10-K 1 svlf1231201010k.htm SILVERLEAF RESORTS, INC 10-K 12-31-2010 WebFilings | EDGAR view
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
 
 
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For The Fiscal Year Ended December 31, 2010
 
or
 
o
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
75247
Dallas, 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 o     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 o     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 o

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     
Yes o    No o
 
Indicate by check mark 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.     o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.     Large accelerated filer     o           Accelerated filer     o            
Non-accelerated filer     T         Smaller reporting company     o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     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, 2010 as reported on The NASDAQ Capital Market, was $20,481,921.  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 16, 2011, 38,136,921 shares of the registrant’s common stock, $0.01 par value, were outstanding.

FORM 10-K TABLE OF CONTENTS
 
Item Number
 
Page
 
 
 
PART I
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
(Removed and Reserved)
 
 
 
 
PART II
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
PART III
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
PART IV
 
 
 
Item 15.
 
 
 
 
 
 
 

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Forward-Looking Statements
 
Throughout this report and any documents incorporated herein by reference, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including in particular, statements about our plans, objectives, expectations, and prospects. You can identify these statements by forward-looking words such as “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seeks,” and similar expressions. Although we believe that the plans, objectives, expectations, and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations, and prospects will be achieved. You should understand that the following important factors could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:
 
•    
adverse developments in general business and economic conditions;
 
•    
our inability to access the capital markets and/or the asset-backed securitization markets on a favorable basis;
 
•    
our substantial amount of outstanding indebtedness which requires us to operate as a highly-leveraged company;
 
•    
our future operating results could impact our ability to service our debt and meet our debt obligations as they come due;
 
•    
our ability to comply with the covenants relating to our indebtedness;
 
•    
an increase in interest rates on our variable rate indebtedness;
 
•    
the global credit market crisis and economic weakness that may adversely affect our customers and suppliers;
 
•    
our failure to comply with laws and regulations and any changes in laws and regulations, including timeshare-related regulations, consumer protection laws, employment and labor laws, environmental laws, telemarketing regulations, privacy policy regulations, and state and federal tax laws;
 
•    
seasonal fluctuation in the timeshare business;
 
•    
local and regional economic conditions that affect the travel and tourism industry in the areas where we operate;
 
•    
the loss of any of our senior management; and
 
•    
competition in the timeshare industry and the financial resources of our competitors.
 
the ability to obtain the required shareholder approval for the merger at the special meeting;
 
the effects of litigation that has been or that may be filed in connection with the merger;
 
the merger may involve unexpected costs or unexpected liabilities;
 
•    
if the merger is not completed under certain circumstances, Silverleaf may be required to repay expenses incurred by SL Resort Holdings Inc. ("Resort Holdings") and Resort Merger Sub Inc. ("Merger Sub"), or even pay a termination fee;
 
•    
the likely decline of the market price for the Company's common stock in the event the merger is not completed, to the extent that the current market price of the stock reflects the assumption that the merger will be consummated;
 
•    
the effect of the announcement of the merger on our relationships with our financing sources, customers and personnel, operating results and business generally;
 
•    
the risk that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger;
 
•    
the financial performance of Silverleaf through the completion of the merger, including in particular Silverleaf's cash flows and cash balances;

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any adjustment to, or event of default under, our warehouse facilities;
 
volatility in the stock markets;
 
the timing of the completion of the merger; and
 
the failure of any closing conditions to the merger.
 
Other factors not identified above, include, among others, those discussed in our 2010 Form 10-K 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.
 
 

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PART I
 
ITEM 1. BUSINESS
 
Execution of an Agreement and Plan of Merger
 
Effective February 3, 2011, Silverleaf Resorts, Inc. (the “Company,” “Silverleaf,” “we,” or “our”) entered into a definitive agreement to be acquired by Resort Holdings, and Merger Sub, a wholly-owned subisidiary of Resort Holdings. Both Resort Holdings and Merger Sub are affiliates of Cerberus Capital Management, L.P. ("Cerberus"). The transaction has been approved by our Board of Directors (the "Board"), and the Board will be recommending that our shareholders approve the transaction. Under the merger agreement, our shareholders will receive, at the closing, $2.50 in cash for each share of our common stock they own, representing a premium of approximately 75% based on the closing trading price of $1.43 of our common stock on February 3, 2011. Cerberus has agreed to provide equity financing for the full amount of the merger consideration. Our Board of Directors has received an opinion from its financial advisor, Gleacher & Company Securities, Inc. ("Gleacher"), that the consideration to be paid to our shareholders in the transaction is fair from a financial point of view. Completion of the transaction is subject to customary closing conditions, including approval by our shareholders. We intend to hold a special meeting of our shareholders for the purpose of approving the merger as promptly as possible. Consummation of the merger is subject to certain terms and conditions customary for transactions of this type, including receipt of shareholder and regulatory approvals. Upon completion of the transaction, we will become a private company, wholly-owned by Resort Holdings, and our common stock will no longer be traded on The NASDAQ Capital Market (“NASDAQ”).
 
Overview
 
Silverleaf 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, 2010, 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 $10,272 for 2010 and $9,989 for 2009.
 
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, through our Bonus Time Program, which is 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”) except for new purchasing owners at our Oak N' Spruce Resort in Massachusetts. As of December 31, 2010, our Oak N' Spruce Resort is under contract with Interval International ("II") exchange network. All of our other Existing Resorts are under contract with the RCI exchange network.
 
Certain Significant 2010 Events
 
•    
In June 2010, we executed a term securitization transaction through a newly-formed, wholly-owned and fully consolidated variable interest entity ("VIE"), Silverleaf Finance VII, LLC (“SF-VII”). SF-VII was formed for the purpose of issuing approximately $151.5 million of its Timeshare Loan-Backed Notes Series 2010-A (“Series 2010-A Notes”) in a private offering and sale through certain financial institutions. The Series 2010-A Notes were issued in three classes with a blended coupon rate of 7.366% and at discounts totaling approximately $6.0 million. These discounts are amortized as an adjustment to interest expense over the terms of the related loans using the effective interest method, which generates

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a blended effective interest rate on these notes of approximately 9.5% at December 31, 2010. The Series 2010-A Notes have a final maturity date of July 2022 and are secured by customer notes receivable sold to SF-VII. The cash proceeds from the sale of the customer notes receivable to SF-VII were primarily used to repay approximately $142.1 million in consolidated indebtedness to senior lenders.
 
•    
In December 2010, we executed two term securitization transactions through two newly-formed, wholly-owned and fully consolidated VIEs, Silverleaf Finance VIII, LLC ("SF-VIII") and Silverleaf Finance IX, LLC ("SF-IX"). SF-VIII was formed for the purpose of issuing approximately $104.4 million of its Timeshare Loan-Backed Notes Series 2010-B ("Series 2010-B Notes") in a private placement to institutional purchasers. The Series 2010-B Notes were issued in two classes with a blended coupon rate of 6.47% and at discounts totaling approximately $57,000. 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 6.5% as of December 31, 2010. The Series 2010-B Notes have a final maturity date of May 2022.
 
SF-IX was formed for the purpose of issuing approximately $48.4 million of its Timeshare Loan-Backed Notes Series 2010-C ("Series 2010-C Notes") in a private placement under Regulation D of the Securities Act of 1933. The Series 2010-C Notes were issued in two classes with a blended coupon rate of 12.00% and at discounts totaling approximately $3.0 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 16.5% as of December 31, 2010. The Series 2010-C Notes have a final maturity date of July 2022. Silverleaf entered into a guaranty regarding the Series 2010-C Notes in which the Company will be liable for all aggregate defaulted timeshare loan make-whole amounts, if any, determined prior to each monthly payment date.
 
The Series 2010-B and Series 2010-C Notes are secured by customer notes receivable sold to SF-VIII and SF-IX by Silverleaf Finance IV, LLC ("SF-IV"), Silverleaf Finance V, L.P. ("SF-V"), and Silverleaf. The customer notes receivable sold to SF-VIII and SF-IX were previously sold to SF-IV or SF-V 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-VIII and SF-IX were primarily used to repay approximately $94.8 million and $35.7 million, respectively, in consolidated indebtedness to senior lenders.
 
•    
During 2010, we paid off our two conduit loans with SF-II and our receivables-based term credit facility through SF-V. We dissolved both SF-II and SF-V with the execution of each loan payout, respectively. We did not record a gain or loss as a result of either dissolution.
 
•    
During 2010, we amended and / or extended several of our senior credit facility agreements as well as the terms of our senior subordinated notes, as described fully in Note 8, "Debt." Also see Item I, "Description of our Indebtedness and Senior Credit Facilities at December 31, 2010."
 
•    
During 2010, we completed construction of one building which added 12 timeshare units, or 624 Vacation Intervals at our Seaside Resort in Galveston, Texas.
 
Other Significant Events Subsequent to 2010
 
•    
In February 2011, we extended the revolving period of our receivables-based credit facility through SF-IV for 90 days, from February 12, 2011 to May 12, 2011.
 
•    
We entered into the merger agreement with Resort Holdings and Merger Sub on February 3, 2011.
 
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.
 

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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, our off-site sales center located in the Dallas/Fort Worth metroplex, and our member services office located in Lombard, Illinois, near Chicago. This practice provides us an alternative to marketing costs of subsidized airfare or lodging, which are typically associated with the timeshare industry.
 
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, 2010 and 2009, we had a portfolio of approximately 52,262 and 51,185 customer promissory notes, respectively, totaling $452.9 million and $449.7 million, respectively, with a weighted average yield of 16.7% and 16.8%, respectively, which compares favorably to our weighted average cost of borrowings of 7.8% at December 31, 2010. We cease recognition of interest income when collection is no longer deemed probable. At December 31, 2010 and 2009, $6.8 million and $8.5 million, or 1.5% and 1.9%, 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, 2010 and 2009, 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, 2010, 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.

