
7.04% and 7.90%, for a total notional amount of $18.0 million at March 31,
2008.  Such interest rate swaps expire between September 2011 and
March 2014.  Our variable funding note with SF-IV also acts as an
interest rate hedge since it contains a provision for an interest rate
cap.  The balance outstanding under this line of credit at March 31,
2008 was $64.9 million.  Such variable funding note will mature in
September 2011.
 
 In
addition, the Series 2005-A Notes related to our off-balance-sheet special
purpose finance subsidiary, SF-III, with a balance of $26.0 million at March 31,
2008, bear interest at a blended fixed rate of 5.4%.
 
 Availability of Funding Sources —We fund substantially all of the 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, thereby
having 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
4.  Controlsand Procedures
 
 Management's
Report on Internal Control over Financial Reporting
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2008.  Based on that
evaluation, our management concluded that our disclosure controls and procedures
as of the end of the period covered by this report have been designed and are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms.  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.  Management is required to apply judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
  21
 Index
  There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls 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 the 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 acceptable accounting
principles. However, the outcome of a claim for which we have not deemed a
reserve to be necessary may be decided unfavorably against us and could require
us to pay damages or incur other expenditures that could be materially adverse
to our business, results of operations, or financial position.
 
 We were
the plaintiff in a suit filed in the U.S. District Court for the District of
Massachusetts.  The case was styled Silverleaf Resorts, Inc. v.
Berkshire Wind Power, LLC, Civil Action No. 06-30152.  We
initiated this lawsuit because the defendant was seeking to construct a wind
farm directly adjacent to the property line of a 500 acre tract of land we own
in Berkshire County, Massachusetts.  Prior to commencement of this
litigation, we were in the initial stages of developing this tract of
land.  Our concern was that if the defendant was 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
future development plans for our property.  Accordingly, we sought to
permanently enjoin the construction of the wind farm facility unless certain of
its proposed turbines were set back further from our property line on the
grounds that, among other things, as proposed it would have constituted a
nuisance and would have unreasonably interfered with the reasonable use and
enjoyment of our property. Alternatively, we requested damages for the
prospective nuisance.  The defendant asserted that we should be
responsible for certain costs, including the costs to take the depositions of
the defendant's experts.  We asserted that the defendant should pay the
costs of the depositions of our experts.  The court originally
scheduled a trial for May 21, 2007 on the issue of our request for an
injunction, but postponed the trial until November 13, 2007 to allow the parties
time to resolve their differences.  Continuing settlement discussions
between the parties were unsuccessful and in October 2007, we moved to dismiss
this action without prejudice.  The defendant opposed our motion to
dismiss unless the dismissal was with prejudice or, alternatively, that the
defendant was allowed to recover certain statutory costs. On February 29, 2008,
the court allowed our Motion to Dismiss without prejudice on our outstanding
nuisance claim, ruling that the parties should bear their own cost, expenses,
and attorney’s fees.  Final judgment dismissing the suit was also
entered on February 29, 2008.
 
 We are a
co-plaintiff with two other parties in a related matter brought in the Land
Court Department of the Trial Court of the Commonwealth of
Massachusetts, 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.  In this action, we and our co-plaintiffs have
challenged the validity of a special permit issued by the Lanesborough Zoning
Board of Appeals to Berkshire Wind Power, LLC, for a portion of a road needed to
access the wind farm facility that was the subject of the U.S. District Court
Action.  We seek a court decree that the special permit granted Berkshire
Wind expired from non-use and is therefore no longer valid. The case is now in
fast track discovery, but no final trial date has been set.
 
 Item
1A.  RiskFactors
 
 No
changes.
  22
 Index
  Item
6.     Exhibits
 
 (a)
              Exhibits
      filed herewith:
 
 31.1
              Certification
      of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002
 
 31.2
              Certification
      of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002
 
 31.3
              Certification
      of CAO Pursuant to Section 302 of Sarbanes-Oxley Act of
    2002
 
 32.1
              Certification
      of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
 
 32.2
              Certification
      of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
 
 32.3
              Certification
      of CAO Pursuant to Section 906 of Sarbanes-Oxley Act of
    2002
  23
 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:  May
      7, 2008
              By:
              /s/  ROBERT
      E. MEADRobert
      E. MeadChairman
      of the Board andChief
      Executive OfficerDated:  May
      7, 2008
              By:
              /s/  ROBERT
      M. SINNOTTRobert
      M. SinnottChief
      Financial OfficerDated:  May
      7, 2008
              By:
              /s/  HARRY
      J. WHITE, JR.Harry
      J. White, Jr.Chief
      Accounting Officer
 24
 Index
  INDEX
TO EXHIBITS
 
 Exhibit
      No.
              Description31.1
              Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.3
              Certification
      of CAO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              Certification
      of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              Certification
      of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.3
              Certification
      of CAO Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002






25