UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K


(Mark
One)





T
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
The Fiscal Year Ended December 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
      or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
      Employer Identification No.)1221
      River Bend Drive, Suite 120
              75247Dallas,
      Texas
              (Zip
      Code)(Address
      of Principal Executive Offices)





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





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





Common
Stock, $.01 par value





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





None


_______________





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes £     No
T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities
Act.     Yes £     No
T





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


Yes T     No
£













Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     £





Indicate
by check mark whether the registrant is 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.


Large
      accelerated filer     £
              Accelerated
      filer     £
              Non-accelerated
      filer     T
              Smaller
      reporting company     £





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


Yes £     No
T


_______________





The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, based upon the closing sales price of the common stock on
June 30, 2008 as reported on The NASDAQ Capital Market, was
$29,847,506.  For this purpose, “affiliates” include members of the
Board of Directors and executive management of the registrant and all persons
known to be the beneficial owners of more than 5% of the registrant’s
outstanding common stock.





As of
March 10, 2009, 38,146,943 shares of the registrant’s common stock, $0.01 par
value, were issued and outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Certain
information required by Part III of this report (Items 10, 11, 12, 13, and 14)
is incorporated by reference from the registrant’s definitive proxy statement to
be filed pursuant to Regulation 14A with respect to the registrant’s fiscal 2009
annual meeting of shareholders.  If such proxy statement is not so
filed on or before 120 days after the end of the registrant’s fiscal year, such
information will be included in an amendment to this Form 10-K to be filed no
later than the end of such 120-day period.





2





FORM 10-K TABLE OF CONTENTS





Item Number
                                                                          
                                                                          PagePART IItem
      1.
                                                                          Business - Governmental Regulation, Environmental Matters,
      Utility Regulation, Other Regulation
                                                                          4Item
      1A.
                                                                          Risk Factors
                                                                          19Item
      1B.
                                                                          Unresolved Staff Comments
                                                                          29Item
      2.
                                                                          Properties
                                                                          29Item
      3.
                                                                          Legal Proceedings
                                                                          35Item
      4.
                                                                          Submission of Matters to a Vote of Security
      Holders
                                                                          36PART IIItem
      5.
                                                                          Market for Registrant’s Common Equity, Related Stockholder
      Matters, and Issuer Purchases of Equity Securities
                                                                          37Item
      6.
                                                                          Selected Financial Data
                                                                          40Item
      7.
                                                                          Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                                                          41Item
      7A.
                                                                          Quantitative and Qualitative Disclosures about Market
      Risk
                                                                          55Item
      8.
                                                                          Financial Statements and Supplementary Data
                                                                          57Item
      9.
                                                                          Changes In and Disagreements With Accountants on Accounting and
      Financial Disclosure
                                                                          57Item
      9A.
                                                                          Controls and Procedures
                                                                          57Item
      9B.
                                                                          Other Information
                                                                          58PART IIIItem
      10.
                                                                          Directors, Executive Officers, and Corporate
      Governance
                                                                          58Item
      11.
                                                                          Executive Compensation
                                                                          58Item
      12.
                                                                          Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                                                          59Item
      13.
                                                                          Certain Relationships and Related Transactions, and Director
      Independence
                                                                          59Item
      14.
                                                                          Principal Accountant Fees and Services
                                                                          59PART IVItem
      15.
                                                                          Exhibits and Financial Statement Schedules
                                                                          60Index to Consolidated Financial
    Statements
                                                                          F-1





3
 Table of Contents





Forward-Looking
Statements





Throughout
this annual report on Form 10-K and documents incorporated herein by reference,
we make forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and
Section 21E of the Securities Exchange Act of 1934, including in particular,
statements about our plans, objectives, expectations, and prospects under the
headings “Business” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” You can identify these statements by
forward-looking words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “plan,” “seek,” and similar expressions. Although we believe that the
plans, objectives, expectations, and prospects reflected in or suggested by our
forward-looking statements are reasonable, those statements involve
uncertainties and risks, and we can give no assurance that our plans,
objectives, expectations, and prospects will be achieved. Important factors that
could cause our actual results to differ materially from results anticipated by
such forward-looking statements are contained herein under the headings “Risk
Factors,” “Properties,” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” as well as elsewhere herein. Any or all of
these factors could cause our actual results and financial or legal status for
future periods to differ materially from those expressed or referred to in any
forward-looking statement. All written or oral forward-looking statements
attributable to us are expressly qualified in their entirety by these cautionary
statements.





In
addition, forward-looking statements speak only as of the date on which they are
made. Such forward-looking statements are based on our beliefs, assumptions, and
expectations of our future performance taking into account all information known
to us at the time such statements are made. These beliefs, assumptions, and
expectations can change as a result of many potential events or factors, not all
of which are known to us. If a change occurs, our business, financial condition,
liquidity, results of operations, plans, and other objectives may vary
materially from those expressed in our forward-looking statements. We caution
investors that while forward-looking statements reflect our good-faith beliefs
at the time such statements are made, such statements are not guarantees of
future performance and are affected by actual events that occur after said
statements are made. We expressly disclaim any responsibility to update
forward-looking statements, whether as a result of new information, future
events, or otherwise. Accordingly, investors should use caution in relying on
past forward-looking statements, which were based on results and trends existing
when those statements were made, to anticipate future results or
trends.





PART
I





ITEM
      1.
            BUSINESS





Overview





Silverleaf
Resorts, Inc. (the “Company,” “Silverleaf,” “we,” or “our”) was incorporated in
Texas in 1989. Our principal business is the development, marketing, and
operation of “getaway” and “destination” timeshare resorts. As of December 31,
2008, we own a) seven “getaway resorts” in Texas, Missouri, Illinois, and
Georgia (the “Getaway Resorts”) and b) six “destination resorts” in Texas,
Missouri, Massachusetts, and Florida (the “Destination Resorts”). In addition,
we own and operate a hotel located near the Winter Park recreational area in
Colorado which provides our owners with another destination vacation alternative
and gives Silverleaf an entry point into this increasingly popular destination
area.





The
Getaway Resorts are designed to appeal to vacationers seeking comfortable and
affordable accommodations in locations convenient to their residences and are
located near major metropolitan areas. Our Getaway Resorts are located close to
principal areas where we market our vacation products to facilitate more
frequent “short-stay” getaways. We believe such short-stay getaways are growing
in popularity as a vacation trend. Our Destination Resorts are located in or
near areas with national tourist appeal and offer our customers the opportunity
to upgrade into a more upscale resort area as their lifestyles and travel
budgets permit. Both the Getaway Resorts and the Destination Resorts
(collectively, the “Existing Resorts”) provide a quiet, relaxing vacation
environment. We believe our resorts offer our customers an economical
alternative to commercial vacation lodging. The average price for an annual
one-week vacation ownership interval (“Vacation Interval”) for a two-bedroom
unit at the Existing Resorts was $10,328 for 2008 and $9,607 for
2007.





Owners of
Vacation Intervals at the Existing Resorts (“Silverleaf Owners”) enjoy certain
distinct benefits. These benefits include (i) use of vacant lodging facilities
at the Existing Resorts through our “Bonus Time” Program; (ii) year-round access
to the Existing Resorts' non-lodging amenities such as fishing, boating,
horseback riding, swimming, tennis, or golf on a daily basis for little or no
additional charge; (iii) the right to exchange the use of a Vacation Interval at
one of our Existing Resorts for a different time period at a different Existing
Resort through our internal exchange program; and (iv) use of the Pinnacle Lodge
hotel located near the Winter Park recreational area in
Colorado.  These benefits are subject to availability and other
limitations. Silverleaf Owners may also enroll in the Vacation Interval exchange
network operated by RCI, LLC (“RCI”). As of December 31, 2008, all of our
Existing Resorts are under contract with the RCI exchange network.





4
 Table of Contents





Certain
Significant 2008 Events





·
            In
      January 2008, we opened our first indoor water park at The Villages Resort
      in Flint, Texas. The opening of the indoor water park marks a significant
      milestone for us, as we continue to enhance our resorts and increase our
      appeal to both new customers and existing
  owners.





·
            In
      June 2008, we executed a term securitization transaction through a
      newly-formed, wholly-owned and fully consolidated special purpose finance
      subsidiary, Silverleaf Finance VI, LLC (“SF-VI”). SF-VI was formed for the
      purpose of issuing approximately $115.4 million of its Timeshare
      Loan-Backed Notes Series 2008-A (“Series 2008-A Notes”) in a private
      offering and sale through certain financial institutions. The Series
      2008-A Notes were issued in seven classes with a blended coupon rate of
      7.263% and at discounts totaling approximately $8.0 million. These
      discounts are amortized as an adjustment to interest expense over the
      terms of the related loans using the effective interest method, which
      generates a blended effective interest rate on these notes of
      approximately 11.3% at December 31, 2008. The Series 2008-A Notes have a
      maturity date of March 2020 and are secured by customer notes receivable
      sold to SF-VI. The cash proceeds from the sale of the customer notes
      receivable to SF-VI were primarily used to repay approximately $93.8
      million in consolidated indebtedness to senior lenders or to Silverleaf
      Finance IV, LLC (“SF-IV”).





·
            During
      2008 we amended our senior credit facility agreements as
      follows:





▪▪
              We
      amended our $50 million receivables-based revolver to reduce availability
      to $20 million and extend the revolving term and maturity date from April
      2008 to June 2010. We also amended our inventory facility with this same
      senior lender to increase availability from $30 million to $50 million and
      extend the revolving period from April 2009 to April 2010 and the maturity
      date from April 2011 to April
2012.





▪▪
              We
      amended our $37.5 million receivables-based revolver to increase
      availability to $72.5 million, extend the revolving period from September
      2009 to July 2010, and extend the maturity date from September 2012 to
      July 2013.





▪▪
              We
      amended our $35 million revolving receivables credit facility to increase
      availability to $50 million, extend the revolving period from December
      2008 to August 2011, and extend the maturity date from December 2011 to
      August 2014. The increase in borrowing capacity of the receivables credit
      facility was facilitated based on the termination of our $15 million
      revolving inventory credit facility with this same senior
      lender.





·
            On
      September 13, 2008, Hurricane Ike caused property damage and business
      interruption related to our Seaside Resort in Galveston, Texas, and our
      Piney Shores Resort just north of Houston, Texas. As a result, Seaside
      Resort was closed from September 10 through October 17, at which time we
      began taking reservations and gradually opening units. The resort was
      fully operational by December 12. Piney Shores Resort was closed from
      September 13 to September 25. We maintain insurance that covers both
      physical damage and business-interruption losses. We accrued $291,000
      related to this incident, which represents our insurance deductibles and
      expenditures deemed uncollectible. In addition, in November 2008, we
      received $1.3 million in business-interruption proceeds, which was
      recorded in other income.





Certain
Significant Events Subsequent to 2008





·
            In
      February 2009, we received $1.5 million in business-interruption proceeds
      related to Hurricane Ike. These proceeds will be reflected in other income
      in the first quarter of 2009 as collection was not assured at December 31,
      2008.





Operations





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





·
            acquiring
      and developing timeshare resorts;


·
            marketing
      and selling one-week annual and biennial Vacation Intervals to prospective
      first-time owners;


·
            marketing
      and selling upgraded and additional Vacation Intervals to existing
      Silverleaf Owners;


·
            financing
      the purchase of Vacation Intervals;
and


·
            managing
      timeshare resorts.





5
 Table of Contents





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





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





At the
conclusion of the Vacation Interval sales process, we offer potential purchasers
financing of up to 90% of the purchase price over a seven-year to ten-year
period. We have historically financed our operations by borrowing from
third-party lending institutions at an advance rate of 75% to 80% of eligible
customer receivables. At December 31, 2008 and 2007, we had a portfolio of
approximately 44,912 and 41,481 customer promissory notes, respectively,
totaling $397.8 million and $358.7 million, respectively, with a weighted
average yield of 16.7% and 16.5% per annum, respectively, which compares
favorably to our weighted average cost of borrowings of 6.8% per annum at
December 31, 2008. We cease recognition of interest income when collection is no
longer deemed probable. At December 31, 2008 and 2007, $7.6 million and $6.0
million, or 1.9% and 1.7%, respectively, of our loans to Silverleaf Owners were
61 to 90 days past due. We record the cancellation of all notes that become 90
days delinquent, net of notes that are no longer 90 days delinquent.
Consequently, as of December 31, 2008 and 2007, we had no timeshare loans
receivable over 90 days past due. We continue collection efforts with regard to
all timeshare notes receivable from customers until all collection techniques
that we utilize have been exhausted. We provide for uncollectible notes by
reserving 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.





Each
timeshare resort has a timeshare owners' association (a “Club”). At December 31,
2008, each Club (other than the club at our Orlando Breeze resort) operates
through a centralized organization to manage its respective resort on a
collective basis. This centralized organization is Silverleaf Club, a Texas
not-for-profit corporation. Silverleaf Club is under contract with each Club for
each of the Existing Resorts (with the exception of Orlando Breeze) to operate
and manage their resort. In turn, we have a contract (“Management Agreement”)
with Silverleaf Club, under which we perform the supervisory and management
functions of the resorts on a collective basis. All costs of operating the
timeshare resorts, including management fees payable to us under the Management
Agreement, are to be covered by monthly dues paid by the timeshare owners to
their respective Clubs as well as income generated by the operation of certain
amenities at the timeshare resorts.





Orlando
Breeze has its own club (“Orlando Breeze Resort Club”), which is operated
independently of Silverleaf Club.  We also provide certain supervisory
and management functions for Orlando Breeze Resort Club under the terms of a
written agreement.





Marketing
and Sales





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





Marketing.Our in-house marketing
staff creates databases of new prospects, which are principally developed
through cooperative arrangements with outside vendors to identify prospects who
meet our marketing criteria. Using our automated dialing and bulk mailing
equipment, in-house marketing specialists conduct coordinated telemarketing and
direct mail procedures which invite prospects to tour one of our resorts and
receive an incentive, such as a free gift, without regard to whether or not a
Vacation Interval is purchased.





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





6
 Table of Contents





Sales
representatives receive commissions ranging from 4.0% to 14.0% of the sales
price of a Vacation Interval depending on established guidelines. In addition,
sales managers receive commissions of 1.25% to 4.5% and sales directors receive
commissions of 1.0% to 3.5%. Commissions received by sales managers and sales
directors are subject to chargebacks in the event the purchaser fails to make
the first required payment.





Prospects
who are interested in a lower priced product are offered biennial (alternate
year) intervals or other lower priced products that entitle the prospect to
sample a resort for a specified number of nights. The prospect may apply the
cost of a lower priced product against the down payment on a Vacation Interval
if the interval is purchased by a certain date. As mentioned, we also market
upgraded Vacation Intervals as well as additional weeks to existing Silverleaf
Owners through both on-site and off-site marketing programs. In recent years, we
have been focusing on shifting our sales mix to more heavily represent sales to
existing customers. These upgrade and additional week programs have been well
received by Silverleaf Owners and accounted for approximately 59.8% and 59.7% of
our gross revenues from Vacation Interval sales for the years ended December 31,
2008 and 2007, respectively. By offering lower priced products and upgraded and
additional week Vacation Intervals, we believe we offer an array of affordable
products for all prospects in our target market. Also, by offering products with
a range of prices, we attempt to broaden our market with initial sales of lower
priced products, which we attempt to gradually upgrade and/or augment with
additional week sales over time.





In March
2006, we opened our first showroom-style, off-site sales office. The showroom,
located in the Dallas/Fort Worth metroplex in Irving, Texas, operates under the
name “Silverleaf Vacation Store.” It offers potential customers an interactive
“virtual” experience of our resorts, including a model unit and photo gallery.
This showroom generated $10.6 million and $10.7 million in annual sales to new
members for the years ended December 31, 2008 and December 31, 2007,
respectively. The showroom has provided us with a significant sales opportunity
by enabling potential customers to experience the quality and service of our
resorts without leaving their own community. We expect that new owners who
purchase at this showroom will later participate in our upgrade and additional
week sales programs.





Our sales
representatives are a critical component of our sales and marketing
effort.  We continually strive to attract, train, and retain a
dedicated sales force. We provide intensive sales instruction and training,
which assists sales representatives in acquainting prospects with each
particular resort's benefits. Our sales instruction and training also focuses on
compliance by each sales representative with all federal, state, and local laws
applicable to timeshare sales. At December 31, 2008, we had a sales force of 723
employees.





Seasonality





Our sales
of Vacation Intervals have generally been lower in the months of November and
December. Cash flow and earnings may be impacted by the timing of development,
the completion of future resorts, and the potential impact of weather or other
conditions in the regions where we operate. Our operating results could be
negatively impacted by these factors.





Customer
Financing





We offer
financing to buyers of Vacation Intervals at our resorts. Buyers who elect to
finance their purchases through us typically make down payments of at least 10%
of the purchase prices and deliver promissory notes for the balances. The
promissory notes generally bear interest at a fixed rate, are generally payable
over a seven-year to ten-year period, and are secured by a deed of trust on the
Vacation Interval. We bear the risk of defaults on these promissory notes. In
2005, we began obtaining a pre-screen credit score on touring families. If the
credit score does not meet certain minimum credit criteria, a 15% down payment
is generally required instead of our standard 10% down payment. There are a
number of risks associated with financing customers’ purchases of Vacation
Intervals.  For an explanation of these risks, please see the section
of this annual report entitled “Risk Factors.”





For the
year ended December 31, 2008, we accrued estimated uncollectible revenue,
reflected as an offset to Vacation Interval sales, at 24.6% of the Vacation
Interval sales. The allowance for uncollectible notes was 19.3% of gross notes
receivable as of both December 31, 2008 and December 31, 2007. We will continue
to evaluate our collections process and marketing programs with a view toward
establishing procedures aimed at reducing note defaults and improving the credit
quality of our customers.





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. For example,
under Texas law, if we pursue a post-foreclosure deficiency claim against a
customer, the customer may file a court proceeding to determine the fair market
value of the property foreclosed upon. In such event, we may not recover a
personal judgment against the customer for the full amount of the deficiency,
but may recover only to the extent that the indebtedness owed to the Company
exceeds the fair market value of the property. Accordingly, we have generally
not pursued this remedy because we have not found it to be cost
effective.





7
 Table of Contents





At
December 31, 2008, we had notes receivable in the approximate principal amount
of $397.0 million with an allowance for uncollectible notes of $76.7
million.





Additionally,
at December 31, 2008, our off-balance-sheet finance subsidiary, Silverleaf
Finance III, LLC (“SF-III”), held notes receivable totaling $22.5 million with
related borrowings of $17.1 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 notes receivable.  Although we are not
obligated, we may 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 year ended December 31, 2008, we paid $639,000
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 $4.9 million at December 31, 2008,
which represents our maximum exposure to loss regarding our investment in
SF-III.





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 intend
to borrow either directly or through our fully consolidated special purpose
finance subsidiaries additional funds under our existing revolving credit
facilities with our lenders to finance our operations. At December 31, 2008, we
and our fully consolidated subsidiaries had borrowings under our credit
facilities in the approximate principal amount of $362.5 million, of which
$299.6 million of such facilities are receivables based and currently permit
borrowings of 75% to 80% of the principal amount of performing notes. Payments
from Silverleaf Owners on such notes are credited directly to our senior lenders
and applied against our loan balances. At December 31, 2008, we had a portfolio
of approximately 44,912 Vacation Interval customer promissory notes in the
approximate principal amount of $397.8 million, of which $7.6 million in
principal amount was 61 days or more past due and therefore ineligible as
collateral.





At
December 31, 2008, our portfolio of customer notes receivable had a weighted
average yield of 16.7%. At such date, our borrowings had a weighted average cost
of 6.8% with a fixed-to-floating debt ratio of 38% fixed to 62% floating.
However, the majority of our floating-rate debt is subject to interest-rate
floors between 5.25% and 8.00%.  We have historically derived net
interest income from our operating activities because the interest rates we
charge our customers who finance the purchase of their Vacation Intervals exceed
the interest rates we pay our senior lenders. As 62% of our existing senior
indebtedness currently bears interest at variable rates and our customer notes
receivable bear interest at fixed rates, increases in interest rates would erode
the spread in interest rates that we have historically experienced and could
cause our interest expense on borrowings to exceed our interest income on our
portfolio of customer loans. Although interest rates declined throughout 2008,
any increase in interest rates above applicable floor rates, particularly if
sustained, could have a material adverse effect on our results of operations,
liquidity, and financial position.





In
addition, the Series 2005-A Notes related to our off-balance-sheet special
purpose finance subsidiary, SF-III, with a balance of $17.1 million at December
31, 2008, bear interest at a blended fixed rate of 5.4%.





Limitations
on availability of financing would inhibit sales of Vacation Intervals due to
(i) the lack of funds to finance the initial negative cash flow that results
from sales that we finance, and (ii) reduced demand if we are unable to provide
financing to purchasers of Vacation Intervals. We ordinarily receive only 10% to
15% of the purchase price as a cash down payment on the sale of a Vacation
Interval that we finance, but we incur the full costs of developing, marketing,
and selling the Vacation Interval. Maximum borrowings available under our
current credit agreements may not be sufficient to cover these costs, thereby
straining capital resources, liquidity, and capacity to grow. In addition, to
the extent interest rates decrease on alternative financing sources available to
our customers, we face an increased risk that customers will pre-pay their loans
and reduce our income from operating activities.





We
typically provide financing to customers over a seven-year to ten-year period.
Our customer notes receivable had a weighted average maturity of seven years at
December 31, 2008. Our credit facilities have scheduled maturities between June
2010 and March 2020. Additionally, our revolving credit facilities could be
declared immediately due and payable as a result of any default by us.
Considering forecasted sales, customer defaults, and expansion plans, our senior
credit facilities provide adequate liquidity to meet our needs into
2010.  We are continuing to identify additional financing arrangements
beyond such date.





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Development
and Acquisition Process





We intend
to further develop our Existing Resorts and/or acquire new resorts only to the
extent we deem such expansion financially beneficial, and then only as the
capital markets permit.





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





We manage
all construction activities internally. We typically complete the development of
a new resort's basic infrastructure and models within one year, with additional
units added within 180 to 270 days, weather permitting, based on demand. In
addition, a functional sales office may be established at each new
resort.





Clubs
/ Silverleaf Club





Silverleaf
Club directors are elected by the majority of the boards of directors of the
individual Clubs. We have the right to supervise the management of our resorts
under the terms of the Management Agreement. Silverleaf Owners are obligated to
pay monthly dues to their respective Clubs, which obligation is secured by a
lien on their Vacation Interval in favor of their Club. If a Silverleaf Owner
fails to pay his monthly dues, his Club may institute foreclosure proceedings
regarding the delinquent Silverleaf Owner's Vacation Interval. The number of
foreclosures that occurred as a result of Silverleaf Owners failing to pay
monthly dues was 1,419 in 2008 and 1,558 in 2007. Typically, we purchase at
foreclosure all Vacation Intervals that are the subject of foreclosure
proceedings instituted by the Club because of delinquent dues.  One of
our resorts issues a certificate of beneficial interest to Silverleaf Owners who
purchase there.  The obligation to pay monthly dues at this resort is
secured by the certificate of beneficial interest.  If a Silverleaf
Owner at this resort fails to pay his monthly dues, his Club may terminate the
certificate of beneficial interest, rather than foreclose.





The Club
at each timeshare resort (other than Orlando Breeze) operates through a
centralized organization provided by Silverleaf Club to manage the resorts on a
collective basis. The consolidation of resort operations through Silverleaf Club
permits: (i) a centralized reservation system for all resorts; (ii) substantial
cost savings by purchasing goods and services for all resorts on a group basis,
which generally results in a lower cost of goods and services than if such goods
and services were purchased by each resort on
an individual basis;(iii) centralized management for the entire resort system; (iv)
centralized legal, accounting, and administrative services for the entire resort
system; and (v) uniform implementation of various rules and regulations
governing all resorts. Aside from the marina and water park at The Villages and
the golf courses at our Holiday Hills and Apple Mountain resorts, all furniture,
furnishings, recreational equipment, and other personal property used in
connection with the operation of the Existing Resorts are owned by either that
resort’s Club or Silverleaf Club, rather than by us.





Orlando
Breeze has its own club, Orlando Breeze Resort Club, which is operated
independently of Silverleaf Club. However, we supervise the management and
operation of the Orlando Breeze Resort Club under the terms of a written
agreement.





At
December 31, 2008, Silverleaf Club had 874 full-time employees and Orlando
Breeze Resort Club had 11 full-timeemployees. Each Club is
solely responsible for their salaries, as well as the direct expenses of
operating the Existing Resorts, while we are responsible for the direct expenses
of new development and all marketing and sales activities. To the extent
Silverleaf Club provides payroll, administrative, and other services that
directly benefit the Company, we reimburse Silverleaf Club for such services and
vice versa.





Silverleaf
Club and Orlando Breeze Resort Club collect dues from Silverleaf Owners, plus
certain other amounts assessed against Silverleaf Owners from time to time, and
generate income by the operation of certain amenities at the Existing Resorts.
Silverleaf Club and Orlando Breeze Resort Club dues were approximately $64.96
per month ($32.48 for biennial owners) during 2008, except for certain members
of Oak N’ Spruce Resort who prepay dues at an annual rate of $546. Such amounts
are used by the respective Clubs to pay the costs of operating the Existing
Resorts and the management fees due to the Company pursuant to applicable
management agreements. Our management agreements with Silverleaf Club and
Orlando Breeze Resort Club authorize us to supervise the management and
operations of the Existing Resorts and provide for a maximum management fee
equal to 15% of gross revenues of either Silverleaf Club or Orlando Breeze
Resort Club, but our right to receive such a fee on an annual basis is limited
to the net income of Silverleaf Club or Orlando Breeze Resort Club. However, if
we do not receive the maximum fee, such deficiency is deferred for payment to
succeeding years, subject again to the annual net income limitation. Due to
anticipated refurbishment of units at the Existing Resorts, together with the
operational and maintenance expenses associated with our current expansion and
development plans, our 2008 management fees were subject to the annual net
income limitations. Accordingly, for the year ended December 31, 2008,
management fees recognized were $3.1 million. For financial reporting purposes,
management fees from Silverleaf Club and Orlando Breeze Resort Club are
recognized based on the lower of (i) the aforementioned maximum fees or (ii) net
income. The Silverleaf Club management agreement expires March 2020 and
continues year-to-year thereafter unless cancelled by either party. The Orlando
Breeze Resort Club management agreement expires January 2011 and continues in
successive 3-year terms thereafter unless cancelled by either party. As a result
of the past performance of the Silverleaf Club and Orlando Breeze Resort Club,
it is uncertain whether Silverleaf Club and Orlando Breeze Resort Club will
consistently generate positive net income. Therefore, future income to the
Company under the management agreements with Silverleaf Club and Orlando Breeze
Resort Club could be limited. At December 31, 2008, there were approximately
109,000 Vacation Interval owners who pay dues to Silverleaf Club and
approximately 2,000 Vacation Interval owners who pay dues to Orlando Breeze
Resort Club. If we develop new resorts outside of Florida, their respective
Clubs are expected to be added to the Silverleaf Club management
agreement.





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Other
Operations





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





Samplers.
Revenues related to sampler contracts, which entitle a prospective owner to
sample a resort during certain periods, are deferred until the customer uses the
stay or allows the contract to expire. 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. Conversely,
incremental revenues in excess of related incremental costs are recorded as a
reduction of inventory in the consolidated balance sheet. Incremental costs
include costs that would not have been incurred had we not sold samplers. Since
our sampler sales primarily function as a marketing program, providing us
additional opportunities to sell Vacation Intervals to prospective customers,
the incremental costs of our sampler sales typically exceed incremental sampler
revenues. Accordingly, during the years ended December 31, 2007 and 2008, all
sampler sales were recorded as a reduction to sales and marketing expense, in
the amounts of $3.4 million and $3.7 million, respectively.





Mini-Vacations.
We began a new marketing program in 2008 which offers prospective customers a
free night at a hotel near one of our resorts in exchange for them taking a tour
of one of our resorts.





Other Properties.During 2006, we sold 9 acres of an 11-acre tract of land we owned in
Mississippi for $789,000 and recognized a gain of $499,000 on the sale. However,
we remain entitled to 85% of any profits generated with regards to the remaining
portion of the land while an affiliate of a director of the Company owns a 10%
net profits interest and non-affiliates own the remaining 5% net profits
interest.





We also
own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts
that we are in the initial stages of developing. During September 2007, we
purchased an additional 394.3 acre tract which adjoins the 500 acres. We have
not yet finalized our future development plans for this site.





In
November 2007, we purchased 15.3 acres of undeveloped land in Grand County,
Colorado with plans to develop up to 136 Vacation Interval units on the
property. The acquired land is located approximately two miles from our Pinnacle
Lodge hotel.





Policies
with Respect to Certain Activities





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





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We do
not:





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


·
            underwrite
      securities of other issuers;


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


·
            offer
      securities in exchange for
property.





Nor do we
propose to engage in any of the above activities. From time to time we have
repurchased or otherwise reacquired our own common stock and other securities.
On July 29, 2008, we authorized the repurchase of up to two million shares of
our common stock to be acquired from time to time in the open market or in
negotiated transactions. During 2008, we acquired 56,211 outstanding shares of
common stock under this program, which we reclassified as treasury stock. This
stock repurchase program expires in July 2010. We have no policy or proposed
policy with respect to future repurchases or re-acquisitions of our common stock
or other securities. However, our Board of Directors may approve such repurchase
activities if it finds these activities to be in the best interests of the
Company and its shareholders.





Investment
Policies





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





Participation
in Vacation Interval Exchange Networks





Internal
Exchanges. Each Silverleaf Owner has certain exchange privileges through
Silverleaf Club which may be used on an annual basis to: (i) exchange an
interval for a different interval (week) at the same resort so long as the
desired interval is of an equal or lower rating; or (ii) exchange an interval
for an interval (week) of equal or lower rating at any of our other Existing
Resorts. Silverleaf Owners of Getaway Resorts can only exchange for an interval
in a Getaway Resort unless they own a “Presidents,” “Chairmans,” or “Ambassador”
Vacation Interval. These exchange rights are a convenience we provide Silverleaf
Owners and are conditioned upon availability of the desired interval or resort.
Approximately 10,668 exchanges occurred in 2008. Silverleaf Owners pay an
exchange fee of $75 to Silverleaf Club for each such internal
exchange.





External Exchange
Network. We believe participation in a Vacation Interval exchange network
operated by RCI makes our Vacation Intervals more attractive. At December 31,
2008, all Existing Resorts are affiliated with RCI, and approximately 40% of
Silverleaf Owners participate in RCI's exchange network. RCI membership allows
participating Silverleaf Owners to exchange their occupancy right in a unit for
an occupancy right in a unit of the same or lower color rating in another
participating resort based upon availability and the payment of a variable
exchange fee. A member may exchange a Vacation Interval for an occupancy right
in another participating resort by a) listing the Vacation Interval as available
with the exchange organization and b) requesting occupancy at another
participating resort, indicating the particular resort or geographic area to
which the member desires to travel, the size of the unit desired, and the period
during which occupancy is desired.





RCI
assigns a rating of “red,” “white,” or “blue” to each Vacation Interval for
participating resorts based upon a number of factors, including the location and
size of the unit, the quality of the resort, and the period during which the
Vacation Interval is available, and attempts to satisfy exchange requests by
providing an occupancy right in another Vacation Interval with a similar rating.
For example, an owner of a red Vacation Interval may exchange his interval for a
red, white, or blue interval. An owner of a white Vacation Interval may exchange
only for a white or blue interval, and an owner of a blue interval may exchange
only for a blue interval. At December 31, 2008, RCI’s designation of our units
as red, white, and blue Vacation Intervals is approximately 68%, 20%, and 12%,
respectively. If RCI is unable to meet the member's initial request, it suggests
alternative resorts based on availability. RCI’s annual membership fees, which
are at the option and expense of the owner of the Vacation Interval, are
currently $89. Exchange rights with RCI require an additional fee of $164 for
both domestic and foreign exchanges. Resorts participating in the exchange
networks are required to adhere to certain minimum standards regarding available
amenities, safety, security, décor, unit supplies, maid service, room
availability, and overall ambiance. See “Risk Factors” for a description of
risks associated with the exchange programs.





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Competition





All of
our operations are contained within and are in support of a single industry
segment – the vacation ownership industry – and we currently operate in only six
geographic areas of the United States. These geographic areas are Texas,
Missouri, Massachusetts, Illinois, Georgia, and Florida. We encounter
significant competition from other timeshare resorts in the markets that we
serve. The timeshare industry is highly fragmented and includes a large number
of local and regional resort developers and operators. However, some of the
world's most recognized lodging, hospitality, and entertainment companies, such
as Marriott International, Inc. (“Marriott”), Walt Disney Company (“Disney”),
Hilton Hotels Corporation (“Hilton”), Hyatt Corporation (“Hyatt”), and Four
Seasons Hotels, Inc. (“Four Seasons”) have entered the industry. Other companies
in the timeshare industry, including Wyndham Worldwide Corporation (“Wyndham”),
Starwood Hotels & Resorts Worldwide Inc. (“Starwood”), Bluegreen Corporation
(“Bluegreen”), and Diamond Resorts International (“Diamond”), most of which are,
or are subsidiaries of, public companies with enhanced access to capital and
other resources that public ownership implies.





Wyndham,
Bluegreen, and Diamond own timeshare resorts in or near Branson, Missouri, which
compete with our Holiday Hills and Ozark Mountain resorts, and to a lesser
extent with our Timber Creek Resort. Additionally, these and a number of other
timeshare resorts operate in most states in which we own Existing Resorts which
generates further competition.





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





The
American Resort Development Association (“ARDA”) recently published a study
entitled “State of the Vacation Timeshare Industry: United States Study 2008”
(the “ARDA Study”), which reported timeshare sales volume in the United States
of $10.6 billion for 2007, compared to $5.5 billion in 2002 and $3.2 billion in
1998, equating to a 10-year compound annual growth rate of approximately 13
percent. The study estimated that 4.7 million households owned one or more U.S.
timeshare intervals or equivalent points at January 1, 2008, representing a 6.8%
increase over the prior year. However, there can be no assurance that the
existing levels of growth in timeshare demand will continue or that we will not
have to compete with larger and better capitalized competitors in future periods
for a declining number of potential timeshare purchasers.





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





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





Governmental
Regulation





General.
Our marketing and sales of Vacation Intervals and other operations are subject
to extensive regulation by the federal government and the states and
jurisdictions in which the Existing Resorts are located and in which our
Vacation Intervals are marketed and sold. On a federal level, the Federal Trade
Commission has taken the most active regulatory role through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-in-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Settlement Procedures Act, the Consumer Credit
Protection Act, the Telephone Consumer Protection Act, the Telemarketing and
Consumer Fraud and Abuse Prevention Act, the Fair Housing Act, the Civil Rights
Acts of 1964 and 1968, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act, and the Americans with Disabilities Act (“ADA”). Additionally, as
a publicly owned company, we are subject to all federal and state securities
laws, including the Sarbanes-Oxley Act of 2002.





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





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





Most of
the states where we currently operate have enacted laws and regulations that
limit our ability to market our resorts through telemarketing activities. These
states have enacted “do not call” lists that permit consumers to block
telemarketing activities by registering their telephone numbers for a period of
years for a nominal fee. We purchase these lists from the various states
quarterly and do not contact those telephone numbers listed. Additionally, the
federal Do-Not-Call Implementation Act, enacted on March 11, 2003, provided for
the establishment of a National Do Not Call Registry administered by the United
States Federal Trade Commission (“FTC”) under its Telemarketing Sales Rule
(“TSR”) and the Federal Communications Commission. The FTC began enforcement
actions in October 2003 for violations of the TSR by telemarketers. The
Do-Not-Call Improvement Act of 2007, which became law in February 2008, ensures
that telephone numbers placed on the National Do Not Call Registry will remain
on it permanently. Violations could result in penalties up to $11,000 per
violation. The FTC reported that approximately 172 million telephone numbers had
been registered on the National Do Not Call List Registry as of October 1, 2008.
Since the introduction of state and federal Do-Not-Call legislation, we have
become more reliant on direct mail solicitations as an alternative to some of
the telemarketing techniques we have historically utilized. Existing and future
restrictions on telemarketing practices could cause our sales to
decline.





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





Historically,
the timeshare industry has been and continues to be afflicted with negative
publicity and prosecutorial attention due to, among other things, marketing
practices which were widely viewed as deceptive or fraudulent. Included among
the many timeshare companies which have been the subject of federal, state, and
local enforcement actions and investigations in the past were certain of the
partnerships and corporations that were merged into the Company prior to 1996
(the “Merged Companies,” or individually “Merged Company”). Some of the
settlements, injunctions, and decrees resulting from litigation and enforcement
actions (the “Orders”) to which certain of the Merged Companies consented in the
1980s purport to bind all successors and assigns, and accordingly may also be
enforceable against the Company. In addition, at that time the Company was
directly a party to one such Order issued in Missouri. No past or present
officers, directors, or employees of the Company or any Merged Company were
named as subjects or respondents in any of these Orders. However, each Order
purports to bind generically unnamed “officers, directors, and employees” of
certain Merged Companies. Therefore, certain of these Orders may be interpreted
to be enforceable against the present officers, directors, and employees of the
Company even though they were not individually named as subjects of the
enforcement actions which resulted in these Orders. These Orders require, among
other things, that all parties bound by the Orders, including the Company,
refrain from engaging in deceptive sales practices in connection with the offer
and sale of Vacation Intervals. The requirements of the Orders are substantially
what applicable state and federal laws and regulations mandate, but the
consequence of violating the Orders may be that sanctions (including possible
financial penalties and suspension or loss of licensure) may be imposed more
summarily and may be harsher than would be the case if the Orders did not bind
the Company. In addition, the existence of the Orders may be viewed negatively
by prospective regulators in jurisdictions where the Company does not now do
business, with attendant risks of increased costs and reduced
opportunities.