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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 2.0% to 6.0% and sales directors receive commissions of 0.65% to 4.0%.  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 59.3% and 62.0% of our gross revenues from Vacation Interval sales for the years ended December 31, 2010 and 2009, 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.
 
We have a showroom-style, off-site sales office, located in the Dallas/Fort Worth metroplex in Irving, Texas, which 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 $10.1 million and $10.6 million in annual sales to new members in 2010 and 2009, 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, 2010, we had a sales force of 726 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. We obtain 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, 2010, we accrued estimated uncollectible revenue, reflected as an offset to Vacation Interval sales, at 28.3% of the Vacation Interval sales. The allowance for uncollectible notes was 20.2% and 21.0% of gross notes receivable as of December 31, 2010 and December 31, 2009, respectively. 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. 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

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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.
 
At December 31, 2010, we had notes receivable in the approximate principal amount of $454.6 million with an allowance for uncollectible notes of $91.7 million.
 
Interest income is recognized as earned. Interest income is accrued on notes receivable, net of an estimated amount that will not be collected, until the individual notes become 90 days delinquent. Once a note becomes 90 days delinquent, the accrual of interest income ceases until collection is deemed probable.
 
We intend to borrow either directly or through our fully consolidated VIEs additional funds under our existing revolving credit facilities with our lenders to finance our operations. At December 31, 2010, we and our fully consolidated subsidiaries had borrowings under our senior credit facilities in the approximate principal amount of $401.0 million, of which $341.0 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, 2010, we had a portfolio of approximately 52,262 Vacation Interval customer promissory notes in the approximate principal amount of $452.9 million, of which $6.8 million in principal amount was 61 days or more past due and therefore ineligible as collateral.
 
At December 31, 2010, 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 7.8% with a fixed-to-floating debt ratio of 73% fixed to 27% floating. However, the majority of our floating-rate debt is subject to interest-rate floors between 6.00% 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 27% 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 remained fairly constant throughout 2010, 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.
 
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, 2010. Our credit facilities have scheduled maturities between June 2011 and July 2022.  Additionally, our revolving credit facilities could be declared immediately due and payable as a result of any default by us. We implemented what we believe to have been conservative business decisions and cash flow management during 2010, which we believe will permit us to maintain adequate liquidity through 2011. We will continue to identify additional financing arrangements beyond such date.
 
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

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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 resorts' 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 3,749 in 2010 and 1,570 in 2009. 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 resorts' 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, 2010, Silverleaf Club had 1,070 full-time employees and Orlando Breeze Resort Club had 10 full-time employees. 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, collectively, ("the Clubs") 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. The Clubs' dues were approximately $64.96 per month ($32.48 for biennial owners) during 2010, except for certain members of Oak N’ Spruce Resort who prepay dues at an annual rate of $651. 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 the Clubs 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 of the Clubs, but our right to receive such a fee on an annual basis is limited to the excess of revenues over expenses of the Clubs. However, if we do not receive the maximum fee from Orlando Breeze Resort Club, such deficiency is deferred for payment to succeeding years, subject again to the annual limitation of excess revenues over expenses. In July 2009, the Silverleaf Club management agreement was amended and restated to remove the requirement that Silverleaf Club pay the Company for any deficiencies in the management fees paid in prior years. Due to refurbishment of units at the Existing Resorts, our 2010 management fees were subject to the annual limitation of excess revenues over expenses. Accordingly, for the year ended December 31, 2010, management fees recognized were $2.5 million. For financial reporting purposes, management fees from the Clubs are recognized based on the lower of (i) the aforementioned maximum fees or (ii) the excess of revenues over expenses. The Silverleaf Club management agreement expires March 2020 and continues year-to-year thereafter unless canceled by either party. The Orlando Breeze Resort Club management agreement expires January 2014 and continues in successive 3-year terms thereafter unless canceled by either party. As a result of the past performance of the Clubs, it is uncertain whether the Clubs will consistently generate an excess of revenues over expenses. Therefore, future income to the Company under the management agreements with the Clubs could be limited. At December 31, 2010, there were approximately 113,000 Vacation Interval owners who pay dues to Silverleaf Club and

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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.
 
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. In accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) “Real Estate – Timesharing Activities,” sampler sales and related costs are accounted for as incidental operations, whereby incremental costs in excess of related incremental revenues are charged to expense as incurred. 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, $4.0 million and $3.3 million of sampler revenues were recorded as a reduction to sales and marketing expense for the years ended December 31, 2009 and 2010, respectively.
 
Mini-Vacations. This marketing program offers prospective customers a free night at a hotel near one of our resorts in exchange for them taking a tour at our nearby resort.
 
Other Properties. We are in the early stages of development of an 894-acre tract of land we own in the Berkshire Mountains of Western Massachusetts. In 2009, we purchased an additional 50 acres which adjoins our 894 acres. During 2010, the additional 50 acres were deeded to the Massachusetts Municipal Wholesale Electric Cooperative at a price of $100,000, which was the same amount as our original cost to acquire the property in 2009. We have not yet finalized our future development plans for this site.
 
We own 15 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 The Pinnacle Lodge hotel.
 
We also own two tracts of land totaling 63 acres in Adams County, Wisconsin. 61 acres are in the city of Wisconsin Dells and 2 acres are in the city of Dell Prairie. We are in the initial stages of planning the future development of this property.
 
Policies with Respect to Certain Activities
 
Our Board of Directors sets policies with regard to all aspects of our business operations without a vote of security holders. In some instances the power to set certain policies may be delegated by the Board of Directors to a committee comprised of its members or to the officers of the Company. As set forth herein under the headings “Customer Financing” and “Description of 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.
 
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 the first quarter of 2010, our Board of Directors approved the extension of this stock repurchase program, which was originally scheduled to expire in July 2010, and the program will now expire in July 2011. We repurchased 378,291 treasury shares during the year ended December 31, 2010. As of December 31, 2010, approximately 1.6 million shares remain available for repurchase under this program. We suspended the stock repurchase program on September 15, 2010 in conjunction with the engagement of Gleacher as the Board's financial advisor (its “Financial Advisor”) in relation to exploring and evaluating, on a confidential basis, a potential sale transaction whether by

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way of (i) a sale of the Company's share capital, capital stock, debt securities, equity securities, equity-linked securities or other securities; (ii) merger, reverse takeover, consolidation, joint venture, transfer, exchange, other strategic or business combination or any similar transaction or series of transactions; (iii) an acquisition of all or a portion of the Company's assets, business or divisions or any right to all or substantially all of the revenues or income of the Company; or (iv) the acquisition directly or indirectly of control of the Company, including, but not limited to, through the acquisition of securities (including by tender offer). The stock repurchase program will remain suspended until the merger agreement is either consummated or terminated under the terms of the merger agreement. 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 Silverleaf 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 13,874 exchanges occurred in 2010. The price to Silverleaf Owners for each such internal exchange is $75, payable to Silverleaf Club.
 
External Exchange Network. We believe participation in a Vacation Interval exchange network operated by RCI or II makes our Vacation Intervals more attractive. As of December 31, 2010, our Oak N' Spruce Resort in Massachusetts is under contract with II exchange network. All of our other Existing Resorts are under contract with the RCI exchange network. Approximately 39% 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.
 
Effective in December 2010, RCI implemented the concept of "trading power" to determine which exchange vacations are available to Vacation Interval owners. This new concept replaces the rating of “red,” “white,” or “blue” which RCI assigned to each Vacation Interval week placed on deposit with them prior to December 2010. Trading power is based upon a number of factors, including supply and demand of a Vacation Interval at a participating resort, the size and type of the unit, the timing of the deposited week, quality of the resort assessed through comment card scores that timeshare owners complete after going on vacation at a resort, and the season of the year. Depending on location, some times of year are worth more than others. If RCI is unable to meet the member's initial exchange 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 $179 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.
 
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.

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(“Marriott”), Walt Disney Company (“Disney”), Hilton Hotels Corporation (“Hilton”), Hyatt Corporation (“Hyatt”), and Four Seasons Hotels, Inc. (“Four Seasons”) have timeshare sales operations. Wyndham Worldwide Corporation (“Wyndham”), Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), Bluegreen Corporation (“Bluegreen”), and Diamond Resorts International (“Diamond”) are other companies in the timeshare industry, 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 Resort and Ozark Mountain Resort, and to a lesser extent with our Timber Creek Resort. Additionally, these and a number of other timeshare resorts operate in most states where our Existing Resorts are located, 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, 2010 Edition” (the “ARDA Study”), which reported timeshare sales volume in the United States of $6.3 billion for 2009, compared to $7.9 billion in 2004 and $4.2 billion in 2000, equating to a 10-year compound annual growth rate of approximately 4.0%. Due to the recession caused by the global financial crisis, timeshare sales volume for the year 2009 decreased by 35.1% from 2008 and 40.6% from 2007. Due to the state of the economy in general, there can be no assurance that sales volumes will not decrease further 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, the Americans with Disabilities Act (“ADA”), and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  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 $16,000 per violation. The FTC reported that approximately 191 million telephone numbers had been registered on the National Do Not Call Registry as of September 30, 2009. 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.
 
Throughout our operating history in the timeshare business, we have periodically been the subject of consumer complaints that triggered governmental investigations into the Company's affairs. As a result of these investigations, we have from time to time agreed with governmental agencies to alter our marketing, sales, and other business practices to satisfy various governmental agencies as to our full compliance with the laws which these agencies administer. To resolve some of these disputes, we have

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agreed to the entry of remedial orders and/or administrative fines. We expect to encounter some level of continued 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.
 
