Silverleaf Resorts 10Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2005


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

1221 RIVER BEND DRIVE, SUITE 120
DALLAS, TEXAS 75247
(Address of principal executive offices, including zip code)

214-631-1166
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yeso Noþ

Number of shares of common stock outstanding of the issuer’s Common Stock, par value $0.01 per share, as of August 12, 2005: 36,954,948

Explanatory Note

CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q UNDER ITEMS 1 AND 2, IN ADDITION TO CERTAIN STATEMENTS CONTAINED ELSEWHERE IN THIS 10-Q, INCLUDING STATEMENTS QUALIFIED BY THE WORDS “BELIEVE,” “INTEND,” “ANTICIPATE,” “EXPECTS,” AND WORDS OF SIMILAR IMPORT, ARE “FORWARD-LOOKING STATEMENTS” AND ARE THUS PROSPECTIVE. THESE STATEMENTS REFLECT THE CURRENT EXPECTATIONS OF THE COMPANY REGARDING THE COMPANY’S FUTURE PROFITABILITY, PROSPECTS, AND RESULTS OF OPERATIONS. ALL SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE RISKS, UNCERTAINTIES, AND OTHER FACTORS ARE DISCUSSED UNDER THE HEADING “CAUTIONARY STATEMENTS” BEGINNING ON PAGE 19 OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004. ALL FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS REPORT ON FORM 10-Q AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THE PROJECTIONS IN THE FORWARD-LOOKING STATEMENTS.

SILVERLEAF RESORTS, INC.

INDEX


		Page
PART I. FINANCIAL INFORMATION (Unaudited)

Item 1.	Consolidated Statements of Income for the three months and six months ended June 30, 2005 and 2004		3

	Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		4

	Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2005		5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		6

	Notes to the Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		25

Item 4.	Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		26

Item 4.	Submission of Matters to a Vote of Security Holders		27

Item 5.	Other Information		27

Item 6.	Exhibits and Reports on Form 8-K		27

	Signatures		28
Amendment No. 1 to Second Amended & Restated Revolving Credit Agreement
Amendment No. 1 to Inventory & Receivables Revolving Credit Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I: FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Revenues:
Vacation Interval sales	$	37,334		$	37,144		$	67,471		$	69,131
Sampler sales		501			468			1,142			914

Total sales		37,835			37,612			68,613			70,045

Interest income		10,113			9,295			19,871			18,222
Management fee income		450			300			900			600
Gain on sales of notes receivable		—			154			669			580
Other income		957			811			1,382			1,203

Total revenues		49,355			48,172			91,435			90,650

Costs and Operating Expenses:
Cost of Vacation Interval sales		6,017			7,285			10,735			13,319
Sales and marketing		18,153			18,699			35,337			35,166
Provision for uncollectible notes		6,534			7,432			11,808			13,832
Operating, general and administrative		7,105			6,656			13,833			12,837
Depreciation and amortization		744			890			1,542			1,792
Interest expense and lender fees		4,286			4,293			8,671			8,575

Total costs and operating expenses		42,839			45,255			81,926			85,521

Income before provision for income taxes and discontinued operations		6,516			2,917			9,509			5,129
Provision for income taxes		(2,285	)		(25	)		(2,884	)		(23	)

Net income from continuing operations		4,231			2,892			6,625			5,106

Discontinued Operations
Income from discontinued operations (net of taxes)		—			160			128			289


Net income	$	4,231		$	3,052		$	6,753		$	5,395


Basic income per share:
Net income from continuing operations	$	0.11		$	0.08		$	0.18		$	0.14

Income from discontinued operations	$	—		$	—		$	—		$	0.01

Net income	$	0.11		$	0.08		$	0.18		$	0.15


Diluted income per share:
Net income from continuing operations	$	0.11		$	0.08		$	0.17		$	0.13

Income from discontinued operations	$	—		$	—		$	—		$	0.01

Net income	$	0.11		$	0.08		$	0.17		$	0.14


Weighted average basic shares outstanding:		36,937,648			36,846,319			36,899,620			36,843,938

Weighted average diluted shares outstanding:		38,933,675			38,935,602			38,874,506			38,905,570

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

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)
(Unaudited)


	June 30,			December 31,
	2005			2004
ASSETS
Cash and cash equivalents	$	7,605		$	10,935
Restricted cash		5,215			3,428
Notes receivable, net of allowance for uncollectible notes of $55,636 and $52,506, respectively		203,357			196,466
Accrued interest receivable		2,293			2,207
Investment in special purpose entity		2,000			5,173
Amounts due from affiliates		188			288
Inventories		114,761			109,303
Land, equipment, buildings, and utilities, net		11,137			24,375
Land held for sale		2,991			2,991
Prepaid and other assets		13,263			14,340


TOTAL ASSETS	$	362,810		$	369,506


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Accounts payable and accrued expenses	$	8,408		$	7,980
Accrued interest payable		1,299			1,302
Amounts due to affiliates		669			929
Unearned revenues		6,682			4,634
Income taxes payable		1,692			—
Notes payable and capital lease obligations		201,780			218,310
Senior subordinated notes		34,029			34,883


Total Liabilities		254,559			268,038


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Preferred stock, 10,000,000 shares authorized, none issued and outstanding		—			—
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 37,249,006 shares issued, 36,954,948 shares outstanding at June 30, 2005, and 36,860,238 shares outstanding at December 31, 2004		372			372
Additional paid-in capital		115,522			116,614
Retained deficit		(4,161	)		(10,914	)
Treasury stock, at cost, 294,058 shares at June 30, 2005 and 388,768 shares at December 31, 2004		(3,482	)		(4,604	)


Total Shareholders’ Equity		108,251			101,468


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	362,810		$	369,506

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

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)


	Common Stock
	Number of		$0.01		Additional
	Shares		Par		Paid-in			Retained			Treasury Stock
	Issued		Value		Capital			Deficit			Shares			Cost			Total
January 1, 2005		37,249,006	$	372	$	116,614		$	(10,914	)		388,768		$	(4,604	)	$	101,468

Exercise of stock options		—		—		(1,092	)		—			(94,710	)		1,122			30
Net income		—		—		—			6,753			—			—			6,753


June 30,2005		37,249,006	$	372	$	115,522		$	(4,161	)		294,058		$	(3,482	)	$	108,251

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

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2005			2004
OPERATING ACTIVITIES:
Net income	$	6,753		$	5,395
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes		(128	)		(289	)
Provision for uncollectible notes		11,808			13,832
Depreciation and amortization		1,542			1,792
Gain on sales of notes receivable		(669	)		(580	)
Proceeds from sales of notes receivable		6,021			9,559
Cash effect from changes in assets and liabilities:
Restricted cash		(1,787	)		(2,028	)
Notes receivable		(23,655	)		(27,760	)
Accrued interest receivable		(86	)		(39	)
Investment in special purpose entity		3,173			(868	)
Amounts due from affiliates		624			947
Inventories		(5,858	)		2,803
Prepaid and other assets		961			(2,482	)
Accounts payable and accrued expenses		422			646
Accrued interest payable		(3	)		109
Unearned revenues		1,170			828
Income taxes payable		1,692			—

Net cash provided by operating activities — continuing operations		1,980			1,865


Net cash used in operating activities — discontinued operations		(841	)		(44	)


INVESTING ACTIVITIES:
Purchases of land, equipment, buildings, and utilities		(216	)		(180	)
Proceeds from sale of discontinued operations		13,101			—

Net cash provided by (used in) investing activities		12,885			(180	)


FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities		72,696			44,300
Payments on borrowings to unaffiliated entities		(90,080	)		(45,383	)
Proceeds from exercise of stock options		30			10

Net cash used in financing activities		(17,354	)		(1,073	)


Net change in cash and cash equivalents		(3,330	)		568

CASH AND CASH EQUIVALENTS:
Beginning of period		10,935			4,093


End of period	$	7,605		$	4,661


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized	$	7,894		$	8,430
Income taxes paid	$	750		$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases	$	62		$	—

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

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 — Background

These condensed consolidated financial statements of Silverleaf Resorts, Inc. and subsidiaries (“the Company”) presented herein do not include certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in suchForm 10-K.

Note 2 — Significant Accounting Policies Summary

Basis of Presentation —The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of the Company, the accompanying condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations and changes in cash flows of the Company and its subsidiaries.

Principles of Consolidation —The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, excluding Silverleaf Finance I, Inc., the Company’s wholly-owned special purpose entity (“SPE”). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

Revenue and Expense Recognition —A substantial portion of Vacation Interval sales are made in exchange for mortgage notes receivable, which are secured by a deed of trust on the Vacation Interval sold. The Company recognizes the sale of a Vacation Interval under the accrual method after a binding sales contract has been executed, the buyer has made a down payment of at least 10%, and the statutory rescission period has expired. If all accrual method criteria are met except that construction is not substantially complete, revenues are recognized on the percentage-of-completion basis. Under this method, the portion of revenue applicable to costs incurred, as compared to total estimated construction and direct selling costs, is recognized in the period of sale. The remaining amount is deferred and recognized as the remaining costs are incurred. The deferral of sales and costs related to the percentage-of-completion method is not significant.