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In early
1997, we were the subject of consumer complaints that triggered governmental
investigations into the Company's affairs. In March 1997, we entered into an
Assurance of Voluntary Compliance with the Texas Attorney General, in which we
agreed to make additional disclosure to purchasers of Vacation Intervals
regarding the limited availability of our Bonus Time program during certain
periods. We paid $15,200 for investigatory costs and attorneys' fees of the
Texas Attorney General in connection with this matter. Also, in March 1997, we
entered into an agreed order (the “Agreed Order”) with the Texas Real Estate
Commission requiring that we comply with certain aspects of the Texas Timeshare
Act, Texas Real Estate License Act, and Rules of the Texas Real Estate
Commission, with which we had allegedly been in non-compliance until mid-1995.
The allegations included (i) our admitted failure to register the Missouri
Destination Resorts in Texas (due to our misunderstanding of the reach of the
Texas Timeshare Act); (ii) payment of referral fees for Vacation Interval sales,
the receipt of which was improper on the part of the recipients; and (iii)
miscellaneous other actions alleged to violate the Texas Timeshare Act, which we
denied. While the Agreed Order acknowledged that we independently resolved ten
consumer complaints referenced in the Agreed Order, discontinued the practices
complained of, and registered the Missouri Destination Resorts during 1995 and
1996, the Texas Real Estate Commission ordered us to cease these discontinued
practices and enhance our disclosure to purchasers of Vacation Intervals. In the
Agreed Order, we agreed to make a voluntary donation of $30,000 to the State of
Texas. The Agreed Order also directed that we revise our training manual for
timeshare salespersons and verification officers. While the Agreed Order
resolved all of the alleged violations contained in complaints received by the
Texas Real Estate Commission through December 31, 1996, we have encountered and
expect to encounter some level of additional consumer complaints, regulatory
scrutiny, and periodic remedial action in the ordinary course of our
business.





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





We are
not currently aware of any non-compliance with any state or federal statute,
rule, or regulation which we believe would have a material adverse effect on our
business, results of operations, or financial position.





Environmental
Matters. Under
various federal, state, and local environmental laws, ordinances, and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and tort liability and for
investigation and clean-up costs incurred by such parties in connection with the
contamination. Such laws typically impose clean-up responsibility and liability
without regard to whether the owner or operator knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The cost of investigation, remediation,
or removal of such substances may be substantial, and the presence of such
substances, or the failure to properly remediate the contamination on such
property, may adversely affect the owner's ability to sell such property or to
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances at a disposal or treatment
facility also may be liable for the costs of removal or remediation of a release
of hazardous or toxic substances at such disposal or treatment facility, whether
or not such facility is owned or operated by such person. In addition, some
environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Finally, the owner or operator of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site or from environmental regulatory violations.
In connection with our ownership and operation of our properties, we may be
potentially liable for such claims.





Certain
federal, state, and local laws, regulations, and ordinances govern the removal,
encapsulation, or disturbance of asbestos-containing materials (“ACMs”) when
such materials are in poor condition or in the event of construction,
remodeling, renovation, or demolition of a building. Such laws may impose
liability for release of ACMs and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACMs. In connection with our ownership and operation of our properties, we may
be potentially liable for such costs. In 2001, we conducted a limited asbestos
survey at each of our resorts existing at that time, which did not reveal
material potential losses associated with ACMs.





14
 Table of Contents





In
addition, studies have linked radon, a naturally occurring substance, to
increased risks of lung cancer. While there are currently no state or federal
requirements regarding the monitoring for, presence of, or exposure to radon in
indoor air, the EPA and the Surgeon General recommend testing residences for the
presence of radon in indoor air. The EPA further recommends that concentrations
of radon in indoor air be limited to less than 4 picocuries per liter of air
(Pci/L) (the “Recommended Action Level”). The presence of radon in
concentrations equal to or greater than the Recommended Action Level in one or
more of our properties may adversely affect our ability to sell Vacation
Intervals at such properties and the market value of such property. We have not
tested our properties for radon.





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





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





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





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





15
 Table of Contents





Employees





At
December 31, 2008, we had 2,125 full and part-time employees and the Clubs
collectively had 885 full and part-time employees.  Our employee
relations are good, both at the Company and at the Clubs. None of our employees
are represented by a labor union and we are not aware of any union organization
efforts with respect to any of our employees.





Insurance





We carry
comprehensive liability, fire, hurricane, and storm insurance with respect to
our resorts, with policy specifications, insured limits, and deductibles
customarily carried for similar properties, which we believe are adequate.
However, certain types of losses (such as losses arising from floods in
non-floodplain areas and acts of war) generally are not insured because such
losses are either uninsurable or not economically insurable. Should an uninsured
loss or a loss in excess of insured limits occur, we could lose the capital
invested in a resort, as well as the anticipated future revenues from such
resort, and would continue to be obligated on any mortgage indebtedness or other
obligations related to the property. Any such loss could have a material adverse
effect on our results of operations,
liquidity, or financial position.





On
September 13, 2008, Hurricane Ike caused property damage and business
interruption related to our Seaside Resort in Galveston, Texas, and our Piney
Shores Resort just north of Houston, Texas. As a result, Seaside Resort was
closed from September 10 through October 17, at which time we began taking
reservations and gradually opening units. The resort was fully operational by
December 12. Piney Shores Resort was closed from September 13 to September 25.
We maintain insurance that covers both physical damage and business-interruption
losses. We accrued $291,000 related to this incident, which represents our
insurance deductibles and expenditures deemed uncollectible.  In
addition, in November 2008, we received $1.3 million in business-interruption
proceeds, which was recorded in other income.





We
self-insure for employee medical claims reduced by certain stop-loss provisions.
We also self-insure for property damage to certain vehicles and heavy
equipment.





16
 Table of Contents





DESCRIPTION
OF OUR INDEBTEDNESS AND SENIOR CREDIT FACILITIES AT DECEMBER 31,
2008





We use
our credit agreements to finance the sale of Vacation Intervals, to finance
construction, and for working capital needs. The loans are collateralized (or
cross-collateralized) by customer notes receivable, inventory, construction in
process, land, improvements, and related equipment at certain Existing Resorts.
The credit facilities secured by customer notes receivable allow advances
ranging from 75% to 80% of the unpaid balance of certain eligible customer notes
receivable.





The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at December 31, 2007 and 2008 (in
thousands):





Revolving
                                
                                
                                
                                
                                
                                Interest
                                
                                
                                Interest2007
                                
                                
                                2008
                                
                                
                                Term
                                
                                
                                Maturity
                                
                                
                                Rate
                                
                                
                                Rate Floor$100
      million receivables-based revolver ($100 million maximum combined
      receivable, inventory, and acquisition commitments,  see
      inventory / acquisition component below).
                                
                                $
                                63,119
                                
                                
                                $
                                31,284
                                
                                
                                1/31/10
                                
                                
                                1/31/13
                                
                                
                                Prime
                                
                                
                                6.00%$20
      million receivables-based revolver
                                
                                
                                14,122
                                
                                
                                
                                9,746
                                
                                
                                6/29/10
                                
                                
                                6/29/10
                                
                                
                                Prime
      + 0.75%
                                
                                
                                6.25%$50
      million receivables-based revolver
                                
                                
                                8,044
                                
                                
                                
                                5,789
                                
                                
                                8/31/11
                                
                                
                                8/31/14
                                
                                
                                Prime
                                
                                
                                6.00%$150
      million receivables-based revolver, with an interest rate cap of
      7.5%
                                
                                
                                59,268
                                
                                
                                
                                70,183
                                
                                
                                9/3/09
                                
                                
                                9/3/11
                                
                                
                                LIBOR
      + 1.25%
                                
                                
                                —$72.5
      million receivables-based revolver
                                
                                
                                9,860
                                
                                
                                
                                43,504
                                
                                
                                7/2/10
                                
                                
                                7/2/13
                                
                                
                                LIBOR
      + 2.40%
                                
                                
                                5.25%$66.4
      million receivables-based non-revolving conduit loan
                                
                                
                                13,489
                                
                                
                                
                                6,549
                                
                                
                                —
                                
                                
                                3/22/14
                                
                                
                                7.035%
                                
                                
                                —$26.3
      million receivables-based non-revolving conduit loan
                                
                                
                                7,765
                                
                                
                                
                                4,140
                                
                                
                                —
                                
                                
                                9/22/11
                                
                                
                                7.90%
                                
                                
                                —$128.1
      million receivables-based non-revolver
                                
                                
                                68,761
                                
                                
                                
                                43,526
                                
                                
                                —
                                
                                
                                7/16/18
                                
                                
                                6.70%
                                
                                
                                —$115.4
      million receivables-based non-revolver, including a total remaining
      discount of approximately $5.8 million
                                
                                
                                —
                                
                                
                                
                                84,885
                                
                                
                                —
                                
                                
                                3/15/20
                                
                                
                                7.263%
                                
                                
                                —Inventory
      / acquisition loan agreement (see $100 million receivables-based revolver
      above)
                                
                                
                                30,005
                                
                                
                                
                                28,407
                                
                                
                                1/31/10
                                
                                
                                1/31/12
                                
                                
                                Prime
      + 1.00%
                                  Prime
      + 3.00%
                                
                                
                                6.00%
                                  8.00%$50
      million inventory loan agreement
                                
                                
                                20,091
                                
                                
                                
                                34,464
                                
                                
                                4/29/10
                                
                                
                                4/29/12
                                
                                
                                Prime
      + 1.50%
                                
                                
                                7.00%$15
      million inventory loan agreement
                                
                                
                                12,982
                                
                                
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                
                                Prime
      + 2.00%
                                
                                
                                —Various
      notes, due from February 2009 through August
      2016,  collateralized by various assets with interest rates
      ranging from 6.0% to 8.5%
                                
                                
                                6,970
                                
                                
                                
                                4,684
                                
                                
                                —
                                
                                
                                various
                                
                                
                                various
                                
                                
                                —Total
      notes payable
                                
                                
                                314,476
                                
                                
                                
                                367,161Capital
      lease obligations
                                
                                
                                1,722
                                
                                
                                
                                1,910
                                
                                
                                —
                                
                                
                                various
                                
                                
                                various
                                
                                
                                —Total
      notes payable and capital lease obligations
                                
                                
                                316,198
                                
                                
                                
                                369,071101⁄2%
      senior subordinated notes, due 2008
                                
                                
                                2,146
                                
                                
                                
                                —
                                
                                
                                —
                                
                                
                                4/1/08
                                
                                
                                10.50%
                                
                                
                                —8.0%
      senior subordinated notes, due 2010
                                
                                
                                24,671
                                
                                
                                
                                23,121
                                
                                
                                —
                                
                                
                                4/1/10
                                
                                
                                8.00%
                                
                                
                                —Total
      senior subordinated notes
                                
                                
                                26,817
                                
                                
                                
                                23,121Total
                                
                                $
                                343,015
                                
                                
                                $
                                392,192





At
December 31, 2008, the LIBOR rate on our senior credit facilities was 0.44% (1
month) and the Prime rate on these facilities was 3.25%. Our weighted average
cost of borrowings for the year ended December 31, 2008 was 6.8% compared to
7.6% for the year ended December 31, 2007.





At
December 31, 2008, our senior credit facilities provided for loans of up to
$549.0 million, of which $186.6 million was available for future advances. The
following table summarizes our credit agreements with our senior lenders, our
wholly-owned and consolidated special purpose finance subsidiaries, our senior
subordinated debt and other debt, and our credit agreement with our
off-balance-sheet qualified special purpose entity (“SPE”), SF-III, as of
December 31, 2008 (in thousands):





Maximum
      Amount Available
                  
                  
                  BalanceReceivables-Based
      Revolvers
                  
                  $
                  331,534
                  
                  
                  $
                  160,506Receivables-Based
      Non-Revolvers
                  
                  
                  139,100
                  
                  
                  
                  139,100Inventory
      Loans
                  
                  
                  78,407
                  
                  
                  
                  62,871Subtotal
      Senior Credit Facilities
                  
                  
                  549,041
                  
                  
                  
                  362,477Senior
      Subordinated Debt
                  
                  
                  23,121
                  
                  
                  
                  23,121Other
      Debt
                  
                  
                  6,594
                  
                  
                  
                  6,594Subtotal
      On-Balance-Sheet
                  
                  
                  578,756
                  
                  
                  
                  392,192Off-Balance-Sheet
      Receivables-Based Term Loan
                  
                  
                  17,135
                  
                  
                  
                  17,135Grand
      Total
                  
                  $
                  595,891
                  
                  
                  $
                  409,327





During
2008, we added to and amended our senior credit facility agreements as
follows:





·
            Silverleaf Finance VI,
      LLC. In June 2008, we executed a term securitization transaction
      through a newly-formed, wholly-owned and fully consolidated special
      purpose finance subsidiary, SF-VI. SF-VI was formed for the purpose of
      issuing approximately $115.4 million of its Timeshare Loan-Backed Notes
      Series 2008-A (“Series 2008-A Notes”) in a private offering and sale
      through certain financial institutions. The Series 2008-A Notes were
      issued in seven classes with a blended coupon rate of 7.263% and at
      discounts totaling approximately $8.0 million. These discounts are
      amortized as an adjustment to interest expense over the terms of the
      related loans using the effective interest method, which generates a
      blended effective interest rate on these notes of approximately 11.3% at
      December 31, 2008. The Series 2008-A Notes have a maturity date of March
      2020. The Series 2008-A Notes are secured by customer notes receivable
      sold to SF-VI by SF-IV and Silverleaf. The customer notes receivable sold
      to SF-VI were previously sold to SF-IV or pledged as collateral by
      Silverleaf under revolving credit facilities with senior lenders. The cash
      proceeds from the sale of the customer notes receivable to SF-VI were
      primarily used to repay approximately $93.8 million in consolidated
      indebtedness to senior lenders or to
SF-IV.





17
 Table of Contents





·
            In
      April 2008, we amended our $50 million receivables-based revolver to
      reduce availability to $20 million and extend the revolving term and
      maturity date from April 2008 to June 2008. In June 2008, this
      receivables-based facility was further amended to extend the revolving
      term and maturity date from June 2008 to June 2010. We also amended our
      inventory facility with this same senior lender in June 2008 to increase
      availability from $30 million to $50 million and extend the revolving
      period from April 2009 to April 2010 and the maturity date from April 2011
      to April 2012.





·
            In
      July 2008, we amended our $37.5 million receivables-based revolver to
      increase availability to $72.5 million, extend the revolving period from
      September 2009 to July 2010, and extend the maturity date from September
      2012 to July 2013.





·
            In
      September 2008, we amended our $35 million revolving receivables credit
      facility to increase availability to $50 million, extend the revolving
      period from December 2008 to August 2011, and extend the maturity date
      from December 2011 to August 2014. The increase in borrowing capacity of
      the receivables credit facility from $35 million to $50 million was
      facilitated based on the termination of our $15 million revolving
      inventory credit facility with this same senior lender, also effective in
      September 2008.





In
addition, during the fourth quarter of 2008, we retired $1.6 million of 8.0%
senior subordinated notes, due April 2010, for $1.3 million, which resulted in a
gain of approximately $250,000.





Financial
Covenants Under Senior Credit Facilities.





Our
senior credit facilities discussed above provide certain financial covenants
that we must satisfy. Any failure to comply with the financial covenants in any
single loan agreement will result in a cross default under the various
facilities. As of and for the years ended December 31, 2006, 2007, and 2008, we
have been in full compliance with our debt covenants in our credit facilities
with all of our senior lenders. Financial covenants existing at December 31,
2008 are described below.





Tangible Net
Worth Covenant.Although our senior lenders’ requirements
vary, the most restrictive “net worth” covenant is that we must maintain
Tangible Net Worth at all times greater than the Tangible Net Worth as of
December 31, 2004, or $132.1 million, plus 50% of the aggregate Consolidated Net
Income after December 31, 2004. “Tangible Net Worth” is (i) the consolidated net
worth of the Company and our consolidated subsidiaries, plus (ii) to the extent
not otherwise included in the such consolidated net worth, unsecured
subordinated indebtedness of the Company and our consolidated subsidiaries, the
terms and conditions of which are reasonably satisfactory to the required banks,
minus (iii) the consolidated intangibles of the Company and our consolidated
subsidiaries, including, without limitation, goodwill, trademarks, trade names,
copyrights, patents, patent applications, licenses, and rights in any of the
foregoing and other items treated as intangibles in accordance with generally
accepted accounting principles. “Consolidated Net Income” is the consolidated
net income of the Company and our subsidiaries after deduction of all expenses,
taxes, and other proper charges (but excluding any extraordinary profits or
losses) determined in accordance with generally accepted accounting
principles.





Marketing and
Sales Expenses Covenant.  Our ratio of marketing expenses to
Vacation Interval sales for the latest rolling 12 months then ended must not
equal or exceed 60% as of the last day of any fiscal quarter. One senior lender
has increased such ratio to 62% as of the last day of each fiscal quarter for a
four-quarter cumulative ratio. As of December 31, 2008 and 2007, the ratio was
52.7% and 50.9%, respectively.





Maximum Loan
Delinquency Covenant.  Our over 30-day delinquency rate on our
entire consumer loan portfolio may not be greater than 10% as of the last day of
each fiscal quarter, measured on a rolling 12 month basis based on the last day
of said most recent quarter and the trailing three quarters. As of December 31,
2008 and 2007, the 30-day delinquency rate was 6.1% and 5.2%,
respectively.





Debt Service
Covenant.  Our ratio of (i) earnings before interest, income
taxes, depreciation, and amortization (“EBITDA”) less capital expenditures as
determined in accordance with generally accepted accounting principles to (ii)
the interest expense minus all non-cash items constituting interest expense must
not be less than 1.25 to 1 as of the last day of each fiscal quarter, for the
latest rolling 12 months then ending, or for the average of the last four
quarters. As of December 31, 2008 and 2007, the ratio for the latest rolling 12
months was 1.5 to 1 and 2.3 to 1, respectively.





18
 Table of Contents





Profitable
Operations Covenant.Our Consolidated
Net Income (i) for any fiscal year must not be less than $1.00, (ii) for any two
consecutive fiscal quarters (reviewed on an individual rather than on an
aggregate basis) must not be less than $1.00, and (iii) for any rolling 12-month
period must not be less than $1.00.





Leverage Ratio
Covenant.Our ratio of debt to Tangible Net Worth must not
exceed 6.0 to 1 at any time during the term of the loans.  As of
December 31, 2008 and 2007, the ratio was 1.8 to 1 and 1.7 to 1,
respectively.





FICO® Score
Covenant.Our weighted average FICO® Credit Bureau Score for
all sales to Silverleaf Owners with respect to which a FICO® score can be
obtained must not be less than 640 for any fiscal calendar quarter. For the
fourth quarters of 2008 and 2007, our weighted average FICO® score was 697 and
673, respectively.





Our
credit facilities also contain covenants including requirements that we (i)
preserve and maintain the collateral securing the loans; (ii) pay all taxes and
other obligations relating to the collateral; and (iii) refrain from selling or
transferring the collateral or permitting any encumbrances on the collateral.
The credit agreements also contain restrictive covenants which include (i)
restrictions on liens against and dispositions of collateral, (ii) restrictions
on distributions to affiliates and prepayments of loans from affiliates, (iii)
restrictions on changes in control and management of the Company, (iv)
restrictions on sales of substantially all of the assets of the Company, and (v)
restrictions on mergers, consolidations, or other reorganizations of the
Company. Under certain credit facilities, a sale of all or substantially all of
our assets, a merger, consolidation, or reorganization of the Company, or other
changes of control of the Company would constitute an event of default and
permit senior lenders to accelerate the maturity of the facility. At December
31, 2008, we are in compliance with these covenants.





ITEM
      1A.
            RISK
      FACTORS





If
our assumptions and estimates in our business model are not accurate, our future
results could be negatively impacted.





The
financial covenants in our credit facilities are based upon a business model
prepared by our management. We used a number of assumptions and estimates in
preparing the business model, including:





·
            We
      estimated that we will sell our existing and planned inventory of Vacation
      Intervals within 15 years;


·
            We
      assumed that our level of sales and operating profits and costs can be
      maintained and will grow in future
periods;


·
            We
      assumed the availability of credit facilities necessary to sustain our
      operations and anticipated growth;
and


·
            We
      assumed that we can raise the prices on our products and services to
      offset costs of production as market conditions
  allow.





These
assumptions and estimates are subject to significant business, economic, and
competitive risks and uncertainties. If our assumptions and estimates are wrong,
our future results of operations and financial position may vary significantly
from those projected in the business model. Our independent auditors have not
reviewed or expressed an opinion about our business model or our ability to
achieve it.





Changes
in the timeshare industry could affect our operations.





We
operate principally within the timeshare industry. Our results of operations and
financial position could be negatively affected by any of the following
events:





·
            An
      oversupply of timeshare units;


·
            A
      reduction in demand for timeshare
units;


·
            Changes
      in travel and vacation patterns;


·
            A
      decrease in popularity of our resorts with our
  consumers;


·
            Governmental
      regulations or taxation of the timeshare industry;
  and


·
            Negative
      publicity about the timeshare
industry.





19
 Table of Contents





We
may be vulnerable to the current conditions in the credit markets which could
adversely impact our results of operations, liquidity, and financial
position.





The
capital and credit markets have been experiencing unprecedented levels of
volatility and disruption for more than a year.  As a consequence of
the recession that the United States now finds itself in, business activity
across a wide range of industries face serious difficulties due to the lack of
consumer spending and the extreme lack of liquidity in the credit
markets.  Unemployment has also increased
significantly.  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 2008 and 2007, approximately
14.7% and 21.6%, 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 increase further. 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. Specifically, if default rates for our borrowers were to
rise, it may require an increase in our estimated uncollectible revenue, and it
could result in a default of the maximum loan delinquency covenant discussed
above.





We
may be impacted by general economic conditions.





Our
customers may be more vulnerable to deteriorating economic conditions than
consumers in the luxury or upscale timeshare markets. The state of the economy
in general and deterioration of the residential real estate market could depress
consumer spending for Vacation Intervals. Additionally, significant increases in
the cost of transportation may limit the number of potential customers who
travel to our resorts for a sales presentation. Due to the economic slowdown and
recent deterioration of the sub-prime mortgage markets, we could experience
increased delinquencies in the payment of Vacation Interval promissory notes and
monthly Club dues.  A sustained weakness or weakening in business and
economic conditions generally or specifically in the principal markets in which
we do business could also cause an increase in the number of our customers who
become delinquent, file for protection under bankruptcy laws, or default on
their loans. This could result in an increase in our provision for estimated
uncollectible revenue in 2009.  Due to these factors, there is no
assurance that we will continue to have access to new credit and securitization
facilities or that they will be available on favorable terms.





We
may have more funds on deposit at banks than is covered by FDIC insurance
limits.





At
December 31, 2008, we had substantial sums of cash on deposit with various
banks.   If a bank becomes insolvent and is taken over by the
Federal Deposit Insurance Corporation, we may lose cash in excess of the current
insurable limits for our accounts.  A loss of a significant portion of
our cash would have a material impact on our ability to operate.





We
are at risk for defaults by our customers.





We offer
financing to the buyers of Vacation Intervals at our resorts. Notes receivable
from timeshare buyers constitute one of our principal assets. These buyers make
down payments of at least 10% of the purchase price and deliver promissory notes
to us for the balances. The promissory notes generally bear interest at a fixed
rate, are payable over a seven-year 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 in the
early stages of the marketing and sales process, we generally do not perform a
detailed credit history review of our customers, as is the case with most other
timeshare developers.





For the
years ended December 31, 2008 and 2007, we recorded 24.6% and 17.0% of the
purchase price of Vacation Intervals as estimated uncollectible revenue, which
resulted in decreases in our sales revenue of $63.1 million and $40.1 million,
respectively.  When a buyer of a Vacation Interval defaults, we
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 we incur such costs again when we resell the Vacation Interval.
Although we may have recourse against a Vacation Interval buyer for the unpaid
price, certain states have laws that limit our ability to recover personal
judgments against customers who have defaulted on their loans. For example, if
we were to file a lawsuit to collect the balance owed to us by a customer in
Texas (where approximately 55% of Vacation Interval sales occurred in 2008), the
customer could file a court proceeding to determine the fair market value of the
property foreclosed upon. In such event, we would only recover the amount that
the indebtedness owed to us exceeds the property’s fair market value rather than
the full amount owed. Accordingly, we have generally not pursued this
remedy.





At
December 31, 2008, we had Vacation Interval customer notes receivable in the
approximate principal amount of $397.8 million, and had an allowance for
uncollectible notes of $76.7 million. Due to the current economic conditions and
recent deterioration of the sub-prime mortgage markets, the risk of Vacation
Interval defaults has heightened. We cannot be certain that this allowance is
adequate.





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We
must borrow funds to finance our operations.





Our
business is dependent on our ability to finance customer notes receivable
through our lenders. At December 31, 2008, we either directly or through our
fully consolidated finance subsidiaries owed $362.5 million of principal to our
senior lenders.





Borrowing Base.We have receivables-based loan agreements with senior lenders to borrow
up to $470.6 million. We have pledged our customer promissory notes as security
under these agreements. Our senior lenders typically lend us 75% to 80% of the
principal amount of such customers' notes. Collections from Silverleaf Owners on
such notes are credited directly to our senior lenders and applied against our
loans receivable balances. At December 31, 2008, we had a portfolio of
approximately 44,912 Vacation Interval customer notes receivable in the
approximate principal amount of $397.8 million.  Approximately $7.6
million in principal amount of our customer notes were 61 days or more past due
and, therefore, ineligible as collateral.  The amount of customer
notes receivable eligible as collateral in the future may not be sufficient to
support the borrowings we may require for our liquidity and continued
growth.





Negative Cash
Flow.We ordinarily receive only 10% to 15% of the purchase price as a
down payment on the sale of a Vacation Interval, but we must pay in full the
cost of developing, marketing, and selling the interval. Maximum borrowings
available under our credit facilities may not be sufficient to cover these
costs, thereby straining our capital resources, liquidity, and capacity to
grow.





Interest Rate
Mismatch.At December 31, 2008, our portfolio of customer loans
receivable had a weighted average fixed interest rate of 16.7%. At such date,
our borrowings (which bear interest predominantly at variable rates) against the
portfolio had a weighted average cost of funds of 6.8%. We have historically
derived net interest income from our financing activities because the interest
rates we charge our customers who finance the purchase of their Vacation
Intervals exceed the interest rates we pay to our senior lenders. As 62% of our
senior indebtedness bears interest at variable rates and our customer notes
receivable bear interest at fixed rates, increases in interest rates will erode
the spread in interest rates that we have historically experienced and could
cause our interest expense on borrowings to exceed our interest income on our
portfolio of customer loans. Although interest rates declined throughout 2008,
any increase in interest rates above applicable floor rates, particularly if
sustained, could have a material adverse effect on our results of operations,
cash flows, and financial position. To the extent interest rates decrease on
alternative financing sources available to our customers, we face an increased
risk that customers will pre-pay their loans, which would reduce our income from
operating activities.





In
addition, the Series 2005-A Notes related to our off-balance-sheet special
purpose finance subsidiary, SF-III, with a balance of $17.1 million at December
31, 2008, bear interest at a blended fixed rate of 5.4%.





Maturity
Mismatch.We typically provide financing to our customers over a
seven-year to ten-year period. Our customer notes had a weighted average
maturity of seven years at December 31, 2008. Our senior credit facilities have
scheduled maturity dates between June 2010 and March 2020. Additionally, should
our revolving credit facilities be declared in default, the amount outstanding
could be immediately due and payable. Accordingly, there could be a mismatch
between our anticipated cash receipts and cash disbursements in future periods.
Although we have historically been able to secure financing sufficient to fund
our operations, we do not presently have agreements with our senior lenders to
extend the terms of our existing funding commitments beyond their scheduled
maturity dates or to replace such commitments upon their expiration. If we are
unable to refinance our existing loans, we could be required to sell our
portfolio of customer notes receivable, probably at a substantial discount, or
to seek other alternatives to enable us to continue in business. We cannot be
certain that we will be able to obtain required financing in the
future.





Impact on
Sales. Limitations on the availability of financing would inhibit sales
of Vacation Intervals due to (i) the lack of funds to finance the initial
negative cash flow that results from sales that we finance and (ii) reduced
demand if we are unable to provide financing to purchasers of Vacation
Intervals.





We
may not be able to obtain additional financing.





Several
unpredictable factors may cause our adjusted EBITDA to be insufficient to meet
debt service requirements or satisfy financial covenants. We incurred a net loss
in 2003. Should we record net losses in future periods, our cash flow and our
ability to obtain additional financing could be materially and adversely
impacted.





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Many
factors that determine whether or not we generate sufficient EBITDA to meet
current or future debt service requirements and satisfy financial covenants are
inherently difficult to predict. These factors include:





·
            the
      number of sales of Vacation
Intervals;


·
            the
      average purchase price per
interval;


·
            the
      number of customer defaults;


·
            our
      cost of borrowing; and


·
            our
      sales and marketing costs and other operating
  expenses.





Our
current and planned expenses and debt repayment levels are and will be to a
large extent fixed in the short term, and consider historical expectations to
project future revenues and cash flows. We may be unable to reduce spending in a
timely manner to compensate for any past or future revenue or cash flow
shortfall. It is possible that our revenue, cash flow, or operating results may
not meet the expectations of our business model, and may even result in our
being unable to meet debt repayment schedules or financial covenants contained
in our debt agreements.





Our
leverage is significant and may impair our ability to obtain additional
financing, reduce the amount of cash available for operations, and make us more
vulnerable to financial downturns.





Our
agreements with our various lenders may:





·
            require
      a substantial portion of our cash flow to be used to pay interest expense
      and principal;


·
            impair
      our ability to obtain on acceptable terms, if at all, additional financing
      that might be necessary for working capital, capital expenditures, or
      other purposes; and


·
            limit
      our ability to further refinance or amend the terms of our existing debt
      obligations, if necessary or
advisable.





We may
not be able to manage our financial leverage as we intend, and we may not be
able to achieve an appropriate balance between the rate of growth which we
consider acceptable and future reductions in financial leverage. If we are not
able to achieve growth in adjusted EBITDA, we may not be able to refinance our
existing debt obligations and we may be precluded from incurring additional
indebtedness due to cash flow coverage requirements under existing or future
debt instruments.





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





Continued
or increased volatility in the credit markets will likely impair our ability to
securitize our assets.





We
periodically sell interests in our timeshare loans to our special purpose
entities. Adverse conditions in the credit markets for loan-backed notes in
general and the performance of the notes receivable will likely continue to
impair the timing and volume of the timeshare loans that we
sell.  Although we expect to realize the economic value of our
timeshare note portfolio even if future note sales are temporarily or
indefinitely delayed, such delays in note sales could cause us to reduce
spending in order to maintain our leverage and return targets.





The
financial crisis may have impacts on our business and financial condition that
we currently cannot predict.





The
continued credit crisis and related turmoil in the financial system may have a
sustained negative impact on our business and our financial condition, and we
may face difficult challenges if conditions in the financial markets do not
improve.  Our ability to access the capital markets may be restricted
at a time when we would like, or need, to raise financing, which could have an
impact on our flexibility to react to changing economic and business
conditions.  Further, the economic situation could have a negative
impact on our lenders or customers causing them to fail to meet their
obligations to us.





Our
business is highly regulated.





We are
subject to substantial governmental regulation in the conduct of our business.
See “Item 1. Business - Governmental Regulation, Environmental Matters, Utility
Regulation, Other Regulation,” and “Item 3. Legal Proceedings.” If we are found
to have violated any statute, rule, or regulation applicable to us, our assets,
or our business, it could have a material adverse effect on our results of
operations, liquidity, and financial position.





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We
are dependent on our key personnel.





The loss
of the services of key members of our management or our inability to hire,
retain, or integrate new or replacement management and employees as needed could
have a material adverse effect on our results of operations, liquidity, and
financial position in future periods.





We
will incur costs at our resorts for additional development and construction
activities.





We intend
to continue to develop our Existing Resorts and to acquire or develop additional
timeshare resorts. However, continued development of our resorts places
substantial demands on our liquidity and capital resources, as well as on our
personnel and administrative capabilities. Risks associated with our development
and construction activities include:





·
            construction
      costs or delays at a property may exceed original estimates which could
      make the development uneconomical or
  unprofitable;


·
            sales
      of Vacation Intervals at a newly completed property may not be sufficient
      to make the property profitable;
and


·
            financing
      may not be available on favorable terms for development of or the
      continued sales of Vacation Intervals at a
  property.





We cannot
be certain that we will have the liquidity and capital resources available to
develop and expand our resorts as we presently intend.





Our
development and construction activities, as well as our ownership and management
of real estate, are subject to comprehensive federal, state, and local laws
regulating such matters as environmental and health concerns, protection of
endangered species, water supplies, zoning, land development, land use, building
design and construction, marketing and sales, and other matters. Our failure to
maintain the requisite licenses, permits, allocations, authorizations, and other
entitlements pursuant to such laws could impact the development, completion, and
sale of Vacation Intervals at our resorts. The enactment of “slow growth” or
“no-growth” initiatives or changes in labor or other laws in any area where our
resorts are located could also delay, affect the cost or feasibility of, or
preclude entirely the expansion planned at one or more of our
resorts.





Most of
our resorts are located in rustic areas, which in the past have often required
us to provide public utility water and sanitation services in order to proceed
with development. This development is subject to permission and regulation by
governmental agencies, the denial or conditioning of which could limit or
preclude development.  We currently own and operate the water
utilities and water treatment at one of our resorts.  We are subject
to risk of liability in connection with both the quality of fresh water provided
and the treatment and discharge of waste-water at this resort.





Failure
by utilities providers to supply service to the resorts or to adequately
maintain and expand as needed the water distribution and waste-water treatment
utilities assets could impact our ability to provide the utilities necessary to
operate or expand the resorts, either of which could have a material adverse
effect on our business, results of operations and financial
position.





We
must incur costs to comply with laws governing accessibility of facilities to
disabled persons.





We are
subject to a number of state and federal laws, including the Fair Housing Act
and ADA, which impose requirements related to disabled persons access and use of
a variety of public accommodations and facilities. Although ADA did not become
effective until 1991, we believe our Existing Resorts are substantially in
compliance and we will incur additional costs to fully comply if necessary.
Additional federal, state, and local legislation may impose further restrictions
or requirements on us with respect to access by disabled persons. The ultimate
cost of compliance with such legislation is not currently known, however such
costs are not expected to have a material effect on our results of operations,
liquidity, and financial position





We
may be vulnerable to regional conditions.





Our
performance and the value of our properties are affected by regional factors,
including local economic conditions (which may be adversely impacted by business
layoffs or downsizing, industry slowdowns, changing demographics, and other
factors) and the local regulatory climate. Our current geographic concentration
could make us more susceptible to adverse events or conditions that affect the
particular areas in which we operate. At December 31, 2008, 54% of our owners
lived in Texas, 15% lived in Illinois, 7% lived in Massachusetts, and 3% lived
in Missouri. Our remaining customer base lives primarily in other states within
the United States of America.





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We
may be liable for environmental claims.





Under
various federal, state, and local laws, ordinances, and regulations, as well as
common law, the owner or operator of real property generally is liable for the
costs of removal or remediation of certain hazardous or toxic substances located
on, in, or emanating from such property, as well as related costs of
investigation and property damage. Such laws often impose liability without
regard to whether the owner knew of, or was responsible for, the presence of the
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the owner's ability
to sell or lease a property or to borrow money using such real property as
collateral. Other federal and state laws require the removal or encapsulation of
asbestos-containing material when such material is in poor condition or in the
event of construction, demolition, remodeling, or renovation. Other statutes may
require the removal of underground storage tanks. Noncompliance with these and
other environmental, health, or safety requirements may result in the need to
cease or alter operations at a property. Further, the owner or operator of a
site may be subject to common law claims by third parties based on damages and
costs resulting from violations of environmental regulations or from
contamination associated with the site. Phase I environmental reports (which
typically involve inspection without soil sampling or ground water analysis)
were prepared in 2001 or later by independent environmental consultants for all
of the Existing Resorts.  The reports did not reveal, nor are we aware
of, any environmental liability that would have a material adverse effect on our
results of operations, liquidity, or financial position. We cannot be certain
that the Phase I reports revealed all environmental liabilities or that no prior
owner created any material environmental condition not known to us.