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

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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.
 
Employees
 
At December 31, 2010, we had 1,983 full and part-time employees and the Clubs collectively had 1,080 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.
 
In September 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. We maintain insurance that covers both physical damage and business-interruption losses. In 2008, we accrued $291,000 related to this incident, which represented our insurance deductibles and expenditures deemed uncollectible. No additional expenses related to this incident were incurred during 2009. We received business-interruption proceeds of $1.3 million and $2.4 million in 2008 and 2009, respectively.

17


 
We self-insure for employee medical claims reduced by certain stop-loss provisions.  We also self-insure for property damage to certain vehicles and heavy equipment.
 
DESCRIPTION OF OUR INDEBTEDNESS AND SENIOR CREDIT FACILITIES AT DECEMBER 31, 2010
 
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, 2009 and 2010 (in thousands):
 
 
2009
 
2010
 
Revolving Term
 
Maturity
 
Interest Rate
 
Interest Rate Floor
$75 million receivables-based revolver ($75 million maximum combined receivable, inventory, and acquisition commitments, see inventory / acquisition component below)
 
$
29,035
 
 
$
7,073
 
 
1/31/12
 
1/31/13
 
Prime
 
6.25%
$20 million receivables-based revolver
 
16,886
 
 
1,087
 
 
6/30/11
 
6/30/11
 
Prime + 0.75%
 
6.25%
$50 million receivables-based revolver
 
28,439
 
 
10,506
 
 
8/31/11
 
8/31/14
 
Prime
 
6.00%
$75 million receivables-based revolver (limited in funded amounts to $40 million, pending a new participating lender)
 
52,696
 
 
28,793
 
 
6/09/12
 
6/09/15
 
LIBOR + 5.00%
 
6.25%
$100 million receivables-based revolver
 
111,824
 
 
 
 
2/12/11
 
2/12/13
 
LIBOR + 5.00%
 
6.00%
$66.4 million receivables-based non-revolving conduit loan
 
2,021
 
 
 
 
 -
 
3/22/14
 
7.035%
 
 
$26.3 million receivables-based non-revolving conduit loan
 
1,621
 
 
 
 
 -
 
9/22/11
 
7.90%
 
 
$128.1 million receivables-based non-revolver
 
24,163
 
 
 
 
 -
 
7/16/18
 
6.70%
 
 
$115.4 million receivables-based non-revolver, including a total remaining discount of approximately $1.6 million
 
51,767
 
 
33,466
 
 
 -
 
3/16/20
 
7.263%
 
 
$151.5 million receivables-based non-revolver, including a total remaining discount of approximately $4.4 million
 
 
 
110,211
 
 
 -
 
7/15/22
 
7.366%
 
 
$104.4 million receivables-based non-revolver, including a total remaining discount of approximately $57,000
 
 
 
104,376
 
 
 -
 
5/15/22
 
6.47%
 
 
$48.4 million receivables-based non-revolver, including a total remaining discount of approximately $3.0 million
 
 
 
45,464
 
 
 -
 
7/15/22
 
12.00%
 
 
Inventory / acquisition loan agreement (see $75 million receivables-based revolver above)
 
24,674
 
 
12,479
 
 
-
 
1/31/12
 
Prime + 1.00%
Prime + 3.00%
 
6.00%
8.00%
$50 million inventory / acquisition loan agreement (a)
 
45,198
 
 
47,543
 
 
11/30/13
 
11/30/16
 
LIBOR + 6.25%
 
7.00%
Various notes, due from September 2011 through July 2020, collateralized by various assets with interest rates ranging from 6.0% to 15.5%
 
5,700
 
 
7,008
 
 
 -
 
various
 
various
 
 
Total notes payable
 
394,024
 
 
408,006
 
 
 
 
 
 
 
 
 
Capital lease obligations
 
993
 
 
885
 
 
 -
 
various
 
various
 
 
Total notes payable and capital lease obligations
 
395,017
 
 
408,891
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8.0% senior subordinated notes
 
7,956
 
 
 
 
 -
 
4/01/10
 
8.00%
 
 
10.0% senior subordinated notes
 
10,000
 
 
 
 
-
 
4/01/12
 
10.00%
 
 
12.0% senior subordinated notes
 
 
 
7,682
 
 
 -
 
4/01/12
 
12.00%
 
 
Total senior subordinated notes
 
17,956
 
 
7,682
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
412,973
 
 
$
416,573
 
 
 
 
 
 
 
 
 

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(a)     We amended this revolving credit facility in December 2010 resulting in the addition of a receivables component. There were no borrowings against the receivables component at December 31, 2010. See additional information regarding the amendment of this revolving credit facility below.
 
At December 31, 2010, the Prime rate on our senior credit facilities was 3.25% and the one-month LIBOR rate on these facilities was 0.26%. Our weighted average cost of borrowings for the year ended December 31, 2009 was 6.0% compared to 7.2% for the year ended December 31, 2010.
 
At December 31, 2010, our senior credit facilities provided for loans of up to $628.5 million, of which $227.5 million was available for future advances. The following table summarizes our credit agreements with our senior lenders, our wholly-owned and consolidated variable interest entities, and our senior subordinated debt and other debt, as of December 31, 2010 (in thousands):
 
 
Maximum Amount Available
 
Balance
Receivables-Based Revolvers
 
$
272,521
 
 
$
47,459
 
Receivables-Based Non-Revolvers
 
293,517
 
 
293,517
 
Inventory Loans
 
62,479
 
 
60,022
 
Subtotal Senior Credit Facilities
 
628,517
 
 
400,998
 
Senior Subordinated Debt
 
7,682
 
 
7,682
 
Other Debt
 
7,893
 
 
7,893
 
Grand Total
 
$
644,092
 
 
$
416,573
 
 
During 2009 and 2010, the following changes were made to our senior credit facility agreements, senior subordinated debt, and off-balance-sheet qualified special purpose entity ("QSPE"):
 
•    
During 2009, we amended our $100 million consolidated receivables, inventory, and acquisition revolving line of credit. The revolving loan term of the receivables component was extended from January 2010 to January 2011. The maximum aggregate commitment under the facility was reduced from $100 million to $80 million effective July 8, 2009, and further reduced to $75 million effective December 31, 2009. The commitment under the receivables financing arrangement is the same as the total aggregate commitment, provided we have no borrowings under either of the inventory or acquisition financing arrangements. The total availability under the inventory financing arrangement and the maximum aggregate combined commitment for the inventory and acquisition financing arrangements was reduced from $50 million to $30 million effective July 8, 2009, and was further reduced to $25 million effective December 31, 2009. The commitment on the acquisition line remained the same at $10 million. The maturity dates and interest rates for all three components remained the same.
 
•    
During 2009, we retired $1.7 million of 8.0% senior subordinated notes, due April 2010 (the “Old Notes”), for $1.4 million in open-market transactions, which resulted in a gain of $316,000. Additionally, in June 2009, we completed an exchange transaction involving $10.0 million in principal of the Old Notes for $10.0 million in principal of our new class of 10.0% senior subordinated notes due 2012 (the “Exchange Notes”) and paid accrued, unpaid interest from April 1, 2009 through June 29, 2009 related to the retired Old Notes of $198,000. The primary purpose of this exchange transaction was to extend the maturity of $10.0 million principal of debt from April 1, 2010 to April 1, 2012. Concurrently with the exchange transaction, we retired an additional $3.5 million in principal of our Old Notes at par and paid accrued, unpaid interest from April 1, 2009 through June 25, 2009 related to such Old Notes of $66,000. The remaining $8.0 million in principal of Old Notes not included in the exchange transaction retained its original terms with semiannual interest-only payments through April 1, 2010. Payment terms related to the Exchange Notes require semiannual interest-only payments through July 2010, at which time principal and interest payments of approximately $1.4 million will be paid quarterly through maturity at April 1, 2012.
 
•    
In October 2009, we exercised a cleanup call on the balance of the Series 2005-A Notes previously sold by SF-III, our wholly-owned off-balance-sheet special purpose finance subsidiary, and paid off the SF-III credit facility. The total payment of $10.2 million consisted of the principal balance of the Series 2005-A Notes, plus accrued and unpaid interest and other fees through October 30, 2009. We dissolved SF-III simultaneously with the execution of this transaction. We did not record a gain or loss as a result of the dissolution as our investment in SF-III was carried on our financial statements at fair value.
 

19


•    
In February 2010, we extended our receivables-based revolving credit facility through SF-IV. The initial maximum commitment amount of the variable funding note was decreased to $106 million, which commitment amount was further decreased to $100 million on September 30, 2010. The scheduled funding period under the VFN initially ended in September 2009, but was reinstated and extended to February 2011. The scheduled maturity date was extended from September 2011 to February 2013. The interest rate was increased from Prime to LIBOR plus 5.00% with a floor of 6.00%.
 
•    
In February 2010, in accordance with the terms of the first amendment to the inventory facility dated June 2008, we extended our $50 million inventory line of credit with one of our senior lenders. Both the revolving period and the maturity date of the facility were extended one year to April 2011 and April 2013, respectively. The commitment on the line remained the same at $50 million.
 
•    
In April 2010, in accordance with the terms of the fourth amendment to the receivables-based revolving credit facility dated June 2008, we extended our $20 million receivables-based line of credit with one of our senior lenders. The revolving term and maturity date of the facility were extended one year to June 2011. The commitment on the line remained the same at $20 million.
 