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

In addition to sales of Vacation Intervals to new prospective owners, the Company sells upgraded and additional Vacation Intervals to existing Silverleaf Owners. Revenues are recognized on these upgrade Vacation Interval sales when the criteria described above are satisfied. The revenue recognized is the net of the incremental increase in the upgrade sales price and cost of sales is the incremental increase in the cost of the Vacation Interval purchased.

A provision for estimated customer returns is reported net against Vacation Interval sales. Customer returns represent cancellations of sales transactions in which the customer fails to make the first installment payment.

The Company recognizes interest income as earned. Interest income is accrued on notes receivable, net of an estimated amount that will not be collected, until the individual notes become 90 days delinquent. Once a note

becomes 90 days delinquent, the accrual of additional interest income ceases until collection is deemed probable.

Revenues related to one-time sampler contracts, which entitles the prospective owner to sample a resort during certain periods, are recognized when earned. Revenue recognition is deferred until the customer uses the stay, purchases a Vacation Interval, or allows the contract to expire.

The Company receives fees for management services provided to each timeshare resort’s owners’ association (a “Club”). These revenues are recognized on an accrual basis in the period the services are provided if collection is deemed probable.

Utilities, services, and other income are recognized on an accrual basis in the period service is provided.

Sales and marketing costs are charged to expense in the period incurred. Commissions, however, are recognized in the same period as the related sales.

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

Restricted Cash— Restricted cash consists of certificates of deposit that serve as collateral for construction bonds and cash restricted for repayment of debt.

Investment in Special Purpose Entity— The Company is party to a $75 million revolving credit agreement to finance Vacation Interval notes receivable through an off-balance-sheet SPE. The Company accounts for and evaluates its investment in the SPE in accordance with SFAS 140, EITF 99-20, and SFAS 115, as applicable. Sales of notes receivable from the Company to its SPE that meet certain underwriting criteria occur on a periodic basis. The SPE funds these purchases through advances under a credit agreement arranged for this purpose. The gain or loss on the sale is determined based on the proceeds received, the fair value assigned to the investment in SPE, and the recorded value of notes receivable sold. The fair value of the investment in the SPE is estimated based on the present value of future expected cash flows back to the Company from the notes receivable sold. The Company utilized the following key assumptions to estimate the fair value of such cash flows: customer prepayment rate — ranging from 2.3% to 4.3%; expected accounts paid in full as a result of upgrades — ranging from 5.8% to 6.2%; expected credit losses — ranging from 5.6% to 8.1%; discount rate — ranging from 13.5% to 19%; base interest rate — ranging from 3.3% to 4.4%; agent fee — ranging from 2% to 2.37%; and loan servicing fees — 1%. The Company’s assumptions are based on experience with its notes receivable portfolio, available market data, estimated prepayments, the cost of servicing, and net transaction costs. Such assumptions are assessed quarterly and, if necessary, adjustments are made to the carrying value of the investment in SPE. The carrying value of the investment in SPE represents the Company’s maximum exposure to loss regarding its involvement with the SPE.

Provision for Uncollectible Notes —Such provision is recorded at an amount sufficient to maintain the allowance for uncollectible notes at a level management considers adequate to provide for anticipated losses resulting from customers’ failure to fulfill their obligations under the terms of their notes. Such allowance for uncollectible notes is adjusted based upon periodic analysis of the notes receivable portfolio, historical credit loss experience, and current economic factors.

Credit losses take three forms. The first is the full cancellation of the note, whereby the customer is relieved of the obligation and the Company recovers the underlying inventory. The second form is a deemed cancellation, whereby the Company records the cancellation of all notes that become 90 days delinquent, net of notes that are no longer 90 days delinquent. The third form is the note receivable reduction that occurs when a customer trades a higher value product for a lower value product. In estimating the allowance, the Company projects future cancellations, net of recovery of the related inventory, for each sales year by using historical cancellations experience.

The allowance for uncollectible notes is reduced by actual cancellations and losses experienced, including losses related to previously sold notes receivable which became delinquent and were reacquired pursuant to the recourse obligations discussed herein. Actual cancellations and losses experienced represents all notes identified by management as being probable of cancellation. Recourse to the Company on sales of customer notes receivable is governed by the agreements between the purchasers and the Company.

The Company classifies the components of the provision for uncollectible notes as either credit losses or customer

returns (cancellations of sales whereby the customer fails to make the first installment payment). The provision for uncollectible notes pertaining to credit losses and customer returns are classified in provision for uncollectible notes and Vacation Interval sales, respectively.

Inventories —Inventories are stated at the lower of cost or market value. Cost includes amounts for land, construction materials, direct labor and overhead, taxes, and capitalized interest incurred in the construction or through the acquisition of resort dwellings held for timeshare sale. Timeshare unit costs are capitalized as inventory and are allocated to Vacation Intervals based upon their relative sales values. Upon sale of a Vacation Interval, these costs are charged to cost of sales on a specific identification basis. Vacation Intervals reacquired are placed back into inventory at the lower of their original historical cost basis or market value.

The Company estimates the total cost to complete all amenities at each resort. This cost includes both costs incurred to date and expected costs to be incurred. The Company allocates the estimated total amenities cost to cost of Vacation Interval sales based on Vacation Intervals sold in a given period as a percentage of total Vacation Intervals expected to sell over the life of a particular resort project.

Company management periodically reviews the carrying value of its inventory on an individual project basis to ensure that the carrying value does not exceed market value.

Land, Equipment, Buildings, and Utilities— Land, equipment (including equipment under capital lease), buildings, and utilities are stated at cost, which includes amounts for construction materials, direct labor and overhead, and capitalized interest. When assets are disposed of, the cost and related accumulated depreciation are removed, and any resulting gain or loss is reflected in income for the period. Maintenance and repairs are charged to expense as incurred; significant betterments and renewals, which extend the useful life of a particular asset, are capitalized. Depreciation is calculated for all fixed assets, other than land, using the straight-line method over the estimated useful life of the assets, ranging from 3 to 20 years. Company management periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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

Income Taxes— Deferred income taxes are recorded for temporary differences between the bases of assets and liabilities as recognized by tax laws and their carrying value as reported in the condensed consolidated financial statements. A provision is made or benefit recognized for deferred income taxes relating to temporary differences for financial reporting purposes. To the extent a deferred tax asset does not meet the criteria of “more likely than not” for realization, a valuation allowance is recorded.

Earnings Per Share— Basic earnings per share is computed by dividing net income by the weighted average shares outstanding. Earnings per share assuming dilution is computed by dividing net income by the weighted average number of shares and potentially dilutive shares outstanding. The number of potentially dilutive shares is computed using the treasury stock method, which assumes that the increase in the number of shares resulting from the exercise of the stock options is reduced by the number of shares that could have been repurchased by the Company with the proceeds from the exercise of the stock options.

Stock-Based Compensation— In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”). SFAS 148 amends the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employee” (“APB No. 25”).

As allowed by SFAS No. 123, the Company has elected to continue to utilize the accounting method prescribed by APB No. 25, provide the disclosure requirements of SFAS No. 123 and, as of December 31, 2002, adopted the disclosure requirements of SFAS No. 148. Although the Company selected an accounting policy which requires only the excess of the market value of its common stock over the exercise price of options granted to be recorded as compensation expense (intrinsic method), pro forma information regarding net income is required as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. Pro forma net income applicable to the options granted is not likely to be representative of the effects on reported net income for future years. The fair value for these options is estimated at the date of grant using the Black-Scholes option-pricing model. Stock compensation determined under the intrinsic method is recognized over the vesting period using the straight-line method.

Had compensation cost for the Company’s stock option grants been determined based on the fair value at the date of grant in accordance with the provisions of SFAS No. 123, the Company’s net income and net income per share would have been the following pro forma amounts:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income, as reported	$	4,231		$	3,052		$	6,753		$	5,395
Stock-based compensation expense recorded under the intrinsic value method		—			—			—			—
Pro forma stock-based compensation expense computed under the fair value method		(57	)		(78	)		(122	)		(156	)

Pro forma net income	$	4,174		$	2,974		$	6,631		$	5,239


Net income per share, basic
As reported	$	0.11		$	0.08		$	0.18		$	0.15
Pro forma	$	0.11		$	0.08		$	0.18		$	0.14
Net income per share, diluted
As reported	$	0.11		$	0.08		$	0.17		$	0.14
Pro forma	$	0.11		$	0.08		$	0.17		$	0.13

There were no stock options granted during the first six months of 2005 or 2004.

Use of Estimates— The preparation of the condensed consolidated financial statements requires the use of management’s estimates and assumptions in determining the carrying values of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from those estimated. Significant management estimates include the allowance for uncollectible notes, valuation of SPE, and the future sales plan used to allocate certain costs to inventories and cost of sales.