Certain
environmental laws impose liability on a previous owner of property to the
extent hazardous or toxic substances were present during the prior ownership
period. A transfer of the property may not relieve an owner of such liability.
Thus, we may have liability with respect to properties previously sold by us or
by our predecessors.





We
believe that we are in compliance in all material respects with all federal,
state, and local ordinances and regulations regarding hazardous or toxic
substances. We have not been notified by any governmental authority or third
party of any non-compliance, liability, or other claim in connection with any of
our present or former properties.





Our
sales could decline if our resorts do not qualify for participation in an
exchange network.





The
attractiveness of Vacation Interval ownership is enhanced by the availability of
exchange networks that allow Silverleaf Owners to exchange in a particular year
the occupancy right in their Vacation Interval for an occupancy right in another
participating network resort. According to ARDA, the ability to exchange
Vacation Intervals was cited by many buyers as an important reason for
purchasing a Vacation Interval. Several companies, including RCI, provide
broad-based Vacation Interval exchange services. As of December 31, 2008, all
Existing Resorts are qualified for participation in the RCI exchange network. We
cannot be certain that the Existing Resorts or any future resorts will continue
to qualify for participation in these networks or any other exchange network. If
such exchange networks cease to function effectively, or if our resorts are not
accepted as exchanges for other desirable resorts, our sales of Vacation
Intervals could decline.





We have
no control over RCI, and any changes in their operation could have a material
impact on our Vacation Interval Owners’ ability to exchange their week for one
in the RCI network.





Our
sales would be affected by a secondary market for Vacation
Intervals.





We
believe the market for resale of Vacation Intervals is very limited and that
resale prices are substantially below the original purchase price of a Vacation
Interval. This may make ownership of Vacation Intervals less attractive to
prospective buyers. Owners of Vacation Intervals who wish to sell their Vacation
Interval compete with our sales efforts. Vacation Interval resale clearinghouses
and brokers, including Internet-based clearinghouses, do not currently have a
material impact on our sales. However, if the secondary market for Vacation
Intervals becomes more organized and liquid, whether through Internet-based
clearinghouses and brokers or other means, the availability of resale intervals
at lower prices could materially and adversely affect our prices and our ability
to sell new Vacation Intervals.





Our
sales are seasonal in nature.





Our sales
of Vacation Intervals have generally been lower in the months of November and
December. Cash flow and earnings may be impacted by the timing of development,
the completion of future resorts, and the potential impact of weather or other
conditions in the regions where we operate. Our operating results could be
negatively impacted by these factors.





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We
are not insured for certain types of losses.





While we
believe that we maintain adequate levels of insurance for most casualties and
losses, we do not insure certain types of losses (such as losses arising from
floods in non-floodplain areas and acts of war) either because insurance is
unavailable or unaffordable.  Should an uninsured loss or a loss in
excess of insured limits occur, we could be required to repair damage at our
expense or lose our capital invested in a damaged resort, as well as lose
anticipated future revenues from such resort. However, we would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Hence, our results of operations, liquidity, and financial position
could be adversely affected by such losses.





We
will continue to be leveraged.





Our
ability to finance customer notes receivable and develop our resorts is
dependent upon borrowed funds, which would be collateralized by certain of our
assets. In addition, our loan agreements contain financial covenants that must
be complied with in order to continue to borrow additional funds. Failure to
comply with such covenants could result in an event of default which, if not
cured or waived, could have a material adverse effect on our results of
operations, liquidity, and financial position. Future loan agreements would
likely contain similar restrictions.





The
indenture pertaining to our 8% senior subordinated notes permits us to incur
certain additional indebtedness, including indebtedness secured by our customer
notes receivable. Accordingly, to the extent our customer notes receivable
increase and we have sufficient credit facilities available, we may be able to
borrow additional funds. The indenture pertaining to our 8% senior subordinated
notes also permits us to borrow additional funds in order to finance development
of our resorts. Future construction loans may result in liens against the
respective properties.





Common
stock could be impacted by our indebtedness.





The level
of our indebtedness could negatively impact holders of our common stock,
because:





·
            a
      substantial portion of our cash flow from operations must be dedicated to
      the payment of principal and interest on our
  indebtedness;


·
            our
      ability to obtain additional debt financing in the future for working
      capital, capital expenditures, or acquisitions may be
    limited;


·
            our
      level of indebtedness could limit our flexibility in reacting to changes
      in the industry and economic conditions
  generally;


·
            negative
      covenants in our loan agreements may limit our management’s ability to
      operate our business in the best interests of our
      shareholders;


·
            some
      of our loans are at variable rates of interest, and a substantial increase
      in interest rates above applicable floor rates, could adversely affect our
      ability to meet debt service obligations;
and


·
            increased
      interest expense will reduce earnings, if
any.





We
could lose the right to manage the Clubs.





Aside
from Orlando Breeze, each Existing Resort has a Club that operates through a
centralized organization called Silverleaf Club, to manage such resorts on a
collective basis. Orlando Breeze has its own Club, which is not part of
Silverleaf Club. The consolidation of operations under Silverleaf Club
permits:





·
            a
      centralized reservation system for these
  resorts;


·
            substantial
      cost savings by purchasing goods and services for these resorts on a group
      basis, which generally results in a lower cost of goods and services than
      if such goods and services were purchased by each resort on an individual
      basis;


·
            centralized
      management for the entire resort
system;


·
            centralized
      legal, accounting, and administrative services for the entire resort
      system; and


·
            uniform
      implementation of various rules and regulations governing these
      resorts.





We
currently have the right to unilaterally appoint the Board of Directors or
Governors of the Clubs until the respective control periods expire (typically
triggered by the cessation of sales of the planned development), unless
otherwise provided by the bylaws of the association or under applicable law.
Thereafter, the bylaws of certain Clubs require that a majority of the members
of the Board of Directors or Governors of those Clubs be owners of Vacation
Intervals of those resorts. The loss of control of the Board of Directors or
Governors of the Clubs could result in our being unable to unilaterally cause
the renewal of the Management Agreement with the Silverleaf Club when it expires
in 2020. This could result in a loss of revenue and have other materially
adverse effects on our business, results of operations, or financial
position.





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We
could issue preferred stock that would have rights and preferences senior to
common stock.





Our
Articles of Incorporation authorize the Board of Directors to issue up to
10,000,000 shares of preferred stock in one or more series and to establish the
preferences and rights, including the right to vote and the right to convert
into common stock. Such preferences and rights would likely grant such preferred
stockholders certain preferences in right of payment upon a dissolution of the
Company and the liquidation of our assets that would not be available to common
stockholders.  To the extent that our credit facilities would permit,
the Board could also establish a dividend payable to the holders of the
preferred stock that would not be available to common stockholders.





Our
cash flow may not be adequate upon an acceleration of deferred
taxes.





While we
report sales of Vacation Intervals as income at the time of the sale after
receiving a 10% to 15% down payment for financial reporting purposes, we report
substantially all of the Vacation Interval sales we finance under the
installment method for regular federal income tax purposes. 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. Our liability for deferred taxes (i.e., taxes owed to taxing
authorities in the future related to income previously reported in the financial
statements) was $106.9 million at December 31, 2008, primarily attributable to
this method of reporting Vacation Interval sales, before utilization of any
available deferred tax benefits (up to $71.8 million at December 31, 2008),
including net operating loss carryforwards, limitations on the use of which are
discussed below. These amounts do not include accrued interest on the deferred
taxes, which will be payable if the deferred taxes become payable, the amount of
which is not now reasonably ascertainable. If we should sell our installment
notes or be required to factor such notes or if the notes were foreclosed on by
one of our senior lenders or otherwise disposed of, the deferred gain would be
reportable for regular federal tax purposes and the deferred taxes, including
interest on the taxes for the period such taxes were deferred, as computed under
Section 453 of the Internal Revenue Code of 1986, as amended (the “Code”), would
become due. We cannot be certain that we would have sufficient cash resources to
pay those taxes and interest nor can we be certain how the payment of such taxes
may affect our operational liquidity needs. Furthermore, if our sales of
Vacation Intervals should decrease in the future, our diminished operations may
not generate either sufficient tax losses to offset taxable income or funds to
pay the deferred tax liability from prior periods.





We
are subject to Alternative Minimum Taxes.





For
purposes of computing the 20% alternative minimum tax (“AMT”) imposed under
Section 55 of the Code on our alternative minimum taxable income (“AMTI”), the
installment sales method is generally not allowed. The Code requires an
adjustment to our AMTI for a portion of our adjusted current earnings (“ACE”).
Our ACE must be computed without application of the installment sales method.
Accordingly, we anticipate that we will pay AMT in future years. However,
Section 53 of the Code provides for a credit (“minimum tax credit”) against our
regular federal income tax liability for all or a portion of any AMT previously
paid.





For 2008,
we estimate our AMT liability was $6.6 million, which results in total AMT
credit carryforwards of $20.2 million as of December 31, 2008. Our credit
carryforwards as of December 31, 2007 were $13.6 million, as
adjusted.





Due to
the exchange offer described under the next heading, an ownership change within
the meaning of Section 382(g) of the Code occurred. Under Section 383, the
excess credits existing as of the date of an ownership change can be used to
offset tax liability for post-change years only to the extent of the Section 383
Credit Limitation, which is defined as the tax liability attributable to taxable
income to the extent it does not exceed the Section 382 limitation for such
post-change year (to the extent available after the application of various
adjustments). As a result of certain refunds of previously paid AMT, there is no
minimum tax credit that is subject to Section 383 of the Code as a result of our
ownership change. If it is subsequently determined that we have an AMT liability
for prior years, and thus a minimum tax credit as of the time of the exchange
offer, or if additional “ownership changes” within the meaning of Section 382(g)
of the Code occur in the future, the ownership changes may result in a
limitation on the use of our minimum tax credit. See the discussion under the
next heading regarding possible future ownership changes.





Our
use of net operating loss carryforwards could be limited by an ownership
change.





We had
net operating loss (“NOL”) carryforwards of $140.6 million at December 31, 2008
for regular federal income tax purposes, related primarily to the immediate
deduction of expenses and the simultaneous deferral of installment sale gains.
In addition to the general limitations on the carryback and carryforward of NOLs
under Section 172 of the Code, Section 382 of the Code imposes additional
limitations on the utilization of NOLs by a corporation following various types
of ownership changes which result in more than a 50 percentage point change in
ownership of a corporation within a three-year period.





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Our
completion in 2002 of our exchange offer with certain holders of our senior
subordinated notes resulted in an ownership change within Section 382(g) as of
May 2, 2002 (the “change date”). As a result, the future utilization of $15.0
million of our NOL as of December 31, 2008 is subject to limitation for regular
federal income tax purposes. 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.  However, that annual
limitation may be increased for any recognized built-in gain, which existed as
of the change date to the extent allowed in Section 382 of the Code. We believe
that the built-in gain associated with the installment sale gains as of the
change date increases the annual limitation and will allow the utilization of
most of the $15.0 million portion of our NOL as needed.  Nevertheless,
we cannot be certain that the limitations of Section 382 will not limit or deny
our future utilization of the $15.0 million portion of our NOL. Such limitation
or denial could require us to pay substantial additional federal and state taxes
and interest.





Moreover,
we cannot be certain that future ownership changes will not limit or deny our
future utilization of all of our NOL. The more than 50 percentage point test for
a change in ownership is based on a three-year lookback and will be determined
for the three years commencing May 26, 2006 by including the 8,000,000 shares
sold by two of our principal shareholders on that date, which resulted in an
approximately 21.3 percentage point change in ownership based on the shares
outstanding on that date.  Therefore, that change in ownership, when
combined with other changes before and after that date, could result in another
more than 50 percentage point change in ownership in the future.





If we
cannot utilize our NOL, we will be required to pay substantial additional
federal and state taxes and interest. Such tax and interest liabilities may
adversely affect our liquidity.





We
could be liable for back payroll taxes if our independent contractors are
reclassified as employees.





Although
we treat all on-site sales personnel as employees for payroll tax purposes, we
do have independent contractor agreements with certain sales and marketing
persons or entities. We have not treated these independent contractors as
employees and do not withhold payroll taxes from the amounts paid to such
persons or entities. In the event the Internal Revenue Service or any state or
local taxing authority were to successfully classify such persons or entities as
employees, rather than as independent contractors, we could be liable for back
payroll taxes. This could have a material adverse effect on our results of
operations, liquidity, and financial position.





We
could be negatively impacted by national and state Do-Not-Call
Lists.





We rely
heavily on telemarketing activities to arrange tours of our resorts to potential
customers. On July 3, 2003, the Federal Communications Commission (“FCC”)
released new rules and regulations promulgated under the Telephone Consumer
Protection Act of 1991, which could have a future negative impact on our
telemarketing activities. The FCC has implemented, in conjunction with the
Federal Trade Commission (“FTC”), a National Do Not Call Registry, which applies
to both interstate and intrastate commercial telemarketing calls. The FTC has reported that
approximately 172 million telephone numbers had been registered on the National
Do Not Call Registry as of October 1, 2008.This will continue to limit
the number of contacts we will be able to make through our telemarketing
activities. We will continue to telemarket to individuals who do not place their
telephone numbers on a do-not-call list and those with whom we have an
established business relationship. Our use of autodialers to call potential
customers in our database could also be restricted by new call abandonment
standards specified in the FCC rules and regulations. The large quantity of
telephone numbers registered on the National Do Not Call Registry and the
restrictions on our use of autodialers could negatively affect our sales and
marketing efforts and require us to use less effective, more expensive
alternative marketing methods such as direct mail. The new rules became
effective on October 1, 2003 and we have experienced a decline in the number of
telemarketing calls we are able to complete as a result of the changes in the
rules relating to the use of automatic dialers. All companies involved in
telemarketing have experienced some negative impact to their businesses as a
result of the do-not-call rules and other federal and state legislation, which
seeks to protect the privacy of consumers from various types of marketing
solicitations. Because of our historical dependence on telemarketing, we believe
that these changes in the law will continue to have a material impact on our
operations and will require us to modify our historical marketing practices in
order to both remain compliant with the law and to achieve the levels of resort
tours by consumers which are necessary for our profitable operation. We will
continue to assess the do-not-call rules' impact on both operations and
alternative methods of marketing, such as direct mail, that are not impacted by
the new rules. In addition to the National Do-Not-Call List, various states have
implemented Do-Not-Call legislation that also may affect our
business.





The
substantially increased costs of our compliance with the requirements of the
Sarbanes-Oxley Act, including the requirements of Section 404, may adversely
affect our available cash, our management team’s attention to our core business,
and the price of our stock.





As of
December 31, 2008, we are required to comply with the internal control reporting
provisions of §404 of the Sarbanes-Oxley Act of 2002 and the rules and
regulations promulgated thereunder by the Securities and Exchange Commission
(“SEC”) to implement §404. However, we are not required to obtain an attestation
report of our independent registered public accounting firm for this annual
report due to the transition of our filing status from accelerated to
non-accelerated, effective with this Form 10-K.  In response to this,
we have taken steps over the last several years to increase the effectiveness of
our internal control over financial reporting. These internal control
enhancements have resulted in substantially increased costs to us. Our
management also regularly evaluates the effectiveness and design and operation
of our disclosure controls and procedures and our internal control over
financial reporting. While we currently believe our disclosure controls and
procedures and our internal controls over financial reporting are effective and
properly documented, we may find it necessary to continue to incur substantially
increased costs in future periods to further enhance our internal controls over
financial reporting. There can be no assurance that our continuing assessment of
the effectiveness of our internal control over financial reporting will not
result in increased costs of compliance which may adversely affect our available
cash, our management team’s attention to our core business, and our stock
price.





27
 Table of Contents





The
market trading price and trading volume of our common stock has been and is
likely to continue to be volatile.





The
market trading price of our common stock has recently been, and may continue to
be, volatile. In addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. For example, the closing market
trading price for our common stock has fluctuated over the past two years from a
low of $0.53 to a high of $6.89. Because of our stock’s history of trading
volatility and current economic conditions, we believe that significant market
fluctuations are likely to continue in future periods. Some of the factors that
could negatively affect our share price or result in fluctuations in the price
or trading volume of our common stock include:





·
            actual
      or anticipated variations in our quarterly operating
    results;


·
            publication
      of research reports about us or the real estate
  industry;


·
            adverse
      market reaction to any additional debt we
incur;


·
            additions
      or departures of key management
personnel;


·
            actions
      by institutional stockholders;


·
            speculation
      in the press or investment
community;


·
            the
      realization of any of the other risk factors presented in this report;
      and


·
            general
      market and economic conditions.





The
trading market for our common stock may be limited.





Approximately
38.4% of our shares are held by non-affiliates and there has historically been a
low and inconsistent trading volume for our shares. For example, the average
daily trading volume for our shares for the two-month period ended February 28,
2009 was approximately 35,000 shares. There can be no assurance that an active
and steady trading market, which is not subject to extreme fluctuations, will
develop for our shares.





Sales
of common stock by existing shareholders, including officers or directors, may
adversely affect the market price of our common stock.





Approximately
61.6% of our common stock is held by affiliates, including our officers and
directors. Volume sales of stock by these affiliates in the trading market
coupled with the historically low daily trading volume for our common stock may
materially and adversely affect the market price of our common
stock.





We
may fail to meet the continued listing requirements of The NASDAQ Capital
Market.





Effective
February 28, 2007, we began trading on The NASDAQ Capital Market and ceased
trading on AMEX. However, due to the historic volatility of the market trading
price of our common stock, there can be no assurance that we will continue to
meet the requirements for continued listing on NASDAQ. Our failure to comply
with NASDAQ listing standards could result in the delisting of our common stock
by NASDAQ, thereby limiting the ability of our shareholders to sell our common
stock. During October 2008, due to market conditions, NASDAQ suspended the bid
price and market value of publicly held shares requirements through January 16,
2009.Effective
January 16, 2009, the SEC extended the temporary suspension of the NASDAQ rules
requiring a minimum $1 closing bid price and a minimum market value of publicly
held shares through April 20, 2009. Also in January 2009, the SEC approved a
NASDAQ proposal that extended the compliance period for companies that fail to
meet the continued listing requirement for market value of listed securities
from 30 to 90 days.





28
 Table of Contents





Certain
of our existing shareholders have the ability to exert a significant amount of
control over the Company.





As of
December 31, 2008, Robert E. Mead, our Chairman of the Board and Chief Executive
Officer, beneficially owned approximately 24.5% of our outstanding common stock,
and Bradford Whitmore and a partnership controlled by him, Grace Brothers, Ltd.,
beneficially owned 19.3% of our common stock.  As a result, these
stockholders are able to exert significant influence over the Company and its
activities, including the nomination, election, and removal of our Board of
Directors, the adoption of amendments to our charter documents, and the outcome
of any corporate transaction or other matter submitted to our shareholders for
approval, including mergers, consolidations, and the sale of all or
substantially all of our assets.





Mr. Mead
and Mr. Whitmore’s interests may conflict with the interests of other holders of
our common stock and they may take actions affecting us with which other
shareholders may disagree. For example, if Mr. Mead and Mr. Whitmore acted in
concert, they may jointly decide not to enter into a transaction in which our
shareholders would receive consideration for their shares that is much higher
than the cost of their investment in our common stock or than the then current
market price of our common stock.





Available
Information





We file
reports with the SEC, including our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished to the SEC pursuant to the requirements of the
Securities Exchange Act of 1934. The general public may read and copy any
materials that we file with the SEC at the SEC’s Public Reference Room located
at 100 F Street N.E., Washington, DC 20549. The public may also obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, which
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.





Our
Internet address is www.silverleafresorts.com.
On our Internet website, we provide a link to the SEC’s website where our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished to the SEC pursuant to
the requirements of the Securities Exchange Act of 1934 can be viewed. Upon
request, we will make available free of charge copies of the aforementioned
reports, as well as copies of the charters of the three independent committees
of our Board of Directors and our Code of Business Conduct and Ethics. This
information can be obtained by written request to us at: Silverleaf Resorts,
Inc. Attention: Sandra G. Cearley, Corporate Secretary, 1221 River Bend Drive,
Suite 120, Dallas, Texas 75247. The information contained on our website, or on
other websites linked to our website, is not part of this report.





ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS





None.





ITEM 2.
            PROPERTIES





Corporate
Offices.Our principal executive office, located in Dallas, Texas, is
approximately 66,000 square feet of leased space. We also maintain two leased
telemarketing centers in the Dallas area. Our sales are conducted primarily
through sales centers located at our various resorts, a leased off-site sales
center in Irving, Texas, and a leased member services office in Lombard,
Chicago. The square footage of our leased telemarketing centers and off-site
sales centers are approximately 21,000, 40,000, 16,500, and 16,000,
respectively. We also lease small office facilities in San Antonio and Houston,
Texas, which we use in our marketing efforts in those locales.





Pinnacle Lodge.In 2006, we purchased Pinnacle Lodge, a 64-room hotel property located
near the Winter Park recreational area in Colorado which provides our owners
with another destination vacation alternative and gives Silverleaf an entry
point into this increasingly popular destination area. We generated $1.3 million
and $1.1 million of revenues at the Pinnacle Lodge during the years 2008 and
2007, respectively.





Other
Properties.We own a 500-acre tract of land in the Berkshire
Mountains of Western Massachusetts that we are in the initial stages of
developing. During September 2007, we purchased an additional 394.3 acre tract
which adjoins the 500 acres. We have not yet finalized our future development
plans for this site.





In
November 2007, we purchased 15.3 acres of undeveloped land in Grand County,
Colorado with plans to develop up to 136 Vacation Interval units on the
property. The acquired land is located only two miles from the Pinnacle Lodge
hotel.





Resorts.  At
December 31, 2008, we owned a total of 13 timeshare resorts. Each of these
resorts was encumbered by various liens and security agreements at December 31,
2008 due to inventory from each resort being pledged as collateral under our
inventory credit facilities with our senior lenders. See “Note 8 – Debt” in the
Notes to our Consolidated Financial Statements for a further description of
these credit facilities. A description of our Existing Resorts, principal
developmental activity which occurred during 2008, and future plans are
summarized below.





29
 Table of Contents





Getaway
Resorts





Holly Lake
Resort.Holly Lake Resort is a family-oriented golf resort located in the
Piney Woods of east Texas, approximately 105 miles east of Dallas, Texas. The
timeshare portion of Holly Lake is part of a 4,300 acre mixed-use development of
single-family lots and timeshare units with other third-party developers. The
resort has 130 existing units. No additional units are planned for development
at this resort.





The Villages and
Lake O’ The Woods Resorts.The Villages and Lake O’ The Woods are sister
resorts located on the shores of Lake Palestine, approximately 100 miles east of
Dallas, Texas.





The
Villages Resort is an active sports resort popular for water-skiing and boating.
In the first quarter of 2008, we opened our indoor water park and Beach Club
amenity, which are popular attractions at the resort. The Villages Resort is a
mixed-use development of single-family lots and timeshare units. The resort has
378 existing units. We plan to develop approximately 220 additional units at
this resort in the future, which would yield an additional 11,440 Vacation
Intervals available for sale. During 2008, we added 16 new units at this
resort.





Lake O'
The Woods Resort is a quiet wooded resort where Silverleaf Owners can enjoy the
seclusion of dense pine forests. The resort is also popular for its fishing
pier, nature trails, and recreational beach area. Lake O’ The Woods Resort has
64 existing units. No additional units are planned for development at this
resort.





Piney Shores
Resort.Piney Shores Resort is located on the shores of Lake Conroe,
approximately 40 miles north of Houston, Texas. Piney Shores Resort is a quiet,
wooded resort ideally located for day-trips from metropolitan areas in the
southeastern Gulf Coast area of Texas. The resort has 250 existing units. We
plan to develop approximately 188 additional units at this resort in the future,
which would yield an additional 9,776 Vacation Intervals available for sale.
During 2008, we added 48 new units at this resort. During 2008, we purchased
approximately 10 additional acres of land contiguous to the Piney Shores
Resort.





Timber Creek
Resort.Timber Creek Resort, in Desoto, Missouri, is located
approximately 50 miles south of St. Louis, Missouri. The primary recreational
amenity available at the resort is a 40-acre fishing lake. In addition, the
resort has a five-hole par-three executive golf course. The resort has 72
existing units and 24 additional units are planned for future development, which
would yield an additional 1,248 Vacation Intervals available for
sale.





Fox River Resort.Fox River Resort, in Sheridan, Illinois, is located approximately 70
miles southwest of Chicago. The gentle rolling hills and seven-acre stocked lake
provide an ideal environment for outdoor activities such as canoeing, fishing,
and swimming. We also offer winter recreational activities at this resort,
including ice-skating, snowmobiling, and cross-country skiing. The resort has
240 existing units. We plan to develop approximately 276 additional units at
this resort in the future, which would yield an additional 14,352 Vacation
Intervals available for sale.





Apple Mountain
Resort.Apple Mountain Resort, in Clarkesville, Georgia, is located
approximately 125 miles north of Atlanta, Georgia. The resort is situated on 285
acres of beautiful open pastures and rolling hills, with 150 acres being the
resort’s golf course. The resort has 84 existing units and approximately 180
additional units are planned for future development, which would yield an
additional 9,360 Vacation Intervals available for sale.





Destination
Resorts





Ozark Mountain
Resort.Ozark Mountain Resort is a family-oriented resort located on the
shores of Table Rock Lake, which features bass fishing. The resort is located
approximately 15 miles from Branson, Missouri, a family music and entertainment
center, 233 miles from Kansas City, and 276 miles from St. Louis. Ozark Mountain
Resort is a mixed-use development of timeshare and condominium units. Ozark
Mountain Resort has 160 existing units. No additional units are planned for
development at this resort. During 2008, we added 12 new units at this
resort.





Holiday Hills
Resort.Holiday Hills Resort is a resort community located in Taney
County, Missouri, two miles east of Branson, Missouri. Taneycomo Lake, a popular
lake for trout fishing, is approximately three miles from the resort, and Table
Rock Lake is approximately ten miles from the resort. The resort is 224 miles
from Kansas City and 267 miles from St. Louis. Holiday Hills Resort is heavily
wooded by cedar, pine, and hardwood trees, and is favored by Silverleaf Owners
seeking quality golf and nightly entertainment in nearby Branson. The resort is
a mixed-use development of single-family lots, condominiums, and timeshare
units. The resort has 482 existing units. We have future plans to develop
approximately 516 additional units at this resort, which would yield an
additional 26,832 Vacation Intervals available for sale. During 2008, we added
24 new units at this resort.





30
 Table of Contents





Hill Country
Resort.Hill Country Resort is located near Canyon Lake in the hill
country of central Texas between Austin and San Antonio. Area sights and
activities include water-tubing on the nearby Guadalupe River and visiting the
many tourist attractions in San Antonio, such as Sea World, The Alamo, The River
Walk, Fiesta Texas, and the San Antonio Zoo. The resort has 342 existing units.
We have future plans to develop approximately 188 additional units at this
resort, which would yield an additional 9,776 Vacation Intervals available for
sale. During 2008, we purchased approximately 8 additional acres of land that is
adjacent to the existing resort.





Oak N' Spruce
Resort.Oak N’ Spruce Resort, located in the Berkshire mountains of
western Massachusetts, is approximately 134 miles west of Boston, Massachusetts,
and 114 miles north of New York City. Oak N' Spruce Resort is a mixed-use
development which includes a hotel and timeshare units. The resort is an active
sports resort popular for hiking in the Appalachian Trail, boating, fishing,
snowmobiling, and cross-country skiing. The resort has 340 existing units. We
have future plans to develop approximately 10 additional units at this resort,
which would yield an additional 520 Vacation Intervals available for sale.
During 2008, we added 20 new units at this resort.





Silverleaf’s
Seaside Resort.Silverleaf’s Seaside Resort is located in Galveston,
Texas, approximately 50 miles south of Houston, Texas. With 635 feet of
beachfront, the primary amenity at the resort is the Gulf of Mexico. The resort
has 144 existing units. We have future plans to develop approximately 264
additional units at this resort, which would yield an additional 13,728 Vacation
Intervals available for sale. During 2008, we added 12 new units at this
resort.





Orlando Breeze
Resort.Orlando Breeze Resort is located in Davenport, Florida, just
outside Orlando, Florida, near the major tourist attractions of Walt Disney
World, Sea World, and Universal Studios. The resort has 60 existing units. We
plan to develop approximately 12 additional units at this resort, which would
yield an additional 624 Vacation Intervals available for sale. During 2008, we
added 12 new units at this resort. We also own an additional 31 acres contiguous
to the Orlando Breeze Resort. We have not yet finalized plans for development of
this property.





31
 Table of Contents





Resorts
Summary





The
following tables set forth certain information regarding each of the Existing
Resorts at December 31, 2008, unless otherwise indicated.





Existing
Resorts





Units at
      Resorts
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Vacation IntervalsAt
      Resorts
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Vacation Intervals
      SoldResort/Location
                                                                                                                                                                                                
                                                                                                                                                                                                Primary Market
      Served
                                                                                                                                                                                                
                                                                                                                                                                                                Inventory At12/31/08
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                PlannedExpansion(b)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Inventory At
      12/31/08
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Planned
      Expansion
                                                                                                                                                                                                
                                                                                                                                                                                                Date Sales
      Commenced
                                                                                                                                                                                                
                                                                                                                                                                                                Through 12/31/08
      (c)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                In 2008 Only
      (a)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Percentage Through
      12/31/08
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                AverageSales Price in 2008
      (a)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                Amenities/
      Activities(d)Getaway
      ResortsHolly
      Lake
                                                                                                                                                                                                
                                                                                                                                                                                                Dallas-
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                130
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                389
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                1982
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                6,111
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,213
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                94.0
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                $
                                                                                                                                                                                                7,475
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,G,M,S,THawkins,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                Ft. Worth,
      TXThe
      Villages
                                                                                                                                                                                                
                                                                                                                                                                                                Dallas-
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                378
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                220
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                3,633
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                11,440
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1980
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                15,615
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,793
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                81.1
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                9,648
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,H,M,S,T,WFlint,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                Ft. Worth,
      TXLake O' The Woods

                                                                                                                                                                                                    Flint,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                Dallas- Ft. Worth,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                64
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                349
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                1987
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,851
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                463
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                89.1
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                7,255
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                F,M,S,T
                                                                                                                                                                                                (e)Piney
      Shores
                                                                                                                                                                                                
                                                                                                                                                                                                Houston,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                250
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                188
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                5,451
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                9,776
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1988
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                7,357
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,793
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                57.4
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                10,550
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,H,M,S,TConroe,
      TXTimber
      Creek
                                                                                                                                                                                                
                                                                                                                                                                                                St.
      Louis,
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                72
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                24
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,800
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,248
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1997
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,944
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                461
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                51.9
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                8,139
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,G,H,M,S,TDeSoto,
      MO
                                                                                                                                                                                                
                                                                                                                                                                                                MOFox
      River
                                                                                                                                                                                                
                                                                                                                                                                                                Chicago,
      IL
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                240
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                276
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,772
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                14,352
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1997
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                9,708
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,141
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                77.8
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                11,023
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,G,H,M,S,TSheridan,
      ILApple
      Mountain
                                                                                                                                                                                                
                                                                                                                                                                                                Atlanta,
      GA
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                84
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                180
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,746
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                9,360
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1999
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,622
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                712
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                60.0
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                10,166
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                G,H,M,S,TClarkesville,
      GADestination
      Resorts
                                                                                                                                                                                                
                                                                                                                                                                                                LocationsOzark Mountain

                                                                                                                                                                                                    Kimberling City, MO
                                                                                                                                                                                                
                                                                                                                                                                                                Branson,
      MO
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                160
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,166
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                —
                                                                                                                                                                                                
                                                                                                                                                                                                1982
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                6,930
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                705
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                85.6
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                10,486
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                B,F,M,S,THoliday Hills

                                                                                                                                                                                                    Branson,
      MO
                                                                                                                                                                                                
                                                                                                                                                                                                Branson,
      MO
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                482
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                516
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,865
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                26,832
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1984
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                22,063
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,773
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                88.5
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                12,356
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                G,S,T
                                                                                                                                                                                                (e)Hill Country

                                                                                                                                                                                                    Canyon Lake, TX
                                                                                                                                                                                                
                                                                                                                                                                                                Austin-San

                                                                                                                                                                                                    Antonio,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                342
                                                                                                                                                                                                (f)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                188
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,969
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                9,776
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1984
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                15,443
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,703
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                88.7
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                12,046
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                M,S,T
                                                                                                                                                                                                (e)Oak N' Spruce

                                                                                                                                                                                                    South Lee, MA
                                                                                                                                                                                                
                                                                                                                                                                                                Boston, MA-

                                                                                                                                                                                                    New
      York, NY
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                340
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                10
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,900
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                520
                                                                                                                                                                                                (g)
                                                                                                                                                                                                1998
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                14,780
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,454
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                83.6
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                10,804
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                F,M,S,TSilverleaf's Seaside

                                                                                                                                                                                                    Galveston, TX
                                                                                                                                                                                                
                                                                                                                                                                                                Galveston,
      TX
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                144
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                264
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,339
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                13,728
                                                                                                                                                                                                (g)
                                                                                                                                                                                                2000
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                6,149
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                581
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                82.1
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                13,765
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                M,S,TOrlando Breeze

                                                                                                                                                                                                    Davenport,
      FL
                                                                                                                                                                                                
                                                                                                                                                                                                Orlando,
      FL
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                60
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                12
                                                                                                                                                                                                (g)
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                794
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                624
                                                                                                                                                                                                (g)
                                                                                                                                                                                                2005
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,326
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                21
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                74.6
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                21,673
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                STotal
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                2,746
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                1,878
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                27,173
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                97,656
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                113,899
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                15,813
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                
                                                                                                                                                                                                80.7
                                                                                                                                                                                                %
                                                                                                                                                                                                
                                                                                                                                                                                                $
                                                                                                                                                                                                10,328




32
 Table of Contents





(a)
            These
      totals do not reflect sales of upgraded Vacation Intervals to existing
      Silverleaf Owners. An “upgraded Vacation Interval” sale refers to an
      exchange of a lower priced interval for a higher priced interval in which
      the Silverleaf Owner is given credit for all principal payments previously
      made toward the purchase of the lower priced interval. For the year ended
      December 31, 2008, upgrade sales at the Existing Resorts were as
      follows:





Resort
                  
                  Upgraded Vacation Intervals
      Sold
                  
                  
                  Average
      Sales Price — Net of Exchanged
      IntervalHolly
      Lake
                  
                  
                  155
                  
                  
                  $
                  5,549The
      Villages
                  
                  
                  917
                  
                  
                  
                  8,430Lake
      O' The Woods
                  
                  
                  29
                  
                  
                  
                  6,586Piney
      Shores
                  
                  
                  590
                  
                  
                  
                  8,719Hill
      Country
                  
                  
                  1,688
                  
                  
                  
                  10,065Timber
      Creek
                  
                  
                  23
                  
                  
                  
                  8,589Fox
      River
                  
                  
                  815
                  
                  
                  
                  9,155Ozark
      Mountain
                  
                  
                  278
                  
                  
                  
                  8,851Holiday
      Hills
                  
                  
                  2,372
                  
                  
                  
                  9,998Oak
      N’ Spruce
                  
                  
                  937
                  
                  
                  
                  8,696Apple
      Mountain
                  
                  
                  299
                  
                  
                  
                  9,145Silverleaf's
      Seaside
                  
                  
                  1,248
                  
                  
                  
                  8,954Orlando
      Breeze
                  
                  
                  563
                  
                  
                  
                  10,9819,914





The
average sales price for the 9,914 upgraded Vacation Intervals sold was $9,380
for the year ended December 31, 2008.





(b)
            Represents
      units included in our master plan. This plan is subject to change based
      upon various factors, including consumer demand, the availability of
      financing, grant of governmental land-use permits, and future
      land-planning and site layout considerations. The following chart reflects
      the status of certain planned units at December 31,
  2008:





Land-Use
      Process Not Started
                  
                  
                  Land-Use
      Process Pending
                  
                  
                  Land-Use
      Process Complete
                  
                  
                  Currently
      in Construction
                  
                  
                  TotalThe
      Villages
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  204
                  
                  
                  
                  16
                  
                  
                  
                  220Piney
      Shores
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  172
                  
                  
                  
                  16
                  
                  
                  
                  188Timber
      Creek
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  24
                  
                  
                  
                  —
                  
                  
                  
                  24Fox
      River
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  264
                  
                  
                  
                  12
                  
                  
                  
                  276Apple
      Mountain
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  168
                  
                  
                  
                  12
                  
                  
                  
                  180Holiday
      Hills
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  500
                  
                  
                  
                  16
                  
                  
                  
                  516Hill
      Country
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  156
                  
                  
                  
                  32
                  
                  
                  
                  188Oak
      N' Spruce
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  10Silverleaf's
      Seaside
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  264
                  
                  
                  
                  —
                  
                  
                  
                  264Orlando
      Breeze
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  12
                  
                  
                  
                  —
                  
                  
                  
                  12—
                  
                  
                  
                  —
                  
                  
                  
                  1,774
                  
                  
                  
                  104
                  
                  
                  
                  1,878





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





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





(c)
            These
      totals are net of intervals received from upgrading customers and from
      intervals received from
cancellations.