•    
In April 2010, we paid off the two conduit loans with SF-II. The total payment of $1.7 million consisted of the principal balance of the conduit loans, plus accrued and unpaid interest and other fees through April 27, 2010. We dissolved SF-II simultaneously with the execution of the loan payout. We did not record a gain or loss as a result of the dissolution.
 
•    
Effective June 8, 2010, we executed a term securitization transaction through a newly-formed, wholly-owned and fully consolidated VIE, Silverleaf Finance VII, LLC. SF-VII was formed for the purpose of issuing approximately $151.5 million of its Timeshare Loan-Backed Notes Series 2010-A in a private offering and sale through certain financial institutions. The Series 2010-A Notes were issued in three classes with a blended coupon rate of 7.366% and at discounts totaling approximately $6.0 million. These discounts are amortized as an adjustment to interest expense over the terms of the related loans using the effective interest method, which generates a blended effective interest rate on these notes of approximately 9.5% as of December 31, 2010. The Series 2010-A Notes have a final maturity date of July 2022.
 
The Series 2010-A Notes are secured by customer notes receivable sold to SF-VII by SF-IV and Silverleaf. The customer notes receivable sold to SF-VII were previously sold to SF-IV or pledged as collateral by Silverleaf under revolving credit facilities with senior lenders. The cash proceeds from the sale of the customer notes receivable to SF-VII were primarily used to repay approximately $142.1 million in consolidated indebtedness to senior lenders. All customer notes receivable purchased by SF-VII were acquired without recourse, except in the case of breaches of customary representations and warranties made in connection with the sale of the notes. Pursuant to the terms of an agreement, we continue to service these customer notes receivable and receive fees for our services. These servicing fees are eliminated in consolidation and are therefore not reflected in our consolidated financial statements.
 
•    
In June 2010, we amended our $72.5 million receivables-based revolver to increase availability to $75.0 million, limited in funded amounts to $40.0 million until a new participating lender joins the credit agreement. Upon execution of the amendment, we prepaid in full the balances owed to two lenders who were participants in $32.5 million of the aggregate maximum amount. The revolving period was extended from July 2010 to June 2012 and the maturity date was extended from July 2013 to June 2015. The interest rate was increased from LIBOR plus 2.40% with a floor of 5.25% to LIBOR plus 5.00% with a floor of 6.25%. In addition, we established a depository account with the senior lender for an initial amount of $250,000 with increases to $500,000 and $750,000 on July 1, 2011 and December 1, 2011, respectively.
 
•    
In October 2010, we amended our $75 million consolidated receivables, inventory and acquisition revolving line of credit. The maximum aggregate commitment under the facility, which was $75 million at December 31, 2010, will be $60 million effective January 31, 2011, $50 million effective July 31, 2011, and $40 million effective January 31, 2012. The revolving period of the receivables component was extended one year from January 31, 2011 to January 31, 2012, provided that if the maximum amount outstanding exceeds the maximum aggregate commitment on any of the respective dates on which the maximum aggregate commitment is reduced, the revolving term shall end on that date. The maturity date will remain at January 31, 2013. The interest rate for the receivables component will remain at the prime rate with an increase in the floor interest rate from 6.00% to 6.25%. The terms of the inventory and acquisition components remained the same.
 
•    
In November 2010, we entered into a note modification agreement to amend our 10% senior subordinated notes ("Notes") issued in June 2009 with an original principal balance of $10.0 million. Under the terms of the note modification agreement, the interest rate on the Notes will be increased to 12% effective October 1, 2010, and quarterly principal payments will

20


be eliminated. Quarterly interest payments will continue through maturity with the next such interest payment due on January 1, 2011. The remaining $7.7 million in outstanding principal balance will be due at maturity on April 1, 2012.
•    
In December 2010, we amended our $50 million inventory and acquisition revolving line of credit. Pursuant to the loan agreement, a receivables component was added to the revolving credit facility with the maximum initial aggregate commitment for all three components remaining at $50 million. The commitment under the inventory component will be reduced to $45 million effective June 15, 2011, $37.5 million effective December 15, 2011, $30 million effective June 15, 2012, $22.5 million effective December 15, 2012, and $15 million effective June 15, 2013. The commitment under the acquisition component will remain the same at $15 million. The commitment under the receivables component is the same as the maximum aggregate commitment, subject to aggregate borrowings under the inventory and acquisition components. The revolving term of the inventory and acquisition components was extended from April 30, 2011 to November 30, 2013 and the revolving term for the receivables component will expire on November 30, 2013. The maturity date for all three components will be November 30, 2016. The interest rate for the inventory and acquisition components is LIBOR plus 6.25% with the interest rate floor remaining at 7.00%. The interest rate for the receivables component is LIBOR plus 5.50% with an interest rate floor of 6.25%.
 
•    
Effective December 27, 2010, we executed two term securitization transactions through two newly-formed, wholly-owned and fully consolidated VIEs, Silverleaf Finance VIII, LLC and Silverleaf Finance IX, LLC. SF-VIII was formed for the purpose of issuing approximately $104.4 million of its Timeshare Loan-Backed Notes Series 2010-B in a private placement to institutional purchasers. The Series 2010-B Notes were issued in two classes with a blended coupon rate of 6.47% and at discounts totaling approximately $57,000. 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 6.5% as of December 31, 2010. The Series 2010-B Notes have a final maturity date of May 2022.
 
SF-IX was formed for the purpose of issuing approximately $48.4 million of its Timeshare Loan-Backed Notes Series 2010-C in a private placement under Regulation D of the Securities Act of 1933. The Series 2010-C Notes were issued in two classes with a blended coupon rate of 12.00% and at discounts totaling approximately $3.0 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 16.5% as of December 31, 2010. The Series 2010-C Notes have a final maturity date of July 2022. Approximately $10.9 million of the proceeds received by SF-IX will be held in a special prefunding account in restricted cash under the terms of the indenture through the prefunding termination date of April 30, 2011. Silverleaf has until the prefunding termination date to sell up to approximately $14.5 million in additional qualifying timeshare loans to SF-IX. All funds held in the prefunding account that are not used by SF-IX to finance the purchase of additional qualifying timeshare loans from Silverleaf during the prefunding period will be returned to the holders of the Series 2010-C Notes as a distribution of principal. Silverleaf entered into a guaranty regarding the Series 2010-C Notes in which the Company will be liable for all aggregate defaulted timeshare loan make-whole amounts, if any, determined prior to each monthly payment date.
 
The Series 2010-B and Series 2010-C Notes are secured by customer notes receivable sold to SF-VIII and SF-IX by SF-IV, SF-V, and Silverleaf. The customer notes receivable sold to SF-VIII and SF-IX were previously sold to SF-IV or SF-V 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-VIII and SF-IX were primarily used to repay approximately $94.8 million and $35.7 million, respectively, in consolidated indebtedness to senior lenders. All customer notes receivable purchased by SF-VIII were acquired without recourse, except in the case of breaches of customary representations and warranties made in connection with the sale of the notes. Pursuant to the terms of an agreement, we continue to service these customer notes receivable and receive fees for our services. These servicing fees are eliminated in consolidation and are therefore not reflected in our consolidated financial statements.
 
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) canceled notes from customers who have upgraded to a higher value product and b) notes that have been subject to payment concessions.
 

21


Financial Covenants Under Senior Credit Facilities.
 
Our senior credit facilities provide certain financial covenants that we must satisfy. Any failure to comply with the financial covenants in any single loan agreement will result in a cross default under the various facilities. As of and for the years ended December 31, 2008, 2009, and 2010, 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, 2010 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 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, 2010 and 2009, the ratio was 55.0% and 52.2%, 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, 2010 and 2009, the 30-day delinquency rate was 4.6% and 6.3%, 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. The ratio for the latest rolling 12 months was 1.4 to 1 and 1.5 to 1 at December 31, 2010 and 2009, respectively.
 
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, determined on an individual rather than 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. One senior lender has decreased such maximum leverage ratio to not greater than 4.5 to 1. The ratio was 1.9 to 1 as of both December 31, 2010 and 2009.
 
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. One senior lender has increased such minimum weighted average FICO® Credit Bureau Score to 650. For the fourth quarters of 2010 and 2009, our weighted average FICO® score was 683 and 688, respectively.
 
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.
 

22


ITEM 1A. RISK FACTORS
 
We have entered into a definitive merger agreement with SL Resort Holdings Inc.
 
Effective February 3, 2011, we entered into an "Agreement and Plan of Merger" with Resort Holdings and Merger Sub pursuant to which Merger Sub will be merged with and into Silverleaf, with Silverleaf continuing as the surviving corporation and a wholly-owned subsidiary of Resort Holdings. If the merger is completed, the holders of common stock will receive $2.50 in cash, without interest and less applicable withholding tax, for each share of common stock that they own immediately prior to the effective time of the merger, unless they timely exercise and perfect their respective dissenters' rights under the Texas Business Organizations Code. The transaction has been approved by our Board of Directors, and the Board will be recommending that our shareholders approve the transaction. We intend to hold a special meeting of our shareholders for the purpose of approving the merger as promptly as possible. The closing of the transaction is subject to certain terms and conditions customary for transactions of this type, including receipt of shareholder and regulatory approvals. There can be no assurance that the merger will occur, or will occur on the timetable contemplated as a result of a variety of factors, including the failure to obtain shareholder or any required regulatory approval, litigation relating to the merger, or the failure of one or more of the closing conditions set forth in the merger agreement.
 