Reclassifications— Certain reclassifications have been made to the 2004 condensed consolidated financial statements to conform to the 2005 presentation. These reclassifications had no effect on net income. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the water utility property assets and liabilities have been designated as held for sale effective December 31, 2004. In accordance with the provisions of SFAS No. 144, the results of operations of these properties are included in income from discontinued operations. The first six months of 2004 has been reclassified for comparability, as required.

Recent Accounting Pronouncements—

SFAS No. 151 – In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 will not impact the Company’s consolidated financial position or results of operations.

SFAS No. 152 – In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate Time-Sharing Transactions” (“SFAS No. 152”). SFAS No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting

and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions (“SOP 04-2”). This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for fiscal years beginning after June 15, 2005, and is to be reported as a cumulative effect of a change in accounting principle. The Company is still evaluating the impact the adoption of SFAS No. 152 will have on its results of operations, financial position, and future financial statements.

SFAS No. 123 — In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Share-Based Payment, revised (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. SFAS No. 123R will be effective for the next fiscal year beginning after June 15, 2005 and allows, but does not require, companies to restate the fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS No. 123R. The Company has not yet determined which fair-value method and transitional provision it will follow. The adoption of SFAS No. 123R is not expected to have a material impact on the Company’s consolidated financial position or results of operations. See Stock-Based Compensation in Note 2 for the pro forma impact on net income and net income per share from calculating stock-based compensation costs under the fair value alternative of SFAS No. 123.

SFAS No. 153 — In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, An Amendment of APB Opinion No. 29 (“SFAS No. 153”). The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to impact the Company’s consolidated financial position or results of operations.

SFAS No. 154 — In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes (“APB No. 20”) and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Financial Statements (“SFAS No. 3”). The statement requires a voluntary change in accounting principle to be applied retrospectively to all prior period financial statements so that those financial statements are presented as if the current accounting principle had always been applied. APB No. 20 previously required most voluntary changes in accounting principle to be recognized by including in net income of the period of change the cumulative effect of changing to the new accounting principle. In addition, SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting a correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and correction of errors made after January 1, 2006, with early adoption permitted.

Note 3 — Earnings Per Share

The following table illustrates the reconciliation between basic and diluted weighted average shares outstanding for the three and six months ended June 30, 2005 and 2004:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Weighted average shares outstanding — basic		36,937,648			36,846,319			36,899,620			36,843,938
Issuance of shares from stock options exercisable		2,543,013			2,777,147			2,543,013			2,777,147
Repurchase of shares from stock options proceeds		(546,986	)		(687,864	)		(568,127	)		(715,515	)

Weighted average shares outstanding — diluted		38,933,675			38,935,602			38,874,506			38,905,570

Outstanding stock options totaling approximately 2,543,013 and 2,777,147 were dilutive securities that were included in the computation of diluted EPS at June 30, 2005 and 2004, respectively. Outstanding stock options totaling approximately 871,500 and 887,500 were not dilutive at June 30, 2005 and 2004, respectively, because the exercise price for such options substantially exceeded the market price for the Company’s shares.

Note 4—Notes Receivable

The Company provides financing to the purchasers of Vacation Intervals, which are collateralized by their interest in such Vacation Intervals. The notes receivable generally have initial terms of seven to ten years. The average yield on outstanding notes receivable at June 30, 2005 was approximately 15.2%. In connection with the sampler program, the Company routinely enters into notes receivable with terms of 10 months. Notes receivable from sampler sales were $2.1 million and $2.0 million at June 30, 2005 and 2004, respectively, and are non-interest bearing.

The activity in gross notes receivable is as follows for the three and six-month periods ended June 30, 2005 and 2004 (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Balance, beginning of period	$	246,687		$	240,192		$	248,972		$	241,751
Sales		32,511			33,684			58,505			60,477
Collections		(16,566	)		(15,361	)		(32,717	)		(30,010	)
Receivables charged off		(3,639	)		(1,316	)		(7,749	)		(6,819	)
Sold notes receivable		—			(4,525	)		(8,018	)		(12,725	)

Balance, end of period	$	258,993		$	252,674		$	258,993		$	252,674

The Company considers accounts over 60 days past due to be delinquent. As of June 30, 2005, $600,000 of notes receivable, net of accounts charged off, were considered delinquent. An additional $40.6 million of notes would have been considered to be delinquent had the Company not granted payment concessions to the customers. The activity in the allowance for uncollectible notes is as follows for the three and six months ended June 30, 2005 and 2004 (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Balance, beginning of period	$	52,741		$	48,565		$	52,506		$	48,372
Provision for credit losses		6,534			7,432			11,808			13,832
Receivables charged off		(3,639	)		(1,316	)		(7,749	)		(6,819	)
Allowance related to notes sold		—			(371	)		(929	)		(1,075	)

Balance, end of period	$	55,636		$	54,310		$	55,636		$	54,310

During the six months ended June 30, 2005, the Company sold $8.0 million of notes receivable and recognized pre-tax gains of $669,000. The SPE funded these purchases through advances under a credit agreement arranged for this purpose. In connection with these sales, the Company received cash consideration of $6.0 million, which was used to pay down borrowings under its revolving loan facilities.

Note 5 — Debt

Notes payable, capital lease obligations, and senior subordinated notes as of June 30, 2005 and December 31, 2004 (in thousands):


	June 30,		December 31,
	2005		2004
$55.9 million loan agreement, which contains certain financial covenants, due March 2007, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note (the loan agreement is limited to a $44.6 million revolver with an interest rate of LIBOR plus 3% with a 6% floor, revolving through March 2006, and a $11.3 million term loan with an interest rate of 8%)	$	33,834	$	37,514
$11.3 million term loan with an interest rate of 8%, due in March 2007		—		9,991
$55.1 million loan agreement, which contains certain financial covenants, due March 2007, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note (the loan agreement is limited to a $44.1 million revolver with an interest rate of LIBOR plus 3% with a 6% floor, revolving through March 2006, and a $11.0 million term loan with an interest rate of 8%)		33,769		37,039
$11.0 million term loan with an interest rate of 8%, due in March 2007		—		9,852
$7.9 million loan agreement, which contains certain financial covenants, due March 2007, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note (the loan agreement is limited to a $6.2 million revolver with an interest rate of Prime plus 3% with a 6% floor, revolving through March 2006, and a $1.7 million term loan with an interest rate of 8%)		5,057		5,250


	June 30,		December 31,
	2005		2004
$1.7 million term loan with an interest rate of 8%, due in March 2007		—		1,415
$66.4 million conduit loan, due March 2014, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of 7.035%		43,980		50,299
$26.3 million conduit loan, due September 2011, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of 7.9%		24,602		—
$40.4 million loan agreement, which contains certain financial covenants, due March 2009, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note (the loan agreement is limited to a $25 million revolver with an interest rate of the higher of Prime or Federal Funds plus 2.75% with a 6% floor, revolving through March 2006)		17,725		18,689
$50 million revolving loan agreement, which contains certain financial covenants, revolving through and due April 2008, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 4.25%		4,864		—
$70 million loan agreement, capacity reduced by amounts outstanding under the $10 million inventory loan agreement and the $9 million supplemental revolving loan agreement, which contains certain financial covenants, due February 2006, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 2.65% with a 6.0% floor (additional draws are no longer available under this facility)		—		9,080
$9 million supplemental revolving loan agreement, which contains certain financial covenants, due March 2007, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of LIBOR plus 2.67% with a 6% floor		—		5,735
$10 million revolving loan agreement, which contains certain financial covenants, revolving through March 2006, due March 2009, collateralized by either notes receivable or inventory, interest payable monthly, at an interest rate of the higher of Prime plus 2% or Federal Funds plus 4.75% with a 6.0% floor		9,500		10,000
$10 million inventory loan agreement, which contains certain financial covenants, revolving through March 2007, due March 2009, interest payable monthly, at an interest rate of LIBOR plus 3.25%		10,000		10,000
$8 million inventory loan agreement, which contains certain financial covenants, revolving through March 2007, due March 2009, interest payable monthly, at an interest rate of Prime plus 3% with a 6% floor (the loan agreement is limited to $6 million)		—		6,000
$5 million inventory term loan agreement, which contains certain financial covenants, due March 2007, interest payable monthly, at an interest rate of Prime plus 3% with a 6% floor		4,445		—
$15 million inventory loan agreement, which contains certain financial covenants, revolving through and due April 2008, interest payable monthly, at an interest rate of Prime plus 3%		8,500		—
Various notes, due from January 2006 through January 2010, collateralized by various assets with interest rates ranging from 2.1% to 12.4%		5,341		7,122

Total notes payable		201,617		217,986
Capital lease obligations		163		324

Total notes payable and capital lease obligations		201,780		218,310
8.0% senior subordinated notes, due 2010, interest payable semiannually on April 1 and October 1, guaranteed by all of the Company’s present and future domestic restricted subsidiaries		24,671		24,671
6.0% senior subordinated notes, due 2007, interest payable semiannually on April 1 and October 1, guaranteed by all of the Company’s present and future domestic restricted subsidiaries		3,796		3,796

10¹/2% senior subordinated notes, subordinate to the 6.0% senior subordinated notes above, due 2008, interest payable semiannually on April 1 and October 1, guaranteed by all of the Company’s present and future domestic restricted subsidiaries		2,146		2,146
Interest on the 6.0% senior subordinated notes, due 2007, and the 8.0% senior subordinated notes, due 2010, interest payable semiannually through October 2007 on April 1 and October 1, guaranteed by all of the Company’s present and future domestic restricted subsidiaries		3,416		4,270

Total senior subordinated notes		34,029		34,883


Total	$	235,809	$	253,193

At June 30, 2005, LIBOR rates on the Company’s senior credit facilities were from 3.21% to 3.50%, and the Prime rate on these facilities was 6.00%. At December 31, 2004, LIBOR rates on the Company’s senior credit facilities were from 2.03% to 2.42%, and the Prime rate on these facilities was 5.00%.

On April 29, 2005, the Company entered into a $50 million receivables loan agreement, which matures on April 29, 2008 and bears interest at a rate of LIBOR plus 4.25%. The Company also entered into a $15 million inventory loan agreement with the same lender, which also matures on April 29, 2008 and bears interest at a rate of Prime plus 3%.

During the second quarter of 2005, the Company entered into a $25 million receivables loan agreement, which matures on May 20, 2010 and bears interest at a rate of Prime plus 1.5%, with a 6.5% floor. The Company has not borrowed against this loan facility as of June 30, 2005.

Note 6 — Subsidiary Guarantees

As of June 30, 2005, all subsidiaries of the Company, except the SPE and Silverleaf Finance II, Inc. a Delaware corporation, (“SF-II”), have guaranteed the $34.0 million of senior subordinated notes. Separate financial statements and other disclosures concerning each guaranteeing subsidiary (each, a “Guarantor Subsidiary”) are not presented herein because the guarantee of each Guarantor Subsidiary is full and unconditional and joint and several, and each Guarantor Subsidiary is a wholly-owned subsidiary of the Company, and together comprise all direct and indirect subsidiaries of the Company.

The Guarantor Subsidiaries had no operations for the six months ended June 30, 2005 and 2004. Combined summarized balance sheet information as of June 30, 2005 and December 31, 2004 for the Guarantor Subsidiaries is as follows (in thousands):


	June 30,		December 31,
	2005		2004
Other assets	$	2	$	2

Total assets	$	2	$	2


Investment by parent (includes equity and amounts due to parent)	$	2	$	2

Total liabilities and equity	$	2	$	2

Note 7—Discontinued Operations

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the water and utility property assets and liabilities were designated as held for sale effective December 31, 2004. In accordance with the provisions of SFAS No. 144, the results of operations of these properties are included in income from discontinued operations. The three and six month periods ended June 30, 2004 have been reclassified for comparability, as required. The carrying amounts of the water and utility property assets and liabilities are summarized below (in thousands):


	June 30,		December 31,
	2005		2004
Cash	$	—	$	841
Amount due from affiliates		—		150
Land, equipment, buildings, and utilities, net		—		11,912
Prepaid and other assets		—		55

Total assets	$	—	$	12,958


Accounts payable	$	—	$	70

Total liabilities	$	—	$	70

On March 11, 2005, the Company sold the water distribution and waste water treatment utilities assets at eight of its timeshare resorts for an aggregate purchase price of $13.1 million, which will result in a gain of approximately $879,000 when all conditions of the sale are met. At June 30, 2005 this deferred gain is included in unearned revenue. The purchasers of the utilities are Algonquin Water Resources, of Texas, LLC, a Texas limited liability company; Algonquin Water Resources of Missouri, LLC, a Missouri limited liability company; Algonquin Water Resources of Illinois, LLC, an Illinois limited liability company; Algonquin Water Resources of America, Inc., a Delaware corporation; and Algonquin Power Income Fund, an open-ended investment trust established under the laws of Ontario, Canada (collectively, the “Purchasers”). Certain of the Purchasers have entered into a services agreement to provide uninterrupted water supply and waste water treatment services to the Company’s eight timeshare resorts to which the transferred utility assets relate. The Purchasers will charge the Company’s timeshare resorts the tariffed rate for those utility services that are regulated by the states in which the resorts are located. For any unregulated utility services, the Purchasers will charge a rate set in accordance with the ratemaking procedures of the Texas Commission on Environmental Quality. The proceeds of the Company’s sale of these utility assets were used to reduce senior debt in accordance with the Company’s loan agreements with its senior lenders.

Notwithstanding the closing of this sale of utilities assets, the agreement contains provisions relating to the required post-closing receipt of customary governmental approvals from utility regulators in Missouri and Texas.

Specifically, if the Purchasers do not receive required approvals from Missouri regulators relating to the utility assets in Missouri (the “Missouri Assets”) within twelve months of closing, the Missouri Assets will be reconveyed to the Company, the transaction involving the Missouri Assets will be rescinded, and the Company will be obligated to return to the Purchasers approximately $3.8 million of the purchase price attributable to the Missouri Assets. Similarly, if the Purchasers do not receive required approvals from Texas regulators relating to the utility assets in Texas (the “Texas Assets”) within eighteen months of closing, the Texas Assets will be reconveyed to the Company, the transaction involving the Texas Assets will be rescinded, and the Company will be obligated to return to the Purchasers approximately $6.2 million of the purchase price attributable to the Texas Assets.

Subsequent to June 30, 2005, the Purchasers received governmental approval from the utility regulators in Missouri. Approval from the utility regulators in Texas is still pending at this time.

The net income from discontinued operations is summarized as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005			2004
REVENUE:
Other income	$	—	$	731	$	438		$	1,358


COSTS AND OPERATING EXPENSES:
Other expense		—		357		278			660
Depreciation and amortization		—		213		—			408
Interest expense		—		1		—			1

Total costs and operating expenses		—		571		278			1,069


Income from discontinued operations		—		160		160			289
Provision for income taxes		—		—		(32	)		—

Net income from discontinued operations	$	—	$	160	$	128		$	289

Note 8—Commitments and Contingencies

Holiday Hills Condominium Association, Inc. et al v. Silverleaf Resorts, Inc. et al, Circuit Court of Christian County, Missouri. The homeowners’ associations of five condominium projects that a former subsidiary of the Company constructed in Missouri filed two separate actions against the Company in 1999 and 2000, respectively, alleging breach of warranty, construction defects and breach of management agreements. These two cases have been consolidated. The plaintiffs have filed an amended petition alleging actual damages in excess of $25,000 and punitive damages. A special master has been appointed by agreement of all the parties in this case. A special master is appointed by the court to assist the court with judicial duties. The special master will decide discovery disputes and make recommendations on substantive motions. Discovery continued in the lawsuit during the first six months of 2005, but is not yet complete. The Company has filed a counterclaim seeking contractual indemnification under the terms of management agreements with each of the plaintiffs. The parties have agreed to mediate this matter in October 2005. If the parties are unable to agree to a settlement of this matter through mediation, the case will proceed to trial before the special master without a jury in November 2005. At this time, the Company’s legal fees and costs of litigation are being paid by its insurance carriers, subject to a reservation of rights by these insurers. The Company cannot predict the final outcome of these claims, nor can it estimate the additional costs it could incur, or whether its insurance carriers will continue to cover its costs in connection with these claims. The Company intends to vigorously defend this litigation.

Ozark Mountain Condominium Association, Inc. et al v. Silverleaf Resorts, Inc.,Circuit Court of Stone County, Missouri. The homeowners’ associations of three condominium projects that a former subsidiary of the Company constructed in Missouri filed an action against the Company in 2000 alleging construction defects, misrepresentation, breach of fiduciary duty, negligence, and breach of management agreements and seeking damages and certain other equitable relief. The plaintiffs seek actual and punitive damages in excess of $500,000, attorneys’ fees and costs. The Company has filed a counterclaim seeking contractual indemnification under the terms of management agreements with the plaintiffs. At this time, a majority of the Company’s legal fees and costs of litigation are being paid by its insurance carriers, subject to a reservation of rights by these insurers. The trial, which was rescheduled for March 21, 2005 has been continued and the parties, through their counsel have agreed in writing to the terms of a settlement, which terms have not yet been reduced to a definitive settlement agreement and executed by all parties. The Company believes that it will not incur any liability under these terms of settlement and the likelihood of payment by the Company is remote; however, in any event, the terms of settlement would limit any possible future contingent liability of the Company to a maximum of $200,000. In order for any further claims of this sort to be asserted against the Company by the plaintiffs, the terms of settlement require that the plaintiffs must

first exhaust all reasonable efforts to collect at least $200,000 from a third party insurance carrier and all amounts collected from the carrier would be a credit against the Company’s $200,000 maximum liability. Should the settlement not be fully implemented, the Company intends to continue to vigorously defend this litigation.

The Company is currently subject to other litigation arising in the normal course of its 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 the judgment of the Company, none of the lawsuits currently pending against the Company, either individually or in the aggregate, is likely to have a material adverse effect on the Company, its business, results of operations, or financial condition.

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

Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. Reserves will be established from time to time by the Company when deemed appropriate under generally acceptable accounting principles. However, the outcome of a claim for which the Company has not deemed a reserve to be necessary may be decided unfavorably to the Company and could require the Company to pay damages or make other expenditures in amounts or a range of amounts that could be materially adverse to the Company.

During 2001, Silverleaf Club entered into a loan agreement for $1.8 million, whereby the Company guaranteed such debt with certain of its aircraft or related sales proceeds. As of June 30, 2005, Silverleaf Club’s related note payable balance was $356,000.

Note 9 — Subsequent Events

On July 26, 2005, the Company closed a securitization transaction with its newly-formed, wholly-owned off-balance sheet special purpose finance subsidiary, Silverleaf Finance III, LLC (“SF-III”), a Delaware limited liability company, which was formed for the purpose of issuing $108.7 million of its Timeshare Loan-Backed Notes Series 2005-A (“Series 2005-A Notes”) in a private offering and sale through UBS Securities LLC. The Series 2005-A Notes were issued pursuant to an Indenture (“Indenture”) between the Company, as servicer of the timeshare loans, SF-III, and Wells Fargo Bank, National Association, as Indenture Trustee, Custodian, Backup Servicer, and Account Intermediary. The Series 2005-A Notes were issued in four classes as follows:

$46,857,000 4.857% Timeshare Loan-Backed Notes, Series 2005-A, Class A (the “Class A Notes”);
$28,522,000 5.158% Timeshare Loan-Backed Notes, Series 2005-A, Class B (the “Class B Notes”);
$16,299,000 5.758% Timeshare Loan-Backed Notes, Series 2005-A, Class C (the “Class C Notes”); and
$16,977,000 6.756% Timeshare Loan-Backed Notes, Series 2005-A, Class D, (the “Class D Notes”).

The Class A Notes, Class B Notes, Class C Notes and Class D Notes have received a rating from Moody’s Investor Services, Inc. of “Aaa”, “Aa2”, “A2” and “Baa2”, respectively.

The Series 2005-A Notes are secured by timeshare loans sold to SF-III by the Company pursuant to a transfer agreement between the Company and SF-III. Under that agreement, the Company sold to SF-III approximately $132.8 million in timeshare loans that were previously pledged as collateral under revolving credit facilities with senior lenders of the Company and its SPE, Silverleaf Finance I, Inc. The proceeds from the sale of the timeshare loans to SF-III were used to pay off in full the credit facility of the SPE and to pay down amounts owed by the Company under credit facilities with its senior lenders. The SPE was dissolved by the Company simultaneously with the sale of the notes to SF-III. The timeshare loans were sold to SF-III without recourse to the Company, except for breaches of certain representations and warranties at the time of sale. The Company is responsible for servicing the timeshare loans pursuant to the terms of the Indenture and will receive a fee for its services.

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

Certain matters discussed throughout this Form 10-Q filing are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, those discussed in the Company’s Form 10-K for the year ended December 31, 2004.

The Company currently owns and operates 13 resorts in various stages of development. These resorts offer a wide array of country club-like amenities, such as golf, swimming, horseback riding, boating, and many organized activities for children and adults. The Company represents a Vacation Interval ownership base of over 90,000. The condensed consolidated financial statements of the Company include the accounts of Silverleaf Resorts, Inc. and its subsidiaries, all of which are wholly-owned.

Results of Operations

The following table sets forth certain operating information for the Company.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
As a percentage of total revenues:
Vacation Interval sales		75.7	%		77.1	%		73.8	%		76.3	%
Sampler sales		1.0	%		1.0	%		1.2	%		1.0	%

Total sales		76.7	%		78.1	%		75.0	%		77.3	%

Interest income		20.5	%		19.3	%		21.8	%		20.1	%
Management fee income		0.9	%		0.6	%		1.0	%		0.7	%
Gain on sale of notes receivable		0.0	%		0.3	%		0.7	%		0.6	%
Other income		1.9	%		1.7	%		1.5	%		1.3	%

Total revenues		100.0	%		100.0	%		100.0	%		100.0	%

As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales		16.1	%		19.6	%		15.9	%		19.3	%
Provision for uncollectible notes		17.5	%		20.0	%		17.5	%		20.0	%

As a percentage of total sales:			��
Sales and marketing		48.0	%		49.7	%		51.5	%		50.2	%

As a percentage of total revenues:
Operating, general and administrative		14.4	%		13.8	%		15.1	%		14.2	%
Depreciation and amortization		1.5	%		1.8	%		1.7	%		2.0	%

As a percentage of interest income:
Interest expense and lender fees		42.4	%		46.2	%		43.6	%		47.1	%

Results of Operations for the Three Months Ended June 30, 2005 and 2004

Revenues

Revenues for the quarter ended June 30, 2005 were $49.4 million, a $1.2 million increase from revenues of $48.2 million for the quarter ended June 30, 2004. The increase is primarily due to increased interest income during the second quarter of 2005 versus the same period of 2004.

The following table summarizes our Vacation Interval sales (dollars in thousands).


	Three Months Ended June 30, 2005						Three Months Ended June 30, 2004
					Average						Average
	$ Sales		Intervals		Price		$ Sales		Intervals		Price
Interval Sales to New Customers	$	16,033		1,314	$	12,201	$	18,440		1,581	$	11,663
Upgrade Interval Sales to Existing Customers		8,959		1,023		8,757		7,239		1,102		6,569
Additional Interval Sales to Existing Customers		12,342		1,309		9,429		11,465		1,369		8,375

Total	$	37,334					$	37,144

Overall, Vacation Interval sales remained relatively flat during the second quarter of 2005 versus the second quarter of 2004, increasing by $190,000, or less than 1%. The number of interval sales to new customers decreased 16.9% as a result of the Company’s marketing strategy to improve the sales margin by increasing the proportion of sales to existing customers over sales to new customers. Average prices of sales to new customers increased 4.6% however, resulting in a 13.1% net decrease in the sales amount. The number of interval sales to existing customers decreased 5.6%, but average prices increased 20.7%, resulting in a 13.9% net increase in the sales amount during the second quarter of 2005 versus the same period of 2004. Total interval sales for the second quarter of 2005 included 777 biennial intervals (counted as 388 Vacation Intervals) compared to 870 biennial intervals (counted as 435 Vacation Intervals) in the second quarter of 2004.

Sampler sales increased $33,000 to $501,000 for the quarter ended June 30, 2005, compared to $468,000 for the same period in 2004. Sampler sales are not recognized as revenue until the Company’s obligation has elapsed, which often does not occur until the sampler contract expires eighteen months after the sale is consummated. Hence, a significant portion of sampler sales recognized in the second quarter of 2005 relate to 2003 sales activity.

Interest income increased $818,000, or 8.8%, to $10.1 million during the second quarter of 2005 from $9.3 million during the same period of 2004. The increase primarily resulted from the improved performance of notes originated in 2003, 2004, and 2005 as compared to notes originated in earlier years, before the Company focused on selling to customers with a higher quality of credit. The improved performance of the Company’s notes receivable resulted in greater collections of interest during the second quarter of 2005 versus the same period of 2004. In addition, the higher average outstanding notes receivable balance during the second quarter of 2005 versus the same period of 2004, primarily due to a reduction in sales of notes receivable to the Company’s off-balance-sheet SPE since 2003, contributed to the increase. Lastly, the average yield on the Company’s outstanding notes receivable increased to 15.2% at June 30, 2005 from 15.0% at June 30, 2004, which also contributed to the increase.

Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income increased $150,000 to $450,000 for the second quarter of 2005 versus $300,000 for the second quarter of 2004, due primarily to increased profitability of the resorts’ management clubs during the second quarter of 2005 versus the same period of 2004.

There was no gain on sales of notes receivable during the second quarter of 2005. The $154,000 gain in the second quarter of 2004 resulted from the sale of $4.5 million of notes receivable to the SPE.

Other income consists of marina income, golf course and pro shop income, condo rental income, and other miscellaneous items. Other income increased $146,000 to $957,000 for the second quarter of 2005 versus $811,000 for the same period of 2004, largely due to condo rentals at the Company’s Orlando Breeze resort, acquired in the fourth quarter of 2004.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 16.1% during the second quarter of 2005 versus 19.6% for the same period of 2004 primarily due to the Company selling a much higher percentage of its lower cost inventory in the second quarter of 2005 versus selling primarily its higher cost inventory during the same period of

2004. Higher average sales prices during the second quarter of 2005 compared to the second quarter of 2004 also contributed to the reduction in cost of sales as a percentage of Vacation Interval sales. The $1.3 million decrease in cost of sales in the second quarter of 2005 compared to the second quarter of 2004 is due to the inventory costing. Cost of sales as a percentage of Vacation Interval sales is expected to increase in future periods as the Company continues to deplete its inventory of low-cost Vacation Intervals and shifts its sales mix to more recently constructed units, which were built at higher average costs.

Sales and Marketing

Sales and marketing expenses as a percentage of total sales decreased to 48.0% for the quarter ended June 30, 2005, from 49.7% for the same period of 2004. The decreased percentage is the result of the Company’s marketing strategy to improve the sales margin by increasing the proportion of sales to existing customers over sales to new customers, as sales to existing customers require less sales and marketing expense. For the second quarter of 2005, sales to existing customers increased to 57.1% of Vacation Interval sales, up from 50.4% during the same period of 2004. Sales and marketing expense decreased $546,000 for the second quarter of 2005, as compared to the same period of 2004, primarily due to the Company’s improved sales margin.

Certain credit facilities of the Company contain a financial covenant that requires sales and marketing expense to be 55% or less of total sales for the latest rolling twelve months. For the latest rolling twelve months ended June 30, 2005, this percentage was 51.9%. The Company does not currently foresee issues regarding compliance with this financial covenant for the remainder of the year ending December 31, 2005.

Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales was 17.5% in the second quarter of 2005 compared to 20.0% for the second quarter of 2004. The decrease from 2004 to 2005 is due to improved performance of notes originated in 2003, 2004, and 2005 as compared to notes originated in earlier years, before the Company focused on selling to customers with a higher quality of credit. The allowance for doubtful accounts was 21.5% and 21.1% of gross notes receivable as of June 30, 2005 and December 31, 2004, respectively. The Company will continue its current collection programs and seek new programs to reduce note defaults and improve the credit quality of its customers. However, there can be no assurance that these efforts will be successful.

Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues increased to 14.4% for the second quarter of 2005, from 13.8% for the same period of 2004. Overall, operating, general and administrative expense increased by $449,000 for the second quarter of 2005, as compared to the same period of 2004. This was primarily due to increased salaries and professional fees.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues decreased to 1.5% for the quarter ended June 30, 2005 versus 1.8% for the same quarter of 2004. Overall, depreciation and amortization expense decreased $146,000 for the second quarter of 2005, as compared to 2004, primarily due to a general reduction in capital expenditures since 2000. In addition, depreciation of the Company’s water distribution and waste water treatment utilities assets was ceased effective December 31, 2004 due to the assets being designated as held for sale.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income decreased to 42.4% for the second quarter of 2005, from 46.2% for the same period of 2004. This decrease is primarily the result of the increased interest income during the second quarter of 2005 versus the same period of 2004, partially offset by an increase in the Company’s weighted average cost of borrowings from 6.6% during the second quarter of 2004 to 6.9% during the second quarter of 2005. Overall, interest expense and lender fees remained unchanged at $4.3 million for both of the second quarters of 2005 and 2004.

Income before Provision for Income Taxes and Discontinued Operations

Income before provision for income taxes and discontinued operations increased to $6.5 million for the quarter ended June 30, 2005, as compared to $2.9 million for the quarter ended June 30, 2004, as a result of the above-mentioned operating results.

Provision for Income Taxes

Provision for income taxes as a percentage of income before provision for income taxes and discontinued operations was 35.1% for the second quarter of 2005 as compared to 0.9% for the second quarter of 2004. The higher effective income tax rate during the second quarter of 2005 was the result of utilizing fully the NOL carryforward during the year and incurring tax expense. The low effective income tax rate during the second quarter of 2004 was the result of the 2004 projected income tax benefits being reduced by the effect of a valuation allowance, which reduces the projected net deferred tax assets to zero due to the unpredictability of recovery.

Net Income from Continuing Operations

Net income from continuing operations increased to $4.2 million for the quarter ended June 30, 2005, as compared to $2.9 million for the quarter ended June 30, 2004, as a result of the above-mentioned operating results.

Income from Discontinued Operations

There was no income from discontinued operations during the second quarter of 2005, whereas income from discontinued operations, net of income taxes, was $160,000 for the second quarter of 2004.

Net Income

Net income increased to $4.2 million for the quarter ended June 30, 2005, as compared to $3.1 million for the quarter ended June 30, 2004, as a result of the above-mentioned operating results.

Results of Operations for the Six Months Ended June 30, 2005 and 2004

Revenues

Revenues for the six months ended June 30, 2005 were $91.4 million, representing a $785,000 increase from revenues of $90.7 million for the six months ended June 30, 2004. The increase is primarily due to increased interest income, partially offset by decreased sales during the first half of 2005 versus the same period of 2004.

The following table summarizes our Vacation Interval sales (dollars in thousands).


	Six Months Ended June 30, 2005						Six Months Ended June 30, 2004
					Average						Average
	$ Sales		Intervals		Price		$ Sales		Intervals		Price
Interval Sales to New Customers	$	31,042		2,594	$	11,967	$	33,345		2,983	$	11,178
Upgrade Interval Sales to Existing Customers		13,918		1,673		8,319		16,915		2,430		6,961
Additional Interval Sales to Existing Customers		22,511		2,502		8,997		18,871		2,249		8,391

Total	$	67,471					$	69,131

Overall, Vacation Interval sales decreased $1.7 million during the first half of 2005 versus the first half of 2004, primarily due to lower interval sales to existing customers during the first quarter of 2005, due to the testing of new sales programs for existing customers during this period. Although the Company ended the tests and returned to previous programs to start the second quarter of 2005, the impact from the first quarter outweighed the second quarter recovery, resulting in decreased sales for the six-month period ended June 30, 2005 versus the same period of 2004. The number of interval sales to new customers decreased 13.0%, but average prices increased 7.1%, resulting in a 6.9% net decrease in the sales amount, and the number of interval sales to existing customers decreased 10.8%, but average prices increased 14.1%, resulting in a 1.8% net increase in the sales amount during the first half of 2005 versus the same period of 2004. Total interval sales for the first six months of 2005 included 1,405 biennial intervals (counted as 702 Vacation Intervals) compared to 1,134 biennial intervals (counted as 567 Vacation Intervals) in the same period of 2004.

Sampler sales increased $228,000 to $1.1 million for the first half of 2005, compared to $914,000 for the same period in 2004. Sampler sales are not recognized as revenue until the Company’s obligation has elapsed, which often

does not occur until the sampler contract expires eighteen months after the sale is consummated. Hence, a significant portion of sampler sales recognized in the first half of 2005 relate to 2003 sales activity.

Interest income increased $1.6 million, or 9.0%, to $19.9 million during the first half of 2005 from $18.2 million during the same period of 2004. The increase primarily resulted from the improved performance of notes originated in 2003, 2004, and 2005 as compared to notes originated in earlier years, before the Company focused on selling to customers with a higher quality of credit. The improved performance of the Company’s notes receivable resulted in greater collections of interest during the first six months of 2005 versus the same period of 2004. In addition, the higher average outstanding notes receivable balance during the first half of 2005 versus the same period of 2004, primarily due to a reduction in sales of notes receivable to the Company’s off-balance-sheet SPE since 2003, contributed to the increase. Lastly, the average yield on the Company’s outstanding notes receivable increased to 15.2% at June 30, 2005 from 15.0% at June 30, 2004, which also contributed to the increase.

Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income increased $300,000 to $900,000 for the first half of 2005 versus $600,000 for the first half of 2004, due primarily to increased profitability of the resorts’ management clubs during the first six months of 2005 versus the same period of 2004.

Gain on sales of notes receivable was $669,000 for the first six months of 2005, resulting from the sale of $8.0 million of notes receivable to the SPE. The $580,000 gain during the first six months of 2004 resulted from the sale of $12.7 million of notes receivable to the SPE.

Other income consists of marina income, golf course and pro shop income, condo rental income, and other miscellaneous items. Other income increased $179,000 to $1.4 million for the first half of 2005 versus $1.2 million for the same period of 2004, largely due to condo rentals at the Company’s Orlando Breeze resort, acquired in the fourth quarter of 2004.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 15.9% during the first half of 2005 versus 19.3% for the same period of 2004 primarily due to the Company selling a much higher percentage of its lower cost inventory in the first six months of 2005 versus selling primarily its higher cost inventory during the same period of 2004. Higher average sales prices during the first half of 2005 compared to the first half of 2004 also contributed to the reduction in cost of sales as a percentage of Vacation Interval sales. The $2.6 million decrease in cost of sales in the first half of 2005 compared to the same period of 2004 is primarily due to the inventory costing and to a lesser extent, lower sales. Cost of sales as a percentage of Vacation Interval sales is expected to increase in future periods as the Company continues to deplete its inventory of low-cost Vacation Intervals and shifts its sales mix to more recently constructed units, which were built at higher average costs.

Sales and Marketing

Sales and marketing expenses as a percentage of total sales increased to 51.5% for the six months ended June 30, 2005, from 50.2% for the same period of 2004. The increased percentage is the result of increased marketing expenses related to more expensive direct mail marketing programs established during the first quarter of 2005 for outside sales to new customers, and the expansion of programs to existing customers during the first quarter of 2005. Overall, sales and marketing expense remained relatively flat for the six month period ended June 30, 2005 versus the same period of 2004, increasing by $171,000, or less than 1%.

Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales was 17.5% during the first half of 2005 compared to 20.0% for the first half of 2004. The decrease from 2004 to 2005 is due to improved performance of notes originated in 2003, 2004, and 2005 as compared to notes originated in earlier years, before the Company focused on selling to customers with a higher quality of credit. The allowance for doubtful accounts was 21.5% and

21.1% of gross notes receivable as of June 30, 2005 and December 31, 2004, respectively. The Company will continue its current collection programs and seek new programs to reduce note defaults and improve the credit quality of its customers. However, there can be no assurance that these efforts will be successful.

Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues increased to 15.1% for the first half of 2005, from 14.2% for the same period of 2004. Overall, operating, general and administrative expense increased by $996,000 for the first half of 2005, as compared to the same period of 2004. This was primarily due to increased salaries and professional fees.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues decreased to 1.7% for the six months ended June 30, 2005 versus 2.0% for the same quarter of 2004. Overall, depreciation and amortization expense decreased $250,000 for the first six months of 2005, as compared to 2004, primarily due to a general reduction in capital expenditures since 2000. In addition, depreciation of the Company’s water distribution and waste water treatment utilities assets was ceased effective December 31, 2004 due to the assets being designated as held for sale.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income decreased to 43.6% for the first half of 2005, from 47.1% for the same period of 2004. This decrease is primarily the result of the increased interest income during the first half of 2005 versus the same period of 2004, partially offset by an increase in the Company’s weighted average cost of borrowings from 6.6% during the first half of 2004 to 6.9% during the first half of 2005. Overall, interest expense and lender fees remained relatively flat at $8.7 million and $8.6 million for the six months ended June 30, 2005 and 2004, respectively.

Income before Provision for Income Taxes and Discontinued Operations

Income before provision for income taxes and discontinued operations increased to $9.5 million for the six months ended June 30, 2005, as compared to $5.1 million for the six months ended June 30, 2004, as a result of the above-mentioned operating results.

Provision for Income Taxes

Provision for income taxes as a percentage of income before provision for income taxes and discontinued operations was 30.3% for the first half of 2005 as compared to 0.4% for the first half of 2004. The higher effective income tax rate during the six months ended June 30, 2005 was the result of utilizing fully the NOL carryforward during the year and incurring tax expense. The low effective income tax rate during the same period of 2004 was the result of the 2004 projected income tax benefits being reduced by the effect of a valuation allowance, which reduces the projected net deferred tax assets to zero due to the unpredictability of recovery.

Net Income from Continuing Operations

Net income from continuing operations increased to $6.6 million for the six months ended June 30, 2005, as compared to $5.1 million for the same period of 2004, as a result of the above-mentioned operating results.

Income from Discontinued Operations

Income from discontinued operations, net of income taxes, decreased $161,000 to $128,000 during the first half of 2005, compared to $289,000 during the same period of 2004. The Company sold its water distribution and waste water treatment utilities assets at eight of its timeshare resorts during March 2005, thus there has been no income (loss) from discontinued operations since that time.

Net Income

Net income increased to $6.8 million for the six months ended June 30, 2005, as compared to $5.4 million for the six months ended June 30, 2004, as a result of the above-mentioned operating results.

Liquidity and Capital Resources

Sources of Cash.The Company generates cash primarily from the cash received on the sale of Vacation Intervals, the financing of customer notes receivable from Silverleaf Owners, the sale of notes receivable to the SPE, management fees, sampler sales, and resort and utility operations. The Company typically receives a 10% down payment on sales of Vacation Intervals and finances the remainder by receipt of a seven-year to ten-year customer promissory note. The Company generates cash from customer notes receivable by (i) borrowing at an advance rate of up to 75% of eligible customer notes receivable, (ii) selling notes receivable, and (iii) from the spread between interest received on customer notes receivable and interest paid on related borrowings. Because the Company uses significant amounts of cash in the development and marketing of Vacation Intervals, but collects cash on customer notes receivable over a seven-year to ten-year period, borrowing against receivables has historically been a necessary part of normal operations. During the six months ended June 30, 2005, the Company’s operating activities reflected cash provided by operating activities of $2.0 million versus $1.9 million during the same period of 2004. The increase in cash provided by operating activities was primarily the result of $2.7 million of refunds received during the first half of 2005 due to reducing funds being held in escrow related to customer down payments on new sales, and the decrease in the Company’s maximum exposure to loss regarding its involvement with its SPE, offset by cash spent towards construction of new inventory and fewer sales of notes receivable.

The Company entered into two new revolving credit facilities during the second quarter, which expanded the Company’s borrowing capacity by $75 million. Additionally, the Company is currently negotiating an amendment to the credit facility with one of its other senior lenders to extend the availability of that facility until June 2008. There can be no assurance that the Company will be successful in these negotiations. Although it appears the Company has adequate liquidity to meet its needs in 2005 and 2006, it is continuing to identify additional financing arrangements into 2007 and beyond. To finance the Company’s growth, development, and any future expansion plans, the Company may at some time be required to consider the issuance of other debt, equity, or collateralized mortgage-backed securities. Any debt incurred or issued by the Company may be secured or unsecured, have fixed or variable rate interest, and may be subject to such terms as management deems prudent.

Uses of Cash.Investing activities typically reflect a net use of cash due to capital additions and property acquisitions. However, during the first six months of 2005, net cash provided by investing activities was $12.9 million, due primarily to the sale of the Company’s water distribution and waste water treatment utilities assets at eight of its resorts. During the first half of 2004, net cash used in investing activities was $180,000, due to equipment purchases. The Company evaluates sites for additional new resorts or acquisitions on an ongoing basis.

During the six months ended June 30, 2005, net cash used in financing activities was $17.4 million compared to $1.1 million in the comparable 2004 period. The increase in cash used in financing activities was the result of increased payments on borrowings against pledged notes receivable as the Company paid in full its two non-revolving loans with one of its senior lenders in an aggregate amount of $12.5 million during the first half of 2005, as well as paying off its $20.7 million of term notes with one of its senior lenders. This activity was partially offset by increased borrowings against pledged notes receivable, largely due to the $26.3 million conduit term loan transaction through SF-II during the first half of 2005. During the first half of 2004, net cash of $1.1 million used in financing activities was the result of $45.4 million of payments on borrowings against pledged notes receivable, partially offset by $44.3 million of proceeds received from borrowings against pledged notes receivable.

At June 30, 2005, the Company’s senior credit facilities provided for loans of up to $309.6 million of which approximately $196.3 million of principal related to advances under the credit facilities was outstanding. For the six months ended June 30, 2005, the weighted average cost of funds for all borrowings, including the senior subordinated debt, was 6.9%. Customer defaults have a significant impact on cash available to the Company from financing customer notes receivable in that notes more than 60 days past due are not eligible as collateral. As a result, the Company must repay borrowings against such delinquent notes.

Certain debt agreements include restrictions on the Company’s ability to pay dividends. The Company’s ability to pay dividends might also be restricted by the Texas Business Corporation Act.

Off-Balance-Sheet Arrangements.The Company entered into a $100 million revolving credit agreement to finance Vacation Interval notes receivable through an off-balance-sheet SPE during 2000. The Company obtained an extension of the SPE’s existing revolving credit facility through March 2006. In connection with the two-year extension of this facility, however, the Company agreed to reduce the principal amount of the facility from $100 million to $85 million. On March 31, 2005 the facility amount was further reduced to $75 million. The SPE allows the Company to realize the benefit of an additional $75 million credit facility in addition to the on-balance-sheet credit arrangements it has with its senior lenders. Credit facilities are necessary for the Company to have the liquidity necessary to fund its costs and expenses. Therefore it is vitally important to the Company’s liquidity plan to have financing available in order to finance future sales, since it finances the majority of its timeshare sales over seven to ten years.

During the first half of 2005, the Company sold $8.0 million of notes receivable to the SPE and recognized pre-tax gains of $669,000. In conjunction with these sales, the Company received cash consideration of $6.0 million, which was used to pay down borrowings under its revolving loan facilities. During the first half of 2004, the Company sold $12.7 million of notes receivable to the SPE and recognized pre-tax gains of $580,000. In conjunction with these sales, the Company received cash consideration of $9.6 million, which was primarily used to pay down borrowings under its revolving loan facilities. The SPE funded these purchases through advances under a credit agreement arranged for this purpose. The Company receives fees for servicing sold notes, calculated based on 1% of eligible notes held by the facility. Such fees were $309,000 and $366,000 for the six months ended June 30, 2005 and 2004, respectively. Such fees received approximate the Company’s internal cost of servicing such notes. As a result, the related servicing asset or liability was estimated to be insignificant. At June 30, 2005, the SPE held notes receivable totaling $62.5 million, with related borrowings of $54.8 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, the Company is not obligated to repurchase defaulted or any other contracts sold to the SPE. It is anticipated, however, that it will place bids in accordance with the terms of the conduit agreement to repurchase some defaulted contracts in public auctions to facilitate the re-marketing of the underlying collateral. The investment in the SPE was valued at $2.0 million at June 30, 2005.

Taxes.For regular federal income tax purposes, the Company reports substantially all of the Vacation Interval sales it finances under the installment method. Under this method, income on sales of Vacation Intervals is not recognized until cash is received, either in the form of a down payment or as installment payments on customer notes receivable. The deferral of income tax liability conserves cash resources on a current basis. Interest is imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the payment is received. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The condensed consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method as the interest expense is not estimable. In addition, the Company is subject to current alternative minimum tax (“AMT”) as a result of the deferred income that results from the installment sales treatment. It is anticipated that significant AMT will be due during 2005. Payment of AMT creates a deferred tax asset in the form of a minimum tax credit, which, unless otherwise limited, reduces the future regular tax liability attributable to Vacation Interval sales. In 1998, the Internal Revenue Service approved a change in the method of accounting for installment sales effective as of January 1, 1997. As a result, the Company’s alternative minimum taxable income for 1997 through 1999 was increased each year by approximately $9.0 million for the pre-1997 adjustment, which resulted in the Company paying substantial additional federal and state taxes in those years. Subsequent to December 31, 2000, the Company applied for and received refunds of $8.3 million and $1.6 million during 2001 and 2002, respectively, as the result of the carryback of its 2000 AMT loss to 1999, 1998, and 1997. Accordingly, no minimum tax credit exists currently.

As of December 31, 2004, the Company had $225 million in net operating losses (“NOLs”), which expire between 2018 through 2021. Realization of the deferred tax assets arising from NOLs is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Management currently does not believe that it will be able to utilize its NOL from normal operations. At present, future NOL utilization is expected to be limited to the temporary differences creating deferred tax liabilities. If necessary, management could implement a strategy to accelerate income recognition for federal income tax purposes to utilize the existing NOL. The amount of the deferred tax asset considered realizable could be decreased if estimates of future taxable income during the carryforward period are reduced.

Due to the restructuring completed in May 2002, an ownership change within the meaning of Section 382(g) of the Internal Revenue Code (“the Code”) occurred. As a result, a portion of the Company’s NOL is subject to an annual limitation for taxable years beginning after the date of the exchange (“change date”), and a portion of the taxable year

which includes the change date. The annual limitation will be equal to the value of the stock of the Company immediately before the ownership change, multiplied by the long-term tax-exempt rate (i.e., the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs). This annual limitation may be increased for any recognized built-in gain to the extent allowed in Section 382(h) of the Code.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of and for the six months ended June 30, 2005, the Company had no significant derivative financial instruments or foreign operations. Interest on the Company’s notes receivable portfolio, senior subordinated debt, capital leases, and miscellaneous notes is fixed, whereas interest on the Company’s primary loan agreements, which totaled $196.3 million at June 30, 2005, is partially fixed and partially variable. The impact of a one-point interest rate change on the outstanding balance of variable-rate financial instruments at June 30, 2005, on the Company’s results of operations for the first six months of 2005 would be approximately $638,000, or approximately $0.02 per share.

At June 30, 2005, the carrying value of the Company’s notes receivable portfolio approximates fair value because the weighted average interest rate on the portfolio approximates current interest rates received on similar notes. If interest rates on the Company’s notes receivable are increased or perceived to be above market rates, the fair market value of the Company’s fixed-rate notes will decline, which may negatively impact the Company’s ability to sell new notes. The impact of a one-point interest rate change on the portfolio could result in a fair value impact of $5.9 million or approximately $0.15 per share.

Credit Risk— The Company is exposed to on-balance sheet credit risk related to its notes receivable. The Company is exposed to off-balance sheet credit risk related to notes receivable sold.

The Company offers financing to the buyers of Vacation Intervals at the Company’s resorts. These buyers generally make a down payment of at least 10% of the purchase price and deliver a promissory note to the Company 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 first mortgage on the Vacation Interval. The Company bears the risk of defaults on these promissory notes.

If a buyer of a Vacation Interval defaults, the Company 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 the Company in many cases may have recourse against a Vacation Interval buyer for the unpaid price, certain states have laws that limit the Company’s ability to recover personal judgments against customers who have defaulted on their loans. Accordingly, the Company has generally not pursued this remedy.

Interest Rate Risk —The Company has historically derived net interest income from its financing activities because the interest rates it charges its customers who finance the purchase of their Vacation Intervals exceed the interest rates the Company pays to its lenders. Because the Company’s indebtedness primarily bears interest at variable rates and the Company’s customer receivables bear interest at fixed rates, increases in interest rates will erode the income that the Company has historically obtained due to this spread and could cause the rate on the Company’s borrowings to exceed the rate at which the Company provides financing to its customers. The Company has not engaged in interest rate hedging transactions. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on the Company’s results of operations, cash flows, and financial position.

Availability of Funding Sources —The Company funds substantially all of the notes receivable, timeshare inventories, and land inventories which it originates or purchases with borrowings through its financing facilities, sales of notes receivable, internally generated funds, and proceeds from public debt and equity offerings. Borrowings are in turn repaid with the proceeds received by the Company from repayments of such notes receivable. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its operations or sell assets, thereby having a material adverse effect on the Company’s results of operations, cash flows, and financial condition.

Geographic Concentration —The Company’s notes receivable are primarily originated in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk inherent in such concentrations is dependent upon regional and general economic stability, which affects property values and the financial stability of the borrowers. The Company’s Vacation Interval inventories are concentrated in Texas, Missouri, Illinois, Massachusetts, and Georgia. The risk

inherent in such concentrations is in the continued popularity of the resort destinations, which affects the marketability of the Company’s products and the collection of notes receivable.

Item 4. Controls and Procedures

An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness and design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were adequate to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized, and reported as and when required.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

either individually or in the aggregate, is likely to have a material adverse effect on the Company, its business, results of operations, or financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

At the 2005 Annual Meeting of Shareholders held on May 19, 2005, the shareholders of the Company elected directors, approved the terms of a performance-based incentive bonus plan for 2006 for the Company’s chief executive officer (the “2006 CEO Incentive Bonus Plan”) to comply with the requirements of Internal Revenue Code Section 162(m), and ratified the selection of BDO Seidman, LLP as the Company’s independent auditors.

The board nominees were elected as directors with the following vote:


Nominee	For	Withheld
J. Richard Budd, III.	36,526,281	76,888

James B. Francis, Jr.	36,527,381	75,788

Herbert B. Hirsch	36,527,381	75,788

Robert E. Mead	36,520,031	83,138

Rebecca Janet Whitmore	36,526,281	76,888

With respect to the approval of the 2006 CEO Incentive Bonus Plan, the vote was as follows:


For	Against	Abstain
28,236,384	942,429	5,235

With respect to the Board proposal to ratify the appointment of BDO Seidman, LLP as the Company’s independent auditors, the vote was as follows:


For	Against	Abstain
36,478,280	120,188	4,701

Item 5. Other Information

The Company has filed an application to list its shares of common stock on the American Stock Exchange (“AMEX”). The Company believes that the application process will be completed in the third or fourth quarter of 2005; however, there can be no assurance that the AMEX will approve the listing of the Company’s shares of common stock.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits filed herewith.


			10.1			Amendment No. 1 to Second Amended and Restated Revolving Credit Agreement dated as of July 1, 2005 between the Registrant and Sovereign Bank.

			10.2			Amendment No. 1 to Inventory and Receivables Revolving Credit Agreement dated as of July 1, 2005 between the Registrant and Sovereign Bank.

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

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

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

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

(b)

Reports on Form 8-K

The Company filed the following Current Reports on Form 8-K with the SEC during the quarter ended June 30, 2005:

Current Report on Form 8-K filed with the SEC on April 19, 2005 relating to the amendment to the Registrant’s employment agreement with Robert E. Mead.

Current Report on Form 8-K filed with the SEC on May 5, 2005 relating to a loan agreement between the Registrant and CapitalSource Finance, LLC.

Current Report on Form 8-K filed with the SEC on May 16, 2005 relating to the Registrant’s earnings release for the quarter ended March 31, 2005.

SIGNATURES

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


Dated: August 12, 2005	By:	/s/ ROBERT E. MEAD

		Robert E. Mead Chairman of the Board and Chief Executive Officer

Dated: August 12, 2005	By:	/s/ HARRY J. WHITE, JR.

		Harry J. White, Jr. Chief Financial Officer

INDEX TO EXHIBITS


Exhibit No.		Description
10.1		Amendment No. 1 to Second Amended and Restated Revolving Credit Agreement dated as of July 1, 2005 between the Registrant and Sovereign Bank.

10.2		Amendment No. 1 to Inventory and Receivables Revolving Credit Agreement dated as of July 1, 2005 between the Registrant and Sovereign Bank.

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

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

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

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Silverleaf Resorts Inactive 10-Q2005 Q2 Quarterly report

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