(d)
            Principal
      amenities available to Silverleaf Owners at each resort are indicated by
      the following symbols: B — boating; F — fishing; G — golf; H — horseback
      riding; M — miniature golf; S — swimming pool; T — tennis; and W — indoor
      water park.





(e)
            Boating
      is available near the resort.





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





33
 Table of Contents





(g)
            Engineering,
      architectural, and construction estimates have not been completed, and we
      cannot be certain that we will develop these properties at the unit
      numbers currently projected.





Features
Common to Existing Resorts





Getaway
Resorts are primarily located in rustic areas offering Silverleaf Owners a
quiet, relaxing vacation environment. Furthermore, the resorts offer different
vacation activities, including golf, fishing, boating, swimming, horseback
riding, tennis, and archery. Destination Resorts are located in or near areas
with national tourist appeal. Features common to the Existing Resorts include
the following:





Bonus Time
Program. Silverleaf Club’s Bonus Time program offers Silverleaf Owners a
benefit not typically enjoyed by other timeshare owners. In addition to the
right to use a unit one week per year, the Bonus Time program allows all
Silverleaf Owners, who are current on their dues and timeshare loan installment
payments, to use vacant units for up to three nights at a time at any of our
owned resorts. Sunday through Thursday night stays are currently without charge,
while Friday through Saturday stays presently cost $49.95 per night payable to
Silverleaf Club. The Bonus Time program is limited based on the availability of
units. Availability is created when a Silverleaf Owner does not use his or her
owned week. Silverleaf Owners who have utilized the resort less frequently are
given priority to use the program and may only use an interval with an equal or
lower rating than their owned Vacation Interval. We believe this program is
important as many vacationers prefer shorter two to three day vacations. Owners
of unused intervals that are utilized by the Bonus Time program are not
compensated other than by their participation in the Bonus Time
program.





Year-Round Use of
Amenities. Even when not using the lodging facilities, Silverleaf Owners
have unlimited year-round day usage of the amenities located at the Existing
Resorts, such as boating, fishing, miniature golf, tennis, swimming, or hiking,
for little or no additional cost. Certain amenities, however, such as our indoor
water park, golf, horseback riding, or watercraft rentals, may require a usage
fee.





Exchange
Privileges. Each Silverleaf Owner has certain exchange privileges through
Silverleaf Club which may be used on an annual basis to (i) exchange an interval
for a different interval (week) at the same resort so long as the desired
interval is of an equal or lower rating; or (ii) exchange an interval for an
interval (week) of equal or lower rating at any other of our Existing Resorts.
Silverleaf Owners of Getaway Resorts can only exchange for an interval in a
Getaway Resort unless they own a “Presidents,” “Chairmans,” or “Ambassador”
Vacation Interval. These exchange rights are a convenience we provide Silverleaf
Owners and are conditioned upon availability of the desired interval or resort.
Approximately 10,668 exchanges occurred in 2008. Silverleaf Owners pay an
exchange fee of $75 to Silverleaf Club for each such internal exchange. In
addition, Silverleaf Owners may join the exchange program administered by RCI
for an annual fee of $89.





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





Management
Club. Each of the Existing Resorts has a Club for the benefit of the
timeshare owners. At December 31, 2008, the Clubs (except for the club at
Orlando Breeze) operate under Silverleaf Club to manage the Existing Resorts on
a centralized and collective basis. We have contracted with Silverleaf Club to
perform the supervisory and management functions granted by the Clubs. Costs of
these operations are covered by monthly dues paid by timeshare owners to their
respective Clubs together with income generated by the operation of certain
amenities at each respective resort. Our destination resort in Florida, Orlando
Breeze, has its own club, Orlando Breeze Resort Club, which operates
independently of Silverleaf Club. However, we supervise the management and
operation of Orlando Breeze Resort Club under the terms of a written
agreement.





On-Site
Security. Each of the Existing Resorts is patrolled by security personnel
who are either employees of the various management clubs or employees of
independent security service companies that have contracted with the
Clubs.





Competitive
Advantages





We
believe our business affords us the following competitive
advantages:





Convenient
Getaway Locations. Our Getaway Resorts are located within a two-hour
drive of a majority of our target customers' residences, which accommodates what
we believe to be the growing demand for shorter, more frequent, close-to-home
vacations. This proximity of our customer base to our resorts facilitates use of
our Bonus Time program, allowing Silverleaf Owners to use vacant units, subject
to availability and certain limitations. We believe we are the only timeshare
operator that offers customers these expanded use benefits. Silverleaf Owners
can also conveniently drive to and enjoy non-lodging resort amenities at our
resorts year-round on a day use “country-club” type basis.





34
 Table of Contents





Substantial
Internal Growth Capacity. At December 31, 2008, we had an inventory of
27,173 Vacation Intervals and a master plan to construct new units which will
result in up to 97,656 additional Vacation Intervals at our Existing Resorts.
Our master plan for construction of new units is contingent upon future sales at
our Existing Resorts and the availability of financing, granting of governmental
permits, and future land-planning and site-layout considerations.





In-House
Operations. We have in-house marketing, sales, financing, development,
and property management capabilities. While we utilize outside contractors to
supplement internal resources, our internal capabilities provide greater control
over all phases of our operations, help maintain operating standards, and reduce
overall costs.





Lower
Construction and Operating Costs. We have developed and generally employ
standard architectural designs and operating procedures, which we believe
significantly reduce construction and operating expenses. Standardization and
integration also allow us to rapidly develop new inventory in response to
demand. Weather permitting, new units at Existing Resorts can typically be
constructed on an “as needed” basis within 180 to 270 days.





Centralized
Property Management Supervision. We presently supervise the operation of
all of our Existing Resorts (except for Orlando Breeze) on an integrated,
centralized, and collective basis through our Management Agreement with
Silverleaf Club with operating and maintenance costs paid from Silverleaf
Owners' monthly dues. While our Orlando Breeze resort in Florida has its own
separate Club (Orlando Breeze Resort Club), we also provide centralized
supervision of its operations under the terms of a written agreement to ensure
the quality of services provided to Orlando Breeze timeshare owners. We believe
that consolidation of resort operations benefits Silverleaf Owners by providing
a uniform level of service, accommodations, and amenities on a standardized,
cost-effective basis. Integration also facilitates our internal exchange program
and the Bonus Time program.





Experienced
Management. Our senior management has extensive experience in the
acquisition, development, marketing, sales, and operation of timeshare resorts.
The senior officers have an average of nineteen years of experience in the
timeshare industry.





Future
Growth Strategy





Our
future growth strategy is to conservatively increase annual revenues through a
combination of:





·
            continuing
      to develop new or existing resorts;


·
            maintaining
      marketing, sales, and development activities at those resorts in
      accordance with our current business
model;


·
            concentrating
      on marketing to existing members, including sales of upgraded Vacation
      Intervals, additional week sales, and existing owner referral
      programs;


·
            adding
      other assets and amenities to attract our customers by enhancing vacation
      experiences; and


·
            emphasizing
      our secondary products, such as biennial (alternate year) intervals, to
      broaden our potential market with a wider price range of products for
      first-time buyers.





ITEM
      3.
            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.





35
 Table of Contents





We are a
co-plaintiff with two other parties in two related matters brought in the Land
Court Department of the Trial Court of the Commonwealth of Massachusetts, each
styled as Silverleaf Resorts,
Inc., et al. v. Zoning Board of Appeals of the Town of Lanesborough, et al.,Civil Action No. 07 MISC 351155 and Civil Action No. 09 MISC
393464.  In these actions, we and the co-plaintiffs have challenged
the validity of a special permit issued by the Lanesborough Zoning Board of
Appeals to Berkshire Wind Power Cooperative Corporation (“Berkshire”), for a
portion of a road that Berkshire needs to access property located where
Berkshire plans to construct a wind farm.  We initiated this lawsuit
because the predecessor in interest of 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.  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 property.  We seek a court
decree that the special permit expired from non-use and is therefore no longer
valid, or alternatively, that the road was not built as permitted.  We
will seek to consolidate these matters.  We are in fast track
discovery in the Land Court, but no final trial date has been set.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





36
 Table of Contents





PART
II





ITEM5.
            MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
      PURCHASES OF EQUITY SECURITIES





STOCK
PERFORMANCE GRAPH





The stock
performance graph below shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act or under the Exchange Act, except to
the extent we specifically incorporate this information by reference, and it
shall not otherwise be deemed filed under such Acts.





Set forth
below is a line graph comparing the total cumulative return of our common stock
since December 31, 2003 to (a) the S&P 500 Index, a broad equity market
index, and (b) the Russell MicroCap Index, an index that measures the
performance of stocks in the micro-cap segment of market capitalization. The
comparisons in this table are required by the Securities and Exchange Commission
and are not intended to forecast or be indicative of possible future performance
of our common stock.





Only a
few other publicly held companies engage in our principal line of business - the
sale of vacation ownership intervals. Prominent among this limited group are
Walt Disney Company, Hilton Hotels Corporation, and Marriott International,
Inc., which are (i) diversified, with far less than 50% of their respective
revenues attributable to vacation ownership interval sales, and (ii)
substantially larger than we are in terms of revenue, assets, and market
capitalization. Therefore, we concluded that a sufficient body of reliable
market data to use as a comparison peer group is not available. In 2006 our
common stock was added to the Russell MicroCap Index. In the below graph, we
have elected to compare the performance of our common stock to the S&P 500
Index and the Russell MicroCap Index.




The graph
assumes $100 was invested on December 31, 2003 in our common stock, the S&P
500, and the Russell MicroCap and assumes dividends are reinvested. Silverleaf’s
cumulative total return of $90 is due to the decline in the bid price of our
common stock from $0.77 at December 31, 2003 to $0.72 at December 31,
2008.









*100
invested on 12/31/03 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31. Copyright © 2009
S&P, a division of the McGraw-Hill Companies Inc. All rights reserved.
Copyright © 2009 Dow
Jones & Co. All rights reserved.











Measurement Period (Fiscal Year
      Covered)12/03
                    
                    
                    
                    12/04
                    
                    
                    
                    12/05
                    
                    
                    
                    12/06
                    
                    
                    
                    12/07
                    
                    
                    
                    12/08Silverleaf
      Resorts, Inc.
                    
                    
                    100.00
                    
                    
                    
                    172.50
                    
                    
                    
                    407.50
                    
                    
                    
                    558.75
                    
                    
                    
                    520.00
                    
                    
                    
                    90.00S
      & P 500
                    
                    
                    100.00
                    
                    
                    
                    110.88
                    
                    
                    
                    116.33
                    
                    
                    
                    134.70
                    
                    
                    
                    142.10
                    
                    
                    
                    89.53Russell
      MicroCap
                    
                    
                    100.00
                    
                    
                    
                    114.14
                    
                    
                    
                    117.07
                    
                    
                    
                    136.44
                    
                    
                    
                    125.52
                    
                    
                    
                    75.59





37
 Table of Contents





The
following table sets forth the high and low closing prices of our common stock
for the quarterly periods indicated, which correspond to the quarterly fiscal
periods for financial reporting purposes. The common stock prices from January
1, 2007 to February 27, 2007 are the closing bid prices as quoted on the
American Stock Exchange under the symbol “SVL.” Effective February 28, 2007, we
listed our common stock on The NASDAQ Capital Market (“NASDAQ”), under the
symbol “SVLF.” From that point forward the common stock prices shown are the
closing bid prices as quoted on NASDAQ.





High
                  
                  
                  LowYear
      Ended December 31, 2007:First
      Quarter
                  
                  $
                  5.00
                  
                  
                  $
                  4.25Second
      Quarter
                  
                  
                  5.95
                  
                  
                  
                  4.56Third
      Quarter
                  
                  
                  6.89
                  
                  
                  
                  4.60Fourth
      Quarter
                  
                  
                  6.50
                  
                  
                  
                  4.05Year
      Ended December 31, 2008:First
      Quarter
                  
                  $
                  4.08
                  
                  
                  $
                  2.05Second
      Quarter
                  
                  
                  3.03
                  
                  
                  
                  2.02Third
      Quarter
                  
                  
                  2.28
                  
                  
                  
                  1.24Fourth
      Quarter
                  
                  
                  1.36
                  
                  
                  
                  0.53





As of
December 31, 2008, we believe that there were approximately 2,200 holders of our
common stock, which is the only class of our equity securities
outstanding.  During October 2008, due to market conditions, NASDAQ
suspended the bid price and market value of publicly held shares requirements
through January 16, 2009.Effective January 16,
2009, the SEC extended the temporary suspension of the NASDAQ rules requiring a
minimum $1 closing bid price and a minimum market value of publicly held shares
through April 20, 2009. Also in January 2009, the SEC approved a NASDAQ proposal
that extended the compliance period for companies that fail to meet the
continued listing requirement for market value of listed securities from 30 to
90 days.





Our stock
option plans provide for awarding nonqualified stock options to directors,
officers, and key employees and incentive stock options to key salaried
employees. Stock options provide for the right to purchase common stock at a
specified price, which may be less than or equal to fair market value on the
date of grant (but not less than par value). Stock options may be granted for
any term and upon such conditions determined by our Board of
Directors.





On July
29, 2008, our shareholders approved our 2008 Stock Option Plan, which reserved
for issuance up to two million shares of our common stock as either incentive or
nonqualified stock options to our directors, officers, and key employees. In
August 2008, we granted 1,925,000 stock options under this plan of which 300,000
were nonqualified stock options granted to our directors and 1,625,000 were
incentive stock options granted to certain officers and key employees. In
September 2008, we granted the remaining 75,000 stock options that were reserved
for issuance as incentive stock options. The options granted to our officers and
key employees will vest in equal increments over a five-year period. The options
granted to our directors will vest in equal increments over a four-year
period.





Dividend
Policy





We have
never declared or paid any cash dividends on our capital stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
We currently intend to retain future earnings to finance our operations and fund
the growth of our business.  In addition, certain of our debt
agreements include restrictions on the Company's ability to pay dividends based
on minimum levels of net income and cash flow.  Any payment of future
dividends will be at the discretion of our Board of Directors and will depend
upon, among other things, our earnings, financial position, capital
requirements, level of indebtedness, contractual and other restrictions related
to payment of dividends under our senior credit facilities, and other factors
that our Board of Directors deem relevant.





Shares
Authorized for Issuance under Equity Compensation Plans





Information
regarding shares authorized under our equity compensation plans is discussed
under the heading “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters” in Item 12 of this Annual Report on
Form 10-K.





Recent
Sales of Unregistered Securities





There
have been no recent sales of unregistered securities.





38
 Table of Contents





Issuer
Purchases of Equity Securities





On July
29, 2008, we authorized the repurchase of up to two million shares of our common
stock to be acquired from time to time in the open market or in negotiated
transactions. This stock repurchase program expires in July 2010 or upon the
purchase of an aggregate of 2,000,000 shares of our common stock. In the third
quarter of 2008, we acquired 56,211 outstanding shares of common stock, which we
reclassified as treasury stock, for $108,000.  However, in the fourth
quarter of 2008, 115,000 stock options were exercised and 56,211 shares of
treasury stock were reissued in these transactions. We did not repurchase any
treasury shares during the fourth quarter of 2008. As of December 31, 2008,
1,943,789 shares may yet be repurchased under this program.





39
 Table of Contents





ITEM
      6.
            SELECTED
      FINANCIAL DATA





Selected
Consolidated Historical Financial and Operating Information





The
Selected Consolidated Historical Financial and Operating Information shown below
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing elsewhere in this report on Form 10-K. In
2006, we changed our accounting for real estate time-sharing transactions in
connection with the adoption of Statement of Financial Accounting Standards No.
152, “Accounting for Real Estate Time-Sharing Transactions” and changed our
accounting for stock-based compensation in connection with the adoption of
Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”
As a result, certain amounts presented in the following tables for years
preceding 2006 may not be comparable to 2006 and subsequent years.





Year Ended
December 31,2004
                  
                  
                  2005
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2008(in
      thousands, except share and per share amounts)Statement
      of Income Data:Revenues:Vacation
      Interval sales
                  
                  $
                  138,046
                  
                  
                  $
                  146,416
                  
                  
                  $
                  187,481
                  
                  
                  $
                  235,135
                  
                  
                  $
                  256,300Estimated
      uncollectible revenue
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (32,491
                  )
                  
                  
                  (40,071
                  )
                  
                  
                  (63,051
                  )Sampler
      sales
                  
                  
                  2,150
                  
                  
                  
                  2,623
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      sales
                  
                  
                  140,196
                  
                  
                  
                  149,039
                  
                  
                  
                  154,990
                  
                  
                  
                  195,064
                  
                  
                  
                  193,249Interest
      income
                  
                  
                  37,843
                  
                  
                  
                  38,154
                  
                  
                  
                  46,248
                  
                  
                  
                  53,019
                  
                  
                  
                  61,077Management
      fee income
                  
                  
                  1,201
                  
                  
                  
                  1,856
                  
                  
                  
                  1,861
                  
                  
                  
                  2,806
                  
                  
                  
                  3,121Gain
      on sale of notes receivable
                  
                  
                  1,915
                  
                  
                  
                  6,457
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      income
                  
                  
                  2,522
                  
                  
                  
                  6,402
                  
                  
                  
                  3,785
                  
                  
                  
                  4,141
                  
                  
                  
                  6,515Total
      revenues
                  
                  
                  183,677
                  
                  
                  
                  201,908
                  
                  
                  
                  206,884
                  
                  
                  
                  255,030
                  
                  
                  
                  263,962Costs
      and operating expenses:Cost
      of Vacation Interval sales
                  
                  
                  24,964
                  
                  
                  
                  23,427
                  
                  
                  
                  19,003
                  
                  
                  
                  23,027
                  
                  
                  
                  24,903Sales
      and marketing
                  
                  
                  71,890
                  
                  
                  
                  74,667
                  
                  
                  
                  93,957
                  
                  
                  
                  119,679
                  
                  
                  
                  135,059Provision
      for uncollectible notes
                  
                  
                  26,811
                  
                  
                  
                  23,649
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Operating,
      general and administrative
                  
                  
                  25,639
                  
                  
                  
                  28,038
                  
                  
                  
                  32,315
                  
                  
                  
                  39,101
                  
                  
                  
                  41,154Depreciation
                  
                  
                  3,588
                  
                  
                  
                  2,723
                  
                  
                  
                  2,539
                  
                  
                  
                  3,511
                  
                  
                  
                  4,929Interest
      expense and lender fees:Related
      to receivables-based credit facilities
                  
                  
                  15,525
                  
                  
                  
                  13,524
                  
                  
                  
                  17,550
                  
                  
                  
                  19,285
                  
                  
                  
                  22,213Related
      to other indebtedness
                  
                  
                  2,102
                  
                  
                  
                  3,729
                  
                  
                  
                  4,112
                  
                  
                  
                  5,325
                  
                  
                  
                  6,341Total
      costs and operating expenses
                  
                  
                  170,519
                  
                  
                  
                  169,757
                  
                  
                  
                  169,476
                  
                  
                  
                  209,928
                  
                  
                  
                  234,599Income
      before provision for income taxes and discontinued
    operations
                  
                  
                  13,158
                  
                  
                  
                  32,151
                  
                  
                  
                  37,408
                  
                  
                  
                  45,102
                  
                  
                  
                  29,363Provision
      for income taxes
                  
                  
                  23
                  
                  
                  
                  9,725
                  
                  
                  
                  14,402
                  
                  
                  
                  17,398
                  
                  
                  
                  11,437Income
      from continuing operations
                  
                  
                  13,135
                  
                  
                  
                  22,426
                  
                  
                  
                  23,006
                  
                  
                  
                  27,704
                  
                  
                  
                  17,926Discontinued
      operations:Gain
      on sale of discontinued operations (net of taxes)
                  
                  
                  —
                  
                  
                  
                  613
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Income
      from discontinued operations (net of taxes)
                  
                  
                  624
                  
                  
                  
                  128
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Income
      from discontinued operations
                  
                  
                  624
                  
                  
                  
                  741
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      income
                  
                  $
                  13,759
                  
                  
                  $
                  23,167
                  
                  
                  $
                  23,006
                  
                  
                  $
                  27,704
                  
                  
                  $
                  17,926Net
      income per share — Basic:Income
      from continuing operations
                  
                  $
                  0.35
                  
                  
                  $
                  0.61
                  
                  
                  $
                  0.61
                  
                  
                  $
                  0.73
                  
                  
                  $
                  0.47Income
      from discontinued operations
                  
                  
                  0.02
                  
                  
                  
                  0.02
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      income
                  
                  $
                  0.37
                  
                  
                  $
                  0.63
                  
                  
                  $
                  0.61
                  
                  
                  $
                  0.73
                  
                  
                  $
                  0.47Net
      income per share — Diluted:Income
      from continuing operations
                  
                  $
                  0.33
                  
                  
                  $
                  0.57
                  
                  
                  $
                  0.59
                  
                  
                  $
                  0.70
                  
                  
                  $
                  0.46Income
      from discontinued operations
                  
                  
                  0.02
                  
                  
                  
                  0.02
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      income
                  
                  $
                  0.35
                  
                  
                  $
                  0.59
                  
                  
                  $
                  0.59
                  
                  
                  $
                  0.70
                  
                  
                  $
                  0.46Weighted
      average number of common shares issued
      and  outstanding:Basic
                  
                  
                  36,852,133
                  
                  
                  
                  36,986,926
                  
                  
                  
                  37,579,462
                  
                  
                  
                  37,811,387
                  
                  
                  
                  38,037,635Diluted
                  
                  
                  38,947,854
                  
                  
                  
                  39,090,921
                  
                  
                  
                  39,261,652
                  
                  
                  
                  39,417,017
                  
                  
                  
                  38,897,619





40
 Table of Contents




December 31,2004
                                  
                                  
                                  2005
                                  
                                  
                                  2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008(in
      thousands)Balance
      Sheet Data:Cash
      and cash equivalents
                                  
                                  $
                                  10,935
                                  
                                  
                                  $
                                  10,990
                                  
                                  
                                  $
                                  11,450
                                  
                                  
                                  $
                                  13,170
                                  
                                  
                                  $
                                  11,431Notes
      receivable, net of allowance for uncollectible notes
                                  
                                  
                                  196,466
                                  
                                  
                                  
                                  177,572
                                  
                                  
                                  
                                  229,717
                                  
                                  
                                  
                                  289,907
                                  
                                  
                                  
                                  320,306Amounts
      due from affiliates
                                  
                                  
                                  288
                                  
                                  
                                  
                                  680
                                  
                                  
                                  
                                  1,251
                                  
                                  
                                  
                                  1,358
                                  
                                  
                                  
                                  1,738Inventories
                                  
                                  
                                  109,303
                                  
                                  
                                  
                                  117,597
                                  
                                  
                                  
                                  147,759
                                  
                                  
                                  
                                  179,188
                                  
                                  
                                  
                                  190,318Total
      assets
                                  
                                  
                                  369,506
                                  
                                  
                                  
                                  361,796
                                  
                                  
                                  
                                  474,530
                                  
                                  
                                  
                                  581,059
                                  
                                  
                                  
                                  644,822Amounts
      due to affiliates
                                  
                                  
                                  929
                                  
                                  
                                  
                                  544
                                  
                                  
                                  
                                  246
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Notes
      payable and capital lease obligations
                                  
                                  
                                  218,310
                                  
                                  
                                  
                                  177,269
                                  
                                  
                                  
                                  254,550
                                  
                                  
                                  
                                  316,198
                                  
                                  
                                  
                                  369,071Senior
      subordinated notes
                                  
                                  
                                  34,883
                                  
                                  
                                  
                                  33,175
                                  
                                  
                                  
                                  31,467
                                  
                                  
                                  
                                  26,817
                                  
                                  
                                  
                                  23,121Total
      liabilities
                                  
                                  
                                  268,038
                                  
                                  
                                  
                                  236,961
                                  
                                  
                                  
                                  326,338
                                  
                                  
                                  
                                  405,018
                                  
                                  
                                  
                                  450,576Shareholders'
      equity
                                  
                                  
                                  101,468
                                  
                                  
                                  
                                  124,835
                                  
                                  
                                  
                                  148,192
                                  
                                  
                                  
                                  176,041
                                  
                                  
                                  
                                  194,246Cash
      Flows Data:Net
      cash provided by (used in) operating activities
                                  
                                  $
                                  9,404
                                  
                                  
                                  $
                                  75,681
                                  
                                  
                                  $
                                  (45,648
                                  )
                                  
                                  $
                                  (39,895
                                  )
                                  
                                  $
                                  (21,341
                                  )





As of and for the Year Ended
      December 31,2004
                    
                    
                    2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008Other
      Operating Data:Number
      of Existing Resorts at period end
                    
                    
                    12
                    
                    
                    
                    13
                    
                    
                    
                    13
                    
                    
                    
                    13
                    
                    
                    
                    13Number
      of Vacation Intervals sold (excluding Upgrades)(a)
                    
                    
                    10,431
                    
                    
                    
                    8,332
                    
                    
                    
                    9,855
                    
                    
                    
                    15,394
                    
                    
                    
                    15,813Number
      of in-house Vacation Intervals sold
                    
                    
                    4,816
                    
                    
                    
                    6,576
                    
                    
                    
                    8,777
                    
                    
                    
                    9,988
                    
                    
                    
                    9,914Number
      of Vacation Intervals in inventory
                    
                    
                    22,857
                    
                    
                    
                    27,396
                    
                    
                    
                    28,801
                    
                    
                    
                    27,300
                    
                    
                    
                    27,173Average
      price of Vacation Intervals sold (excluding
Upgrades)(a)(b)
                    
                    $
                    10,031
                    
                    
                    $
                    11,124
                    
                    
                    $
                    11,681
                    
                    
                    $
                    9,607
                    
                    
                    $
                    10,328Average
      price of upgraded Vacation Intervals sold (net of exchanged
      interval)
                    
                    $
                    6,938
                    
                    
                    $
                    8,171
                    
                    
                    $
                    8,245
                    
                    
                    $
                    8,735
                    
                    
                    $
                    9,380





__________





(a)
            Vacation
      Intervals sold during the years ended December 31, 2004, 2005, 2006, 2007,
      and 2008, include 2,556 biennial intervals (counted as 1,278 annual
      Vacation Intervals), 2,780 biennial intervals (counted as 1,390 annual
      Vacation Intervals), 5,117 biennial intervals (counted as 2,558 annual
      Vacation Intervals), 3,588­ biennial intervals (counted as 1,794
      annual Vacation Intervals), and 4,536 biennial intervals (counted as 2,268
      annual Vacation Intervals),
respectively.





(b)
            Includes
      annual and biennial Vacation Interval sales for one-bedroom, two-bedroom,
      and three-bedroom units.





ITEM
      7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion should be read in conjunction with “Selected Financial
Data,” our consolidated financial statements and notes thereto, and other
financial data included elsewhere herein. The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements.





Executive
Summary





We are in
the business of owning and operating thirteen timeshare resorts as of December
31, 2008. Our income is derived principally from marketing and selling timeshare
interests at our resorts in one-week intervals and from the interest earned from
financed sales of such timeshare interests. As of December 31, 2008, we own a)
seven Getaway Resorts located within 1.5 to 2 hours of major metropolitan areas,
which are the primary market for timeshare sales to new purchasers, and b) six
Destination Resorts located farther from major metropolitan areas. The principal
purchasers of timeshare interests at the Destination Resorts are existing owners
who are upgrading or buying additional interests.





The
Company anticipates a continuation of the challenging economic environment which
it experienced in 2008. Our biggest challenges include the current economic
weaknesses, constrained consumer spending, collection of customer receivables,
our ability to access the capital markets, and our ability to manage inventory
levels.  Although we do not anticipate a significant decline in our
Vacation Interval sales in 2009, our success in collecting payments due on
customers’ loans in this challenging environment will continue to pressure our
bottom-line. However, we believe that conservative business decisions and
aggressive cash flow management in 2009, along with other measures in the coming
year, will allow us to maintain adequate liquidity into 2010, including the
payment of our $23.1 million 8.0%senior subordinated notes, due April 1, 2010.
These other measures include continuing to focus on improving the credit quality
of our notes receivable, a continued favorable sales mix trend toward upgrades
and second-week sales to existing customers as such sales have relatively lower
associated sales and marketing costs, reductions in capital expenditures for
expansion at existing resorts, including construction of lodging units and
additional amenities, and the prudent management of our liquidity through
controlled and measured growth.  However, there can be no assurance
that economic conditions will not deteriorate further, which could increase
customer loan delinquencies and defaults. Increases in loan delinquencies and
defaults could impair our ability to pledge or sell such loans to lenders in
order to obtain sufficient cash advances to meet our obligations through 2010,
including payment of the aforementioned 8.0% senior subordinated
notes.





41
 Table of Contents





The
following economic or industry-wide factors are relevant to us:





·
            We
      predominantly sell vacation and recreational products to customers who
      drive to our locations. We believe that this type of usage is somewhat
      immune from issues that would affect the travel industry as a whole (i.e.,
      the disruptions to the airline industry and destination resort industry
      after September 11, 2001 and the current state of the economy). However,
      major increases in gasoline prices or other issues that cause the U.S
      population to drive less could have a negative impact on
    us.





·
            Telemarketing
      is a very important element in the generation of tours to potential new
      customers of timeshare interests. We presently comply with state and
      national do-not-call regulations. Changes to existing regulations could
      have a negative impact on our ability to generate the necessary tours to
      sell timeshare interests.  We will continue to assess the
      do-not-call rules' impact on both operations and alternative methods of
      marketing, such as direct mail, that are not impacted by the new
      rules.





·
            We
      finance the majority of our sales over seven to ten years. A sustained
      economic downturn could negatively affect the ability of our customers to
      pay the principal and interest due on their loans, which would result in
      additional estimated uncollectible
revenue.





·
            Our
      fixed-to-floating debt ratio is 38% fixed and 62% floating. However, the
      majority of our floating-rate debt is subject to interest-rate floors
      between 5.25% and 8.00%.  Although interest rates declined
      throughout 2008, an increase in interest rates above applicable floor
      rates on our variable-rate facilities could have a negative impact on our
      profitability.





·
            Since
      we predominantly finance our sales of timeshare interests, we require
      credit facilities to provide the liquidity necessary to fund our
      day-to-day costs and expenses. We presently have adequate credit
      facilities to fund our operations into 2010. A disruption in the
      availability of credit facilities would severely impact our ability to
      continue marketing and selling timeshare interests as we do
      today.




·
            We
      believe there are three areas which are particularly important to our
      success as a business:





▪▪
              Identifying
      potential customers who are likely to pay their principal and interest
      payments when due after purchasing timeshare intervals, thereby resulting
      in an acceptable level of estimated uncollectible
  revenue.





▪▪
              Maintaining
      sales and marketing expenses at an acceptable level to result in a
      favorable percentage relationship between sales and marketing expense and
      Vacation Interval sales.





▪▪
              Maintaining
      adequate credit facilities to finance our operations and support the
      borrowings that are required for our liquidity and continued
      growth.





We earn
revenue and income and finance our operations as follows:





·
            Our
      primary source of revenue is Vacation Interval sales. Vacation Interval
      sales are a combination of sales to new customers and upgrade and/or
      additional week sales to existing customers. We have been focusing on
      increasing the percentage mix of sales to existing customers in recent
      years. In addition, we have been focusing on identifying potential new
      customers who have more favorable credit characteristics and will
      ultimately be more likely to pay principal and interest on their timeshare
      notes when due. To manage sales, we separately assess sales to potential
      new customers and sales to existing customers as different factors affect
      these types of sales. For example, for sales to potential new customers,
      we measure sales per tour in order to ascertain that our marketing
      programs are delivering the proper types of family tours to effectively
      and efficiently generate sales and we closely monitor rescission
      rates.





42
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One
product that is sold to new customers is a sampler, which gives the customer the
right to use the resorts on an “as available” basis from Sunday to Thursday.
Revenues related to sampler contracts, which entitle the prospective owner to
sample a resort during certain periods, have been and will continue to be
deferred until the customer uses the stay or allows the contract to expire.
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. Conversely, incremental revenues in excess of related
incremental costs are recorded as a reduction of inventory in the consolidated
balance sheet. Incremental costs include costs that would not have been incurred
had we not sold samplers. Since our sampler sales primarily function as a
marketing program, providing us additional opportunities to sell Vacation
Intervals to prospective customers, the incremental costs of our sampler sales
typically exceed incremental sampler revenues. Accordingly, during the years
ended December 31, 2006, 2007, and 2008, all sampler sales were recorded as a
reduction to sales and marketing expense in the amounts of $2.9 million, $3.4
million, and $3.7 million, respectively.





The
following table shows the elements management considers important to assessing
our Vacation Interval sales (in thousands, except for tours and sales per
tour):





Year Ended
December 31,2006
                  
                  
                  2007
                  
                  
                  2008Tours
      to potential new purchasers
                  
                  
                  86,950
                  
                  
                  
                  108,541
                  
                  
                  
                  116,713Sales
      per tour
                  
                  $
                  1,217
                  
                  
                  $
                  1,123
                  
                  
                  $
                  1,094Gross
      sales to new customers
                  
                  
                  105,785
                  
                  
                  
                  121,867
                  
                  
                  
                  127,735Rescissions
      of sales to new customers
                  
                  
                  (19,970
                  )
                  
                  
                  (23,809
                  )
                  
                  
                  (20,981
                  )Net
      sales to new customers
                  
                  
                  85,815
                  
                  
                  
                  98,058
                  
                  
                  
                  106,754Gross
      sales to existing customers
                  
                  
                  109,524
                  
                  
                  
                  150,026
                  
                  
                  
                  165,920Rescissions
      of sales to existing customers
                  
                  
                  (4,953
                  )
                  
                  
                  (9,559
                  )
                  
                  
                  (12,631
                  )Net
      sales to existing customers
                  
                  
                  104,571
                  
                  
                  
                  140,467
                  
                  
                  
                  153,289Total
      sales
                  
                  
                  190,386
                  
                  
                  
                  238,525
                  
                  
                  
                  260,043Less
      sampler sales
                  
                  
                  (2,905
                  )
                  
                  
                  (3,390
                  )
                  
                  
                  (3,743
                  )Total
      Vacation Interval sales
                  
                  $
                  187,481
                  
                  
                  $
                  235,135
                  
                  
                  $
                  256,300Rescission
      rate for new customers
                  
                  
                  18.9
                  %
                  
                  
                  19.5
                  %
                  
                  
                  16.4
                  %Rescission
      rate for existing customers
                  
                  
                  4.5
                  %
                  
                  
                  6.4
                  %
                  
                  
                  7.6
                  %Rescission
      rate for all customers
                  
                  
                  11.6
                  %
                  
                  
                  12.3
                  %
                  
                  
                  11.4
                  %





·
            In
      assessing the effectiveness of our sales and marketing programs, we
      believe it is also important to compare sales and marketing expenses to
      Vacation Interval sales. The separate elements of sales and marketing
      expense that we assess are the cost of marketing to new purchasers, the
      cost of marketing to existing purchasers, offsite marketing, commissions,
      and sales and marketing overhead as detailed in the following table (in
      thousands, except for tours and cost per
tour):





Year Ended
December 31,2006
                  
                  
                  2007
                  
                  
                  2008Tours
      to potential new purchasers
                  
                  
                  86,950
                  
                  
                  
                  108,541
                  
                  
                  
                  116,713Cost
      per tour
                  
                  $
                  424
                  
                  
                  $
                  464
                  
                  
                  $
                  516Cost
      of marketing to new purchasers
                  
                  
                  36,875
                  
                  
                  
                  50,324
                  
                  
                  
                  60,230Cost
      of marketing to existing purchasers
                  
                  
                  11,649
                  
                  
                  
                  15,424
                  
                  
                  
                  17,286Offsite
      marketing
                  
                  
                  6,041
                  
                  
                  
                  6,118
                  
                  
                  
                  6,839Commissions
                  
                  
                  29,733
                  
                  
                  
                  37,780
                  
                  
                  
                  39,972Sales
      and marketing overhead
                  
                  
                  12,564
                  
                  
                  
                  13,423
                  
                  
                  
                  14,475Sampler
      sales offset
                  
                  
                  (2,905
                  )
                  
                  
                  (3,390
                  )
                  
                  
                  (3,743
                  )Total
      sales and marketing expense
                  
                  $
                  93,957
                  
                  
                  $
                  119,679
                  
                  
                  $
                  135,059As
      a percentage of Vacation Interval  sales:Cost
      of marketing to new purchasers
                  
                  
                  19.7
                  %
                  
                  
                  21.4
                  %
                  
                  
                  23.5
                  %Cost
      of marketing to existing purchasers
                  
                  
                  6.2
                  %
                  
                  
                  6.5
                  %
                  
                  
                  6.7
                  %Offsite
      marketing
                  
                  
                  3.2
                  %
                  
                  
                  2.6
                  %
                  
                  
                  2.7
                  %Commissions
                  
                  
                  15.9
                  %
                  
                  
                  16.1
                  %
                  
                  
                  15.6
                  %Sales
      and marketing overhead
                  
                  
                  6.7
                  %
                  
                  
                  5.7
                  %
                  
                  
                  5.7
                  %Sampler
      sales offset
                  
                  
                  (1.6
                  )%
                  
                  
                  (1.4
                  )%
                  
                  
                  (1.5
                  )%Total
      sales and marketing expense
                  
                  
                  50.1
                  %
                  
                  
                  50.9
                  %
                  
                  
                  52.7
                  %





·
            Our
      second most important source of revenue is interest income, which is
      predominantly earned on our notes receivable. Interest income as a
      percentage of average annual notes receivable has increased each year from
      2004 through 2008as a result of
      periodically increasing the interest rate we charged our new
      customers.





43
 Table of Contents





·
            We
      have two lesser revenue sources, management fees, predominantly from
      Silverleaf Club, and other income.





·
            We
      generate cash from the collection of down payments, from the collection of
      principal and interest from timeshare notes receivable, from sales of
      notes receivable, and from management fees and other income. We also
      generated cash during 2006 and 2007 from the sale of undeveloped land at
      locations that had been previously acquired for the possible development
      of new resorts.





·
            Since
      the majority of our sales are financed, we have revolving credit
      facilities that are drawn upon monthly to fund our day-to-day costs,
      expenses, and capital expenditures.





We
operate principally in only one business segment, the timeshare industry.
Further, we only operate in the United States. As of December 31, 2008, we
operate resorts in six states (Texas, Missouri, Illinois, Massachusetts,
Georgia, and Florida), and sell primarily to residents of those states, with
limited sales to residents of nearby states. In addition, we own and operate a
hotel located near the Winter Park recreational area in Colorado, which provides
our owners with another destination vacation alternative and gives Silverleaf an
entry point into this increasingly popular destination area.





Our
principal short-term focus is on continuing to conservatively increase annual
revenues. We will continue to identify new and existing customers with
acceptable credit characteristics that will allow us to profitably sell new,
upgrade, and additional Vacation Intervals at our Existing Resorts. Long term,
if the opportunities present themselves, we will consider adding and developing
new resorts where timeshare intervals can be marketed and sold at a
profit.





Critical
Accounting Policies





Timeshare Accounting Practices —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. There were
no sales deferred at December 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.


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


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





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





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 Table of Contents





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





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





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, collateral for construction bonds,
surety bonds, and cash reserved for payments of debt.





Allowance for UncollectibleNotes —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.





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 certain recourse obligations.
Recourse on sales of customer notes receivable is governed by agreements between
the purchasers of said notes and the Company, though we typically do not have an
obligation to repurchase defaulted notes held by our financing
subsidiaries.





Our
estimated uncollectible revenue as a percentage of Vacation Interval sales was
24.6%, 17.0% and 17.3% for the years ended December 31, 2008, 2007 and 2006,
respectively. Under the relative sales value method, an estimate of the value of
inventory recoveries is considered in determining inventory costing and
allocation to sales. 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. We will continue
our current collection programs and seek new programs to reduce note defaults.
We will also maintain our focus on tour lead procurement in an effort to improve
the credit quality of our customers. During 2008 and 2007, approximately 14.7%
and 21.6%, respectively, of our sales were made to customers with FICO® scores
below 600. However, there can be no assurance that these efforts will be
successful.





45
 Table of Contents





Inventories —Inventories are
stated at the lower of cost or market value less cost to sell.  Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, taxes, and capitalized interest incurred in the
construction or through the acquisition of resort dwellings held for timeshare
sale. At December 31, 2008, the estimated costs not yet incurred but expected to
complete promised amenities was $625,000. Inventory costs are allocated to cost
of Vacation Interval sales using the relative sales value method, as described
above. We periodically review the carrying value of our inventory on an
individual project basis for impairment to ensure that the carrying value does
not exceed market value.





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





Liquidity
and Capital Resources





As of and
for the years ended December 31, 2006, 2007, and 2008, we have been in full
compliance with our debt covenants in our credit facilities with all of our
senior lenders.





At
December 31, 2008, our senior credit facilities provided for loans of up to
$549.0 million, of which $186.6 million was available for future advances. The
following table summarizes our credit agreements with our senior lenders, our
wholly-owned and consolidated special purpose finance subsidiaries, our senior
subordinated debt and other debt, and our credit agreement with our
off-balance-sheet qualified SPE, SF-III, as of December 31, 2008 (in
thousands):





MaximumAmount
      Available
                  
                  
                  BalanceReceivables-Based
      Revolvers
                  
                  $
                  331,534
                  
                  
                  $
                  160,506Receivables-Based
      Non-Revolvers
                  
                  
                  139,100
                  
                  
                  
                  139,100Inventory
      Loans
                  
                  
                  78,407
                  
                  
                  
                  62,871Subtotal
      Senior Credit Facilities
                  
                  
                  549,041
                  
                  
                  
                  362,477Senior
      Subordinated Debt
                  
                  
                  23,121
                  
                  
                  
                  23,121Other
      Debt
                  
                  
                  6,594
                  
                  
                  
                  6,594Subtotal
      On-Balance-Sheet
                  
                  
                  578,756
                  
                  
                  
                  392,192Off-Balance-Sheet
      Receivables-Based Term Loan
                  
                  
                  17,135
                  
                  
                  
                  17,135Grand
      Total
                  
                  $
                  595,891
                  
                  
                  $
                  409,327





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





The loans
mature between June 2010 and March 2020 and are collateralized (or
cross-collateralized) by customer notes receivable, inventory, construction in
process, land, improvements, and related equipment at certain of the Existing
Resorts. Our fixed-to-floating debt ratio at December 31, 2008 was 38% fixed to
62% floating. However, the majority of our floating-rate debt is subject to
interest-rate floors between 5.25% and 8.00%.  The credit facilities
that bear interest at variable rates are tied to the Prime rate or
LIBOR.  At December 31, 2008, the LIBOR rate on our senior credit
facilities was 0.44% (1 month) and the Prime rate on these facilities was 3.25%.
The credit facilities secured by customer notes receivable allow advances of 75%
to 80% of eligible customer notes receivable. In addition, we have $23.1 million
of senior subordinated notes due April 2010, with interest payable semi-annually
on April 1 and October 1, guaranteed by all of our present and future domestic
restricted subsidiaries.





We are
aware that our outstanding debt securities are currently trading at substantial
discounts to face amount.  During the fourth quarter of 2008, we
retired $1.6 million of our 8.0% senior subordinated notes, due April 2010, for
$1.3 million, which resulted in a gain of approximately $250,000.  In
order to reduce future cash interest payments, as well as future amounts due at
maturity or upon redemption, we may from time to time in future periods seek to
retire or purchase our outstanding senior subordinated notes through cash
purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions, or otherwise.  Such repurchases or
exchanges, if any, will depend on prevailing market conditions, our liquidity
requirements, contractual restrictions, and other factors.  The
amounts involved may be material.





46
 Table of Contents





Contractual
Obligations and Commitments





The
following table summarizes our scheduled contractual commitments as of December
31, 2008 (in thousands):





2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  ThereafterLong-term
      debt
                  
                  $
                  79,307
                  
                  
                  $
                  85,045
                  
                  
                  $
                  111,568
                  
                  
                  $
                  77,111
                  
                  
                  $
                  85,637
                  
                  
                  $
                  8,614Capital
      leases
                  
                  
                  1,010
                  
                  
                  
                  597
                  
                  
                  
                  345
                  
                  
                  
                  104
                  
                  
                  
                  18
                  
                  
                  
                  —Operating
      leases
                  
                  
                  2,337
                  
                  
                  
                  1,504
                  
                  
                  
                  968
                  
                  
                  
                  519
                  
                  
                  
                  306
                  
                  
                  
                  475Construction
      commitments
                  
                  
                  16,349
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  99,003
                  
                  
                  $
                  87,146
                  
                  
                  $
                  112,881
                  
                  
                  $
                  77,734
                  
                  
                  $
                  85,961
                  
                  
                  $
                  9,089





Principal
maturities on our term securitizations (SF-II, SF-V, and SF-VI) are shown
proportionate to the projected collections of the corresponding notes receivable
that serve as collateral to this debt. Long-term debt includes $57.0 million of
future interest, using an approximate interest rate of 6.8%, which is our
weighted average cost of borrowings at December 31, 2008. Capital leases include
$164,000 of future interest, using an approximate interest rate of 6.2%, which
is our weighted average cost of borrowings on our capital lease obligations at
December 31, 2008. Construction commitments of $16.3 million relate to the
continued development of our resorts and will be funded via availability under
our credit facilities. As of December 31, 2008, we had availability under our
credit facilities of $186.6 million.  We also have a $15.7 million
demand note with SF-II, our wholly owned on-balance-sheet conduit financing
subsidiary, which is excluded from long-term debt as the note represents only a
potential, future cash outlay and is eliminated on a consolidated
basis.





Net Cash Used in
Operating Activities. 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 year ended December 31, 2008, cash used in operating activities was $21.3
million compared to $39.9 million and $45.6 million during the same periods of
2007 and 2006, respectively. This $18.6 million decrease in cash used in
operating activities during 2008 versus 2007 primarily resulted from the
reduction in capital expenditures for expansion at existing resorts, including
construction of lodging units and additional amenities. This reduction in
capital expenditures is consistent with our moderate growth initiative in effect
for 2008.





Net Cash Used in
Investing Activities. During
2008, investing activities used $19.5 million of cash compared to $16.8 million
during 2007 and $13.6 million during 2006. The $13.6 million net cash used
during 2006 resulted primarily from the purchase of the following assets:
Pinnacle Lodge (our 64-room hotel located near the Winter Park recreational area
in Colorado), two offsite sales offices, and a corporate aircraft. We also began
construction on the water park at The Villages Resort in 2006. These purchases
were partially offset by net proceeds of $789,000 received from the sale of two
parcels of land in Mississippi. The $16.8 million net cash used during 2007
consisted of capital expenditures totaling $17.0 million, partially offset by
net proceeds of $242,000 received from the sale of a land parcel in Texas. The
$17.0 million capital expenditures resulted primarily from construction of the
water park at The Villages Resort and purchases of unimproved real property in
Massachusetts and Missouri. The Massachusetts land is a 394.3 acre tract which
adjoins 500 acres that we own in Berkshire County, Massachusetts, and the
Missouri land consists of 36.7 acres and is adjacent to our Holiday Hills resort
in Taney County, Missouri. The $19.5 million cash used for investing activities
in 2008 resulted primarily from the construction or expansion of member services
buildings at six of our existing resorts, completion of construction on the
water park at The Villages Resort which opened in January 2008, and purchases of
two parcels of land in Texas. We purchased approximately 10 acres adjacent to
our Piney Shores Resort located on the shores of Lake Conroe, approximately 40
miles north of Houston, Texas, and 8 acres adjacent to our Hill Country Resort,
near Canyon Lake in the hill country of central Texas between Austin and
San Antonio.





Net Cash Provided
by FinancingActivities.
During 2008, net cash provided by financing activities was $39.1 million
compared to $58.4 million and $59.7 million for 2007 and 2006, respectively. The
net cash of $59.7 million provided by financing activities during 2006 was
primarily the result of $320.3 million of proceeds received from borrowings
against pledged notes receivable and our inventory loans, partially offset by
$250.6 million of payments on borrowings against pledged notes receivable and
our inventory loans, and $10.2 million of increases in restricted cash reserved
for payments of debt, all of which were primarily due to our transactions with
SF-IV and Silverleaf Finance V, L.P. (“SF-V”). The net cash of $58.4 million
provided by financing activities during 2007 was primarily the result of $181.3
million of proceeds received from borrowings against pledged notes receivable
and our inventory loans, offset by $124.3 million of payments on borrowings
against pledged notes receivable and our inventory loans. The net cash of $39.1
million provided by financing activities during 2008 was primarily the result of
$339.4 million of proceeds received from borrowings against pledged notes
receivable and our inventory loans, partially offset by $292.4 million of
payments on borrowings against pledged notes receivable and our inventory loans,
and $7.9 million of increases in restricted cash reserved for payments of debt.
The securitization transaction we closed in June 2008 through our newly-formed,
wholly-owned and fully consolidated special purpose finance subsidiary, SF-VI,
generated $107.4 million of the $339.4 million of proceeds received from
borrowings and $93.8 million of the $292.4 million of payments on borrowings for
the year ended December 31, 2008.





47
 Table of Contents





At
December 31, 2008, our senior credit facilities provided for loans of up to
$549.0 million, of which $362.5 million of principal related to advances under
the credit facilities was outstanding. As of December 31, 2008, the weighted
average cost of funds for all borrowings was 6.8%. 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 December 31, 2008, $7.6 million of notes, net of accounts charged off,
were more than 60 days past due.





Considering
forecasted sales, customer defaults, and expansion plans, our senior credit
facilities provide adequate liquidity to meet our needs into 2010. 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.





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. 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., our former qualified SPE which was dissolved in
2005.





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”), our bases for classifying SF-III as a qualified
SPE are i) SF-III is demonstrably distinct from the transferor as dissolution of
the SPE would require an affirmative vote of 100% of the SPE’s Board of
Directors, one of which is independent, ii) there are limits on permitted
activities that the SPE has the power to carry out, and iii) financial assets
transferred to the SPE are passive in nature.





The
Series 2005-A Notes are secured by timeshare receivables we sold to SF-III. The
timeshare receivables we sold to SF-III are without recourse to us, except for
breaches of certain representations and warranties at the time of sale. In
accordance with the
agreement, we continue servicing these timeshare receivables and receive
fees for our services equal to 1.75% of eligible timeshare receivables held by
the facility. Such fees were $1.5 million, $854,000, and $491,000 for the years
ended December 31, 2006, 2007, and 2008, respectively.





At
December 31, 2008, SF-III held notes receivable totaling $22.5 million with
related borrowings of $17.1 million. Except for the repurchase of notes that
fail to meet initial eligibility requirements, we are not obligated to
repurchase defaulted or any other contracts sold to SF-III. As the servicer of
notes receivable sold to SF-III, we are obligated to foreclose upon Vacation
Intervals securing defaulted note receivables. Although we are not
obligated, we may purchase foreclosed Vacation Intervals for 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 year ended December 31, 2008, we paid
$639,000 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 $4.9 million at December 31, 2008, which represents
our maximum exposure to loss regarding our investment in 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
continue to finance the majority of our timeshare sales over seven to ten
years.





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





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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, 2008, we did not require an accrual for
interest and penalties related to unrecognized tax benefits.





In
addition, we are subject to current 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. However, we have paid AMT in subsequent years, and anticipate
that we will pay AMT in future periods.





Federal
NOLs of $140.6 million existing at December 31, 2008 expire between 2020 and
2021. Realization of the deferred tax assets arising from NOLs is dependent on
generating sufficient taxable income prior to the expiration of the loss
carryforwards.





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





Results
of Operations





The
following table summarizes key ratios from our consolidated statements of
operations for the years ended December 31, 2006, 2007, and 2008:





2006
                  
                  
                  2007
                  
                  
                  2008As
      a percentage of total revenues:Vacation
      Interval sales
                  
                  
                  90.6
                  %
                  
                  
                  92.2
                  %
                  
                  
                  97.1
                  %Estimated
      uncollectible revenue
                  
                  
                  (15.7
                  )%
                  
                  
                  (15.7
                  )%
                  
                  
                  (23.9
                  )%Net
      sales
                  
                  
                  74.9
                  %
                  
                  
                  76.5
                  %
                  
                  
                  73.2
                  %Interest
      income
                  
                  
                  22.4
                  %
                  
                  
                  20.8
                  %
                  
                  
                  23.1
                  %Management
      fee income
                  
                  
                  0.9
                  %
                  
                  
                  1.1
                  %
                  
                  
                  1.2
                  %Other
      income
                  
                  
                  1.8
                  %
                  
                  
                  1.6
                  %
                  
                  
                  2.5
                  %Total
      revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %As
      a percentage of Vacation Interval sales:Cost
      of Vacation Interval sales
                  
                  
                  10.1
                  %
                  
                  
                  9.8
                  %
                  
                  
                  9.7
                  %Sales
      and marketing
                  
                  
                  50.1
                  %
                  
                  
                  50.9
                  %
                  
                  
                  52.7
                  %As
      a percentage of total revenues:Operating,
      general and administrative
                  
                  
                  15.6
                  %
                  
                  
                  15.3
                  %
                  
                  
                  15.6
                  %Depreciation
                  
                  
                  1.2
                  %
                  
                  
                  1.4
                  %
                  
                  
                  1.9
                  %As
      a percentage of interest income:Interest
      expense and lender fees
                  
                  
                  46.8
                  %
                  
                  
                  46.4
                  %
                  
                  
                  46.8
                  %





Results
of Operations for the Years Ended December 31, 2008 and 2007





Revenues





Revenues
for the year ended December 31, 2008 were $264.0 million, representing a $9.0
million, or 3.5%, increase compared to revenues of $255.0 million for the year
ended December 31, 2007. As discussed below, the increase is primarily
attributable to a $21.2 million increase in Vacation Interval sales and an $8.1
million increase in interest income offset by a $23.0 million increase in
estimated uncollectible revenue during the year ended December 31,
2008.





49
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The
following table summarizes our Vacation Interval sales for the years ended
December 31, 2008 and 2007 (dollars in thousands, except average
price):





2007
                  
                  
                  2008Average
                  
                  
                  
                  
                  
                  
                  
                  
                  AverageSales
                  
                  
                  Intervals
                  
                  
                  Price
                  
                  
                  Sales
                  
                  
                  Intervals
                  
                  
                  PriceInterval
      Sales to New Customers
                  
                  $
                  94,668
                  
                  
                  
                  9,121
                  
                  
                  $
                  10,379
                  
                  
                  $
                  103,011
                  
                  
                  
                  9,580
                  
                  
                  $
                  10,753Upgrade
      Interval Sales to Existing Customers
                  
                  
                  87,243
                  
                  
                  
                  9,988
                  
                  
                  
                  8,735
                  
                  
                  
                  92,989
                  
                  
                  
                  9,914
                  
                  
                  
                  9,380Additional
      Interval Sales to Existing Customers
                  
                  
                  53,224
                  
                  
                  
                  6,273
                  
                  
                  
                  8,485
                  
                  
                  
                  60,300
                  
                  
                  
                  6,233
                  
                  
                  
                  9,674Total
                  
                  $
                  235,135
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  256,300





Vacation
Interval sales increased 9.0% in 2008 versus 2007 primarily due to a 6.0%
increase in tours. The number of interval sales to new customers increased 5.0%
and average prices increased 3.6%, which resulted in an 8.8% increase in sales
to new customers in 2008 versus 2007. The number of upgrade interval sales to
existing customers decreased 0.7% but average prices increased 7.4%, resulting
in a 6.6% net increase in upgrade interval sales to existing customers during
the year ended December 31, 2008 compared to the year ended December 31, 2007.
The number of additional interval sales to existing customers decreased 0.6% but
average prices increased 14.0%, resulting in a 13.3% net increase in additional
interval sales to existing customers during 2008 versus 2007. Vacation
Interval sales to existing customers comprised 59.8% and 59.7% of total Vacation
Interval sales in the years ended December 31, 2008 and 2007, respectively,
which maintains our favorable sales mix trend toward upgrades and second-week
sales to existing customers as such sales have relatively lower associated sales
and marketing costs.





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





Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $63.1 million for the year ended December 31, 2008 versus
$40.1 million for the year ended December 31, 2007. Our estimated uncollectible
revenue as a percentage of Vacation Interval sales was 24.6% for the year 2008
compared to 17.0% for 2007. Our receivables charged off as a percentage of
beginning of period gross notes receivable was 15.5% for 2008 compared to 13.1%
for the same period of 2007. Since the fourth quarter of 2007, we have increased
the provision for estimated uncollectible revenue each successive quarter as
follows: 22.0% for the first quarter of 2008, 23.9% for the second quarter of
2008, 24.9% for the third quarter of 2008, and 28.1% for the fourth quarter of
2008. Due to the increased defaults during 2008, our provision for estimated
uncollectible revenue has increased to maintain the allowance for uncollectible
notes at a level management considers adequate to provide for anticipated losses
resulting from customer defaults.  However, there can be no assurance
that the percentage of estimated uncollectible revenue will remain at its
current level. We review the allowance for uncollectible notes quarterly and
make adjustments as necessary.





Interest
income increased $8.1million, or 15.2%, to $61.1 million for the year ended
December 31, 2008 from $53.0 million for 2007. The increase primarily resulted
from a higher average notes receivable balance in 2008 versus the same period of
2007, and an increase in the weighted average yield on our outstanding notes
receivable to 16.7% at December 31, 2008 from 16.5% at December 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 $315,000 to $3.1 million for the year ended December 31, 2008
compared to $2.8 million for the year ended December 31, 2007 primarily due to
increased profitability of the resorts’ management clubs.





Other
income consists of water park income, marina income, golf course and pro shop
income, hotel income, and other miscellaneous items. Other income was $6.5
million for the year ended December 31, 2008 compared to $4.1 million for the
year ended December 31, 2007. The increase is primarily attributable to $1.3
million of insurance proceeds we received in November 2008 for business-interruption
losses incurred as a result of Hurricane Ike and $1.1 million ofincome
from our water park at The Villages Resort which opened in January 2008.





Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including both costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including 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 remained relatively flat
at 9.7% of Vacation Interval sales during 2008 compared to 9.8% during
2007.





50
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Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales increased to 52.7%
for the year ended December 31, 2008 versus 50.9% for the comparable prior year
period. The $15.4 million increase in sales and marketing expense is
attributable to the increased volume of Vacation Interval sales and the higher
cost of various marketing efforts to improve the credit quality of our
customers. The sales mix remained fairly constant for the year ended December
31, 2008 compared to the same period of 2007 at 59.8% of sales to existing
customers in 2008 versus 59.7% of sales to existing customers in
2007.





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, providing us additional opportunities
to sell Vacation Intervals to prospective customers, the incremental costs of
our sampler sales typically exceed incremental sampler revenues. Accordingly,
$3.7 million and $3.4 million of sampler revenues were recorded as a reduction
to sales and marketing expense for the years ended December 31, 2008 and 2007,
respectively.





Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues increased
to 15.6% in 2008 from 15.3% in 2007. Overall, operating, general and
administrative expenses increased by $2.1 million during 2008 as compared to
2007, primarily due to expenses of $1.4 million for our water park at The
Villages Resort which opened in January 2008 and an increase in bank fees
of $821,000 (resulting from higher credit card processing fees related to
increased sales volume), partially offset by a decrease of $473,000 in group
insurance.In
addition, we accrued $291,000 related to Hurricane Ike in 2008, which
represents our insurance deductibles and expenditures deemed
uncollectible.  We also wrote off
predevelopment costs associated with potential land acquisitions of $1.1 million
and $1.0 million for the years ended December 31, 2008 and 2007, respectively.





Depreciation





Depreciation
expense as a percentage of total revenues increased to 1.9% in 2008 versus 1.4%
in 2007. Overall, depreciation expense increased by $1.4 million during 2008 as
compared to 2007 due to capital expenditures of $19.5 million during the year
ended December 31, 2008.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income increased to 46.8%
for the year ended December 31, 2008, compared to 46.4% for the same period of
2007. Overall, interest expense and lender fees increased $3.9 million for 2008
versus 2007 primarily due to a larger average debt balance outstanding during
2008, which was $367.6 million compared to $314.5 million for the prior year
period, and to a lesser extent an increase in lender fees related to our SF-VI
securitization which closed in the second quarter of 2008. These increases were
partially offset by a decrease in our weighted average cost of borrowings to
6.8% for the year ended December 31, 2008 as compared to 7.6% for the year ended
December 31, 2007.





Income before Provision for
Income Taxes





Income
before provision for income taxes decreased to $29.4 million for the year ended
December 31, 2008 compared to $45.1 million for the year ended December 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
38.9% for the year ended December 31, 2008 compared to 38.6% for 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, 2008, we did not require an accrual for interest and
penalties related to unrecognized tax benefits.





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 Table of Contents





Net
Income





Net
income was $17.9 million for the year ended December 31, 2008 compared to $27.7
million for the year ended December 31, 2007 as a result of the above-mentioned
operating results.





Results
of Operations for the Years Ended December 31, 2007 and 2006





Revenues





Revenues
for the year ended December 31, 2007 were $255.0 million, representing a $48.1
million, or 23.3% increase, compared to revenues of $206.9 million for the year
ended December 31, 2006. As discussed below, the increase is primarily
attributable to a $47.7 million increase in Vacation Interval sales during the
year 2007.





The
following table summarizes our Vacation Interval sales for the years ended
December 31, 2007 and 2006 (dollars in thousands, except average
price):





2006
                  
                  
                  2007Average
                  
                  
                  
                  
                  
                  
                  
                  
                  AverageSales
                  
                  
                  Intervals
                  
                  
                  Price
                  
                  
                  Sales
                  
                  
                  Intervals
                  
                  
                  PriceInterval
      Sales to New Customers
                  
                  $
                  82,909
                  
                  
                  
                  6,557
                  
                  
                  $
                  12,644
                  
                  
                  $
                  94,668
                  
                  
                  
                  9,121
                  
                  
                  $
                  10,379Upgrade
      Interval Sales to Existing Customers
                  
                  
                  72,366
                  
                  
                  
                  8,777
                  
                  
                  
                  8,245
                  
                  
                  
                  87,243
                  
                  
                  
                  9,988
                  
                  
                  
                  8,735Additional
      Interval Sales to Existing Customers
                  
                  
                  32,206
                  
                  
                  
                  3,298
                  
                  
                  
                  9,765
                  
                  
                  
                  53,224
                  
                  
                  
                  6,273
                  
                  
                  
                  8,485Total
                  
                  $
                  187,481
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  235,135





Vacation
Interval sales increased 25.4% in 2007 versus 2006 as a result of 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 39.1% offset by a decrease in average prices of 17.9% (due to
promotional pricing we offered during the third and fourth quarters of 2007 on
select products) resulting in a 14.2% increase in sales to new customers in 2007
versus 2006. The number of upgrade interval sales to existing customers
increased 13.8% and average prices increased 5.9%, resulting in a 20.6% increase
in upgrade interval sales to existing customers during the year ended December
31, 2007 compared to the year ended December 31, 2006. The number of additional
interval sales to existing customers increased 90.2% and average prices
decreased 13.1% (also due to promotional pricing on additional interval sales)
resulting in a 65.3% net increase in additional interval sales to existing
customers during 2007 versus 2006.





Estimated
uncollectible revenue, which represents estimated future gross cancellations of
notes receivable, was $40.1 million for the year ended December 31, 2007 versus
$32.5 million for the year ended December 31, 2006. Our estimated uncollectible
revenue as a percentage of Vacation Interval sales was 17.0% for the year 2007
compared to 17.3% for 2006. Our receivables charged off as a percentage of
beginning of period gross notes receivable was 13.1% for 2007 compared to 12.4%
for the same period of 2006. We believe our notes receivable are adequately
reserved, however, there can be no assurance that the percentage of estimated
uncollectible revenue will remain at its current level.





Interest
income increased $6.8 million, or 14.6%, to $53.0 million for the year ended
December 31, 2007 from $46.2 million for 2006. The increase primarily resulted
from a higher average notes receivable balance in 2007 versus the same period of
2006, and an increase in the weighted average yield on our outstanding notes
receivable to 16.5% at December 31, 2007 from 16.0% at December 31,
2006.





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 $945,000 to $2.8 million for the year ended December 31, 2007
compared to $1.9 million for the year ended December 31, 2006, due primarily to
increased profitability of the resorts’ management clubs during 2007 versus
2006.





Other
income consists of marina income, golf course and pro shop income, hotel income,
and other miscellaneous items. Other income was $4.1 million for the year ended
December 31, 2007 compared to $3.8 million for the year ended December 31, 2006.
The increase is primarily attributable to hotel income of $1.1 million
during 2007 versus $522,000 during 2006, offset by gains on sales of land of
$242,000 in 2007 compared to $499,000 in 2006.





52
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Cost of Vacation Interval
Sales





Under the
relative sales value method, cost of sales is estimated as a percentage of net
sales using a cost of sales percentage which represents the ratio of total
estimated cost, including both costs already incurred plus estimated costs to
complete the phase, if any, to total estimated Vacation Interval revenues under
the project, including 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 9.8% in 2007 compared to 10.1% in 2006.
During 2007, cost of sales decreased due to increases in our future relative
sales value related to an increase in repossession and resale of timeshare
intervals, an increase in expected future sales price on some of our higher-end
products, and an increase in our master plan for new units added across our
properties as we continue to execute on our long-term growth strategy of adding
lodging units, amenities, and other assets to our existing properties. In
addition, we experienced an increase in sales of lower cost-basis timeshare
intervals during 2007 versus 2006. These increases were partially offset by
costs recognized during 2007 related to past construction projects that were
terminated as we revamped our master plan during the year.





Sales and
Marketing





Sales and
marketing expense as a percentage of Vacation Interval sales increased to 50.9%
for the year ended December 31, 2007 versus 50.1% for the comparable prior year
period. The $25.7 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 24.8% growth in tours to potential new purchasers and a 25.4% increase in
Vacation Interval sales during the year of 2007 versus 2006.





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,
$3.4 million and $2.9 million of sampler revenues were recorded as a reduction
to sales and marketing expense for the years ended December 31, 2007 and 2006,
respectively.





Operating, General and
Administrative





Operating,
general and administrative expenses as a percentage of total revenues decreased
to 15.3% in 2007 from 15.6% in 2006. Overall, operating, general and
administrative expenses increased by $6.8 million during 2007 as compared to
2006, primarily due to an increase in salaries of $2.7 million, a write-off of
$1.0 million of predevelopment costs associated with a potential land
acquisition that was terminated, an increase in bank fees of $900,000 (resulting
from higher credit card processing fees related to increased sales volume), and
a $474,000 increase in legal fees.





Depreciation





Depreciation
expense as a percentage of total revenues increased to 1.4% in 2007 versus 1.2%
in 2006. Overall, depreciation expense was $3.5 million for 2007 compared to
$2.5 million for 2006, an increase of $972,000 due to capital expenditures of
$17.1 million during the year ended December 31, 2007.





Interest Expense and Lender
Fees





Interest
expense and lender fees as a percentage of interest income decreased to 46.4%
for the year ended December 31, 2007, compared to 46.8% for the same period of
2006.  Overall, interest expense and lender fees increased $2.9
million for 2007 versus 2006 primarily due to a larger average debt balance
outstanding during 2007, partially offset by a decrease in our weighted average
cost of borrowings to 7.6% for the year ended December 31, 2007 as compared to
7.9% for the year ended December 31, 2006.





Income before Provision for
Income Taxes





Income
before provision for income taxes increased to $45.1 million for the year ended
December 31, 2007 compared to $37.4 million for the year ended December 31, 2006
as a result of the above-mentioned operating results.





53
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Provision for Income
Taxes





Provision
for income taxes as a percentage of income before provision for income taxes was
38.6% for the year ended December 31, 2007 compared to 38.5% for 2006. As of
January 1, 2007, 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, we did not require an accrual for interest and
penalties related to unrecognized tax benefits.





Net
Income





Net
income was $27.7 million for the year ended December 31, 2007 compared to $23.0
million for the year ended December 31, 2006 as a result of the above-mentioned
operating results.





Inflation





Inflation
and changing prices have not had a material impact on our revenues, operating
income, and net income during any of the three most recent fiscal years.
However, to the extent inflationary trends affect short-term interest rates, a
portion of our debt service costs may be affected as well as the rates we charge
on our customer notes receivable.





Recent
Accounting Pronouncements





SFAS No.157–We adopted the
provisions of Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”), 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. In February 2008, the FASB issued Staff
Position (“FSP”) No. 157-2, which deferred its effective date for one year
relative to non-financial assets and liabilities that are recognized or
disclosed at fair value in the financialstatements on a
nonrecurring basis. 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 SPE and our derivative contracts as shown
in Note 13. This adoption did not impact our consolidated financial position,
results of operations, or cash flows. The remaining aspects of SFAS No. 157,
which will be adopted effective January 1, 2009, apply to our non-financial
long-lived assets (land, equipment, buildings, and leasehold improvements) which
are measured at fair value based on a periodic impairment assessment. Adoption
of the remaining aspects of SFAS No. 157 will result in additional disclosures,
however, will not impact our consolidated financial position, results of
operations, or cash flows.





SFAS No. 159–We adopted the
provisions of Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),
on January 1, 2008. SFAS No. 159 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. The adoption of SFAS No. 159 did not
impact our consolidated financial position, results of operations, or cash flows
as we did not elect to measure additional items at fair value under SFAS
No. 159.





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 to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning after
December 15, 2008. Early adoption is not permitted. The adoption of
SFAS No. 141(R) as of January 1, 2009 is not expected to impact our consolidated
financial position, results of operations, or cash flows as we do not have any
planned acquisitions that fall under the definition of a business
combination.





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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. The adoption of SFAS No. 160 as of
January 1, 2009 will not impact our consolidated financial position, results of
operations, or cash flows as we do not own minority interests in any
entities.





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 Statement of Financial
Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”). Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
Early adoption is encouraged. The adoption of SFAS No. 161 as of January 1, 2009
will not impact our consolidated financial position, results of operations, or
cash flows. Disclosures regarding our derivative instruments and hedging
activities are included in Note 2 and in disclosures related to interest rate
risk and market risk.





SFAS No. 162–In May 2008, the FASB
issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and a framework for selecting
the principles to be used in preparation of financial statements of
nongovernmental entities that are prepared in conformity with generally accepted
accounting principles in the United States (“the GAAP hierarchy”). The current
GAAP hierarchy is set forth in the AICPA Statement on Auditing Standards No. 69,
“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles” (“SAS No. 69”). However, the FASB believes the GAAP hierarchy should
be directed to entities rather than auditors because the entity is responsible
for selecting accounting principles for financial statements that are presented
in conformity with GAAP. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” The adoption of SFAS No. 162 will not impact
our consolidated financial position, results of operations, or cash
flows.





FSP No. 157-3– In October
2008, the FASB Staff issued an  FSP related to SFAS No. 157, FSP
157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset is not Active.” The provisions of FSP 157-3 are effective upon issuance,
or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The adoption of FSP 157-3 did not
impact our consolidated financial position, results of operations, or cash
flows.





FSP No. FAS 140-4 and FIN
46(R)-8–
In December 2008, the FASB Staff issued an FSP related to SFAS No. 140 and
FIN No. 46(R), FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities.” The provisions of FSP FAS 140-4 and FIN
46(R)-8 are effective for fiscal periods (quarterly and annually) ending
after December 15, 2008. The purpose of this FSP is to require enhanced
disclosures by public entities (enterprises) about transfers of financial assets
(securitizations) and interests in variable interest entities (consolidations of
certain special-purpose investment entities) as part of the FASB’s projects to
amend SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities” and FIN No. 46(R), “Consolidation of
Variable Interest Entities” (“VIEs”). The adoption of
FSP FAS 140-4 and FIN 46(R)-8 did not impact our consolidated financial
position, results of operations, or cash flows. Disclosures in accordance with
FSP FAS 140-4 and FIN 46(R)-8 have been included herein.





ITEM7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





General - Interest on our
notes receivable portfolio, senior subordinated debt, capital leases, and
miscellaneous notes is fixed, whereas interest on our primary loan agreements,
which had a total facility amount of $549.0 million at December 31, 2008, have a
fixed-to-floating debt ratio of 38% fixed to 62% floating. However, the majority
of our floating-rate debt is subject to interest-rate floors between 5.25% and
8.00%.  The impact of a one-point effective interest rate change on
the $223.4 million balance of variable-rate financial instruments at December
31, 2008 would be approximately $432,000 on our results of operations, after
taxes, for the year ended December 31, 2008, or approximately $0.01 per diluted
share.





At
December 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 December 31, 2008 would result in a
fair value decrease of approximately $12.8 million on our notes receivable
portfolio.





55
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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 2008 and 2007,
approximately 14.7% and 21.6%, 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 increase further. 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 24.6% for
the year ended December 31, 2008 from 17.0% for the comparable period of 2007.
However, if default rates for our borrowers were to continue to rise, it may
require an additional increase in our estimated uncollectible revenue. We will
continue to evaluate our collections process and marketing programs with a view
toward establishing procedures aimed at reducing note defaults and improving the
credit quality of our customers. However, there can be no assurance that these
efforts will be successful.





If a
buyer of a Vacation Interval defaults, we generally must foreclose on the
Vacation Interval and attempt to resell it; the associated marketing, selling,
and administrative costs from the original sale are not recovered; and such
costs must be incurred again to resell the Vacation Interval. Although in many
cases we may have recourse against a Vacation Interval buyer for the unpaid note
balance, certain states have laws that limit our ability to recover personal
judgments against customers who have defaulted on their loans. Accordingly, we
have generally not pursued this remedy.





Interest Rate Risk — We have
historically derived net interest income from our financing activities because
the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceed the interest rates we pay to our senior lenders. As
62% of our senior indebtedness bears interest at variable rates and our customer
notes receivable bear interest at fixed rates, increases in interest rates will
erode the spread in interest rates that we have historically experienced and
could cause our interest expense on borrowings to exceed our interest income on
our portfolio of customer loans. Although interest rates declined throughout
2008, any increase in interest rates above applicable floor rates, particularly
if sustained, could have a material adverse effect on our results of operations,
cash flows, and financial position.





To
partially offset potential increases in interest rates, we have executed two
interest rate swaps related to our conduit loan with SF-II, with fixed rates of
7.04% and 7.90%, for a total notional amount of $2.6 million at December 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 December 31, 2008 was $70.2 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 $17.1 million at December
31, 2008, bear interest at a blended fixed rate of 5.4%.





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





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ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





See the
information set forth on Index to Consolidated Financial Statements appearing on
page F-1 of this report on Form 10-K.





ITEM9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM9A.
            CONTROLS
      AND PROCEDURES





Management's
Report on Internal Control over Financial Reporting





Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that are filed or submitted under
the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. These disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed under the Exchange
Act is accumulated and communicated to our management on a timely basis to allow
decisions regarding required disclosure. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2008 based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) as well as criteria established
in Item 307 of Regulation S-K.





Our
internal control over financial reporting includes policies and procedures that
(1) pertain to maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of our management and Board of Directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of assets that could have a material effect on
the financial statements.





Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and, even when determined to be effective, can
only provide reasonable, not absolute, assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate as a result of changes in conditions or deterioration in the degree
of compliance.





Based
upon our evaluation of the effectiveness and design of our disclosure controls
and procedures as of December 31, 2008, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosures.  The results of management's assessment were reviewed
with the Audit Committee of our Board of Directors.





This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management’s
report in this annual report.





Changes
in Internal Control over Financial Reporting





During
the fourth quarter of 2008, there were no changes in our internal control over
financial reporting that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





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ITEM
      9B.
            OTHER
      INFORMATION





None.





PART III





MANAGEMENT





ITEM10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





The
required information is incorporated by reference from our Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on May 7,
2009.





The
following table sets forth certain information concerning each person who was a
director or executive officer of the Company as of December 31,
2008.





Name
                      Age
                      PositionRobert
      E. Mead
                      62
                      Chairman
      of the Board and Chief Executive OfficerSharon
      K. Brayfield
                      48
                      PresidentDavid
      T. O'Connor
                      66
                      Senior
      Executive Vice President — SalesJoe
      W. Conner
                      51
                      Chief
      Operating OfficerRobert
      M. Sinnott
                      43
                      Chief
      Financial OfficerHarry
      J. White, Jr.
                      54
                      Vice
      President - TreasurerMichael
      D. Jones
                      42
                      Chief
      Information OfficerEdward
      L. Lahart
                      44
                      Executive
      Vice President — OperationsThomas
      J. Morris
                      43
                      Executive
      Vice President — Capital Markets & Strategic
  PlanningSandra
      G. Cearley
                      47
                      Corporate
      SecretaryJames
      B. Francis, Jr.
                      60
                      DirectorJ.
      Richard Budd
                      56
                      DirectorHerbert
      B. Hirsch
                      72
                      DirectorRebecca
      Janet Whitmore
                      54
                      Director


____________________





Effective
February 4, 2008, the Company’s Board of Directors elected
Robert M. Sinnott as Chief Financial Officer. Mr. Sinnott
succeeded Harry J. White, Jr., who served as Chief Financial
Officer since June 1998. Mr. White then served as Chief Accounting Officer from
February 2008 to May 2008, at which time our Board of Directors elected him as
Vice President - Treasurer.





The
following table sets forth certain information concerning other officers of the
Company as of December 31, 2008.





Name
                  Age
                  PositionRobert
      G. Levy
                  60
                  Vice
      President — Resort OperationsDarla
      K. Cordova
                  44
                  Vice
      President — Sales AdministrationHerman
      Jay Hankamer
                  69
                  Vice
      President — Resort DevelopmentBarbara
      L. Lewis
                  44
                  Vice
      President — Financial ServicesMichael
      P. Lowrey
                  50
                  Vice
      President — Call Center OperationsPhillip
      B. Davis
                  38
                  Vice
      President — FinanceGinger
      M. Ford
                  41
                  Vice
      President — ­­­Owner MarketingAllen
      G. Jowers
                  37
                  Vice
      President — ­­­SalesJeremy
      T. Brayfield
                  29
                  Vice
      President —
­­­Sales


____________________





ITEM
      11.
            EXECUTIVE
      COMPENSATION





The
required information is incorporated by reference from our Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on May 7,
2009.





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 Table of Contents





ITEM12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Equity Compensation Plan
Information





The
following table sets forth information about our equity compensation plans as of
December 31, 2008:





Plan Category
                    
                    Number
      of Securities to be Issued Upon Exercise of Outstanding Options,Warrants, and Rights
                    
                    
                    Weighted
      Average Exercise Price of Outstanding Options, Warrants, and Rights
                    
                    
                    Number
      of Securities Remaining Available for Future Issuance Under Equity Compensation PlansEquity
      Compensation Plans Approved by Security Holders
                    
                    
                    3,790,307
                    
                    
                    $
                    1.60
                    
                    
                    
                    59Equity
      Compensation Plans Not  Approved by Security
    Holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    3,790,307
                    
                    
                    $
                    1.60
                    
                    
                    
                    59





On July
29, 2008, our shareholders approved our 2008 Stock Option Plan, which reserved
for issuance up to two million shares of our common stock as either incentive or
nonqualified stock options to our directors, officers, and key employees. In
August 2008, we granted 1,925,000 stock options under this plan of which 300,000
were nonqualified stock options granted to our directors and 1,625,000 were
incentive stock options granted to certain officers and key employees. In
September 2008, we granted the remaining 75,000 stock options that were reserved
for issuance to certain officers and key employees as incentive stock options.
The options granted to our officers and key employees will vest in equal
increments over a five-year period. The options granted to our directors will
vest in equal increments over a four-year period.





Issuer Purchases of Equity
Securities





On July
29, 2008, we authorized the repurchase of up to two million shares of our common
stock to be acquired from time to time in the open market or in negotiated
transactions. This stock repurchase program expires in July 2010 or upon the
purchase of an aggregate of 2,000,000 shares of our common stock. In the third
quarter of 2008, we acquired 56,211 outstanding shares of common stock, which we
reclassified as treasury stock, for $108,000. However, in the fourth quarter of
2008, 115,000 stock options were exercised and 56,211 shares of treasury stock
were reissued in these transactions. We did not repurchase any treasury shares
during the fourth quarter of 2008. As of December 31, 2008, 1,943,789 shares may
yet be repurchased under this program.





Security Ownership of
Certain Beneficial Owners and Management





The
required information is incorporated by reference from our Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on May 7,
2009.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





The
required information is incorporated by reference from our Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on May 7,
2009.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





The
required information is incorporated by reference from our Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held on May 7,
2009.




59
 Table of Contents





PART
IV





ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





(a)
            The
      following documents are filed as part of this
  report:





Exhibit
                        Number
                      
                      Description3.1
                      
                      
                      —
                      Third
      Amended and Restated Articles of Incorporation of the Registrant dated
      December 17, 2003 (incorporated by reference to Exhibit 3.1 to
      Registrant's Form 8-K filed December 29, 2003).3.2
                      
                      
                      —
                      Articles
      of Correction dated February 9, 2004 to Articles of Incorporation of the
      Registrant (incorporated by reference to Exhibit 3.2 of Registrant’s Form
      10-K for year ended December 31, 2003).3.3
                      
                      
                      —
                      Third
      Amended and Restated Bylaws of Silverleaf Resorts, Inc. (incorporated by
      reference to Exhibit 3.1 to Registrant’s Form 8-K dated November 14,
      2007).3.4
                      
                      
                      —
                      Amended
      and Restated Certificate of Incorporation of Silverleaf Finance II, Inc.
      dated December 23, 2003 (incorporated by reference to Exhibit 3.2 to
      Registrant's Form 8-K filed December 29, 2003).4.1
                      
                      
                      —
                      Form
      of Stock Certificate of Registrant (incorporated by reference to Exhibit
      4.1 to Amendment No. 1 dated May 16, 1997 to Registrant's Registration
      Statement on Form S-1, File No. 333-24273).4.2
                      
                      
                      —
                      Indenture
      dated June 7, 2004 by and among the Registrant, the Subsidiary Guarantors,
      and Wells Fargo Bank, National Association for the Registrant’s 8% Senior
      Subordinated Notes due 2010 (incorporated by reference to Exhibit 4.1 of
      Registrant’s Form 10-Q for the quarter ended June 30,
    2004).4.3
                      
                      
                      —
                      Certificate
      No. 001 dated June 7, 2004 of 8% Senior Subordinated Notes due 2010
      (incorporated by reference to Exhibit 4.2 of Registrant’s Form 10-Q for
      the quarter ended June 30, 2004).4.4
                      
                      
                      —
                      Subsidiary
      Guarantee dated June 7, 2004 by Awards Verification Center, Inc.,
      Silverleaf Travel, Inc., Silverleaf Resort Acquisition,
      Inc.,  Bull’s Eye Marketing, Inc., Silverleaf Berkshires, Inc.,
      eStarCommunications, Inc., People Really Win Sweepstakes, Inc., and SLR
      Research, Inc. (incorporated by reference to Exhibit 4.3 of Registrant’s
      Form 10-Q for the quarter ended June 30, 2004).9.1
                      
                      
                      —
                      Voting
      Trust Agreement dated November 1, 1999 between Robert E. Mead and Judith
      F. Mead (incorporated by reference to Exhibit 9.1 of the Registrant’s Form
      10-K for the year ended December 31, 1999).10.1
                      
                      
                      —
                      Form
      of Registration Rights Agreement between Registrant and Robert E. Mead
      (incorporated by reference to Exhibit 10.1 to Amendment No. 1 dated May
      16, 1997 to Registrant's Registration Statement on Form S-1, File No.
      333-24273).10.2
                      
                      
                      —
                      Form
      of Indemnification Agreement (between Registrant and all officers,
      directors, and proposed directors) (incorporated by reference to Exhibit
      10.18 to Registrant's Registration Statement on Form S-1, File No.
      333-24273).10.3
                      
                      
                      —
                      Silverleaf
      Club Agreement between the Silverleaf Club and the resort clubs named
      therein (incorporated by reference to Exhibit 10.4 to Registrant's
      Registration Statement on Form S-1, File No.
333-24273).10.4
                      
                      
                      —
                      First
      Amendment to Silverleaf Club Agreement, dated March 28, 1990, among
      Silverleaf Club, Ozark Mountain Resort Club, Holiday Hills Resort Club,
      the Holly Lake Club, The Villages Condoshare Association, The Villages
      Club, Piney Shores Club, and Hill Country Resort Condoshare Club
      (incorporated by reference to Exhibit 10.22 to Amendment No. 1 dated May
      16, 1997 to Registrant's Registration Statement on Form S-1, File No.
      333-24273).10.5
                      
                      
                      —
                      Management
      Agreement between Registrant and the Silverleaf Club (incorporated by
      reference to Exhibit 10.5 to Registrant's Registration Statement on Form
      S-1, File No. 333-24273).10.6
                      
                      
                      —
                      First
      Amendment to Management Agreement, dated January 1, 1993, between Master
      Endless Escape Club and Ascension Resorts, Ltd. (incorporated by reference
      to Exhibit 10.23 to Amendment No. 1 dated May 16, 1997 to Registrant's
      Registration Statement on Form S-1, File No.
333-24273).10.7
                      
                      
                      —
                      Second
      Amendment to Management Agreement, dated December 31, 1997, between
      Silverleaf Club and Registrant (incorporated by reference to Exhibit 10.33
      to Registrant’s Annual Report on Form 10-K for year Ended December 31,
      1997).10.8
                      
                      
                      —
                      Eighth
      Amendment to Management Agreement, dated March 9, 1999, between the
      Registrant and the Silverleaf Club (incorporated by reference to Exhibit
      10.47 to Registrant's Form 10-K for the year ended December 31,
      1999).10.9
                      
                      
                      —
                      Ninth
      Amendment to Management Agreement dated September 27, 2002 between the
      Registrant and Silverleaf Club (incorporated by reference to Exhibit 10.1
      to Registrant’s Form 10-Q for quarter dated September 30,
      2002).10.10
                      
                      
                      —
                      Tenth
      Amendment to Management Agreement dated September 6, 2007 between the
      Registrant and Silverleaf Club (incorporated by reference to Exhibit 10.62
      to Registrant’s Form 10-K for the year ended December 31,
      2007).10.11
                      
                      
                      —
                      Resort
      Affiliation and Owners Association Agreement between the Registrant, RCI,
      LLC, and Hill Country Resort Condoshare Club, dated July 29, 1995 (similar
      agreements for all other Existing Owned Resorts) (incorporated by
      reference to Exhibit 10.19 to Registrant's Registration Statement on Form
      S-1, File No. 333-24273).10.12
                      
                      
                      —
                      Resort
      Affiliation and Owners Association Agreement dated October 18, 2007
      between the Registrant, Orlando Breeze Resort Club and RCI, LLC
      (incorporated by reference to Exhibit 10.56 to Registrant’s Form 10-K for
      the year ended December 31, 2007).10.13
                      
                      
                      —
                      Master
      Club Agreement, dated November 13, 1997, between Master Club and Fox River
      Resort Club (incorporated by reference to Exhibit 10.43 to Registrant’s
      Annual Report on Form 10-K for year ended December 31,
    1997).10.14
                      
                      
                      —
                      Silverleaf
      Club Agreement dated September 25, 1997, between Registrant and Timber
      Creek Resort Club (incorporated by reference to Exhibit 10.13 to
      Registrant's Form 10-Q for quarter ended September 30,
    1997).10.15
                      
                      
                      —
                      Silverleaf
      Club Agreement, dated January 5, 1998, between Silverleaf Club and Oak N'
      Spruce Resort Club (incorporated by reference to Exhibit 10.34 to
      Registrant’s Annual Report on Form 10-K for year ended December 31,
      1997).10.16
                      
                      
                      —
                      Management
      Agreement dated October 13, 1998, by and between the Registrant and Eagle
      Greens, Ltd. (incorporated by reference to Exhibit 10.6 to Registrant’s
      Form 10-Q for quarter ended September 30, 1998).10.17
                      
                      
                      —
                      Developer
      Transfer Agreement dated as of December 19, 2003 between the Registrant
      and Silverleaf Finance II, Inc. (incorporated by reference to Exhibit 10.1
      of Registrant’s Form 8-K filed on December 29, 2003).10.18
                      
                      
                      —
                      Amendment
      No. 1 dated as of March 28, 2005 to Developer Transfer Agreement between
      the Registrant and Silverleaf Finance II, Inc. (incorporated by reference
      to Exhibit 10.1 to Registrant's Form 8-K filed on March 31,
      2005).





60
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10.19
                
                
                —
                Loan
      and Security Agreement dated as of December 19, 2003 between Silverleaf
      Finance II, Inc. and Textron Financial Corporation (incorporated by
      reference to Exhibit 10.2 to Registrant’s Form 8-K filed on December 29,
      2003).10.20
                
                
                —
                Amendment
      No. 1 dated as of March 28, 2005 to Loan and Security Agreement between
      the Registrant and Textron Financial Corporation (incorporated by
      reference to Exhibit 10.2 to Registrant's Form 8-K filed on March 31,
      2005).10.21
                
                
                —
                Defined
      Terms to Transfer Agreement and Loan and Security Agreement dated as of
      December 19, 2003 between Silverleaf Finance II, Inc. and Textron
      Financial Corporation (incorporated by reference to Exhibit 10.3 to
      Registrant’s Form 8-K filed on December 29, 2003).10.22
                
                
                —
                2003
      Stock Option Plan of the Registrant (incorporated by reference to Exhibit
      10.55 to Registrant's Form 10-K for year ended December 31,
      2003).10.23
                
                
                —
                2008
      Stock Option Plan of the Registrant (incorporated by reference to Exhibit
      10.1 to Registrant’s Form 8-K filed on July 31, 2008).10.24
                
                
                —
                Form
      of Services Agreements dated as of March 8, 2005 between the Registrant
      and the Purchasers of the water utilities and waste water facilities at
      the Registrant’s resorts in Texas, Missouri and Illinois (incorporated by
      reference to Exhibit 10.10 to Registrant's Form 8-K filed on March 16,
      2005).10.25
                
                
                —
                Receivables
      Loan and Security Agreement between the Registrant and CapitalSource
      Finance LLC dated as of April 29, 2005 (incorporated by reference to
      Exhibit 10.2 to Registrant's Form 8-K filed on May 5,
    2005).10.26
                
                
                —
                First
      Amendment to Receivables Loan and Security Agreement dated as of April 28,
      2006 between CapitalSource Finance LLC and the Registrant (incorporated by
      reference to Registrant’s Exhibit 10.7 to Form 10-Q for the period ended
      March 31, 2006).10.27
                
                
                —
                Third
      Amendment to Receivables Loan and Security Agreement dated as of April 1,
      2008 between the Registrant and CapitalSource FinanceLLC (incorporated
      by reference to Exhibit 10.1 to Registrant’s Form 8-K filed on April 7,
      2008).10.28
                
                
                —
                Fourth
      Amendment to Receivables Loan and Security Agreement dated as of June 4,
      2008 between the Registrant and CapitalSource Finance LLC (incorporated by
      reference to Exhibit 10.2 to Registrant’s Form 8-K filed on June 11,
      2008).10.29
                
                
                —
                Amended
      and Restated Inventory Loan and Security Agreement dated as of April 28,
      2006 between CapitalSource Finance LLC and the Registrant (incorporated by
      reference to Registrant’s Exhibit 10.8 to Form 10-Q for the period ended
      March 31, 2006).10.30
                
                
                —
                First
      Amendment to Amended and Restated Inventory Loan and Security Agreement
      dated as of June 4, 2008 between the Registrant and CapitalSource Finance
      LLC (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K
      filed June 11, 2008).10.31
                
                
                —
                Indenture
      dated as of July 1, 2005 between Silverleaf Finance III, LLC, the
      Registrant and Wells Fargo Bank, National Association (incorporated by
      reference to Exhibit 10.1 to Registrant's Form 8-K filed on July 28,
      2005).10.32
                
                
                —
                First
      Supplement to Indenture dated as of February 8, 2006 between the
      Registrant, Silverleaf Finance III, LLC and Wells Fargo Bank, National
      Association (incorporated by reference to Exhibit 10.1 to Registrant’s
      Form 10-Q for the period ended June 30, 2006).10.33
                
                
                —
                Second
      Supplement to Indenture dated as of July 14, 2006 between the Registrant,
      Silverleaf Finance III, LLC and Wells Fargo Bank, National Association
      (incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q for
      the period ended June 30, 2006).10.34
                
                
                —
                Standard
      Definitions to Indenture and Transfer Agreement (incorporated by reference
      to Exhibit 10.2 to Registrant's Form 8-K filed on July 28,
      2005).10.35
                
                
                —
                Transfer
      Agreement dated as of July 1, 2005 between the Registrant and Silverleaf
      Finance III, LLC (incorporated by reference to Exhibit 10.3 to
      Registrant's Form 8-K filed on July 28, 2005).10.36
                
                
                —
                Loan
      and Security Agreement--Receivables between the Registrant and Well Fargo
      Foothill, Inc. dated as of December 16, 2005 (incorporated by reference to
      Exhibit 10.2 to Registrant's Form 8-K filed on December 23,
      2005).10.37
                
                
                —
                First
      Amendment to Loan and Security Agreement-Receivables dated as of October
      6, 2006, between the Registrant and Wells Fargo Foothill, Inc.
      (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed
      on October 6, 2006).10.38
                
                
                —
                Letter
      Modification Agreement to Loan and Security Agreement-Receivables dated as
      of March 1, 2007, between the Registrant and Wells Fargo Foothill, Inc.
      (incorporated by reference to Exhibit 10.62 to Registrant’s Form 10-K for
      year ended December 31, 2006).10.39
                
                
                —
                Second
      Amendment to Loan and Security Agreement-Receivables dated June 4, 2008
      between the Registrant and Wells Fargo Foothill, Inc. (incorporated by
      reference to Exhibit 10.6 to Registrant’s Form 8-K filed on June 10,
      2008).10.40
                
                
                —
                Third
      Amendment to Loan and Security Agreement – Receivables dated as of
      September 18, 2008 between the Registrant and Wells Fargo Foothill, Inc.
      (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed
      on September 23, 2008).10.41
                
                
                —
                Indenture
      dated as of March 2, 2006 by and among Silverleaf Finance IV, LLC, UBS
      Real Estate Securities Inc. and Wells Fargo Bank, National Association
      (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed
      on March 8, 2006).10.42
                
                
                —
                First
      Supplement to Indenture dated as of December 22, 2006 by and among
      Silverleaf Finance IV, LLC, UBS Real Estate Securities Inc. and Wells
      Fargo Bank, National Association (incorporated by reference to Exhibit
      10.2 to Registrant’s Form 8-K filed on December 29,
  2006).10.43
                
                
                —
                Second
      Supplement to Indenture dated as of September 12, 2007, by and among
      Silverleaf Finance IV, LLC, UBS Real Estate Securities Inc. and Wells
      Fargo Bank, National Association (incorporated by reference to Exhibit
      10.1 of Registrant’s Form 10-Q for the quarter ended September 30,
      2007).10.44
                
                
                —
                Amended
      and Restated Sale and Servicing Agreement dated as of December 22, 2006
      between the Registrant, Silverleaf Finance IV, LLC and Wells Fargo Bank,
      National Association (incorporated by reference to Exhibit 10.1 to
      Registrant’s Form 8-K filed on December 29, 2006).10.45
                
                
                —
                First
      Amendment to Amended and Restated Sale and Servicing Agreement dated as of
      September 12, 2007, by and among Silverleaf Finance IV, LLC, Silverleaf
      Resorts, Inc. and Wells Fargo Bank, National Association (incorporated by
      reference to Exhibit 10.2 of Registrant’s Form 10-Q for the quarter ended
      September 30, 2007).10.46
                
                
                —
                Annex
      A—Amended and Restated Defined Terms to Indenture and Amended and Restated
      Sale and Servicing Agreement dated as of December 22, 2006 (incorporated
      by reference to Exhibit 10.3 to Registrant’s Form 8-K filed on December
      29, 2006).10.47
                
                
                —
                Indenture
      dated as of August 1, 2006 between the Registrant, Silverleaf Finance V,
      L.P., Silverleaf Finance V, LLC and Wells Fargo Bank, National Association
      (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed
      on August 31, 2006).





61
 Table of Contents




10.48
                
                
                —
                Standard
      Definitions to Indenture and Transfer Agreement (incorporated by reference
      to Exhibit 10.2 of Registrant’s Form 8-K filed on August 31,
      2006).10.49
                
                
                —
                Transfer
      Agreement dated as of August 1, 2006 between the Registrant and Silverleaf
      Finance V, L.P. (incorporated by reference to Exhibit 10.3 of Registrant’s
      Form 8-K filed on August 31, 2006).10.50
                
                
                —
                Loan
      Sale Agreement dated as of August 1, 2006 between the Registrant and
      Silverleaf Finance V, L.P. (incorporated by reference to Exhibit 10.4 of
      Registrant’s Form 8-K filed on August 31, 2006).10.51
                
                
                —
                Consolidated,
      Amended and Restated Loan and Security Agreement dated as of February 21,
      2007 between the Registrant and Textron Financial Corporation
      (incorporated by reference to Exhibit 10.61 to Registrant’s Form 10-K for
      year ended December 31, 2006).10.52
                
                
                —
                Amendment
      to Consolidated, Amended and Restated Loan and Security Agreement dated
      October 31, 2007 between the Registrant and Textron Financial Corporation
      (incorporated by reference to Exhibit 10.59 to Registrant’s Form 10-K for
      the year ended December 31, 2007).10.53
                
                
                —
                Second
      Amendment to Consolidated, Amended and Restated Loan and Security
      Agreement and Loan Documents dated as of May 20, 2008 between the
      Registrant and Textron Financial Corporation (incorporated by reference to
      Exhibit 10.5 to Registrant’s Form 8-K filed on June 10,
    2008).10.54
                
                
                —
                Loan
      and Security Agreement dated September 28, 2007 between the Registrant and
      Liberty Bank (incorporated by reference to Exhibit 10.1 to Registrant’s
      Form 8-K filed on October 4, 2007).10.55
                
                
                —
                Letter
      Agreement dated November 15, 2007 to Loan and Security Agreement between
      the Registrant and Liberty Bank (incorporated by reference to Exhibit
      10.61 to Registrant’s Form 10-K for the year ended December 31,
      2007).10.56
                
                
                —
                First
      Amendment to Loan and Security Agreement dated as of July 2, 2008 between
      the Registrant and Liberty Bank (incorporated by reference to Registrant’s
      Form 8-K filed on July 8, 2008).10.57
                
                
                —
                Indenture
      dated as of June 1, 2008 between the Registrant, Silverleaf Finance VI,
      LLC, and Wells Fargo Bank, National Association (incorporated by reference
      to Exhibit 10.1 to Registrant’s Form 8-K filed on June 10,
      2008).10.58
                
                
                —
                Standard
      Definitions to Indenture (incorporated by reference to Exhibit 10.2 to
      Registrant’s Form 8-K filed on June 10, 2008).10.59
                
                
                —
                Transfer
      Agreement dated as of June 1, 2008 between the Registrant and Silverleaf
      Finance VI, LLC (incorporated by reference to Exhibit 10.3 to Registrant’s
      Form 8-K filed on June 10, 2008).10.60
                
                
                —
                Loan
      Sale Agreement dated as of June 1, 2008 between the Registrant, Silverleaf
      Finance IV, LLC, and Silverleaf Finance VI, LLC (incorporated by reference
      to Exhibit 10.4 to Registrant’s Form 8-K filed on June 10,
      2008).10.61
                
                
                —
                Employment
      Agreement dated March 8, 2007 between the Registrant and Sharon K.
      Brayfield (incorporated by reference to Exhibit 10.1 to Registrant’s Form
      8-K filed on March 12, 2007).10.62
                
                
                —
                Employment
      Agreement dated March 8, 2007 between the Registrant and Harry J. White,
      Jr. (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K
      filed on March 12, 2007).10.63
                
                
                —
                Amendment
      No. 1 to Employment Agreement dated February 4, 2008 between the
      Registrant and Harry J. White, Jr. (incorporated by reference to Exhibit
      10.2 of Registrant’s Form 8-K filed on February 6,
  2008).10.64
                
                
                —
                Employment
      Agreement dated March 8, 2007 between the Registrant and Joe W. Conner
      (incorporated by reference to Exhibit 10.3 to Registrant’s Form 8-K filed
      on March 12, 2007).10.65
                
                
                —
                Employment
      Agreement dated March 8, 2007 between the Registrant and David T. O’Connor
      (incorporated by reference to Exhibit 10.4 to Registrant’s Form 8-K filed
      on March 12, 2007).10.66
                
                
                —
                Employment
      Agreement dated February 4, 2008 between the Registrant and Robert M.
      Sinnott (incorporated by reference to Exhibit 10.1 to Registrant’s Form
      8-K filed on February 6, 2008).10.67
                
                
                —
                Employment
      Agreement dated March 4, 2008 between the Registrant and Thomas J. Morris
      (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed
      on April 1, 2008).10.68
                
                
                —
                Contract
      of Sale dated July 24, 2007 by and between J. W. Kelly’s Enterprises,
      Inc., James W. Kelly and Dorothy H. Kelly and James J. Oestreich, as
      assigned pursuant to the Assignment Of Contract Rights dated August 1,
      2007 between James J. Oestreich and Silverleaf Resorts, Inc. (incorporated
      by reference to Exhibit 10.4 of Registrant’s Form 10-Q for the quarter
      ended September 30, 2007).10.69
                
                
                —
                Contract
      of Sale dated July 24, 2007 among J. W. Kelly’s Enterprises, Inc., James
      W. Kelly and Dorothy H. Kelly and James J. Oestreich, as assigned pursuant
      to the Assignment Of Contract Rights dated August 1, 2007 between James J.
      Oestreich and Silverleaf Resorts, Inc. (incorporated by reference to
      Exhibit 10.4 of Registrant’s Form 10-Q for the quarter ended September 30,
      2007).10.70
                
                
                —
                Contract
      of Sale dated May 1, 2006 between the Registrant and Summit at Winter Park
      Land Co., LLC (incorporated by reference to Exhibit 10.63 to Registrant’s
      Form 10-K for the year ended December 31, 2007).10.71
                
                
                —
                Amendment
      to Contract of Sale dated June 26, 2006 between the Registrant and Summit
      at Winter Park Land Co., LLC (incorporated by reference to Exhibit 10.64
      to Registrant’s Form 10-K for the year ended December 31,
      2007).10.72
                
                
                —
                Second
      Amendment to Contract of Sale dated February 23, 2007 between the
      Registrant and Summit at Winter Park Land Co., LLC (incorporated by
      reference to Exhibit 10.65 to Registrant’s Form 10-K for the year ended
      December 31, 2007).10.73
                
                
                —
                Third
      Amendment to Contract of Sale dated March 1, 2007 between the Registrant
      and Summit at Winter Park Land Co., LLC (incorporated by reference to
      Exhibit 10.66 to Registrant’s Form 10-K for the year ended December 31,
      2007).10.74
                
                
                —
                Fourth
      Amendment to Contract of Sale dated April 26, 2007 between the Registrant
      and Summit at Winter Park Land Co., LLC (incorporated by reference to
      Exhibit 10.67 to Registrant’s Form 10-K for the year ended December 31,
      2007).10.75
                
                
                —
                Fifth
      Amendment to Contract of Sale dated May 10, 2007 between the Registrant
      and Summit at Winter Park Land Co., LLC (incorporated by reference to
      Exhibit 10.68 to Registrant’s Form 10-K for the year ended December 31,
      2007).10.76
                
                
                —
                Sixth
      Amendment to Contract of Sale dated September 6, 2007 between the
      Registrant and Summit at Winter Park Land Co., LLC (incorporated by
      reference to Exhibit 10.69 to Registrant’s Form 10-K for the year ended
      December 31, 2007).*12.1
                
                
                —
                Computation
      of Ratio of Earnings to Fixed Charges.14.1
                
                
                —
                Code
      of Ethics adopted by the Registrant on December 16, 2003 (incorporated by
      reference to Exhibit 14.1  to Registrant's Form 10-K for year
      ended December 31, 2003).*21.1
                
                
                —
                Subsidiaries
      of Silverleaf Resorts, Inc.*23.1
                
                
                —
                Consent
      of BDO Seidman, LLP.*31.1
                
                
                —
                Certification
      of Chief Executive Officer Pursuant to Rule 15d-14(a) of the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of
2002.





62
 Table of Contents




*31.2
                
                
                —
                Certification
      of Chief Financial Officer Pursuant to Rule 15d-14(a) of the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                
                
                —
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*32.2
                
                
                —
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




*filed
herewith





(b)
            The
      exhibits required by Item 601 of Regulation S-K have been listed in Item
      15(a) above. The exhibits listed in Item 15(a) above are either (a) filed
      with this report, or (b) have previously been filed with the SEC and are
      incorporated herein by reference to the particular previous
      filing.





(c)
            Financial
      Statement Schedules





None.
Schedules are omitted because of the absence of the conditions under which they
are required or because the information required by such omitted schedules is
set forth in the consolidated financial statements or the notes
thereto.





63
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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 in the City of Dallas, State of Texas,
on March 10, 2009.





SILVERLEAF
      RESORTS, INC.By:
                  /s/ ROBERT E. MEADName:
                  Robert
      E. MeadTitle:
                  Chairman
      of the Board andChief
      Executive Officer





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below on behalf of the Registrant in the
capacities and on the dates indicated.





Signature
                                      
                                      Title
                                      
                                      Date/s/ ROBERT E. MEAD
                                      
                                      Chairman
      of the Board andChief
      Executive Officer (Principal
      Executive Officer)
                                      
                                      March
      10, 2009Robert
      E. Mead/s/ ROBERT M. SINNOTT
                                      
                                      Chief
      Financial Officer
                                      
                                      March
      10, 2009Robert
      M. Sinnott/s/ J. RICHARD BUDD
                                      
                                      Director
                                      
                                      March
      10, 2009J.
      Richard Budd/s/ JAMES B. FRANCIS, JR.
                                      
                                      Director
                                      
                                      March
      10, 2009James
      B. Francis, Jr./s/ HERBERT B. HIRSCH
                                      
                                      Director
                                      
                                      March
      10, 2009Herbert
      B. Hirsch/s/ REBECCA JANET WHITMORE
                                      
                                      Director
                                      
                                      March
      10, 2009Rebecca
      Janet Whitmore





64
 Table of Contents





INDEX TOCONSOLIDATED FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm
                    F-2Financial
      StatementsConsolidated
      Balance Sheets as of December 31, 2007 and 2008
                    F-3Consolidated
      Statements of Operations for the years ended December 31, 2006, 2007, and
      2008..
                    F-4Consolidated
      Statements of Shareholders' Equity for the years ended December 31, 2006,
      2007, and 2008
                    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2007, and
      2008
                    F-6Notes
      to Consolidated Financial Statements
                    F-7





F-1
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Silverleaf
Resorts, Inc.


Dallas,
Texas





We have
audited the accompanying consolidated balance sheets of Silverleaf Resorts, Inc.
(the “Company”) as of December 31, 2008 and 2007 and the related consolidated
statements of operations, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements
are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements.  We believe that our audits provide a reasonable basis for
our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Silverleaf Resorts, Inc. at
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of
America.








/s/ BDO
Seidman, LLP


Dallas,
Texas


March 10,
2009





F-2
 Table of Contents





SILVERLEAF
RESORTS, INC.


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share and per share amounts)





December 31,ASSETS
                    
                    2007
                    
                    
                    2008Cash
      and cash equivalents
                    
                    $
                    13,170
                    
                    
                    $
                    11,431Restricted
      cash
                    
                    
                    12,816
                    
                    
                    
                    22,623Notes
      receivable, net of allowance for uncollectible notes
      of$69,128 and $76,696,
      respectively
                    
                    
                    289,907
                    
                    
                    
                    320,306Accrued
      interest receivable
                    
                    
                    3,744
                    
                    
                    
                    4,154Investment
      in special purpose entity
                    
                    
                    7,315
                    
                    
                    
                    4,908Amounts
      due from affiliates
                    
                    
                    1,358
                    
                    
                    
                    1,738Inventories
                    
                    
                    179,188
                    
                    
                    
                    190,318Land,
      equipment, buildings, and leasehold improvements, net
                    
                    
                    41,565
                    
                    
                    
                    55,393Land
      held for sale
                    
                    
                    509
                    
                    
                    
                    509Prepaid
      and other assets
                    
                    
                    31,487
                    
                    
                    
                    33,442TOTAL
      ASSETS
                    
                    $
                    581,059
                    
                    
                    $
                    644,822LIABILITIES
      AND SHAREHOLDERS' EQUITYLIABILITIESAccounts
      payable and accrued expenses
                    
                    $
                    21,071
                    
                    
                    $
                    12,701Accrued
      interest payable
                    
                    
                    2,470
                    
                    
                    
                    2,380Unearned
      Vacation Interval sales
                    
                    
                    296
                    
                    
                    
                    —Unearned
      samplers
                    
                    
                    6,921
                    
                    
                    
                    6,247Income
      taxes payable
                    
                    
                    782
                    
                    
                    
                    1,942Deferred
      income taxes
                    
                    
                    30,463
                    
                    
                    
                    35,114Notes
      payable and capital lease obligations
                    
                    
                    316,198
                    
                    
                    
                    369,071Senior
      subordinated notes
                    
                    
                    26,817
                    
                    
                    
                    23,121Total
      Liabilities
                    
                    
                    405,018
                    
                    
                    
                    450,576COMMITMENTS
      AND CONTINGENCIES (Note 9)SHAREHOLDERS'
      EQUITYPreferred
      stock, 10,000,000 shares authorized, none issued and
      outstanding
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, par value $0.01 per share, 100,000,000 shares authorized,
      37,818,154 and 38,146,943 shares issued and outstanding at December 31,
      2007 and 2008, respectively
                    
                    
                    378
                    
                    
                    
                    381Additional
      paid-in capital
                    
                    
                    112,700
                    
                    
                    
                    112,976Retained
      earnings
                    
                    
                    62,963
                    
                    
                    
                    80,889Total
      Shareholders' Equity
                    
                    
                    176,041
                    
                    
                    
                    194,246TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                    
                    $
                    581,059
                    
                    
                    $
                    644,822





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





F-3
 Table of Contents





SILVERLEAF
RESORTS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except share and per share amounts)





Year Ended
December 31,2006
                  
                  
                  2007
                  
                  
                  2008Revenues:Vacation
      Interval sales
                  
                  $
                  187,481
                  
                  
                  $
                  235,135
                  
                  
                  $
                  256,300Estimated
      uncollectible revenue
                  
                  
                  (32,491
                  )
                  
                  
                  (40,071
                  )
                  
                  
                  (63,051
                  )Net
      sales
                  
                  
                  154,990
                  
                  
                  
                  195,064
                  
                  
                  
                  193,249Interest
      income
                  
                  
                  46,248
                  
                  
                  
                  53,019
                  
                  
                  
                  61,077Management
      fee income
                  
                  
                  1,861
                  
                  
                  
                  2,806
                  
                  
                  
                  3,121Other
      income
                  
                  
                  3,785
                  
                  
                  
                  4,141
                  
                  
                  
                  6,515Total
      revenues
                  
                  
                  206,884
                  
                  
                  
                  255,030
                  
                  
                  
                  263,962Costs
      and Operating Expenses:Cost
      of Vacation Interval sales
                  
                  
                  19,003
                  
                  
                  
                  23,027
                  
                  
                  
                  24,903Sales
      and marketing
                  
                  
                  93,957
                  
                  
                  
                  119,679
                  
                  
                  
                  135,059Operating,
      general and administrative
                  
                  
                  32,315
                  
                  
                  
                  39,101
                  
                  
                  
                  41,154Depreciation
                  
                  
                  2,539
                  
                  
                  
                  3,511
                  
                  
                  
                  4,929Interest
      expense and lender fees:Related
      to receivables-based credit facilities
                  
                  
                  17,550
                  
                  
                  
                  19,285
                  
                  
                  
                  22,213Related
      to other indebtedness
                  
                  
                  4,112
                  
                  
                  
                  5,325
                  
                  
                  
                  6,341Total
      costs and operating expenses
                  
                  
                  169,476
                  
                  
                  
                  209,928
                  
                  
                  
                  234,599Income
      before provision for income taxes
                  
                  
                  37,408
                  
                  
                  
                  45,102
                  
                  
                  
                  29,363Provision
      for income taxes
                  
                  
                  14,402
                  
                  
                  
                  17,398
                  
                  
                  
                  11,437Net
      Income
                  
                  $
                  23,006
                  
                  
                  $
                  27,704
                  
                  
                  $
                  17,926Basic
      net income per share
                  
                  $
                  0.61
                  
                  
                  $
                  0.73
                  
                  
                  $
                  0.47Diluted
      net income per share
                  
                  $
                  0.59
                  
                  
                  $
                  0.70
                  
                  
                  $
                  0.46Weighted
      average basic common shares outstanding
                  
                  
                  37,579,462
                  
                  
                  
                  37,811,387
                  
                  
                  
                  38,037,635Weighted
      average diluted common shares outstanding
                  
                  
                  39,261,652
                  
                  
                  
                  39,417,017
                  
                  
                  
                  38,897,619





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





F-4
 Table of Contents





SILVERLEAF
RESORTS, INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


(in
thousands, except share amounts)





Common StockNumber
      of
                  
                  
                  $0.01
                  
                  
                  AdditionalShares
                  
                  
                  Par
                  
                  
                  Paid-in
                  
                  
                  Retained
                  
                  
                  Treasury StockIssued
                  
                  
                  Value
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  Shares
                  
                  
                  Cost
                  
                  
                  TotalJanuary
      1, 2006
                  
                  
                  37,494,304
                  
                  
                  $
                  375
                  
                  
                  $
                  112,207
                  
                  
                  $
                  12,253
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  124,835Stock-based
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  252
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  252Exercise
      of stock options
                  
                  
                  313,850
                  
                  
                  
                  3
                  
                  
                  
                  96
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  99Net
      income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  23,006
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  23,006December
      31, 2006
                  
                  
                  37,808,154
                  
                  
                  
                  378
                  
                  
                  
                  112,555
                  
                  
                  
                  35,259
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  148,192Stock-based
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  142
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  142Exercise
      of stock options
                  
                  
                  10,000
                  
                  
                  
                  —
                  
                  
                  
                  3
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3Net
      income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  27,704
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  27,704December
      31, 2007
                  
                  
                  37,818,154
                  
                  
                  
                  378
                  
                  
                  
                  112,700
                  
                  
                  
                  62,963
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  176,041





Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                272
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                272Purchases
      of treasury shares
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                56,211
                
                
                
                (108
                )
                
                
                (108
                )Exercise
      of stock options
                
                
                328,789
                
                
                
                3
                
                
                
                4
                
                
                
                —
                
                
                
                (56,211
                )
                
                
                108
                
                
                
                115Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                17,926
                
                
                
                —
                
                
                
                —
                
                
                
                17,926December
      31, 2008
                
                
                38,146,943
                
                
                $
                381
                
                
                $
                112,976
                
                
                $
                80,889
                
                
                
                —
                
                
                $
                —
                
                
                $
                194,246





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





F-5
 Table of Contents





SILVERLEAF
RESORTS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





Year Ended
December 31,2006
                
                
                2007
                
                
                2008OPERATING
      ACTIVITIES:Net
      income
                
                $
                23,006
                
                
                $
                27,704
                
                
                $
                17,926Adjustments
      to reconcile net income to net cash used in operating
      activities:Estimated
      uncollectible revenue
                
                
                32,491
                
                
                
                40,071
                
                
                
                63,051Deferred
      income taxes
                
                
                9,198
                
                
                
                12,780
                
                
                
                4,651Depreciation
                
                
                2,539
                
                
                
                3,511
                
                
                
                4,929Debt
      discount amortization
                
                
                —
                
                
                
                —
                
                
                
                2,180Gain
      on sale of land held for sale
                
                
                (499
                )
                
                
                (242
                )
                
                
                —Stock-based
      compensation
                
                
                252
                
                
                
                142
                
                
                
                272Cash
      effect from changes in operating assets and liabilities:Restricted
      cash
                
                
                (663
                )
                
                
                1,547
                
                
                
                (1,942
                )Notes
      receivable
                
                
                (96,422
                )
                
                
                (100,261
                )
                
                
                (93,450
                )Accrued
      interest receivable
                
                
                (693
                )
                
                
                (808
                )
                
                
                (410
                )Investment
      in special purpose entity
                
                
                9,794
                
                
                
                5,693
                
                
                
                2,407Amounts
      due from affiliates
                
                
                (869
                )
                
                
                (353
                )
                
                
                (380
                )Inventories
                
                
                (18,376
                )
                
                
                (31,429
                )
                
                
                (11,130
                )Prepaid
      and other assets
                
                
                (10,310
                )
                
                
                (7,398
                )
                
                
                (1,955
                )Accounts
      payable and accrued expenses
                
                
                4,636
                
                
                
                6,879
                
                
                
                (7,590
                )Accrued
      interest payable
                
                
                438
                
                
                
                678
                
                
                
                (90
                )Unearned
      Vacation Interval sales
                
                
                —
                
                
                
                296
                
                
                
                (296
                )Unearned
      samplers
                
                
                935
                
                
                
                676
                
                
                
                (674
                )Income
      taxes payable
                
                
                (1,105
                )
                
                
                619
                
                
                
                1,160Net
      cash used in operating activities
                
                
                (45,648
                )
                
                
                (39,895
                )
                
                
                (21,341
                )INVESTING
      ACTIVITIES:Purchases
      of land, equipment, buildings, and leasehold improvements
                
                
                (14,347
                )
                
                
                (17,050
                )
                
                
                (19,523
                )Proceeds
      from sale of land held for sale
                
                
                789
                
                
                
                242
                
                
                
                —Net
      cash used in investing activities
                
                
                (13,558
                )
                
                
                (16,808
                )
                
                
                (19,523
                )FINANCING
      ACTIVITIES:Proceeds
      from borrowings of debt
                
                
                320,341
                
                
                
                181,311
                
                
                
                339,430Payments
      of debt and capital leases
                
                
                (250,559
                )
                
                
                (124,299
                )
                
                
                (292,447
                )Restricted
      cash reserved for payments of debt
                
                
                (10,215
                )
                
                
                1,408
                
                
                
                (7,865
                )Proceeds
      from exercise of stock options
                
                
                99
                
                
                
                3
                
                
                
                115Purchases
      of treasury shares
                
                
                —
                
                
                
                —
                
                
                
                (108
                )Net
      cash provided by financing activities
                
                
                59,666
                
                
                
                58,423
                
                
                
                39,125Net
      change in cash and cash equivalents
                
                
                460
                
                
                
                1,720
                
                
                
                (1,739
                )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                
                
                10,990
                
                
                
                11,450
                
                
                
                13,170End
      of period
                
                $
                11,450
                
                
                $
                13,170
                
                
                $
                11,431SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid, net of amounts capitalized
                
                $
                19,192
                
                
                $
                21,627
                
                
                $
                22,485Income
      taxes paid
                
                $
                7,500
                
                
                $
                7,755
                
                
                $
                4,793Income
      tax refund
                
                $
                —
                
                
                $
                —
                
                
                $
                1,646SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Land,
      equipment, buildings, and leasehold improvements acquired under capital
      leases
                
                $
                1,691
                
                
                $
                552
                
                
                $
                1,072Land,
      equipment, buildings, and leasehold improvements acquired through seller
      financing
                
                $
                4,100
                
                
                $
                1,100
                
                
                $
                —





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





F-6
 Table of Contents





SILVERLEAF
RESORTS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For
the Years Ended December 31, 2006, 2007, and 2008





1.
            NATURE
      OF BUSINESS





Silverleaf
Resorts, Inc., a Texas Corporation (the “Company,” “Silverleaf,” “we,” or
“our”), is in the business of marketing and selling vacation intervals
(“Vacation Intervals”). Our principal activities, in this regard, consist of (i)
developing and acquiring timeshare resorts; (ii) marketing and selling one-week
annual and biennial Vacation Intervals to new owners; (iii) marketing and
selling upgrade and additional week Vacation Intervals to existing Silverleaf
owners (“Silverleaf Owners”); (iv) providing financing for the purchase of
Vacation Intervals; and (v) operating timeshare resorts under management
agreements. We have in-house sales, marketing, financing, and property
management capabilities and coordinate the operation of our 13 owned resorts
(the “Existing Resorts”) and our one hotel property, Pinnacle Lodge, as of
December 31, 2008, and the development of any new timeshare resort, including
site selection, design, and construction. Sales of Vacation Intervals are
marketed to individuals primarily through direct mail and telephone
solicitation.





Each
Existing Resort has a timeshare owners’ association (a “Club”). Each Club (other
than Orlando Breeze) operates through a centralized organization, Silverleaf
Club, to manage the Existing Resorts on a collective basis. Orlando Breeze has
its own club, (“Orlando Breeze Resort Club”), which operates independently of
Silverleaf Club; however, we supervise the management and operation of the
Orlando Breeze Resort Club under the terms of a written agreement. Silverleaf
Club has contracted with us to perform the supervisory, management, and
maintenance functions at the twelve Existing Resorts that it oversees. All costs
of operating these Existing Resorts, including management fees paid to the
Company, are to be covered by monthly dues paid by Silverleaf Owners to their
respective Clubs as well as income generated by the operation of certain
amenities and revenue-producing assets at these Existing Resorts. Subject to
availability of funds from the Clubs, we are entitled to a management fee to
compensate us for the services provided. We evaluate the Clubs in accordance
with Financial Accounting Standards Board (“FASB”) Interpretation No. 46,
“Consolidation of Variable Interest Entities.” As the Clubs are not-for-profit
entities, consolidation is not necessary.





In
addition to Vacation Interval sales revenues, we generate revenue from interest
income derived from operating activities, management fees received from
Silverleaf Club, and other sources. All of the operations are directly related
to the resort real estate development industry.





Our
consolidated financial statements as of and for the years ended December 31,
2006, 2007, and 2008 reflect the operations of the Company and its wholly-owned
subsidiaries, Silverleaf Travel, Inc., Awards Verification Center, Inc.,
Silverleaf Berkshires, Inc., People Really Win Sweepstakes, Inc., SLR Research,
Inc., Silverleaf Finance II, Inc. (“SF-II”), Silverleaf Finance IV, LLC
(“SF-IV”), Silverleaf Finance V, L.P. (“SF-V”), and Silverleaf Finance VI, LLC
(“SF-VI”). SF-II, SF-IV, SF-V, and SF-VI are all described in more detail in
Note 8.





2.
            SIGNIFICANT
      ACCOUNTING POLICIES SUMMARY





Basis of Presentation —The
accompanying consolidated financial statements have been prepared in conformity
with accounting policies generally accepted in the United States of America and
in accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”).





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





Principles of Consolidation —The 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 consolidated
financial statements.





Timeshare Accounting Practices —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.





F-7
 Table of Contents





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. There were
no sales deferred at December 31, 2008 related to the percentage-of-completion
method.





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





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


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


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





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





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





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





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, collateral for construction bonds,
surety bonds, and cash reserved for payments of debt.





F-8
 Table of Contents





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.





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 certain recourse obligations.
Recourse on sales of customer notes receivable is governed by agreements between
the purchasers of said notes and the Company, though we typically do not have an
obligation to repurchase defaulted notes held by our financing
subsidiaries.





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





We
account for and evaluate the investment in our SPE in accordance with 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 SPE. 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 SPE, however, did require expanded
disclosures about the fair value measurement. See Note 13.  In
December 2008, we adopted the provisions of FASB Staff Position (“FSP”) FAS
140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest Entities.” The
adoption of FSP FAS 140-4 and FIN 46(R)-8 requires expanded disclosures, which
are included herein.





In
accordance with SFAS No. 140, our bases for classifying SF-III as a qualified
special purpose entity are i) SF-III is demonstrably distinct from the
transferor as dissolution of the SPE would require an affirmative vote of 100%
of the SPE’s Board of Directors, one of which is independent, ii) there are
limits on permitted activities that the SPE has the power to carry out, and iii)
financial assets transferred to the SPE are passive in nature.





The fair
value of the investment in our SPE is estimated based on the present value of
future cash flows we expect to receive from the notes receivable sold. We
utilized the following key assumptions to estimate the fair value of such cash
flows: customer prepayment rate (including expected accounts paid in full as a
result of upgrades) – 15.9% to 23.7%; expected credit losses – 15.9%; discount
rate – 0% to 44.9%; base interest rate – 5.37%; and loan servicing fees – 1.75%.
Our assumptions are based on experience with our notes receivable portfolio,
available market data, estimated prepayments, the cost of servicing, and net
transaction costs. Such assumptions are assessed quarterly and, if necessary,
adjustments are made to the carrying value of the investment in our SPE on a
prospective basis as a change in accounting estimate, with the amount of
periodic interest accretion adjusted over the remaining life of the beneficial
interest. The carrying value of the investment in our SPE represents our maximum
exposure to loss regarding our involvement with our SPE. We periodically review
the carrying value of our investment in SPE for impairment to ensure that the
carrying value does not exceed market value.





F-9
 Table of Contents





At
December 31, 2008, the sensitivity of the current fair value of residual cash
flows to immediate 10 percent and 20 percent adverse changes to key assumptions
are as follows (in thousands):





Customer
      Prepayment Rate (including accounts paid in full as a result of
      upgrades):Impact
      on fair value of a 10% adverse change
                  
                  $
                  15Impact
      on fair value of a 20% adverse change
                  
                  $
                  30Expected
      Credit Losses Rate:Impact
      on fair value of a 10% adverse change
                  
                  $
                  113Impact
      on fair value of a 20% adverse change
                  
                  $
                  225Discount
      Rate:Impact
      on fair value of a 10% adverse change
                  
                  $
                  114Impact
      on fair value of a 20% adverse change
                  
                  $
                  225





Inventories —Inventories are
stated at the lower of cost or market value less cost to sell.  Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, taxes, and capitalized interest incurred in the
construction or through the acquisition of resort dwellings held for timeshare
sale. At December 31, 2008, the estimated costs not yet incurred but expected to
complete promised amenities was $625,000. Inventory costs are allocated to cost
of Vacation Interval sales using the relative sales value method, as described
above. We periodically review the carrying value of our inventory on an
individual project basis for impairment to ensure that the carrying value does
not exceed market value.





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





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





Valuation of Long-Lived Assets- 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 years ended December 31, 2006, 2007, and
2008.





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.





During
the years ended December 31, 2008, 2007, and 2006, we wrote off
predevelopment costs associated with potential land acquisitions of $1.1
million, $1.0 million, and $0, respectively.  Such costs were recorded
in prepaid and other assets and were written off to operating, general and
administrative expense.





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 value as reported
in the 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.





F-10
 Table of Contents





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, 2008, we did not require an accrual for interest and
penalties related to unrecognized tax benefits.





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.





Our
objective in using derivatives is to increase stability related to interest
expense and to manage our exposure to interest rate movements or other
identified risks. To accomplish this objective, we primarily use interest rate
swaps and caps within our cash flow hedging strategy. Interest rate swaps
involve the receipt of variable-rate amounts in exchange for fixed-rate payments
over the life of the agreements without exchange of the underlying principal
amount. Interest rate caps provide interest rate protection above the strike
rate on the cap and result in our receipt of interest payments when actual rates
exceed the cap strike. We recognize changes in fair value of our derivatives in
earnings. The amounts recognized for such derivatives for the years ended
December 31, 2006, 2007, and 2008 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.





Outstanding
stock options totaling approximately 2.0 million, 2.0 million, and 3.6 million
were dilutive securities that were included in the computation of diluted
earnings per share at December 31, 2006, 2007, and 2008, respectively.
Outstanding stock options totaling 827,000, 492,000, and 229,000 were not
dilutive at December 31, 2006, 2007, and 2008, respectively, because the
exercise price for such options exceeded the market price for our common
shares.





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 for all stock options granted on or prior to December 31,
2005 that were outstanding as of that date.  Under this transition
method, compensation cost is recognized for the unvested portion of stock option
grants outstanding at December 31, 2005 over the remaining requisite service
period using the fair value for these options as estimated at the date of grant
using the Black-Scholes option-pricing model under the original provisions of
SFAS No. 123 for pro-forma disclosure purposes. We recognize stock-based
compensation for all stock options granted after the adoption of SFAS No. 123R
over the requisite service period using the fair value for these options as
estimated at the date of grant using the Black-Scholes option-pricing
model.  As of December 31, 2008, stock-based compensation expense
related to stock options granted prior to 2006 was fully recognized and the
unamortized compensation expense related to stock options granted after the
adoption of SFAS No. 123R was $2.2 million.





F-11
 Table of Contents





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. In February 2008, the FASB issued FSP No.
157-2, which deferred its effective date for one year relative to non-financial
assets and liabilities that are recognized or disclosed at fair value in the
financialstatements on a
nonrecurring basis. 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 SPE and our derivative contracts as shown
in Note 13. This adoption did not impact our consolidated financial position,
results of operations, or cash flows. The remaining aspects of SFAS No. 157,
which will be adopted effective January 1, 2009, apply to our non-financial
long-lived assets (land, equipment, buildings, and leasehold improvements) which
are measured at fair value based on a periodic impairment assessment. Adoption
of the remaining aspects of SFAS No. 157 will result in additional disclosures,
however, will not impact our consolidated financial position, results of
operations, or cash flows.





SFAS No. 159–We adopted the
provisions of Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”),
on January 1, 2008. SFAS No. 159 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. The adoption of SFAS No. 159 did not
impact our consolidated financial position, results of operations, or cash flows
as we did not elect to measure additional items at fair value under SFAS
No. 159.





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 to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning after
December 15, 2008. Early adoption is not permitted. The adoption of
SFAS No. 141(R) as of January 1, 2009 is not expected to impact our consolidated
financial position, results of operations, or cash flows as we do not have any
planned acquisitions that fall under the definition of a business
combination.





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. The adoption of SFAS No. 160 as of
January 1, 2009 will not impact our consolidated financial position, results of
operations, or cash flows as we do not own minority interests in any
entities.





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 Statement of Financial
Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”). Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
Early adoption is encouraged. The adoption of SFAS No. 161 as of January 1, 2009
will not impact our consolidated financial position, results of operations, or
cash flows. Disclosures regarding our derivative instruments and hedging
activities are included in Note 2 and in disclosures related to interest rate
risk and market risk.





F-12
 Table of Contents





SFAS No. 162–In May 2008, the FASB
issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162
identifies the sources of accounting principles and a framework for selecting
the principles to be used in preparation of financial statements of
nongovernmental entities that are prepared in conformity with generally accepted
accounting principles in the United States (“the GAAP hierarchy”). The current
GAAP hierarchy is set forth in the AICPA Statement on Auditing Standards No. 69,
“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles” (“SAS No. 69”). However, the FASB believes the GAAP hierarchy should
be directed to entities rather than auditors because the entity is responsible
for selecting accounting principles for financial statements that are presented
in conformity with GAAP. SFAS No. 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” The adoption of SFAS No. 162 will not impact
our consolidated financial position, results of operations, or cash
flows.





FSP No. 157-3– In October
2008, the FASB Staff issued an  FSP related to SFAS No. 157, FSP
157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset is not Active.” The provisions of FSP 157-3 are effective upon issuance,
or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The adoption of FSP 157-3 did not
impact our consolidated financial position, results of operations, or cash
flows.





FSP No. FAS 140-4 and FIN
46(R)-8–
In December 2008, the FASB Staff issued an FSP related to SFAS No. 140 and
FIN No. 46(R), FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities.” The provisions of FSP FAS 140-4 and FIN
46(R)-8 are effective for fiscal periods (quarterly and annually) ending
after December 15, 2008. The purpose of this FSP is to require enhanced
disclosures by public entities (enterprises) about transfers of financial assets
(securitizations) and interests in variable interest entities (consolidations of
certain special-purpose investment entities) as part of the FASB’s projects to
amend SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities” and FIN No. 46(R), “Consolidation of
Variable Interest Entities” (“VIEs”). The adoption of
FSP FAS 140-4 and FIN 46(R)-8 did not impact our consolidated financial
position, results of operations, or cash flows. Disclosures in accordance with
FSP FAS 140-4 and FIN 46(R)-8 have been included herein.





3.
            CONCENTRATIONS
      OF 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 $549.0 million at December 31, 2008, have a
fixed-to-floating debt ratio of 38% fixed to 62% floating. However, the majority
of our floating-rate debt is subject to interest-rate floors between 5.25% and
8.00%.  The impact of a one-point effective interest rate change on
the $223.4 million balance of variable-rate financial instruments at December
31, 2008 would be approximately $432,000 on our results of operations, after
taxes, for the year ended December 31, 2008, or approximately $0.01 per diluted
share.





At
December 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 December 31, 2008 would result in a
fair value decrease of approximately $12.8 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.





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.





F-13
 Table of Contents





Interest Rate Risk — We have
historically derived net interest income from our financing activities because
the interest rates we charge our customers who finance the purchase of their
Vacation Intervals exceed the interest rates we pay to our senior lenders. As
62% of our senior indebtedness bears interest at variable rates and our customer
notes receivable bear interest at fixed rates, increases in interest rates will
erode the spread in interest rates that we have historically experienced and
could cause our interest expense on borrowings to exceed our interest income on
our portfolio of customer loans. Although interest rates declined throughout
2008, any increase in interest rates above applicable floor rates, particularly
if sustained, could have a material adverse effect on our results of operations,
cash flows, and financial position.





To
partially offset potential increases in interest rates, we have executed two
interest rate swaps related to our conduit loan with SF-II, with fixed rates of
7.04% and 7.90%, for a total notional amount of $2.6 million at December 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 December 31, 2008 was $70.2 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 $17.1 million at December
31, 2008, bear interest at a blended fixed rate of 5.4%.





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





4.
            NOTES
      RECEIVABLE





We
provide financing to the purchasers of Vacation Intervals in the form of notes
receivable, which are collateralized by their interest in such Vacation
Intervals. Such notes receivable generally have initial terms of seven to ten
years. The weighted average yield on outstanding notes receivable at December
31, 2008 and 2007 was 16.7% and 16.5%, respectively, with individual rates
ranging from 0% to 17.9%. As of December 31, 2008, $1.2 million of timeshare
notes receivable have interest rates below 10%. In connection with the sampler
program, we routinely enter into notes receivable with terms of 10 months. Notes
receivable from sampler sales were $2.5 million and $3.4 million at December 31,
2008 and 2007, respectively, and are non-interest bearing.





Once a
note becomes 90 days delinquent, the accrual of interest income ceases until
collection is deemed probable. We ceased accruing interest on delinquent notes
of $53.2 million and $46.8 million as of December 31, 2008 and 2007,
respectively, as collection of interest on such notes was deemed
improbable.





Notes
receivable are scheduled to mature as follows at December 31, 2008 (in
thousands):





2009
                  
                  $
                  44,1082010
                  
                  
                  44,1902011
                  
                  
                  50,4982012
                  
                  
                  55,3542013
                  
                  
                  56,190Thereafter
                  
                  
                  146,662397,002Less
      allowance for uncollectible notes
                  
                  
                  (76,696
                  )Notes
      receivable, net
                  
                  $
                  320,306





There
were no notes sold with recourse during the years ended December 31, 2006, 2007,
and 2008.





At
December 31, 2008, SF-III, our wholly-owned off-balance-sheet qualified special
purpose finance subsidiary, discussed under the heading “Investment in Special
Purpose Entity” in Note 2, held notes receivable totaling $22.5 million with
related borrowings of $17.1 million. For servicing the timeshare receivables, we
receive a fee equal to 1.75% of eligible timeshare receivables held by the
facility. Such fees were $1.5 million, $854,000, and $491,000 for the years
ended December 31, 2006, 2007, and 2008, respectively.





F-14
 Table of Contents





Except
for the repurchase of notes that fail to meet initial eligibility requirements,
we are not obligated to repurchase defaulted or any other contracts sold to
SF-III. As the servicer of notes receivable sold to SF-III, we are obligated to
foreclose upon Vacation Intervals securing defaulted note receivables. Although
we are not obligated, we may purchase foreclosed Vacation Intervals for 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 years ended December 31, 2006,
2007, and 2008, we paid $2.1 million, $1.2 million, and $639,000, respectively,
to repurchase the Vacation Intervals securing defaulted contracts to facilitate
the re-marketing of those Vacation Intervals.





In the
event cash flows from the notes receivable held by SF-III are sufficient to pay
all debt service obligations, fees, and expenses, we receive distributions from
SF-III. Such distributions were $16.6 million, $8.6 million, and $3.6 million
during the years 2006, 2007, and 2008, respectively.





We
consider accounts over 60 days past due to be delinquent. As of December 31,
2008, $7.6 million of notes receivable, net of accounts charged off, were
considered delinquent. An additional $28.4 million of notes receivable, of which
$25.7 million is pledged to senior lenders, would have been considered to be
delinquent had we not granted payment concessions to the customers, which brings
a delinquent note current and extends the maturity date once a payment is
made.





The
activity in gross notes receivable is as follows for the years ended December
31, 2006, 2007, and 2008 (in thousands):





2006
                  
                  
                  2007
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  230,051
                  
                  
                  $
                  297,835
                  
                  
                  $
                  359,035Sales
                  
                  
                  164,208
                  
                  
                  
                  181,048
                  
                  
                  
                  183,371Collections
                  
                  
                  (67,786
                  )
                  
                  
                  (80,787
                  )
                  
                  
                  (89,921
                  )Receivables
      charged off, gross
                  
                  
                  (28,638
                  )
                  
                  
                  (39,061
                  )
                  
                  
                  (55,483
                  )Balance,
      end of period
                  
                  $
                  297,835
                  
                  
                  $
                  359,035
                  
                  
                  $
                  397,002





We
provide for estimated Vacation Interval defaults at the time the Vacation
Interval revenue is recorded as a reduction to Vacation Interval sales. The
estimated uncollectible revenue represents gross losses for newly originated
Vacation Interval sales. Estimated inventory recoveries are a component of the
relative sales value method in determining cost of sales.





The
activity in the allowance for uncollectible notes is as follows for the years
ended December 31, 2006, 2007, and 2008 (in thousands):





2006
                  
                  
                  2007
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  52,479
                  
                  
                  $
                  68,118
                  
                  
                  $
                  69,128Reclassification
      of estimated inventory recoveries on future charge offs related to the
      adoption of SFAS No. 152
                  
                  
                  11,786
                  
                  
                  
                  —
                  
                  
                  
                  —Estimated
      uncollectible revenue
                  
                  
                  32,491
                  
                  
                  
                  40,071
                  
                  
                  
                  63,051Receivables
      charged off, gross
                  
                  
                  (28,638
                  )
                  
                  
                  (39,061
                  )
                  
                  
                  (55,483
                  )Balance,
      end of period
                  
                  $
                  68,118
                  
                  
                  $
                  69,128
                  
                  
                  $
                  76,696





The
allowance for uncollectible notes remained constant at 19.3% of gross notes
receivable as of December 31, 2007 and 2008. We will continue our current
collection programs and seek new programs to reduce note defaults. We will also maintain our
focus on tour lead procurement in an effort to improve the credit quality of our
customers. However, there can be no assurance that these efforts will be
successful.





5.
            INVENTORIES





Inventories
consist of the following at December 31, 2007 and 2008 (in
thousands):





2007
                  
                  
                  2008Timeshare
      units
                  
                  $
                  96,869
                  
                  
                  $
                  105,627Amenities
                  
                  
                  52,390
                  
                  
                  
                  54,053Land
                  
                  
                  28,504
                  
                  
                  
                  29,963Other
                  
                  
                  1,425
                  
                  
                  
                  675Total
                  
                  $
                  179,188
                  
                  
                  $
                  190,318





Realization
of inventories is dependent upon execution of our long-term sales plan for each
resort, which extends for up to fifteen years. Such sales plans depend upon our
ability to obtain financing to facilitate the build-out of each resort and
marketing of the Vacation Intervals over the planned time period.





F-15
 Table of Contents





6.
            LAND,
      EQUIPMENT, BUILDINGS, AND LEASEHOLD
IMPROVEMENTS





Land,
equipment, buildings, and leasehold improvements consist of the following at
December 31, 2007 and 2008 (in thousands):





2007
                  
                  
                  2008Land
                  
                  $
                  2,734
                  
                  
                  $
                  2,734Vehicles
      and equipment
                  
                  
                  9,911
                  
                  
                  
                  10,677Office
      equipment and furniture
                  
                  
                  36,375
                  
                  
                  
                  39,642Buildings
      and leasehold improvements
                  
                  
                  33,640
                  
                  
                  
                  48,19182,660
                  
                  
                  
                  101,244Less
      accumulated depreciation
                  
                  
                  (41,095
                  )
                  
                  
                  (45,851
                  )Land,
      equipment, buildings, and leasehold improvements, net
                  
                  $
                  41,565
                  
                  
                  $
                  55,393





Depreciation
expense for the years ended December 31, 2006, 2007, and 2008 was $2.5 million,
$3.5 million, and $4.9 million, respectively, which includes amortization of
equipment acquired under capital leases.





7.
            INCOME
      TAXES





Income
tax expense consists of the following components for the years ended December
31, 2006, 2007, and 2008 (in thousands):





2006
                  
                  
                  2007
                  
                  
                  2008Current
      income tax expense – Federal
                  
                  $
                  5,025
                  
                  
                  $
                  3,836
                  
                  
                  $
                  5,697Current
      income tax expense – State
                  
                  
                  179
                  
                  
                  
                  782
                  
                  
                  
                  1,089Total
      current income tax expense
                  
                  
                  5,204
                  
                  
                  
                  4,618
                  
                  
                  
                  6,786Deferred
      income tax expense – Federal
                  
                  
                  7,811
                  
                  
                  
                  11,391
                  
                  
                  
                  4,187Deferred
      income tax expense – State
                  
                  
                  1,387
                  
                  
                  
                  1,389
                  
                  
                  
                  464Total
      deferred income tax expense
                  
                  
                  9,198
                  
                  
                  
                  12,780
                  
                  
                  
                  4,651Total
      income tax expense
                  
                  $
                  14,402
                  
                  
                  $
                  17,398
                  
                  
                  $
                  11,437





A
reconciliation of income tax expense on reported pre-tax income at statutory
rates to actual income tax expense for the years ended December 31, 2006, 2007,
and 2008 is as follows (in thousands):





2006
                  
                  
                  2007
                  
                  
                  2008Dollars
                  
                  
                  Rate
                  
                  
                  Dollars
                  
                  
                  Rate
                  
                  
                  Dollars
                  
                  
                  RateIncome
      tax expense at statutory rates
                  
                  $
                  13,093
                  
                  
                  
                  35.0
                  %
                  
                  $
                  15,786
                  
                  
                  
                  35.0
                  %
                  
                  $
                  10,277
                  
                  
                  
                  35.0
                  %State
      income taxes, net of Federal income tax benefit
                  
                  
                  1,309
                  
                  
                  
                  3.5
                  %
                  
                  
                  1,579
                  
                  
                  
                  3.5
                  %
                  
                  
                  1,069
                  
                  
                  
                  3.6
                  %Permanent
      differences
                  
                  
                  96
                  
                  
                  
                  0.3
                  %
                  
                  
                  77
                  
                  
                  
                  0.2
                  %
                  
                  
                  137
                  
                  
                  
                  0.5
                  %Other
                  
                  
                  (96
                  )
                  
                  
                  (0.3
                  )%
                  
                  
                  (44
                  )
                  
                  
                  (0.1
                  )%
                  
                  
                  (46
                  )
                  
                  
                  (0.2
                  )%Total
      income tax expense
                  
                  $
                  14,402
                  
                  
                  
                  38.5
                  %
                  
                  $
                  17,398
                  
                  
                  
                  38.6
                  %
                  
                  $
                  11,437
                  
                  
                  
                  38.9
                  %





Deferred
income tax assets and liabilities as of December 31, 2007 and 2008 are as
follows (in thousands):





2007
                  
                  
                  2008Deferred
      tax liabilities:Depreciation
                  
                  $
                  850
                  
                  
                  $
                  1,305Installment
      sales income
                  
                  
                  99,827
                  
                  
                  
                  105,641Total
      deferred tax liabilities
                  
                  
                  100,677
                  
                  
                  
                  106,946Deferred
      tax assets:Net
      operating loss carryforward – pre exchange offer
                  
                  
                  8,635
                  
                  
                  
                  5,900Net
      operating loss carryforward – post exchange offer
                  
                  
                  47,682
                  
                  
                  
                  45,068AMT
      tax credit
                  
                  
                  13,627
                  
                  
                  
                  20,185Other
                  
                  
                  270
                  
                  
                  
                  679Total
      deferred tax assets
                  
                  
                  70,214
                  
                  
                  
                  71,832Net
      deferred tax liability
                  
                  $
                  30,463
                  
                  
                  $
                  35,114





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 consolidated financial statements do
not contain an accrual for any interest expense that would be paid on the
deferred taxes related to the installment method as the interest expense is not
reasonably estimable. As we expect to fully realize our deferred tax assets, we
do not currently have a valuation reserve for deferred taxes.





F-16
 Table of Contents





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





Federal
net operating losses (“NOLs”) of $140.6 million existing at December 31, 2008
expire between 2020 and 2021. Realization of the deferred tax assets arising
from NOLs is dependent on generating sufficient taxable income prior to the
expiration of the loss carryforwards.





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





The
following table summarizes approximate net operating loss carryforwards and
related expiration dates at December 31, 2008 (in thousands):





Expiration Dates2020
                        
                        $
                        113,1622021
                        
                        
                        27,455$
                        140,617


8.
            DEBT





The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at December 31, 2007 and 2008 (in
thousands):





Revolving
                              
                              
                              
                              
                              
                              Interest
                              
                              
                              Interest2007
                              
                              
                              2008
                              
                              
                              Term
                              
                              
                              Maturity
                              
                              
                              Rate
                              
                              
                              Rate Floor$100
      million receivables-based revolver ($100 million maximum combined
      receivable, inventory, and acquisition commitments, see inventory /
      acquisition component below).
                              
                              $
                              63,119
                              
                              
                              $
                              31,284
                              
                              
                              1/31/10
                              
                              
                              1/31/13
                              
                              
                              Prime
                              
                              
                              6.00%$20
      million receivables-based revolver
                              
                              
                              14,122
                              
                              
                              
                              9,746
                              
                              
                              6/29/10
                              
                              
                              6/29/10
                              
                              
                              Prime
      + 0.75%
                              
                              
                              6.25%$50
      million receivables-based revolver
                              
                              
                              8,044
                              
                              
                              
                              5,789
                              
                              
                              8/31/11
                              
                              
                              8/31/14
                              
                              
                              Prime
                              
                              
                              6.00%$150
      million receivables-based revolver, with an interest rate cap of
      7.5%
                              
                              
                              59,268
                              
                              
                              
                              70,183
                              
                              
                              9/3/09
                              
                              
                              9/3/11
                              
                              
                              LIBOR
      + 1.25%
                              
                              
                              —$72.5
      million receivables-based revolver
                              
                              
                              9,860
                              
                              
                              
                              43,504
                              
                              
                              7/2/10
                              
                              
                              7/2/13
                              
                              
                              LIBOR
      + 2.40%
                              
                              
                              5.25%$66.4
      million receivables-based non-revolving conduit loan
                              
                              
                              13,489
                              
                              
                              
                              6,549
                              
                              
                              —
                              
                              
                              3/22/14
                              
                              
                              7.035%
                              
                              
                              —$26.3
      million receivables-based non-revolving conduit loan
                              
                              
                              7,765
                              
                              
                              
                              4,140
                              
                              
                              —
                              
                              
                              9/22/11
                              
                              
                              7.90%
                              
                              
                              —$128.1
      million receivables-based non-revolver
                              
                              
                              68,761
                              
                              
                              
                              43,526
                              
                              
                              —
                              
                              
                              7/16/18
                              
                              
                              6.70%
                              
                              
                              —$115.4
      million receivables-based non-revolver, including a total remaining
      discount of approximately $5.8 million
                              
                              
                              —
                              
                              
                              
                              84,885
                              
                              
                              —
                              
                              
                              3/15/20
                              
                              
                              7.263%
                              
                              
                              —Inventory
      / acquisition loan agreement (see $100 million receivables-based revolver
      above)
                              
                              
                              30,005
                              
                              
                              
                              28,407
                              
                              
                              1/31/10
                              
                              
                              1/31/12
                              
                              
                              Prime
      + 1.00%
                                Prime
      + 3.00%
                              
                              
                              6.00%
                                8.00
      %$50
      million inventory loan agreement
                              
                              
                              20,091
                              
                              
                              
                              34,464
                              
                              
                              4/29/10
                              
                              
                              4/29/12
                              
                              
                              Prime
      + 1.50%
                              
                              
                              7.00%$15
      million inventory loan agreement
                              
                              
                              12,982
                              
                              
                              
                              —
                              
                              
                              —
                              
                              
                              —
                              
                              
                              Prime
      + 2.00%
                              
                              
                              —Various
      notes, due from February 2009 through August 2016, collateralized by
      various assets with interest rates ranging from 6.0% to
    8.5%
                              
                              
                              6,970
                              
                              
                              
                              4,684
                              
                              
                              —
                              
                              
                              various
                              
                              
                              various
                              
                              
                              —Total
      notes payable
                              
                              
                              314,476
                              
                              
                              
                              367,161Capital
      lease obligations
                              
                              
                              1,722
                              
                              
                              
                              1,910
                              
                              
                              —
                              
                              
                              various
                              
                              
                              various
                              
                              
                              —Total
      notes payable and capital lease obligations
                              
                              
                              316,198
                              
                              
                              
                              369,071101⁄2%
      senior subordinated notes, due 2008
                              
                              
                              2,146
                              
                              
                              
                              —
                              
                              
                              —
                              
                              
                              4/1/08
                              
                              
                              10.50%
                              
                              
                              —8.0%
      senior subordinated notes, due 2010
                              
                              
                              24,671
                              
                              
                              
                              23,121
                              
                              
                              —
                              
                              
                              4/1/10
                              
                              
                              8.00%
                              
                              
                              —Total
      senior subordinated notes
                              
                              
                              26,817
                              
                              
                              
                              23,121Total
                              
                              $
                              343,015
                              
                              
                              $
                              392,192





At
December 31, 2008, the LIBOR rate on our senior credit facilities was 0.44% (1
month) and the Prime rate on these facilities was 3.25%. Our weighted average
cost of borrowings for the year ended December 31, 2008 was 6.8% compared to
7.6% for the year ended December 31, 2007.





F-17
 Table of Contents





At
December 31, 2008, our senior credit facilities provided for loans of up to
$549.0 million, of which $186.6 million was available for future advances. The
following table summarizes our credit agreements with our senior lenders, our
wholly-owned and consolidated special purpose finance subsidiaries, our senior
subordinated debt and other debt, and our credit agreement with our
off-balance-sheet qualified special purpose entity, SF-III, as of December 31,
2008 (in thousands):





MaximumAmount
      Available
                  
                  
                  BalanceReceivables-Based
      Revolvers
                  
                  $
                  331,534
                  
                  
                  $
                  160,506Receivables-Based
      Non-Revolvers
                  
                  
                  139,100
                  
                  
                  
                  139,100Inventory
      Loans
                  
                  
                  78,407
                  
                  
                  
                  62,871Subtotal
      Senior Credit Facilities
                  
                  
                  549,041
                  
                  
                  
                  362,477Senior
      Subordinated Debt
                  
                  
                  23,121
                  
                  
                  
                  23,121Other
      Debt
                  
                  
                  6,594
                  
                  
                  
                  6,594Subtotal
      On-Balance-Sheet
                  
                  
                  578,756
                  
                  
                  
                  392,192Off-Balance-Sheet
      Receivables-Based Term Loan
                  
                  
                  17,135
                  
                  
                  
                  17,135Grand
      Total
                  
                  $
                  595,891
                  
                  
                  $
                  409,327





During
2007, we amended our revolving senior credit facility through our wholly-owned
and consolidated special purpose finance subsidiary, SF-IV, to increase the
availability from $125 million to $150 million and to extend the funding period
from December 2008 to September 2009. The maturity date of the amended facility
was extended from December 2010 to September 2011. The variable funding note is
secured by customer notes receivable sold to SF-IV. Proceeds from the sale of
customer notes receivable to SF-IV are used to fund normal business operations
and for general working capital purposes. Pursuant to the terms of an agreement,
we continue servicing these customer notes receivable and receive fees for our
services.





During
2007, we amended our loan agreement with one of our senior lenders to
consolidate our receivables and inventory financing arrangements into one
facility, with an additional financing arrangement included for acquisitions.
The maximum aggregate commitment is $100 million, which can be borrowed under
the receivables financing arrangement provided we have no borrowings under
either of the inventory or acquisition financing arrangements. The maximum
commitments with respect to the inventory and acquisition financing arrangements
were $40 million and $20 million, respectively, with a maximum aggregate
combined commitment of $40 million.  In October 2007, we further
amended the agreement to increase our inventory financing arrangement from $40
million to $50 million, with the maximum aggregate combined commitment on the
inventory and acquisition components being $50 million.  The interest
rate on the receivables component was reduced from Prime plus 1% with a 6% floor
to Prime with no floor. The interest rate on the inventory and acquisition
components is Prime plus 1%. The interest rates charged on our prior inventory
loan agreements with this senior lender were Prime plus 3% and LIBOR plus
3.25%.  The funding period was extended from June 2008 to January
2010. The receivables component matures January 31, 2013 and the acquisition and
inventory components each mature on January 31, 2012.





During
2007, we entered into a $37.5 million receivables-based revolving loan agreement
with a senior lender and other lenders. The loan is secured by customer notes
receivable at an advance rate of up to 75% of the aggregate outstanding
principal balance of all eligible notes receivable pledged as security. The
revolving period expires September 28, 2009, and the loan matures September 28,
2012, or if the revolving period is extended, 36 months from the expiration of
the revolving period. The facility bears interest at LIBOR plus
2.40%.





In April
2008, we amended our $50 million receivables-based revolver to reduce
availability to $20 million and extend the revolving term and maturity date from
April 2008 to June 2008. In June 2008, this receivables-based facility was
further amended to extend the revolving term and maturity date from June 2008 to
June 2010, with the option to extend for a one-year term. The interest rate on
the receivables facility remained the same at the Prime rate plus 0.75%, with
the addition of a Prime rate floor of 5.5%. In June 2008, we also amended our
inventory facility with this same senior lender to increase availability from
$30 million to $50 million and extend the revolving period from April 2009 to
April 2010 and the maturity date from April 2011 to April 2012, with the option
to extend both for additional one-year terms. The interest rate on the inventory
facility remained the same at the Prime rate plus 1.5%, with the addition of a
Prime rate floor of 5.5%. Regarding the inventory facility, the financial
covenant for the maximum allowable limit on the ratio of sales and marketing
expense to revenue from the sale of Vacation Intervals was increased from .55 to
1 to .60 to 1. In addition, in the event that this ratio is no longer required
to be tested under our $100 million consolidated receivables, inventory, and
acquisition revolving line of credit with another of our senior lenders, this
covenant would no longer be required by this senior lender.





In June
2008, we executed a term securitization transaction through a newly-formed,
wholly-owned and fully consolidated special purpose finance subsidiary,
Silverleaf Finance VI, LLC. SF-VI was formed for the purpose of issuing
approximately $115.4 million of its Timeshare Loan-Backed Notes Series 2008-A
(“Series 2008-A Notes”) in a private offering and sale through certain financial
institutions. The Series 2008-A Notes were issued in seven classes with a
blended coupon rate of 7.263% and at discounts totaling approximately $8.0
million. These discounts are amortized as an adjustment to interest expense over
the terms of the related loans using the effective interest method, which
generates a blended effective interest rate on these notes of approximately
11.3% at December 31, 2008. The Series 2008-A Notes have a maturity date of
March 2020. As discussed below, credit facilities with certain of our other
senior lenders have been amended to modify the availability under the loan
agreements as a result of such lenders’ participation in the
securitization.





F-18
 Table of Contents





The
Series 2008-A Notes are secured by customer notes receivable sold to SF-VI by
SF-IV and Silverleaf. The customer notes receivable sold to SF-VI were
previously sold to SF-IV or pledged as collateral by Silverleaf under revolving
credit facilities with senior lenders. The cash proceeds from the sale of the
customer notes receivable to SF-VI were primarily used to repay approximately
$93.8 million in consolidated indebtedness to senior lenders or to SF-IV. All
customer notes receivable purchased by SF-VI were acquired without recourse,
except in the case of breaches of customary representations and warranties made
in connection with the sale of the notes. Silverleaf, however, is obligated to
pay up to an aggregate of $1 million to SF-VI in the event there are
insufficient funds available on scheduled payment dates to make required debt
payments. Pursuant to the terms of an agreement, we continue to service these
customer notes receivable and receive fees for our services.





In June
2008, we amended our $100 million consolidated receivables, inventory, and
acquisition revolving line of credit. The availability under the acquisition
loan component of the $100 million line of credit was reduced from $20 million
to $10 million. The total availability under the facility was reduced by the
aggregate of the outstanding principal balance of the Series 2008-A Notes owned
by the senior lender, which was $31.4 million at December 31, 2008, and an
amount equal to 10.5% of the outstanding principal balance of the two conduit
loan facilities for $66.4 million and $26.3 million provided by the senior
lender to SF-II, which was $1.1 million at December 31, 2008. The interest rate
on the acquisition line was increased from Prime rate plus 1% to Prime rate plus
3%, but never less than 8%. The interest rate on the receivables line remained
Prime rate, with the addition of a 6% floor. The interest rate on the inventory
line remained Prime rate plus 1%, with the addition of a 6% floor. In addition,
certain financial covenants were also modified. The maximum allowable limit on
the ratio of sales and marketing expense to revenue from the sale of Vacation
Intervals was increased from .57 to 1 to .60 to 1. The interest coverage ratio
of at least 1.25 to 1 was modified to calculate the ratio based upon a trailing
twelve-month period as opposed to a calculation based upon the calendar quarter
as previously required.





In July
2008, we amended our $37.5 million receivables-based revolver to increase
availability to $72.5 million, extend the revolving period from September 2009
to July 2010, and extend the maturity date from September 2012 to July 2013, or
if the revolving period is further extended, 36 months from the expiration of
the revolving period. The financial covenant for the maximum allowable limit on
the four-quarter cumulative ratio of sales and marketing expense to revenue from
the sale of Vacation Intervals was increased from .57 to 1 to .60 to 1. The
interest rate on the receivables facility remained unchanged at the LIBOR rate
plus 2.40%, with the addition of a LIBOR floor of 2.85%.





During
September 2008, we amended our $35 million revolving receivables credit facility
to increase availability to $50 million, extend the revolving period from
December 2008 to August 2011, and extend the maturity date from December 2011 to
August 2014.  The commitment for financing of our receivables is the
lesser of a) $50 million or b) the amount by which $75 million exceeds the
aggregate amount outstanding under the Series 2008-A Notes purchased by the
senior lender, which was $23.6 million at December 31, 2008. In a previous
amendment, during June 2008, the senior lender’s commitment was the lesser of a)
$35 million or b) the amount by which $75 million exceeded the aggregate amount
outstanding under the Series 2008-A Notes purchased by the senior lender plus
the amount outstanding under the $15 million inventory credit facility with the
senior lender. The increase in borrowing capacity of our receivables credit
facility from $35 million to $50 million was facilitated based on the
termination of our $15 million revolving inventory credit facility, also
effective in September 2008. The terminated facility was originally scheduled to
revolve through December 31, 2008 and mature on December 31, 2010. In September
2008, we paid the $7.8 million balance due on the terminated inventory credit
facility from a draw against our existing $50 million inventory credit facility
with another of our senior lenders. The interest rate on our amended receivables
line remained Prime rate with a 6% floor. In addition, certain financial
covenants were modified under the terms of the amendment. The maximum allowable
limit on the four-quarter cumulative ratio of sales and marketing expense to
revenue from the sale of Vacation Intervals was increased from .57 to 1 to .62
to 1. The tangible net worth minimum was increased from $108 million to $150
million.





During
the fourth quarter of 2008, we retired $1.6 million of 8.0% senior subordinated
notes, due April 2010, for $1.3 million, which resulted in a gain of
approximately $250,000.





Notes
payable secured by customer notes receivable require that collections from
customers be remitted to our senior lenders upon receipt. In addition, we are
required to calculate the appropriate “Borrowing Base” for each note payable
monthly. Such Borrowing Base determines whether the loans are collateralized in
accordance with the applicable loan agreements and whether additional amounts
can be borrowed. In preparing the monthly Borrowing Base reports for our senior
lenders, we have classified certain customer notes as eligible for Borrowing
Base that might be considered ineligible in accordance with the loan agreements.
Such potentially ineligible notes included in the Borrowing Base relate to a)
cancelled notes from customers who have upgraded to a higher value product and
b) notes that have been subject to payment concessions.





F-19
 Table of Contents





We have
developed programs under which customers may be granted payment concessions in
order to encourage delinquent customers to make additional payments. The effect
of these concessions is to extend the term of the customer notes. Upon granting
a concession, we consider the customer account to be current. Under our notes
payable agreements, customer notes that are less than 60 days past due are
considered eligible as Borrowing Base. As of December 31, 2007 and 2008, a total
of $22.5 million and $25.7 million of customer notes, respectively, have been
considered eligible for Borrowing Base purposes which would have been considered
ineligible had payment concessions and the related reclassification as current
not been granted. In addition, as of December 31, 2007 and 2008, $2.1 million
and $2.1 million, respectively, of cancelled notes from customers who have
upgraded to a different product have been treated as eligible for Borrowing Base
purposes.





Principal
maturities of notes payable, capital lease obligations, and senior subordinated
notes are as follows at December 31, 2008 (in thousands):





2009
                  
                  $
                  59,6252010
                  
                  
                  69,7932011
                  
                  
                  100,3722012
                  
                  
                  70,6992013
                  
                  
                  83,651Thereafter
                  
                  
                  8,052Total
                  
                  $
                  392,192





Principal
maturities on our term securitizations (SF-II, SF-V, and SF-VI) are shown
proportionate to the projected collections of the corresponding notes receivable
that serve as collateral to this debt. Total interest expense and lender fees
for the years ended December 31, 2006, 2007, and 2008 was $21.7 million, $24.6
million, and $28.6 million, respectively. Interest of $869,000, $2.1 million,
and $1.9 million was capitalized to inventory during the years ended December
31, 2006, 2007, and 2008, respectively.





As of
December 31, 2008, eligible customer notes receivable with a face amount of
$374.2 million and interval inventory of $52.5 million were pledged as
collateral.





Financial
Covenants Under Senior Credit Facilities.





The
Company’s senior credit facilities provide certain financial covenants that we
must satisfy.  Any failure to comply with the financial covenants in
any single loan agreement will result in a cross default under the various
facilities.  As of and for the years ended December 31, 2006, 2007,
and 2008, we have been in full compliance with our debt covenants in our credit
facilities with all of our senior lenders.





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





Such
credit facilities also contain operating covenants as of December 31, 2008,
requiring us to (i) maintain a minimum tangible net worth, the most restrictive
being to maintain a minimum tangible net worth at all times greater than the
tangible net worth as of December 31, 2004, or $132.1 million, plus 50% of the
aggregate amount of net income after December 31, 2004, maintain sales and
marketing expenses as a percentage of Vacation Interval sales below 60% for the
latest rolling 12 months (one senior lender has increased such ratio to 62% as
of the last day of each fiscal quarter for a four-quarter cumulative ratio),
maintain notes receivable delinquency rate below 10%, maintain a minimum
interest coverage ratio of 1.25 to 1 for the latest rolling 12 months, the
latest quarter, and average of the last four quarters, maintain positive net
income for each year-end, and for any two consecutive fiscal quarters, maintain
a leverage ratio of at least 6.0 to 1, and maintain a minimum weighted average
FICO® Credit Bureau Score of 640 for all fiscal calendar quarter sales with
respect to which a FICO® score can be obtained; (ii) maintain our legal
existence and be in good standing in any jurisdiction where we conduct business;
(iii) maintain our management agreement with our Existing Resorts; and (iv)
refrain from modifying or terminating certain timeshare documents. The credit
facilities also include customary events of default, including, without
limitation (i) failure to pay principal, interest, or fees when due, (ii)
untruth of any representation of warranty, (iii) failure to perform or timely
observe covenants, (iv) defaults under other indebtedness, and (v) bankruptcy.
At December 31, 2008, we are in compliance with these covenants.





F-20
 Table of Contents





9.
            COMMITMENTS
      AND CONTINGENCIES





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





Various
legal actions and claims may be instituted or asserted in the future against us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements.  Some of 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 are a
co-plaintiff with two other parties in two related matters brought in the Land
Court Department of the Trial Court of the Commonwealth of Massachusetts, each
styled as Silverleaf Resorts,
Inc., et al. v. Zoning Board of Appeals of the Town of Lanesborough, et al.,Civil Action No. 07 MISC 351155 and Civil Action No. 09 MISC
393464.  In these actions, we and the co-plaintiffs have challenged
the validity of a special permit issued by the Lanesborough Zoning Board of
Appeals to Berkshire Wind Power Cooperative Corporation (“Berkshire”), for a
portion of a road that Berkshire needs to access property located where
Berkshire plans to construct a wind farm.  We initiated this lawsuit
because the predecessor in interest of 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.  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 property.  We seek a court
decree that the special permit expired from non-use and is therefore no longer
valid, or alternatively, that the road was not built as permitted.  We
will seek to consolidate these matters.  We are in fast track
discovery in the Land Court, but no final trial date has been set.





Insurance Losses — On
September 13, 2008, Hurricane Ike caused property damage and business
interruption related to our Seaside Resort in Galveston, Texas, and our Piney
Shores Resort just north of Houston, Texas. As a result, Seaside Resort was
closed from September 10 through October 17, at which time we began taking
reservations and gradually opening units. The resort was fully operational by
December 12. Piney Shores Resort was closed from September 13 to September 25.
We maintain insurance that covers both physical damage and business-interruption
losses. We accrued $291,000 related to this incident, which represents our
insurance deductibles and expenditures deemed uncollectible.  In
addition, in November 2008, we received $1.3 million in business-interruption
proceeds, which was recorded in other income.





Leases and Other Contractual
Commitments -We have entered into noncancelable operating leases
covering office and storage facilities and equipment, which expire at various
dates through 2015. The total rental expense charged to operations during the
years ended December 31, 2006, 2007, and 2008 was $2.7 million, $3.6 million,
and $4.8 million, respectively. We have also acquired equipment by entering into
capital leases.





The
following table summarizes our scheduled contractual commitments as of December
31, 2008 (in thousands):





2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  ThereafterLong-term
      debt
                  
                  $
                  79,307
                  
                  
                  $
                  85,045
                  
                  
                  $
                  111,568
                  
                  
                  $
                  77,111
                  
                  
                  $
                  85,637
                  
                  
                  $
                  8,614Capital
      leases
                  
                  
                  1,010
                  
                  
                  
                  597
                  
                  
                  
                  345
                  
                  
                  
                  104
                  
                  
                  
                  18
                  
                  
                  
                  —Operating
      leases
                  
                  
                  2,337
                  
                  
                  
                  1,504
                  
                  
                  
                  968
                  
                  
                  
                  519
                  
                  
                  
                  306
                  
                  
                  
                  475Construction
      commitments
                  
                  
                  16,349
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  99,003
                  
                  
                  $
                  87,146
                  
                  
                  $
                  112,881
                  
                  
                  $
                  77,734
                  
                  
                  $
                  85,961
                  
                  
                  $
                  9,089





Principal
maturities on our term securitizations (SF-II, SF-V, and SF-VI) are shown
proportionate to the projected collections of the corresponding notes receivable
that serve as collateral to this debt. Long-term debt includes $57.0 million of
future interest, using an approximate interest rate of 6.8%, which is our
weighted average cost of borrowings at December 31, 2008. Capital leases include
$164,000 of future interest, using an approximate interest rate of 6.2%, which
is our weighted average cost of borrowings on our capital lease obligations at
December 31, 2008. Construction commitments of $16.3 million relate to the
continued development of our resorts and will be funded via availability under
our credit facilities. As of December 31, 2008, we had availability under our
credit facilities of $186.6 million. We also have a $15.7 million demand note
with SF-II, our wholly owned on-balance-sheet conduit financing subsidiary,
which is excluded from long-term debt as the note represents only a potential,
future cash outlay and is eliminated on a consolidated basis.





F-21
 Table of Contents





Equipment
acquired under capital leases consists of the following at December 31, 2007 and
2008 (in thousands):





2007
                  
                  
                  2008Amount
      of equipment under capital leases
                  
                  $
                  2,362
                  
                  
                  $
                  3,434Less
      accumulated depreciation
                  
                  
                  (470
                  )
                  
                  
                  (1,159
                  )$
                  1,892
                  
                  
                  $
                  2,275





At
December 31, 2008, we had notes receivable (including notes unrelated to
Vacation Intervals) in the approximate principal amount of $397.0 million with
an allowance for uncollectible notes of $76.7 million.





Employment Agreements -Periodically, we enter into employment agreements with certain executive
officers, which provide for minimum annual base salaries and other fringe
benefits as determined by our Board of Directors. The agreements have varying
terms of up to three years and typically can be terminated by either party upon
30 days notice, subject to severance provisions. Certain employment agreements
provide that such person will not directly or indirectly compete with the
Company in any county in which it conducts its business or markets its products
for a period of two years following the termination of the agreement. These
agreements also provide that such persons will not influence any employee or
independent contractor to terminate its relationship with us or disclose any of
our confidential information.





10.
            EQUITY





Our stock
option plans provide for awarding nonqualified stock options to directors,
officers, and key employees and incentive stock options to key salaried
employees. Nonqualified stock options provide for the right to purchase common
stock at a specified price which may be less than or equal to fair market value
on the date of grant (but not less than par value). Nonqualified stock options
may be granted for any term and upon such conditions determined by our Board of
Directors.





At
December 31, 2008, we have options outstanding under three stock-based
compensation plans. Outstanding options have a graded vesting schedule, with
shares vesting in equal increments over a three, four, or five-year period from
the original grant date. These options are exercisable at prices ranging from
$0.29 to $16.00 per share and expire 10 years from the date of
grant.





Stock
option transactions during 2006, 2007, and 2008 are summarized as
follows:





2006
                  
                  
                  2007
                  
                  
                  2008Number
      of Shares
                  
                  
                  Weighted
      Average Price per
    Share
                  
                  
                  Number
      of Shares
                  
                  
                  Weighted
      Average Price per
    Share
                  
                  
                  Number
      of Shares
                  
                  
                  Weighted
      Average Price per
    ShareOptions
      outstanding, beginning of year
                  
                  
                  3,137,657
                  
                  
                  $
                  4.20
                  
                  
                  
                  2,823,807
                  
                  
                  $
                  4.63
                  
                  
                  
                  2,513,807
                  
                  
                  $
                  3.28Granted
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  2,000,000
                  
                  
                  $
                  1.89Exercised
                  
                  
                  (313,850
                  )
                  
                  $
                  0.32
                  
                  
                  
                  (10,000
                  )
                  
                  $
                  0.32
                  
                  
                  
                  (385,000
                  )
                  
                  $
                  0.30Expired
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  (299,000
                  )
                  
                  $
                  16.04
                  
                  
                  
                  (338,500
                  )
                  
                  $
                  17.30Forfeited
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  (1,000
                  )
                  
                  $
                  23.47
                  
                  
                  
                  —
                  
                  
                  $
                  —Options
      outstanding, end of year
                  
                  
                  2,823,807
                  
                  
                  $
                  4.63
                  
                  
                  
                  2,513,807
                  
                  
                  $
                  3.28
                  
                  
                  
                  3,790,307
                  
                  
                  $
                  1.60Exercisable,
      end of year
                  
                  
                  2,645,807
                  
                  
                  $
                  4.83
                  
                  
                  
                  2,424,807
                  
                  
                  $
                  3.34
                  
                  
                  
                  1,790,307
                  
                  
                  $
                  1.27





For stock
options outstanding at December 31, 2008:





Range of Exercise Prices
                      
                      
                      Number
      of OptionsOutstanding
                      
                      
                      Weighted
      Average Exercise Priceper
      Option
                      
                      
                      Weighted
      Average Remaining Life in
      Years
                      
                      
                      Number
      of Options Exercisable
                      
                      
                      Weighted
      Average Exercise Price of Options Exercisable
                      
                      
                      Aggregate
      Intrinsic Value$16.00
      - 16.00
                      
                      
                      
                      5,000
                      
                      
                      $
                      16.00
                      
                      
                      
                      0.3
                      
                      
                      
                      5,000
                      
                      
                      $
                      16.00
                      
                      
                      $
                      —$7.31
      - 7.31
                      
                      
                      
                      148,500
                      
                      
                      
                      7.31
                      
                      
                      
                      1.0
                      
                      
                      
                      148,500
                      
                      
                      
                      7.31
                      
                      
                      
                      —$3.59
      - 3.69
                      
                      
                      
                      75,000
                      
                      
                      
                      3.64
                      
                      
                      
                      1.8
                      
                      
                      
                      75,000
                      
                      
                      
                      3.64
                      
                      
                      
                      —$1.86
      - 1.89
                      
                      
                      
                      2,000,000
                      
                      
                      
                      1.89
                      
                      
                      
                      9.7
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —$1.62
      - 1.62
                      
                      
                      
                      267,000
                      
                      
                      
                      1.62
                      
                      
                      
                      6.8
                      
                      
                      
                      267,000
                      
                      
                      
                      1.62
                      
                      
                      
                      —$0.29
      - 0.32
                      
                      
                      
                      1,294,807
                      
                      
                      
                      0.31
                      
                      
                      
                      4.5
                      
                      
                      
                      1,294,807
                      
                      
                      
                      0.31
                      
                      
                      
                      527,000Total
                      
                      
                      
                      3,790,307
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,790,307





The
intrinsic value of stock options exercised during each of the three years ended
December 31, 2006, 2007, and 2008 was $1.1 million, $54,000, and $683,000,
respectively.





We
adopted SFAS No. 123R, as of January 1, 2006, using the modified prospective
method for all stock options granted on or prior to December 31, 2005 that were
outstanding as of that date. Under this transition method, compensation cost is
recognized for the unvested portion of stock option grants outstanding at
December 31, 2005 over the remaining requisite service period using the fair
value for these options as estimated at the date of grant using the
Black-Scholes option-pricing model under the original provisions of SFAS No. 123
for pro-forma disclosure purposes.





F-22
 Table of Contents





On July
29, 2008, our shareholders approved our 2008 Stock Option Plan, which reserved
for issuance up to two million shares of our common stock as either incentive or
nonqualified stock options to our directors, officers, and key employees. In
August 2008, we granted 1,925,000 stock options under this plan of which 300,000
were nonqualified stock options granted to our directors and 1,625,000 were
incentive stock options granted to certain officers and key employees. These
stock options have a fair value of $1.19. In September 2008, we granted the
remaining 75,000 stock options that were reserved for issuance as incentive
stock options. These stock options have a fair value of $1.18. The fair value of
the stock options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility ranging from 33.5% to 57.9%, a risk-free
interest rate of 3.5%, expected life of 7 years, and no distribution yield. The
options granted to our officers and key employees will vest in equal increments
over a five-year period. The options granted to our directors will vest in equal
increments over a four-year period.





For the
years ended December 31, 2006, 2007, and 2008, we recognized stock-based
compensation of $252,000, $142,000, and $272,000, respectively. Stock-based
compensation expense for the year ended December 31, 2008 consists of $88,000
for stock options granted prior to 2006 and $184,000 for stock options granted
during the third quarter of 2008. There were no stock options granted during the
years ended December 31, 2006 and 2007. As of December 31, 2008, stock-based
compensation expense related to stock options granted prior to 2006 was fully
recognized and the unamortized compensation expense related to our stock options
granted in the third quarter of 2008 was $2.2 million.





On July
29, 2008, we authorized the repurchase of up to two million shares of our common
stock to be acquired from time to time in the open market or in negotiated
transactions. This stock repurchase program expires in July 2010. In the third
quarter of 2008, we acquired 56,211 outstanding shares of common stock, which we
reclassified as treasury stock, for $108,000. However, in the fourth quarter of
2008, 115,000 stock options were exercised and 56,211 shares of treasury stock
were reissued in these transactions. We did not repurchase any treasury shares
in the fourth quarter of 2008. As of December 31, 2008, 1,943,789 shares may yet
be repurchased under this program.





11.
            RELATED
      PARTY TRANSACTIONS





At
December 31, 2008, the Club at each timeshare resort (other than Orlando Breeze)
operates through a centralized organization provided by Silverleaf Club to
manage the resorts on a collective basis. Each timeshare owners’ association
(except for the Club at Orlando Breeze) has entered into a management agreement
with Silverleaf Club, which authorizes the Clubs to manage the Existing Resorts.
Silverleaf Club has in turn entered into a management agreement with the
Company, whereby we supervise the management and operations of the Existing
Resorts. Orlando Breeze has its own club, Orlando Breeze Resort Club, which is
operated independently of Silverleaf Club. However, we supervise the management
and operation of the Orlando Breeze Resort Club under the terms of a written
agreement as well. Our management agreements with Silverleaf Club and Orlando
Breeze Resort Club provide for a maximum management fee equal to 15% of gross
revenues of either Silverleaf Club or Orlando Breeze Resort Club, but our right
toreceive such a fee on an annual basis is limited to the net income of
Silverleaf Club or Orlando Breeze Resort Club. However, if we do not receive the
maximum fee, such deficiency is deferred for payment to succeeding years,
subject again to the annual net income limitation. The Silverleaf Club
management agreement expires March 2020 and continues year-to-year thereafter
unless cancelled by either party. The Orlando Breeze Resort Club management
agreement expires January 2011 and continues in successive 3-year terms
thereafter unless cancelled by either party. During the years ended December 31,
2006, 2007, and 2008, we recognized management fee income of $1.9 million, $2.7
million, and $3.0 million, respectively, related to Silverleaf Club. During the
years ended December 31, 2007 and 2008, we recognized management fee income of
$135,000 and $120,000, respectively, related to Orlando Breeze Resort Club.
Prior to 2007, we did not receive payment of management fees from Orlando Breeze
Resort Club.





The
direct expenses of operating the resorts are paid by the Clubs. To the extent
the Clubs provide payroll, administrative, and other services that directly
benefit the Company, we are charged a separate allocation by the Clubs. During
the years ended December 31, 2006, 2007, and 2008, we incurred $312,000,
$406,000, and $489,000, respectively, of expenses under these agreements.
Likewise, to the extent we provide payroll, administrative, and other services
that directly benefit the Clubs, we charge a separate allocation to the Clubs.
During the years ended December 31, 2006, 2007, and 2008, we charged the Clubs
$3.3 million, $3.6 million, and $3.6 million, respectively, under these
agreements.





During
the years ended December 31, 2006, 2007, and 2008, Silverleaf Club paid
Silverleaf $74,000, $444,000, and $717,000, respectively, for Silverleaf Club
members’ use of the Pinnacle Lodge hotel.  The amount the Club paid
Silverleaf is based on the average room rate the hotel receives from outside
parties.





F-23
 Table of Contents





The
following schedule represents amounts due from affiliates at December 31, 2007
and 2008 (in thousands):





2007
                    
                    
                    2008Timeshare
      owners associations and other, net
                    
                    $
                    604
                    
                    
                    $
                    728Amount
      due from Silverleaf Club
                    
                    
                    402
                    
                    
                    
                    144Amount
      due from special purpose entities
                    
                    
                    352
                    
                    
                    
                    866Total
      amounts due from affiliates
                    
                    $
                    1,358
                    
                    
                    $
                    1,738


In
December 2007, we sold approximately 5.7 acres of land located in Wood County,
Texas, to Mr. Robert E. Mead, our Chief Executive Officer, for $244,000. Our
basis in this tract of land was zero, thus we recorded a gain of $242,000 in
other income, which represents the sales price, net of closing costs. The
aggregate market value of our ownership interests and other rights in this tract
of land was determined to be $244,000 at May 7, 2007 based upon an appraisal
from an independent appraisal firm. This transaction was approved by the Board
of Directors, with Mr. Mead abstaining.





Pursuant
to an agreement with TradeMark Consulting, Co. (“TradeMark”), a consulting
company owned and operated by Thomas J. Morris, who became one of our executive
officers in August 2005, we paid TradeMark a bonus of $100,000 in 2006 as a
result of the completion of a financing transaction on March 2, 2006. Our
employment agreement with Mr. Morris provided that his operation of TradeMark
would not be a violation of the noncompetition provisions of his employment
agreement. The agreement with TradeMark terminated on March 15,
2006.





12.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





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





Our
senior subordinated notes of $26.8 million and $23.1 million as of December 31,
2007 and 2008, respectively, had estimated fair values of approximately $16.8
million and $14.5 million, respectively, based on the market value of notes
exchanged in the Exchange Offer in 2002. However, these notes were not traded on
a regular basis and were therefore subject to large variances in offer prices.
Accordingly, the estimated fair value may not be indicative of the amount at
which a transaction could be completed.





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





13.
            FAIR
      VALUE MEASUREMENTS





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 SPE 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 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.





F-24
 Table of Contents





The
following table represents our assets measured at fair value on a recurring
basis as of December 31, 2008 and the basis for that measurement (in
thousands):





Fair Value Measurements at Reporting Date
      UsingDescription
                  
                  December 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
                  
                  $
                  4,908
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  4,908Interest
      rate cap derivative
                  
                  
                  7
                  
                  
                  
                  —
                  
                  
                  
                  7
                  
                  
                  
                  —Total
                  
                  $
                  4,915
                  
                  
                  $
                  —
                  
                  
                  $
                  7
                  
                  
                  $
                  4,908





The
activity in the investment in our SPE measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) is as follows for the
years ended December 31, 2007 and 2008 (in thousands):





2007
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  13,008
                  
                  
                  $
                  7,315Net
      investment returns
                  
                  
                  (5,693
                  )
                  
                  
                  (2,407
                  )Balance,
      end of period
                  
                  $
                  7,315
                  
                  
                  $
                  4,908





14.
            SUBSIDIARY
      GUARANTEES





All
subsidiaries of the Company, except SF-II, SF-III, SF-IV, SF-V, and SF-VI, have
guaranteed our 8.0% senior subordinated notes of $23.1 million at December 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 December 31, 2007 and 2008, and no operations for the
years ended December 31, 2006, 2007, and 2008.





15.
            401(k)
      PLAN





Our
401(k) plan (the “Plan”), a qualified defined contribution retirement plan,
covers employees 21 years of age or older who have completed six months of
service. The Plan allows eligible employees to defer receipt of up to 15% of
their compensation and contribute such amounts to various investment funds.
Employee contributions vest immediately. We are not required by the Plan to
match employee contributions, however, we may do so on a discretionary basis. We
incurred nominal administrative costs related to  maintaining the Plan
and made no contributions to the Plan during the years ended December 31, 2006,
2007, and 2008.





16.
            SELECTED
      QUARTERLY FINANCIAL DATA
(UNAUDITED)





Selected
quarterly financial data for 2007 and 2008 is set forth below (in thousands,
except per share amounts):





First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  FourthQuarter
                  
                  
                  Quarter
                  
                  
                  Quarter
                  
                  
                  QuarterTotal
      revenues2008
                  
                  $
                  67,026
                  
                  
                  $
                  69,068
                  
                  
                  $
                  68,381
                  
                  
                  $
                  59,4872007
                  
                  $
                  58,826
                  
                  
                  $
                  63,853
                  
                  
                  $
                  67,535
                  
                  
                  $
                  64,816Total
      costs and operating expenses2008
                  
                  $
                  54,919
                  
                  
                  $
                  59,497
                  
                  
                  $
                  63,625
                  
                  
                  $
                  56,5582007
                  
                  $
                  48,151
                  
                  
                  $
                  51,289
                  
                  
                  $
                  53,719
                  
                  
                  $
                  56,769Net
      income2008
                  
                  $
                  7,446
                  
                  
                  $
                  5,886
                  
                  
                  $
                  2,925
                  
                  
                  $
                  1,6692007
                  
                  $
                  6,565
                  
                  
                  $
                  7,727
                  
                  
                  $
                  8,497
                  
                  
                  $
                  4,915Net
      income per common share: basic2008
                  
                  $
                  0.20
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.042007
                  
                  $
                  0.17
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.13Net
      income per common share: diluted2008
                  
                  $
                  0.19
                  
                  
                  $
                  0.15
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.042007
                  
                  $
                  0.17
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.12





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17.
            SUBSEQUENT
      EVENTS





In
February 2009, we retired $308,000 of 8.0% senior subordinated debt, due April
2010, for $246,000, which resulted in a gain of approximately
$62,000.





In
February 2009, we received $1.5 million in business-interruption proceeds
related to Hurricane Ike, which, as previously discussed, struck our Seaside
Resort in Galveston, Texas, on September 13, 2008. These proceeds will be
reflected in other income in the first quarter of 2009 as collection was not
assured at December 31, 2008.






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