The execution of the Agreement and Plan of Merger and the Company's obligation thereunder, present a number of potential risks. If the merger agreement is not adopted by our shareholders, or if the merger is not completed for any other reason our shareholders will not receive any payment for their shares pursuant to the merger agreement. Instead, upon the termination of the merger agreement, we will remain as a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on NASDAQ, although the price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that the merger will be consummated. Under specified circumstances, we may be required to pay Resort Holdings a termination fee of up to $4.4 million and/or certain of Resort Holdings' expenses. In addition, we have incurred, and will continue to incur, significant costs, expenses, and fees for professional services and other transaction costs in connection with the merger, and many of these fees and costs are payable by us regardless of whether or not the merger is consummated. Among those costs are the expenses of defending the litigation that has been filed against Silverleaf in connection with the execution of the merger agreement.
 
The announcement and pendency of the merger could cause disruptions in our business. For example, uncertainty concerning potential changes to us and our business could adversely affect our relationships with current or prospective Silverleaf Owners. In addition, key personnel may depart for a variety of reasons, including perceived uncertainty as to the effect of the merger on their employment. The pendency of the merger could also divert the time and attention of our management from our ongoing business operations. These disruptions may increase over time until the closing of the merger.
 
Also, pending the closing of the merger, the merger agreement restricts us from engaging in certain actions without Resort Holdings' consent, which could prevent us from pursuing opportunities that may arise prior to the closing of the merger.
 
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 we can meet our sales and operating profit projections;
•    
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 registered public accounting firm has not reviewed or expressed an opinion about our business model or our ability to achieve it.
 

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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.
 
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 three years. As a consequence of the recession that began in 2007, business activity across a wide range of industries in the United States faces 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 2010 and 2009, approximately 16.6% and 13.7%, 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 current 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 continue 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 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.
 
We may be impacted by general economic conditions.
 
We anticipate a continuation of the difficult economic environment we have experienced over the last several years. These economic weaknesses present formidable challenges related to constrained consumer spending, collection of customer receivables, access to capital markets, and ability to manage inventory levels. Our customers may be more vulnerable to deteriorating economic conditions than consumers in the luxury or upscale timeshare markets. Additionally, significant increases in the cost of transportation may limit the number of potential customers who travel to our resorts for a sales presentation. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could also cause an increase in the number of our customers who become delinquent, file for protection under bankruptcy laws, or default on their loans. This could result in further increases in our provision for estimated uncollectible revenue in 2011.
We implemented what we believe to have been conservative business decisions and cash flow management during 2010, which we believe will permit us to maintain adequate liquidity through 2011. However, there can be no assurance that economic conditions will not deteriorate further or that customer loan delinquencies and defaults could increase further. 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 2011.
 
We may have more funds on deposit at banks than is covered by FDIC insurance limits.
 
At December 31, 2010, 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.
 

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We are at risk for defaults by our customers.
 
We are exposed to credit risk related to our notes receivable. 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 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 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, 2010 and 2009, we recorded 28.3% and 33.3% of the purchase price of Vacation Intervals as estimated uncollectible revenue, which resulted in decreases in our sales revenue of $58.5 million and $80.3 million, respectively. 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, 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 2010), 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, 2010, we had Vacation Interval customer notes receivable in the approximate principal amount of $452.9 million, and had an allowance for uncollectible notes of $91.7 million. Due to the current economic conditions and the deterioration of the sub-prime mortgage markets in recent years, the risk of Vacation Interval defaults has heightened.  We cannot be certain that this allowance is adequate.
 
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, 2010, we either directly or through our fully consolidated finance subsidiaries owed $401.0 million of principal to our senior lenders.
 
Borrowing Base. We have receivables-based loan agreements with senior lenders to borrow up to $566.0 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, 2010, we had a portfolio of approximately 52,262 Vacation Interval customer notes receivable in the approximate principal amount of $452.9 million. Approximately $6.8 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, 2010, our portfolio of customer loans receivable had a weighted average fixed interest rate of 16.7%. At such date, our borrowings against the portfolio had a weighted average cost of funds of 7.8%. 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 27% of our senior indebtedness bears interest at variable rates and our customer notes receivable bear interest at fixed rates, increases in interest rates will erode the spread in interest rates that we have historically experienced and could cause our interest expense on borrowings to exceed our interest income on our portfolio of customer loans. Although interest rates have remained fairly constant the last two years, any increase in interest rates above applicable floor rates, particularly if sustained, could have a material adverse effect on our results of operations, cash flows, and financial position. 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.
 

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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, 2010. Our senior credit facilities have scheduled maturity dates between June 2011 and July 2022. 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 (aside from the amendment and extension of our $100 million SF-IV facility completed in the first quarter of 2011 and mentioned earlier in this report) 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. Should we record net losses in future periods, our cash flow and our ability to obtain additional financing could be materially and adversely impacted.
 
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.
 
Since our current and planned expenses and debt repayment levels are and will be to a large extent fixed in the short term, we consider historical results 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 (“Textron”), and other timeshare industry lenders have announced that they will cease or modify their commercial lending activities in the future. While we have received no notice from any of our other lenders that our current financing arrangements will be impacted by these decisions, our ability to obtain financing in the future to replace these facilities may be limited by a lack of commercial lenders. At December 31, 2010, we had a total of $19.6 million outstanding under our senior credit facility with Textron, which comprises 4.7% of our total outstanding debt of $416.6 million. Our availability for future advances under our senior credit facilities was $227.5 million at December 31, 2010, of which $55.4 million, or 24.4%, was related to our Textron senior credit facility. While we do not currently anticipate a material impact

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to our liquidity as a result of Textron’s announcement about its future as a timeshare lender, we will continue to monitor the effect of this announcement on our operations.
 
In October 2010, we amended our $75 million consolidated receivables, inventory and acquisition revolving line of credit with Textron. The maximum aggregate commitment under the facility, which was $75 million at December 31, 2010, will be $60 million effective January 31, 2011, $50 million effective July 31, 2011, and $40 million effective January 31, 2012. The revolving period of the receivables component was extended one year from January 31, 2011 to January 31, 2012, provided that if the maximum amount outstanding exceeds the maximum aggregate commitment on any of the respective dates on which the maximum aggregate commitment is reduced, the revolving term shall end on that date. The maturity date will remain at January 31, 2013. The interest rate for the receivables component will remain at the prime rate with an increase in the floor interest rate from 6.00% to 6.25%. The terms of the inventory and acquisition components remained the same.
 
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 VIEs. 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.
 
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.
 
Although we have limited plans to further develop our Existing Resorts or to acquire or develop additional timeshare resorts in 2011, continued development of our resorts beyond 2011 will place 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.
 
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

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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.
 
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, 2010, 57% of our owners lived in Texas, 13% lived in Illinois, 7% lived in Massachusetts, 4% lived in New York, and 3% lived in Missouri. Our remaining customer base lives primarily in other states within the United States of America.
 
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.
 

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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 and II, provide broad-based Vacation Interval exchange services. As of December 31, 2010, our Oak N' Spruce Resort in Massachusetts is under contract with the II exchange network. All of our other Existing Resorts are under contract with 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 or II, 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 or II networks.
 
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.
 
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 indentures pertaining to our senior subordinated notes permit 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 indentures pertaining to our senior subordinated notes also permit us to borrow additional funds in order to finance development of our resorts. Future construction loans may result in liens against the respective properties.
 

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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 centralization of operations under Silverleaf Club permits:
 
•    
a centralized reservation system for these resorts;
•    
centralized purchasing of goods and services for these resorts on a group 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.
 
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 income 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 income taxes (i.e., taxes owed to taxing authorities in the future related to income previously reported in the financial statements) was $113.4 million at December 31, 2010, primarily attributable to this method of reporting Vacation Interval sales, before utilization of any available deferred tax benefits (up to $75.7 million at December 31, 2010), 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

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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 2010, we estimate our AMT liability was $492,000, which results in total AMT credit carryforwards of $23.8 million as of December 31, 2010. Our credit carryforwards as of December 31, 2009 were $23.3 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 $141.5 million at December 31, 2010 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.
 
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 $8.5 million of our NOL as of December 31, 2010 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 $8.5 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 $8.5 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. 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. We have primarily analyzed our relationships with our independent contractors in accordance with the employment status classification guidance for employers in Revenue Ruling 87-41. In following this guidance, we have considered our contractual relationship with our independent contractors under each of the twenty enumerated factors or elements in Revenue Ruling 87-41. These twenty factors are used by the Internal Revenue Service (“IRS”) to determine whether sufficient control exists to establish an employer-employee relationship. Based upon application of these twenty factors, we do not believe that it is at least reasonably possible that the IRS would be successful in reclassifying our

31


independent contractors as employees. Among other compelling reasons that demonstrate our lack of control over these contractors is the fact that many of them also provide services to our competitors on a contract basis. However, in the event the IRS 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 an 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 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 191 million telephone numbers had been registered on the National Do Not Call Registry as of September 30, 2009. 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, 2010, 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, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act which amended §404 of the Sarbanes-Oxley Act in 2010, we are not required to obtain an attestation report of our independent registered public accounting firm for this annual report. The amendment, addressed in §404(c) of the Sarbanes-Oxley Act, permanently exempts non-accelerated filers from the §404(b) requirement of an independent audit of internal control over financial reporting. Therefore, we have provided only management’s report in this annual report.
 
In response to the requirements of §404 of the Sarbanes-Oxley Act, 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.
 

32


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 $0.30 to a high of $1.70. 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 52.4% 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 December 31, 2010 was approximately 38,860 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 47.6% of our common stock is held by affiliates, including our executive 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.
 
Our common stock is listed on NASDAQ. 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. 
 
On December 29, 2009, we received notification from NASDAQ stating we were no longer in compliance with the continued listing requirements for The NASDAQ Capital Market as a result of the closing bid price per share of our common stock being below the minimum trading price of $1.00 for thirty consecutive business days. In accordance with applicable NASDAQ rules, we had a grace period of 180 calendar days (until June 28, 2010) to regain compliance with the minimum closing bid price requirement for continued listing. In order to regain compliance, our closing bid price per share had to be at or above $1.00 for at least ten consecutive business days before June 28, 2010.  Our common stock closed above $1.00 for ten consecutive business days beginning on March 11, 2010. On March 25, 2010, we received notification from NASDAQ stating we were back in compliance with the minimum closing bid price requirement for continued listing.
 
Certain of our existing shareholders have the ability to exert a significant amount of control over the Company.
 
As of December 31, 2010, Robert E. Mead, our Chairman of the Board, Chief Executive Officer ("CEO"), and President, beneficially owned approximately 24.5% of our outstanding common stock, and Bradford Whitmore and a partnership controlled by him, Grace Brothers, Ltd., beneficially owned 19.8% 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.
 

33


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.
 
In connection with the transactions contemplated by the merger agreement, contemporaneously with the execution and delivery of the merger agreement, each of Resort Holdings, Merger Sub, and Mr. Mead entered into a voting agreement (the “Mead voting agreement”), under which Mr. Mead agreed to vote as a shareholder of the Company in favor of the merger pursuant to the terms and conditions of the Mead voting agreement. As of the record date, Mr. Mead beneficially owned, in the aggregate 9,349,417 shares, approximately 24.5% of the voting power of our common stock, subject to a voting trust agreement dated November 1, 1999 between Mr. Mead and Judith F. Mead, his wife.
 
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 Exchange Act. 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 Exchange Act 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, Illinois, near 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. During 2009, we consolidated our two telemarketing centers and relocated corporate staff into the vacancy created by this consolidation.  We also lease small office facilities in San Antonio and Houston, Texas, which we use in our marketing efforts in those locales.
 
The Pinnacle Lodge. We own The 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 revenues of $914,000 and $1.3 million at The Pinnacle Lodge during the years ended December 31, 2010 and 2009, respectively.
 
Other Properties. We are in the early stages of development of an 894-acre tract of land we own in the Berkshire Mountains of Western Massachusetts. In 2009, we purchased an additional 50 acres which adjoins our 894 acres. During 2010, the additional 50 acres were deeded to the Massachusetts Municipal Wholesale Electric Cooperative at a price of $100,000, which was the same amount as our original cost to acquire the property in 2009. We have not yet finalized our future development plans for this site.
 
We own15 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.
 
We own two tracts of land totaling 63 acres in Adams County, Wisconsin. 61 acres are in the city of Wisconsin Dells and 2 acres are in the city of Dell Prairie. We are in the initial stages of planning the future development of this property.
 

34


Resorts.  At December 31, 2010, we owned a total of 13 timeshare resorts. Each of these resorts was encumbered by various liens and security agreements at December 31, 2010 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 and future developmental plans are summarized below.
 
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 394 existing units.  We plan to develop approximately 204 additional units at this resort in the future, which would yield an additional 10,608 Vacation Intervals available for sale.
 
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 266 existing units. We plan to develop approximately 172 additional units at this resort in the future, which would yield an additional 8,944 Vacation Intervals available for sale. We own 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 252 existing units.  We plan to develop approximately 264 additional units at this resort in the future, which would yield an additional 13,728 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 96 existing units and approximately 168 additional units are planned for future development, which would yield an additional 8,736 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.
 
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

35


units. The resort has 498 existing units. We have future plans to develop approximately 500 additional units at this resort, which would yield an additional 26,000 Vacation Intervals available for sale.
 
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 374 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. We own 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. 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.
 
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 156 existing units. We have future plans to develop approximately 252 additional units at this resort, which would yield an additional 13,104 Vacation Intervals available for sale. During 2010, 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. We also own an additional 31 acres contiguous to the Orlando Breeze Resort. We have not yet finalized plans for development of this property. 

36


 
Resorts Summary
 
The following tables set forth certain information regarding each of the Existing Resorts at December 31, 2010, unless otherwise indicated.
 
Existing Resorts
 
 
 
 
 
Units at Resorts
 
 
 
Vacation Intervals At Resorts
 
 
 
 
 
Vacation Intervals Sold
 
 
 
 
Resort/Location
 
Primary Market Served
 
Inventory At 12/31/10
 
Planned Expansion (b)
 
 
 
Inventory At 12/31/10
 
Planned Expansion
 
 
 
Date Sales Commenced
 
Through 12/31/10 (c)
 
In 2010 Only (a)
 
Percentage Through 12/31/10
 
Average Sales Price in 2010 (a)
 
Amenities/ Activities(d)
Getaway Resorts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Holly Lake
 
Dallas-
 
130
 
 
 
 
 
 
793
 
 
 
 
 
 
1982
 
5,707
 
 
999
 
 
87.8
%
 
$
8,127
 
 
B,F,G,M,S,T
Hawkins, TX
 
Ft. Worth, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Villages
 
Dallas-
 
394
 
 
204
 
 
(f)
 
2,360
 
 
10,608
 
 
(f)
 
1980
 
17,720
 
 
2,760
 
 
88.2
%
 
9,757
 
 
B,F,H,M,S,T,W
Flint, TX
 
Ft. Worth, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lake O' The Woods
 
Dallas-
 
64
 
 
 
 
 
 
387
 
 
 
 
 
 
1987
 
2,813
 
 
324
 
 
87.9
%
 
8,190
 
 
F,M,S,T(e)
Flint, TX
 
Ft. Worth, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Piney Shores
 
Houston, TX
 
266
 
 
172
 
 
(f)
 
5,659
 
 
8,944
 
 
(f)
 
1988
 
7,981
 
 
1,245
 
 
58.5
%
 
9,788
 
 
B,F,H,M,S,T
Conroe, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timber Creek
 
St. Louis, MO
 
72
 
 
24
 
 
(f)
 
1,753
 
 
1,248
 
 
(f)
 
1997
 
1,991
 
 
221
 
 
53.2
%
 
7,761
 
 
B,F,G,H,M,S,T
DeSoto, MO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fox River
 
Chicago, IL
 
252
 
 
264
 
 
(f)
 
3,304
 
 
13,728
 
 
(f)
 
1997
 
9,800
 
 
815
 
 
74.8
%
 
8,021
 
 
B,F,G,H,M,S,T
Sheridan, IL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apple Mountain
 
Atlanta, GA
 
96
 
 
168
 
 
(f)
 
1,744
 
 
8,736
 
 
(f)
 
1999
 
3,248
 
 
240
 
 
65.1
%
 
10,035
 
 
G,H,M,S,T
Clarkesville, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Destination Resorts
 
Locations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ozark Mountain
 
Branson, MO
 
160
 
 
 
 
 
 
1,039
 
 
 
 
 
 
1982
 
7,057
 
 
495
 
 
87.2
%
 
11,629
 
 
B,F,M,S,T
Kimberling City, MO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Holiday Hills
 
Branson, MO
 
498
 
 
500
 
 
(f)
 
3,356
 
 
26,000
 
 
(f)
 
1984
 
22,404
 
 
1,686
 
 
87.0
%
 
11,465
 
 
G,S,T(e)
Branson, MO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hill Country
 
Austin-San
 
374
 
 
188
 
 
(f)
 
2,501
 
 
9,776
 
 
(f)
 
1984
 
16,575
 
 
1,768
 
 
86.9
%
 
12,083
 
 
M,S,T(e)
Canyon Lake, TX
 
Antonio, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oak N' Spruce
 
Boston, MA-
 
340
 
 
10
 
 
(f)
 
2,849
 
 
520
 
 
(f)
 
1998
 
14,831
 
 
1,276
 
 
83.9
%
 
10,045
 
 
F,M,S,T
South Lee, MA
 
New York, NY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Silverleaf's Seaside
 
Galveston, TX
 
156
 
 
252
 
 
(f)
 
1,665
 
 
13,104
 
 
(f)
 
2000
 
6,447
 
 
374
 
 
79.5
%
 
13,447
 
 
M,S,T
Galveston, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Orlando Breeze
 
Orlando, FL
 
60
 
 
12
 
 
(f)
 
459
 
 
624
 
 
(f)
 
2005
 
2,661
 
 
33
 
 
85.3
%
 
25,721
 
 
S
Davenport, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
2,862
 
 
1,794
 
 
 
 
27,869
 
 
93,288
 
 
 
 
 
 
119,235
 
 
12,236
 
 
81.1
%
 
$
10,272
 
 
 
 
 
 


 
(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, 2010, upgrade sales at the Existing Resorts were as follows:
    Resort
 
Upgraded Vacation Intervals Sold
 
Average Sales Price — Net of Exchanged Interval
Holly Lake
 
286
 
 
$5,412
The Villages
 
1,760
 
 
6,401
Lake O' The Woods
 
37
 
 
4,492
Piney Shores
 
1,001
 
 
6,190
Timber Creek
 
72
 
 
6,319
Fox River
 
865
 
 
5,949
Apple Mountain
 
568
 
 
6,417
Ozark Mountain
 
381
 
 
7,524
Holiday Hills
 
2,539
 
 
7,771
Hill Country
 
1,679
 
 
7,608
Oak N’ Spruce
 
770
 
 
6,301
Silverleaf's Seaside
 
838
 
 
7,188
Orlando Breeze
 
618
 
 
9,557
 
 
11,414
 
 
 
 
The average sales price for the 11,414 upgraded Vacation Intervals sold was $7,060 for the year ended December 31, 2010.
 
(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, 2010:
 
 
Land-Use Process Not Started
 
Land-Use Process Pending
 
Land-Use Process Complete
 
Currently in Construction
 
Total
The Villages
 
 
 
 
 
204
 
 
 
 
204
 
Piney Shores
 
 
 
 
 
172
 
 
 
 
172
 
Timber Creek
 
 
 
 
 
24
 
 
 
 
24
 
Fox River
 
 
 
 
 
264
 
 
 
 
264
 
Apple Mountain
 
 
 
 
 
168
 
 
 
 
168
 
Holiday Hills
 
 
 
 
 
500
 
 
 
 
500
 
Hill Country
 
 
 
 
 
188
 
 
 
 
188
 
Oak N' Spruce
 
 
 
 
 
10
 
 
 
 
10
 
Silverleaf's Seaside
 
 
 
 
 
252
 
 
 
 
252
 
Orlando Breeze
 
 
 
 
 
12
 
 
 
 
12
 
 
 
 
 
 
 
1,794
 
 
 
 
1,794
 
 
“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.
 

38


(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)    
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 13,874 exchanges occurred in 2010. The price to Silverleaf Owners for each such internal exchange is $75, payable to Silverleaf Club. In addition, Silverleaf Owners may join the exchange program administered by RCI for an annual fee of $89 and II at Oak N' Spruce 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, 2010, 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 certain 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. Orlando Breeze Resort, our destination resort in Florida, 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.
 

39


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.
 
Substantial Internal Growth Capacity. At December 31, 2010, we had an inventory of 27,869 Vacation Intervals and a master plan to construct new units which will result in up to 93,288 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 twenty-two years of experience in the timeshare industry.
 
Future Business Strategy
 
Our principal short-term focus is on continuing to conservatively increase annual net income. 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. Although we have no immediate growth plans, 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.
Our future business strategy is to conservatively increase annual net income through a combination of:
 
•    
maintaining marketing, sales, and development activities at our resorts in accordance with our current business model;
•    
emphasizing collection and marketing programs with a view toward establishing procedures aimed at reducing note defaults and improving the credit quality of our customers;
•    
concentrating on marketing to existing members, including sales of upgraded Vacation Intervals, additional week sales, and existing owner referral programs;
•    
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;
•    
adding other assets and amenities to attract our customers by enhancing vacation experiences; and
•    
developing new or existing resorts as the capital markets permit.
 

40


ITEM 3. LEGAL PROCEEDINGS
 
Litigation Related to our Business
 
We are currently subject to litigation arising in the normal course of our business. From time to time, such litigation includes claims regarding employment, tort, contract, truth-in-lending, the marketing and sale of Vacation Intervals, and other consumer protection matters. Litigation has been initiated from time to time by persons seeking individual recoveries for themselves, as well as, in some instances, persons seeking recoveries on behalf of an alleged class. In our judgment, none of the lawsuits currently pending against us, either individually or in the aggregate, is expected to have a material adverse effect on our business, results of operations, liquidity, or financial position.
 
Various legal actions and claims may be instituted or asserted in the future against us and our subsidiaries, including those arising out of our sales and marketing activities and contractual arrangements. Some of the matters may involve claims, which, if granted, could be materially adverse to our financial position.
 
Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. We will establish reserves from time to time when deemed appropriate under generally acceptable accounting principles. However, the outcome of a claim for which we have not deemed a reserve to be necessary may be decided unfavorably against us and could require us to pay damages or incur other expenditures that could be materially adverse to our business, results of operations, or financial position.
 
We have been a co-plaintiff with one other party in two related matters brought in the Land Court Department of the Trial Court of the Commonwealth of Massachusetts, each styled as Silverleaf Resorts, Inc., et al. v. Zoning Board of Appeals of the Town of Lanesborough, et al., Civil Action No. 07 MISC 351155 and Civil Action No. 09 MISC 393464. In these actions, we and the co-plaintiff challenged the validity of a special permit issued in June 2004 by the Lanesborough Zoning Board of Appeals to Berkshire Wind Power Cooperative Corporation's (the “Wind Cooperative”) predecessor-in-interest for construction and use of a private access road that runs from Brodie Mountain Road in Lanesborough to Sheep's Heaven Mountain that the Wind Cooperative needs to access the property on the ridge line of Brodie Mountain in Hancock, Massachusetts, where it is constructing a wind farm. We initiated these lawsuits in 2007 because the Wind Cooperative's predecessor-in-interest had plans to construct a multi-turbine wind farm directly adjacent (in part) to the property line of a 500-acre tract of land we own in Berkshire County, Massachusetts. Our concern was that if the Wind Cooperative were ultimately successful in developing this neighboring site in accordance with its plans, the proximity of such a wind farm facility to our property line could adversely affect our property's development. Our suit sought a court decree that the special permit had expired from non-use and is therefore no longer valid, and also, that the road was not built as permitted. The cases were tried in August 2009, and while we were awaiting the final decision of the Land Court, the Land Court granted our motion for a preliminary injunction, finding that we were likely to prevail on the merits of the suit and that we would suffer irreparable injury if the Wind Cooperative used the access road to continue construction of the wind farm. The Wind Cooperative filed an interlocutory appeal of the preliminary injunction to the Massachusetts Appeals Court, but no action was ever taken on that appeal.
 
On April 7, 2010, the Land Court issued a decision in these cases. In the case in which we claimed that the special permit had expired, the Land Court ruled in our favor, set aside the decision of the Lanesborough Zoning Board of Appeals and entered a permanent injunction barring the Wind Cooperative from using the private access road for any purpose related to or in connection with the construction of the Wind Farm, including servicing and maintaining it. In the companion case, the Court concluded that no decision was needed but indicated a willingness to make a decision if we asked for it to do so. We asked the Court not to act on the second claim while we explore settlement with the Wind Cooperative. The Wind Cooperative appealed the Decision but no action was taken on that appeal.
 
In a related matter, in September 2009, we filed an action against the Massachusetts Municipal Wholesale Electric Cooperative (the “Electric Cooperative”) in the Berkshire Superior Court, styled Silverleaf Resorts, Inc. et al v. Massachusetts Municipal Wholesale Electric Cooperative, Cause No. 09-267. The action was brought on our behalf and on behalf of the former owners. We alleged that the Electric Cooperative, an affiliate of the Wind Cooperative, acted in an ultra vires manner when it condemned approximately 50 acres that we own at the top of Brodie Mountain for use by the Wind Cooperative in building and operating its wind farm. We acquired the 50 acres in question in an arms-length transaction with an unrelated third party. Our acquisition cost attributable to this tract is approximately $100,000. The Electric Cooperative filed a counterclaim alleging abuse of process as a result of our filing this suit. The Electric Cooperative seeks unspecified damages. We filed a special motion with the court to dismiss the counterclaim filed by the Electric Cooperative as we believe that we are protected under Massachusetts law from counterclaims filed by entities such as the Electric Cooperative as a result of our challenging the taking of the property by the Electric Cooperative. In addition, we believe that we are entitled to compensation under Massachusetts law at least equal to our original investment in this tract. No date was set by the court to hear our motion.

41


 
We have been actively engaged in settlement discussions with both the Electric Cooperative and the Wind Cooperative since October 2009 and agreed with the Electric Cooperative to stay proceedings in the action related to the condemned 50 acres while we continued to explore a comprehensive settlement of all claims by and against the Electric Cooperative and the Wind Cooperative. With regard to our actions against the Wind Cooperative, we concluded that we would be able to reach an agreement with the Wind Cooperative that would allow us to fully develop the property in the manner that we originally intended while minimizing the visual impact to our property from the development of the proposed wind farm. Our pending action against the Electric Cooperative regarding the condemned acres has also been discussed as part of the overall settlement, and we were confident that we would be fully reimbursed for our original purchase price for this acreage in the event of a settlement with the Electric Cooperative. We do not believe a loss is reasonably possible for either of these two matters.
 
During July and August, 2010, we negotiated a comprehensive settlement of all outstanding issues involving the Wind Cooperatives' proposed wind farm. A Settlement Agreement (together with related implementing agreements) was then executed dated as of August 30, 2010, between us and the Wind Cooperative. It was joined in by the Electric Cooperative for the limited purposes set out in that Agreement. The Wind Cooperative agreed in the Settlement Agreement to move the three turbines located closest to our property line to locations where their visual impact on our project will be minimized. The Wind Cooperative also agreed not to construct any further wind turbines in the land being used for its wind farm in the easements it holds for this purpose on top of Brodie Mountain. We agreed not to oppose the Wind Cooperative's application for a new road permit or for its further construction or for its operation of the wind farm.
 
In a separate agreement, entered into by us, the Wind Cooperative and the Electric Cooperative, we agreed to give up our claim of title to the disputed fifty acres and to deed that property to the Electric Cooperative. The Electric Cooperative agreed in turn to reimburse us the $100,000 we paid to acquire that property.
 
Finally, all parties to the outstanding suits and appeals agreed to dismiss those actions with prejudice and with all parties to bear their own fees and costs.
 
The various actions required by the Settlement Agreement and the related implementing agreements are nearly complete. The Electric Cooperative has reimbursed us the $100,000 we paid to acquire the fifty acres on top of Brodie Mountain. The Wind Cooperative has advised us that it has completed the wind project construction in the fashion it agreed with us in the settlement agreement, after previously acquiring a new access road permit. The Wind Cooperative has also advised us that it expects to go into operation during the first quarter of 2011. All outstanding suits and appeals have been dismissed with prejudice, as agreed between the parties.
 
Litigation Related to the Merger
 
In February 2011, three purported shareholder derivative suits were filed in Dallas County state district court arising out of the Agreement and Plan of Merger between Silverleaf and Resort Holdings. The three petitions, now consolidated into one action before the 116th District Court, styled In re Silverleaf Resorts, Inc. Derivative Litigation, Cause No. DC-11-1419-F, include claims against each member of the Company's Board, as well as Cerberus and its affiliate companies, Resort Holdings and Merger Sub. The plaintiffs' claims include allegations that the consideration of $2.50 per common share in the proposed transaction is unfairly low and inadequate and that Silverleaf's directors breached their fiduciary duties by allegedly (i) initiating a process to sell Silverleaf that undervalues the Company and vests them with benefits not shared equally by Silverleaf's public shareholders, (ii) by agreeing to a termination fee in the merger agreement, and (iii) by not fully informing themselves of Silverleaf's value or disregarding it in the proposed acquisition. The plaintiff also claims that the Cerberus entities aided and abetted in the alleged breaches of fiduciary duty by Silverleaf's directors. One shareholder also claims that all defendants are liable for “abuse of control,” “gross mismanagement,” and “waste of corporate assets.” Among other relief, the plaintiffs seek to enjoin the proposed transaction or to recover damages if the transaction is consummated. None of the named defendants have yet responded to the derivative lawsuits.
 
In addition, on or about February 16, 2011, Silverleaf received a written demand from legal counsel for Frank Parker, Carlos Tapia, and Leslie Neil Hull, purported shareholders of the Company. Silverleaf also received written demands from legal counsel for Igor Zlokarmik and legal counsel for Jose Dias on or about March 1 and 16, 2011, respectively, both purported shareholders of the Company. These purported shareholders allege that the directors breached their fiduciary duties in connection with the proposed acquisition based generally on similar allegations as set forth in the three derivative lawsuits and they demand that Silverleaf pursue legal action against the directors. Silverleaf has not yet responded to the written demands.
 
 

42


PART II
 
ITEM 5. 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, 2005 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, 2005 in our common stock, the S&P 500, and the Russell MicroCap and assumes dividends are reinvested. Silverleaf’s cumulative total loss of $66 is due to the decline in the bid price of our common stock from $3.26 at December 31, 2005 to $1.12 at December 31, 2010.
 
 
 
Measurement Period (Fiscal Year Covered)
 
 
12/05
 
12/06
 
12/07
 
12/08
 
12/09
 
12/10
 
 
 
 
 
 
 
 
 
 
 
 
 
Silverleaf Resorts, Inc.
 
100.00
 
 
137.12
 
 
127.61
 
 
22.09
 
 
25.37
 
 
34.36
 
S&P 500
 
100.00
 
 
115.80
 
 
122.16
 
 
76.96
 
 
97.33
 
 
111.99
 
Russell MicroCap
 
100.00
 
 
116.54
 
 
107.22
 
 
64.57
 
 
82.31
 
 
106.09
 
 

43


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 shown are the closing bid prices as quoted on NASDAQ under the symbol “SVLF.”
 
 
High
 
Low
Year Ended December 31, 2009:
 
 
 
 
First Quarter
 
$
1.14
 
 
$
0.30
 
Second Quarter
 
1.44
 
 
0.63
 
Third Quarter
 
1.69
 
 
1.15
 
Fourth Quarter
 
1.39
 
 
0.59
 
 
 
 
 
 
Year Ended December 31, 2010:
 
 
 
 
 
 
First Quarter
 
$
1.25
 
 
$
0.74
 
Second Quarter
 
1.70
 
 
1.00
 
Third Quarter
 
1.08
 
 
0.91
 
Fourth Quarter
 
1.23
 
 
0.88
 
 
As of March 1, 2011, we believe that there were approximately 1,800 holders of our common stock, which is the only class of our equity securities outstanding. 
 
On December 29, 2009, we received notification from NASDAQ stating we were no longer in compliance with the continued listing requirements for The NASDAQ Capital Market as a result of the closing bid price per share of our common stock being below the minimum trading price of $1.00 for thirty consecutive business days. In accordance with applicable NASDAQ rules, we had a grace period of 180 calendar days (until June 28, 2010) to regain compliance with the minimum closing bid price requirement for continued listing. In order to regain compliance, our closing bid price per share had to be at or above $1.00 for at least ten consecutive business days before June 28, 2010. Our common stock closed above $1.00 for ten consecutive business days beginning on March 11, 2010. On March 25, 2010, we received notification from NASDAQ stating we were back in compliance with the minimum closing bid price requirement for continued listing.
 
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.
 
During 2010, two officers of Silverleaf resigned resulting in the forfeiture of 280,000 incentive stock options. The forfeiture of these incentive stock options did not have a material impact on stock-based compensation recognized in 2010. These forfeited incentive stock options are now available to be reissued.
 
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 our 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 Equity Securities
 
There have been no recent sales of unregistered equity securities.
 

44


Issuer Purchases of Equity Securities
 
During the first quarter of 2010, our Board of Directors approved the extension of our stock repurchase program which authorized the repurchase of up to two million shares of our common stock. This stock repurchase program, which was originally scheduled to expire in July 2010, will now expire in July 2011. We repurchased 378,291 treasury shares during the year ended December 31, 2010. As of December 31, 2010, approximately 1.6 million shares remain available for repurchase under this program. We suspended the stock repurchase program on September 15, 2010 in conjunction with the hiring of Gleacher as our Board's Financial Advisor. The stock repurchase program will remain suspended until the merger agreement is either consummated or terminated under the terms of the merger agreement.
 

45


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. 
 
 
Year Ended December 31,
 
 
2006
 
2007
 
2008
 
2009
 
2010
 
 
(in thousands, except share and per share amounts)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Vacation Interval sales
 
$
187,481
 
 
$
235,135
 
 
$
256,300
 
 
$
240,961
 
 
$
206,275
 
Estimated uncollectible revenue
 
(32,491
)
 
(40,071
)
 
(63,051
)
 
(80,322
)
 
(58,479
)
Net sales
 
154,990
 
 
195,064
 
 
193,249
 
 
160,639
 
 
147,796
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
46,248
 
 
53,019
 
 
61,077
 
 
64,834
 
 
68,731
 
Management fee income
 
1,861
 
 
2,806
 
 
3,121
 
 
3,721
 
 
2,521
 
Other income
 
3,785
 
 
4,141
 
 
6,515
 
 
7,621
 
 
6,963
 
Total revenues
 
206,884
 
 
255,030
 
 
263,962
 
 
236,815
 
 
226,011
 
 
 
 
 
 
 
 
 
 
 
 
Costs and operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Vacation Interval sales
 
19,003
 
 
23,027
 
 
24,903
 
 
22,161
 
 
18,944
 
Sales and marketing
 
93,957
 
 
119,679
 
 
135,059
 
 
125,800
 
 
113,504
 
Operating, general and administrative
 
32,315
 
 
39,101
 
 
41,154
 
 
44,513
 
 
41,963
 
Depreciation
 
2,539
 
 
3,511
 
 
4,929
 
 
6,224
 
 
6,478
 
Interest expense and lender fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Related to receivables-based credit facilities
 
17,550
 
 
19,285
 
 
22,213
 
 
21,864
 
 
28,747
 
Related to other indebtedness
 
4,112
 
 
5,325
 
 
6,341
 
 
7,191
 
 
7,338
 
 
 
 
 
 
 
 
 
 
 
 
Total costs and operating expenses
 
169,476
 
 
209,928
 
 
234,599
 
 
227,753
 
 
216,974
 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes
 
37,408
 
 
45,102
 
 
29,363
 
 
9,062
 
 
9,037
 
Provision for income taxes
 
14,402
 
 
17,398
 
 
11,437
 
 
3,604
 
 
3,262
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
23,006
 
 
$
27,704
 
 
$
17,926
 
 
$
5,458
 
 
$
5,775
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.61
 
 
$
0.73
 
 
$
0.47
 
 
$
0.14
 
 
$
0.15
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
0.59
 
 
$
0.70
 
 
$
0.46
 
 
$
0.14
 
 
$
0.15
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
 
37,579,462
 
 
37,811,387
 
 
38,037,635
 
 
38,146,943
 
 
37,921,956
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted common shares outstanding
 
39,261,652
 
 
39,417,017
 
 
38,897,619
 
 
39,017,955
 
 
38,803,998
 
 
 

46


 
 
December 31,
 
 
2006
 
2007
 
2008
 
2009
 
2010
 
 
(in thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,450
 
 
$
13,170
 
 
$
11,431
 
 
$
13,905
 
 
$
11,805
 
Notes receivable, net of allowance for uncollectible notes
 
229,717
 
 
289,907
 
 
320,306
 
 
354,659
 
 
362,738
 
Amounts due from affiliates
 
1,251
 
 
1,358
 
 
1,738
 
 
1,587
 
 
10,707
 
Inventories
 
147,759
 
 
179,188
 
 
190,318
 
 
196,010
 
 
178,366
 
Total assets
 
474,530
 
 
581,059
 
 
644,822
 
 
666,488
 
 
680,146
 
Amounts due to affiliates
 
246
 
 
 
 
 
 
 
 
 
Notes payable and capital lease obligations
 
254,550
 
 
316,198
 
 
369,071
 
 
395,017
 
 
408,891
 
Senior subordinated notes
 
31,467
 
 
26,817
 
 
23,121
 
 
17,956
 
 
7,682
 
Total liabilities
 
326,338
 
 
405,018
 
 
450,576
 
 
466,313
 
 
474,204
 
Shareholders' equity
 
148,192
 
 
176,041
 
 
194,246
 
 
200,175
 
 
205,942
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows Data:
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(45,648
)
 
$
(39,895
)
 
$
(21,591
)
 
$
(6,112
)
 
$
9,038
 
 
 
 
As of and for the Year Ended December 31,
 
 
2006
 
2007
 
2008
 
2009
 
2010
Other Operating Data: