Silverleaf Resorts 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission file number: 001-13003

SILVERLEAF RESORTS, INC.

(Exact name of registrant as specified in its charter)

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

1221 RIVER BEND DRIVE, SUITE 120

DALLAS, TEXAS 75247

(Address of principal executive offices, including zip code)

214-631-1166

(Registrant’s telephone number, including area code)

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

Yes [X] No [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ] Accelerated filer [  ]Non-accelerated filer [X]

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

Yes [  ] No [X]

Number of shares of common stock outstanding of the issuer’s Common Stock, par value $0.01 per share, as of November 13, 2006: 37,685,397

Explanatory Note

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including in particular, statements about our plans, objectives, expectations and prospects under Items 1 and 2. You can identify these statements by forward-looking words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek” and similar expressions. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve uncertainties and risks, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that could cause our actual results to differ materially from the results anticipated by the forward-looking statements are discussed under the heading “Risk Factors” beginning on page 22 of our annual report on Form 10-K for the year ended December 31, 2005. Any or all of these factors could cause our actual results and financial or legal status for future periods to differ materially from those expressed or referred to in any forward-looking statement. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Forward-looking statements speak only as of the date on which they are made.

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SILVERLEAF RESORTS, INC.

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Statements of Operations for the three
	months and nine months ended September 30, 2006 and 2005	3
	Condensed Consolidated Balance Sheets as of September 30, 2006
	and December 31, 2005	4
	Condensed Consolidated Statement of Shareholders' Equity for
	the nine months ended September 30, 2006	5
	Condensed Consolidated Statements of Cash Flows for the
	nine months ended September 30, 2006 and 2005	6
	Notes to the Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits and Reports on Form 8-K	30
	Signatures	31

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PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Revenues:
Vacation Interval sales	$	51,414		$	41,833		$	141,516		$	109,304
Estimated uncollectible revenue		(8,910	)		-			(24,525	)		-
Sampler sales		-			617			-			1,759
Net sales		42,504			42,450			116,991			111,063
Interest income		12,021			9,067			33,439			28,937
Management fee income		465			450			1,396			1,351
Gain on sale of notes receivable		-			5,789			-			6,457
Other income		1,110			4,549			2,980			5,931
Total revenues		56,100			62,305			154,806			153,739
Costs and Operating Expenses:
Cost of Vacation Interval sales		6,069			6,772			14,986			17,507
Sales and marketing		25,880			19,648			68,535			54,985
Provision for uncollectible notes		-			6,275			-			18,083
Operating, general and administrative		7,958			7,344			23,329			21,177
Depreciation and amortization		627			616			1,750			2,158
Interest expense and lender fees		5,730			4,094			15,273			12,765
Total costs and operating expenses		46,264			44,749			123,873			126,675
Income before provision for income taxes
and discontinued operations		9,836			17,556			30,933			27,064
Provision for income taxes		(3,787	)		(5,306	)		(11,909	)		(8,189	)
Income from continuing operations		6,049			12,250			19,024			18,875
Discontinued Operations
Gain on sales of discontinued operations (net of taxes)		-			613			-			613
Income from discontinued operations (net of taxes)		-			-			-			128
Net income from discontinued operations (net of taxes)		-			613			-			741
Net income	$	6,049		$	12,863		$	19,024		$	19,616
Basic income per share:
Income from continuing operations	$	0.16		$	0.33		$	0.51		$	0.51
Income from discontinued operations	$	-		$	0.02		$	-		$	0.02
Net income	$	0.16		$	0.35		$	0.51		$	0.53
Diluted income per share:
Income from continuing operations	$	0.15		$	0.31		$	0.48		$	0.48
Income from discontinued operations	$	-		$	0.02		$	-		$	0.02
Net income	$	0.15		$	0.33		$	0.48		$	0.50
Weighted average basic common shares outstanding		37,590,168			36,954,948			37,528,924			36,918,265
Weighted average diluted common shares outstanding		39,233,579			39,042,770			39,232,479			38,934,572
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

		September 30,		December 31,
ASSETS		2006		2005
		(Unaudited)
Cash and cash equivalents	$	8,834	$	10,990
Restricted cash		38,082		4,893
Notes receivable, net of allowance for uncollectible notes of
$69,836 and $52,479, respectively		218,298		177,572
Accrued interest receivable		2,858		2,243
Investment in special purpose entity		15,020		22,802
Amounts due from affiliates		4,122		680
Inventories		145,203		117,597
Land, equipment, and leasehold improvements, net		22,264		10,441
Land held for sale		203		495
Prepaid and other assets		20,297		14,083
TOTAL ASSETS	$	475,181	$	361,796
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses	$	10,721	$	9,556
Accrued interest payable		2,011		1,354
Amounts due to affiliates		104		544
Unearned samplers		6,167		5,310
Income taxes payable		4,094		1,268
Deferred income taxes payable		15,601		8,485
Notes payable and capital lease obligations		260,026		177,269
Senior subordinated notes		32,321		33,175
Total Liabilities		331,045		236,961
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,
37,685,397 shares issued and outstanding at September 30, 2006, and
37,494,304 shares issued and outstanding at December 31, 2005		377		375
Additional paid-in capital		112,482		112,207
Retained earnings		31,277		12,253
Total Shareholders' Equity		144,136		124,835
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	475,181	$	361,796

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

4

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(in thousands, except share amounts)

(Unaudited)

	Common Stock
	Number of		$0.01		Additional
	Shares		Par		Paid-in		Retained
	Issued		Value		Capital		Earnings		Total
January 1, 2006	37,494,304	$	375	$	112,207	$	12,253	$	124,835
Stock-based compensation	-		-		217		-		217
Exercise of stock options	191,093		2		58		-		60
Net income	-		-		-		19,024		19,024
September 30, 2006	37,685,397	$	377	$	112,482	$	31,277	$	144,136

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

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SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

		Nine Months Ended
		September 30,
		2006			2005
					(Revised-see Note 2)
OPERATING ACTIVITIES:
Net income	$	19,024		$	19,616
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Income from discontinued operations, net of taxes		-			(741	)
Estimated uncollectible revenue / provision for uncollectible notes		24,525			18,083
Depreciation and amortization		1,750			2,158
Gain on sale of notes receivable		-			(6,457	)
Gain on sale of land held for sale		(499	)		(3,635	)
Proceeds from sale of notes receivable		-			104,193
Stock-based compensation		217			-
Cash effect from changes in operating assets and liabilities:
Restricted cash		(661	)		(1,112	)
Notes receivable		(77,037	)		(31,987	)
Accrued interest receivable		(615	)		186
Investment in special purpose entity		7,782			(16,794	)
Amounts due from/to affiliates		(3,882	)		(2,231	)
Inventories		(15,820	)		(6,092	)
Prepaid and other assets		(6,214	)		(1,046	)
Accounts payable and accrued expenses		1,165			479
Accrued interest payable		657			126
Unearned samplers		857			742
Income taxes payable		9,942			6,638
Net cash (used in) provided by operating activities		(38,809	)		82,126
INVESTING ACTIVITIES:
Purchases of land, equipment, and leasehold improvements		(13,573	)		(419	)
Proceeds from sale of discontinued operations		-			13,101
Proceeds from sale of land held for sale		791			6,131
Net cash (used in) provided by investing activities		(12,782	)		18,813
FINANCING ACTIVITIES:
Proceeds from borrowings from unaffiliated entities		291,426			111,796
Payments on borrowings to unaffiliated entities		(209,523	)		(215,837	)
Restricted cash for repayment of debt		(32,528	)		(258	)
Proceeds from exercise of stock options		60			30
Net cash provided by (used in) financing activities		49,435			(104,269	)
Net change in cash and cash equivalents		(2,156	)		(3,330	)
CASH AND CASH EQUIVALENTS:
Beginning of period		10,990			10,935
End of period	$	8,834		$	7,605
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized	$	13,026		$	11,108
Income taxes paid	$	3,800		$	1,200
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Notes receivable, net of allowance for uncollectible notes, acquired from SPE	$	-		$	62,884
Notes payable acquired from SPE	$	-		$	50,386
Other assets, liabilities, and equity acquired from SPE	$	-		$	12,498
Land and equipment acquired under capital leases	$	-		$	62
The accompanying notes are an integral part of these condensed consolidated financial statements.

6

SILVERLEAF RESORTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Background

These condensed consolidated financial statements of Silverleaf Resorts, Inc. (“Silverleaf,” “the Company,” “we,” or “our”) 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 our opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (“SEC”), as well as all the financial information contained in interim and other reports filed with the SEC since then. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in such Form 10-K, with the exception of Statement of Financial Accounting Standards No. 152, “Accounting for Real Estate Time-Sharing Transactions” (“SFAS No. 152”) and Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS No. 123R”) noted below.

Note 2 - Significant Accounting Policies Summary

Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in conformity with accounting policies generally accepted in the United States of America. In our opinion, the accompanying condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly our financial condition, our results of operations and changes in our cash flows.

Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, excluding Silverleaf Finance I, Inc., our wholly-owned qualified special purpose entity dissolved during the third quarter of 2005 (“SF-I”), and Silverleaf Finance III, LLC, a wholly-owned off-balance sheet qualified special purpose finance subsidiary, formed during the third quarter of 2005 (“SF-III”). All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

Adoption of SFAS No. 152 — 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. Accordingly, we adopted SFAS No. 152 effective January 1, 2006. SFAS No. 152 amends Financial Accounting Standards Board 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 American Institute of Certified Public Accountants Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). This Statement also amends Financial Accounting Standards Board 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 provides guidance on determining revenue recognition for timeshare transactions, evaluation of uncollectibility of Vacation Interval receivables, accounting for costs of Vacation Interval sales, operations during holding periods (or incidental operations), and other accounting transactions specific to time share operations. Restatement or reclassification of previously reported financial statements is not permitted. Accordingly, as a result of the adoption of SFAS No. 152, our financial statements for periods beginning on or after January 1, 2006 are not comparable, in all respects, with those prepared for periods ending on or prior to December 31, 2005.

Specifically, SFAS No. 152 requires the following changes to our accounting for time-sharing transactions:

·     The relative sales value method of recording Vacation Interval cost of sales has been amended to include estimated future defaults of uncollectible sales and the subsequent resale of the recovered Vacation Intervals reacquired on future cancelled sales in our total estimate of revenues we expect to earn on a project.

7

·      The estimated uncollectible revenue on Vacation Interval sales excludes an estimate for the value of inventory recoveries. Prior to SFAS No. 152 we included a reduction to our provision for uncollectible notes for our estimate of inventory recoveries.

·      The estimated uncollectible revenue (i.e. provision for uncollectible notes) is recorded as a reduction to Vacation Interval sales rather than as an expense, as it was previously recorded prior to SFAS No. 152.

·      Revenues related to sampler contracts, which entitle the prospective owner to sample a resort during certain periods, have been and will continue to be deferred until the customer uses the stay or allows the contract to expire. Effective January 1, 2006, sampler sales and related costs are accounted for as incidental operations, whereby incremental costs in excess of incremental revenue are charged to expense as incurred and the operations are presented as a net expense in the condensed consolidated statement of operations. Conversely, incremental revenue in excess of incremental costs is recorded as a reduction of inventory in the condensed consolidated balance sheet. Incremental costs include costs that would not have been incurred had we not sold samplers. During the three and nine months ended September 30, 2006, all sampler sales were recorded as a reduction to sales and marketing expense since direct and incremental costs of sampler sales exceeded incremental sampler sales. Prior to SFAS No. 152, sampler sales were reported separately as revenue.

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. We recognize the sale of a Vacation Interval under the full accrual method after a binding sales contract has been executed, the buyer has made a down payment of at least 10%, and the statutory rescission period has expired. If all accrual method criteria are met except that significant development costs remain to complete the project or phase, revenues are recognized on the percentage-of-completion basis. Under this method, the amount of revenue recognized (based on the sales value) at the time a sale is recognized is measured by the relationship of costs already incurred to the total of costs already incurred and estimated future costs. The remaining amount is deferred and recognized as the remaining costs are incurred. There were no sales deferred at September 30, 2006 related to the percentage-of-completion method.

Both of the above methods employ the relative sales value method in accounting for costs of sales and inventory, which are applied to each phase separately. Generally, we consider each building a separate phase. Pursuant to the provisions of SFAS No. 152, in determining relative sales value, an estimate of uncollectibility is used to reduce the estimate of total Vacation Interval revenue under the project, both actual to date plus expected future revenue. The relative sales value method is used to allocate inventory cost and determine cost of sales in conjunction with a sale. Under the relative sales value method, cost of sales is estimated as a percentage of net sales using a cost of sales percentage which represents the ratio of total estimated cost, including both costs already incurred plus estimated costs to complete the phase, if any, to total estimated Vacation Interval revenue under the project. Common costs, including amenities, are allocated to inventory cost among the phases that those costs are expected to benefit, and are included in total estimated costs.

The estimate of total revenue for a phase, which includes both actual to date revenues and expected future revenues, incorporates factors such as actual or estimated uncollectibles, changes in sales mix and unit sales prices, repossessions of intervals, effects of upgrade programs, and past and expected sales programs to sell slow moving inventory units. On at least a quarterly basis, we recalculate the estimated cost of sales percentage, using the new estimate of total estimated phase revenue and total estimated phase costs, both actual to date and expected in the future. The effects of changes in estimates are accounted for in the period in which they first become known on a retrospective basis using a current period adjustment.

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

8

In addition to sales of Vacation Intervals to new prospective owners, we sell additional and upgraded Vacation Intervals to existing owners. Revenues are recognized on an additional Vacation Interval sale, which is a new interval sale that is treated as a separate transaction from the original Vacation Interval for accounting purposes, when the buyer makes a down payment of at least 10%, excluding any equity from the original Vacation Interval purchased. Revenues are recognized on an upgrade Vacation Interval sale, which is a modification and continuation of the original sale, by including the buyer’s equity from the original Vacation Interval towards the down payment of at least 10%. The additional accrual method criteria described above must also be satisfied for revenue recognition of additional and upgraded Vacation Intervals. The revenue recognized on upgrade Vacation Interval sales is the difference between the upgrade sales price and traded-in sales price, and cost of sales is the incremental increase in the cost of the Vacation Interval purchased.

We recognize interest income as earned. Interest income is accrued on notes receivable, net of an estimated amount that will not be collected, until the individual notes become 90 days delinquent. Once a note becomes 90 days delinquent, the accrual of interest income ceases until collection is deemed probable.

We receive fees for management services provided to 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.

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 revenue is recognized.

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

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

Investment in Special Purpose Entities —We were party to a $75 million revolving credit agreement to finance Vacation Interval notes receivable through SF-I, an off-balance-sheet qualified special purpose entity through July 2005. Sales of notes receivable from the Company to SF-I that met certain underwriting criteria occurred on a periodic basis. SF-I funded these purchases through advances under a credit agreement arranged for this purpose.

We closed a securitization transaction with SF-III, which is a qualified special purpose entity formed for the purpose of issuing $108.7 million of Timeshare Loan-Backed Notes Series 2005-A (“Series 2005-A Notes”) in a private placement during the third quarter of 2005. The Series 2005-A Notes are secured by timeshare receivables sold to SF-III by the Company pursuant to a transfer agreement between us and SF-III. Under that agreement, we sold to SF-III approximately $132.8 million in timeshare receivables that were previously pledged as collateral under revolving credit facilities with our senior lenders and SF-I. The proceeds from the sale of the timeshare receivables to SF-III were used to pay off in full the credit facility of SF-I and to pay down amounts we owed under our senior credit facilities. The timeshare receivables we sold to SF-III are without recourse, except for breaches of certain representations and warranties at the time of sale. We are responsible for servicing the timeshare receivables purchased by SF-III pursuant to the terms of the agreement and will receive a fee for our services. Such fees received approximate our internal cost of servicing such timeshare receivables, and approximates the fee a third party would receive to service such receivables. As a result, the related servicing asset or liability was estimated to be insignificant.

We account for and evaluate our investment in special purpose entities in accordance with SFAS 140, EITF 99-20, and SFAS 115, as applicable. The gain or loss on the sale is determined based on the proceeds received, the fair value assigned to the investment in special purpose entities, and the recorded value of notes receivable sold. The fair value of the investment in special purpose entities is estimated based on the present value of future cash flows we expect to receive from the notes receivable sold. We utilized the following key assumptions to estimate the fair value of such cash flows related to SF-I: 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%. We utilized the following key assumptions to estimate the fair value of such cash flows related to SF-III: customer prepayment rate (including expected accounts paid in full as a result of upgrades) - 15.9%; expected credit losses - 8.81% to 11.38%; discount rate - 15% to 34.7%; base interest rate - 5.37%; and loan servicing fees - 1.75%. Our assumptions are based on experience with our notes receivable portfolio, available market data, estimated prepayments, the cost of servicing, and net transaction costs. Such assumptions are assessed quarterly and, if necessary, adjustments are made to the carrying value of the investment in special purpose entities on a prospective basis as a change in accounting estimate, with the amount of periodic interest accretion adjusted over the remaining life of the beneficial interest. The carrying value of the investment in special purpose entities represents our maximum exposure to loss regarding our involvement with our special purpose entities.

9

Allowance for Uncollectible Notes — Beginning January 1, 2006, estimated uncollectible revenue, which is an offset to Vacation Interval sales, 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. Prior to the adoption of SFAS No. 152, this line item was recorded as an expense: provision for uncollectible notes. The 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 we recover the underlying inventory. The second form is a deemed cancellation, whereby we record the cancellation of all notes that become 90 days delinquent, net of notes that are no longer 90 days delinquent. 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, we project future cancellations and credit losses 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. Recourse to the Company on sales of customer notes receivable is governed by the agreements between the purchasers and the Company.

Inventories — Inventories are stated at the lower of cost or fair value less cost to sell. Cost includes amounts for land, construction materials, amenities and common costs, direct labor and overhead, an estimate for the value of future recoveries, taxes, and capitalized interest incurred in the construction or through the acquisition of resort dwellings held for timeshare sale. Timeshare unit costs are capitalized as inventory and are allocated to Vacation Intervals based upon their relative sales values.

We estimate the total cost to complete all amenities at each resort. This cost includes both costs incurred to date and expected costs to be incurred. At September 30, 2006, the estimated costs not yet incurred, which are expected to complete promised amenities was $1.2 million. We allocate the estimated promised and completed 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.

The relative sales value method of recording Vacation Interval cost of sales has been amended by SFAS No. 152 beginning January 1, 2006 to include estimated future defaults of uncollectible sales and the subsequent resale of the recovered Vacation Intervals reacquired on future cancelled sales in our total estimate of revenues we expect to earn on a project. We periodically review the carrying value of our inventory on an individual project basis for impairment, to ensure that the carrying value does not exceed fair value.

Land, Equipment, and Leasehold Improvements — Land, equipment (including equipment under capital lease), and leasehold improvements are stated at cost. When assets are disposed of, the cost and related accumulated depreciation are removed, and any resulting gain or loss is reflected in income for the period. Maintenance and repairs are charged to expense as incurred; significant betterments and renewals, which extend the useful life of a particular asset, are capitalized. Depreciation is calculated for all fixed assets, other than land, using the straight-line method over the estimated useful life of the assets, ranging from 3 to 20 years. We periodically review our 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, deferred commissions, novelty inventories, deposits, collected cash in senior lender lock boxes which has not yet been applied to the loan balances by the senior lenders, and miscellaneous receivables. Commitment fees and debt issuance costs are amortized over the life of the related debt.

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Income Taxes— Deferred income taxes are recorded for temporary differences between the basis of assets and liabilities as recognized by tax laws and their carrying value as reported in the 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. Our federal tax return includes all items of income, gain, loss, expense and credit of SF-III, since it is a disregarded entity for federal income tax purposes. We have a tax sharing agreement with SF-III.

Derivative Financial Instruments — We follow Statement of Financial Accounting Standard No. 133, as amended, which establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts and hedging activities. All derivatives, whether designed as hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

We have engaged in two interest rate hedging transactions, or derivatives, to hedge against fluctuations in interest rates. As of September 30, 2006, we had hedging contracts with notional amounts of $45.4 million, which expire between September 2011 and March 2014. The hedge transactions are reflected at fair value on our balance sheet.

Earnings Per Share— Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Earnings per share assuming dilution is computed by dividing net income by the weighted average number of common 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 common shares resulting from the exercise of the stock options is reduced by the number of common shares that we could have repurchased with the proceeds from the exercise of the stock options.

Stock-Based Compensation —In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Share-Based Payment, revised SFAS No. 123R, effective for the next fiscal year beginning after June 15, 2005. Accordingly, we adopted the provisions of SFAS No. 123R effective January 1, 2006. SFAS No. 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, we are no longer 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, or the pro forma disclosure requirements of SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, as if we had accounted for our employee stock options under the fair value method of SFAS No. 123. Instead, we are required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of operations.

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

The following table illustrates the effect on net income and net income per share had we applied the fair-value recognition provisions of SFAS No. 123 to our stock option grants for the three and nine month periods ended September 30, 2005, prior to the adoption of SFAS No. 123R (in thousands, except per share amounts):

		Three Months			Nine Months
		Ended September 30,			Ended September 30,
		2005			2005
Net income, as reported	$	12,863		$	19,616
Add: Stock-based compensation expense included in net income		—			—
Deduct: Stock-based compensation expense computed under the fair value method, net of tax		(48	)		(133	)
Pro forma net income	$	12,815		$	19,483
Net income per share, basic
As reported	$	0.35		$	0.53
Pro forma	$	0.35		$	0.53
Net income per share, diluted
As reported	$	0.33		$	0.50
Pro forma	$	0.33		$	0.50

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There were 267,000 stock options granted during the first nine months of 2005 with an exercise price of $1.62 per share. There were no stock options granted, forfeited, or expired during the first nine months of 2006. There were 191,093 stock options exercised during the first nine months of 2006 at a weighted average exercise price of $0.315 per share. At September 30, 2006 there is $265,000 of unamortized compensation expense related to the stock option grants during 2005, which will be fully recognized by August 2008.

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 SF-III, and the future sales plan and estimated recoveries used to allocate certain costs to inventories and cost of sales.

Revised Statements of Cash Flows Presentation — In previously issued Statements of Cash Flows, we reported the operating and investing activities of our discontinued operations on a combined basis as a single amount. In 2006, we separately disclosed those activities within the Company’s other operating and investing activities. There were no activities from discontinued operations during 2006, however during 2005 we previously disclosed a net use of cash for operating activities of $841,000 pertaining to discontinued operations, all of which took place in the first quarter of 2005. We have revised the 2005 Statement of Cash Flow to reflect $781,000 of cash used in operating activities and $60,000 of cash used in investing activities pertaining to discontinued operations, within the Company’s other operating and investing activities.

In addition, our 2004 and 2003 Statements of Cash Flows presentation will be revised in future annual reports on Form 10-K as follows to reflect this revision (in thousands):

		Cash Provided		Cash Provided by (Used in)
		By Operating		Investing
		Activities		Activities
2004, as previously reported	$	5,748	$	(570	)
2004, revised	$	6,901	$	(1,334	)
2003, as previously reported	$	22,419	$	4,428
2003, revised	$	23,953	$	2,982

Other Recent Accounting Pronouncements —

SFAS No. 155 - In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS No. 155”). SFAS No. 155 amends Financial Accounting Standards Board Statements No. 133 and 140. The statement applies to certain hybrid financial instruments, which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. This new standard also permits an election for fair value re-measurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under Financial Accounting Standards Board Statement No. 133. The fair value election can be applied on an instrument-by-instrument basis to existing instruments at the date of adoption and can be applied to new instruments on a prospective basis. The adoption of SFAS No. 155 is not expected to impact our consolidated financial position or results of operations.

SFAS No. 156 - In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”). The statement allows for the adoption of the fair value method of accounting for servicing assets, as opposed to the lower of amortized cost or market value, including mortgage servicing rights, which represent an entity’s right to a future stream of cash flows based upon the contractual servicing fee associated with servicing mortgage loans. The statement is effective as of the beginning of any fiscal year beginning after September 15, 2006, with early adoption permitted as of January 1, 2006. We are still evaluating the impact the adoption of SFAS No. 156 will have on our consolidated financial position and results of operations.

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FIN No. 48 - In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are still evaluating the impact the adoption of FIN No. 48 will have on our consolidated financial position and results of operations. Our adoption of FIN No. 48 effective January 1, 2007 may result in an adjustment to our tax liability and retained earnings.

SFAS No. 157 - In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements(“SFAS No. 157”), which clarifies that the term fair value is intended to mean a market-based measure, not an entity-specific measure, and gives the highest priority to quoted prices in active markets in determining fair value.  SFAS No. 157 requires disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value, and (3) the effect of fair value measures on earnings.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  The adoption of SFAS No. 157 is not expected to have a material effect on our consolidated financial position or results of operations.

SAB 108 - In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB 108 is effective for fiscal years ending on or after November 15, 2006, with earlier adoption encouraged. The adoption of SAB 108 is not expected to have a material effect on our consolidated financial position or results of operations.

SFAS No. 158 - In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”), which amends Financial Accounting Standards No. 87, 88, 106, and 132(R) to require recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date, the date at which the benefit obligation and plan assets are measured, is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of SFAS No. 158 is not expected to impact our consolidated financial position or results of operations.

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Note 3 - Earnings Per Share

The following table illustrates the reconciliation between basic and diluted weighted average shares outstanding for the three and nine months ended September 30, 2006 and 2005:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Weighted average shares outstanding - basic	37,590,168		36,954,948		37,528,924		36,918,265
Issuance of shares from stock options exercisable	2,174,793		2,656,198		2,236,037		2,543,013
Repurchase of shares from stock options proceeds	(531,382	)	(568,376	)	(532,482	)	(526,706	)
Weighted average shares outstanding - diluted	39,233,579		39,042,770		39,232,479		38,934,572

Outstanding stock options totaling approximately 867,000 and 870,500 were not dilutive at September 30, 2006 and 2005, respectively, because the exercise price for such options exceeded the market price for our shares. 

Note 4 - Notes Receivable

We provide 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 September 30, 2006 was approximately 15.7%, with individual rates ranging from 0% to 17.5%. In connection with the sampler program, we routinely enter into notes receivable with terms of 10 months. Notes receivable from sampler sales were $3.1 million and $2.2 million at September 30, 2006 and 2005, respectively, and are non-interest bearing.

We consider accounts over 60 days past due to be delinquent. As of September 30, 2006, $4.8 million of notes receivable, net of accounts charged off, were considered delinquent. An additional $28.3 million of notes, of which $25.4 million is pledged to senior lenders, would have been considered to be delinquent and therefore ineligible to be used for collateral purposes had we not granted payment concessions to our customers, which brings a delinquent note current and extends the maturity date if two consecutive timely payments are made.

Notes receivable are scheduled to mature as follows at September 30, 2006 (in thousands):

For the 12-Month Period Ending September 30,
2007	$	35,789
2008		35,332
2009		36,797
2010		37,204
2011		38,170
Thereafter		104,866
		288,158
Less discounts on notes		(24	)
Less allowance for uncollectible notes		(69,836	)
Notes receivable, net	$	218,298

The activity in gross notes receivable is as follows for the three and nine-month periods ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Balance, beginning of period	$	270,601		$	258,993		$	230,051		$	248,972
Sales		42,376			37,457			127,599			95,962
Collections		(17,598	)		(16,462	)		(50,562	)		(49,179	)
Receivables charged off		(8,778	)		(4,595	)		(24,488	)		(12,344	)
Receivables received via dissolution of SF-I		—			73,687			—			73,687
(Sold) or repurchased notes receivable		1,533			(132,826	)		5,534			(140,844	)
Balance, end of period	$	288,134		$	216,254		$	288,134		$	216,254

Prior to the adoption of SFAS No. 152, we provided for estimated Vacation Interval defaults at the time the Vacation Interval revenue was recorded by a charge to the provision for uncollectible notes and an increase to the allowance for uncollectible notes. The provision was calculated as the estimated future losses for newly originated Vacation Intervals offset by estimated future recoveries of inventory. Beginning January 1, 2006 with the adoption of SFAS No. 152, we now record estimated uncollectible revenue as a reduction to Vacation Interval sales. The estimated uncollectible revenue is calculated as gross losses for newly originated Vacation Intervals and does not include an offset for inventory recoveries, which is now a component of the relative sales value method.

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The activity in the allowance for uncollectible notes is as follows for the three and nine months ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Balance, beginning of period	$	68,171		$	55,636		$	52,479		$	52,506
Reclassification of estimated inventory recoveries on future charge offs		—			—			11,786			—
Estimated uncollectible revenue		8,910			—			24,525			—
Provision for uncollectible notes		—			6,275			—			18,083
Receivables charged off		(8,778	)		(4,595	)		(24,488	)		(12,344	)
Allowance received via dissolution of SF-I		—			10,803			—			10,803
Allowance related to notes sold or repurchased		1,533			(15,461	)		5,534			(16,390	)
Balance, end of period	$	69,836		$	52,658		$	69,836		$	52,658

Note 5 - Debt

Notes payable, capital lease obligations, and senior subordinated notes as of September 30, 2006 and December 31, 2005 are as follows (in thousands):

		September 30,		December 31,
		2006		2005
$100.0 million revolving loan agreement, which contains certain financial covenants, revolving through June 2008 and due June 2011, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of Prime plus 1.0%, with a 6% floor (the loan agreement is currently limited to $60 million of availability)	$	27,489	$	53,661
$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%		28,808		37,224
$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%		16,312		20,839
$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 Prime plus 0.75%		16,279		28,800
$50 million revolving loan agreement, which contains certain financial covenants, revolving through December 2008, due December 2011, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of Prime plus 0.5%, with a 6% floor		153		—
$100.0 million revolving credit facility, backed by a $100.0 million variable funding note bearing interest at a rate of LIBOR plus 1.5%, revolving through and due March 2010, principal and interest payable from the proceeds obtained on customer notes receivable sold as collateral for the variable funding note		—		—
$128.0 million term securitization, backed by $128.0 million of timeshare loan-backed notes, issued in seven classes and bearing interest at a blended coupon rate of 6.7%, due July 2018, principal and interest payable from the proceeds obtained on customer notes receivable sold as collateral for the timeshare loan-backed notes		126,223		—
$25 million revolving loan agreement, which contains certain financial covenants, revolving through May 2007, due May 2010, principal and interest payable from the proceeds obtained on customer notes receivable pledged as collateral for the note, at an interest rate of Prime plus 1.5%, with a 6.5% floor		—		—
$10 million inventory loan agreement, which contains certain financial covenants, revolving through August 2008, due August 2010, interest payable monthly, at an interest rate of LIBOR plus 3.25%		10,000		10,000
$6 million inventory loan agreement, which contains certain financial covenants, revolving through August 2008, due August 2010, interest payable monthly, at an interest rate of Prime plus 3% with a 6% floor		—		—
$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		1,670		3,335
$30 million inventory loan agreement, which contains certain financial covenants, revolving through April 2009, due April 2011, interest payable monthly, at an interest rate of Prime plus 1.5%		18,876		15,000

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$15 million inventory loan agreement, which contains certain financial covenants, revolving through December 2008, due December 2010, interest payable monthly, at an interest rate of Prime plus 2%, with a 6% floor		5,984		6,000
Various notes, due from November 2006 through August 2016, collateralized by various assets with interest rates ranging from 2.95% to 7.85%		8,132		2,282
Total notes payable		259,926		177,141
Capital lease obligations		100		128
Total notes payable and capital lease obligations		260,026		177,269
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
10½% 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		1,708		2,562
Total senior subordinated notes		32,321		33,175
Total	$	292,347	$	210,444

At September 30, 2006, LIBOR rates on our senior credit facilities were from 5.32% to 5.47%, and the Prime rate was 8.25%. At December 31, 2005, LIBOR rates on our senior credit facilities were from 4.26% to 4.49%, and the Prime rate on these facilities was 7.00%.

In March 2006, we closed a $100 million revolving senior credit facility through a newly-formed, wholly-owned and consolidated special purpose finance subsidiary, Silverleaf Finance IV, LLC ("SF-IV"), a Delaware limited liability company. SF-IV was formed for the purpose of issuing a $100 million variable funding note ("VFN") to UBS Real Estate Securities Inc. (“UBS”). The VFN bears interest on advances by UBS to SF-IV at an initial rate equal to LIBOR plus 1.5%, and matures in March 2010. The VFN is secured by customer notes receivable sold to SF-IV. Proceeds from the sale of customer notes receivable to SF-IV are used to fund normal business operations and for general working capital purposes. The VFN was issued pursuant to the terms and conditions of an indenture between SF-IV, UBS, and Wells Fargo Bank, National Association, as indenture trustee. We will service the customer notes receivable sold to SF-IV under the terms of an agreement with the indenture trustee and SF-IV.

In August 2006, we closed a $128 million term securitization transaction through a newly-formed, wholly-owned and consolidated special purpose finance subsidiary, Silverleaf Finance V, L.P. (“SF-V”), a Delaware limited partnership. SF-V was formed for the purpose of issuing approximately $128.0 million of its Timeshare Loan-Backed Notes Series 2006-A (“Series 2006-A Notes”) in a private offering and sale through UBS Securities LLC (“UBS”). The Series 2006-A Notes were issued pursuant to the terms and conditions of an indenture between ourselves as servicer, SF-V, as issuer, Silverleaf Finance V, LLC, as general partner of SF-V, and Wells Fargo Bank, National Association, as indenture trustee, custodian, backup servicer, and account intermediary. The Series 2006-A Notes were issued in seven classes ranging from Class A through Class G notes with a blended coupon rate of 6.7%. The Class A through Class G notes have been rated Aaa, Aa2, A2, Baa1, Baa2, Baa3, and Ba2 respectively by Moody’s Investors Service, Inc., and have a final maturity of July 2018.

The Series 2006-A Notes are secured by customer notes receivable sold to SF-V by SF-IV and Silverleaf. The proceeds from the sale of the customer notes receivable to SF-V were primarily used to pay down $93.3 million in consolidated indebtedness to senior lenders. Approximately $24.8 million of the proceeds received by SF-V from the sale of the Series 2006-A Notes is being held in a special pre-funding account under the terms of the indenture. We have until November 29, 2006 to sell up to approximately $30 million in additional qualifying timeshare loans to SF-V. All funds held in the pre-funding account that are not used by SF-V to finance the purchase of additional qualifying customer notes receivable by November 29 will be returned to the holders of the Series 2006-A Notes as a distribution of principal. All customer notes receivable purchased by SF-V are being acquired without recourse, except in the case of breaches of customary representations and warranties made in connection with the sale of the notes. We will continue to service the customer notes receivable sold to SF-V under the terms of the indenture and will receive a fee for our services.

To partially offset an increase in interest rates, we have engaged in two interest rate hedging transactions, or derivatives, related to our conduit loan with Silverleaf Finance II, Inc., (“SF-II”), a Delaware corporation, for a notional amount of $45.4 million at September 30, 2006, that expires between September 2011 and March 2014. Our VFN with SF-IV also acts as an interest rate hedge since it contains a provision for an interest rate cap, however there are no amounts outstanding under this line of credit at September 30, 2006. The Series 2005-A Notes related to our off-balance sheet special purpose finance subsidiary, SF-III, with a balance of $60.1 million at September 30, 2006, bear interest at fixed rates ranging from 4.857% to 6.756%, and the above-mentioned Series 2006-A Notes related to SF-V bear interest at a fixed blended rate of 6.7%.

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Note 6 - Subsidiary Guarantees

All subsidiaries of the Company, except SF-II, SF-III, SF-IV, and SF-V have guaranteed the $32.3 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 of our direct and indirect subsidiaries.

The Guarantor Subsidiaries had no operations for the nine months ended September 30, 2006 and 2005. Combined summarized balance sheet information as of September 30, 2006 and December 31, 2005 for the Guarantor Subsidiaries is as follows (in thousands):

		September 30,		December 31,
		2006		2005
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.

On March 11, 2005, we sold the water distribution and waste water treatment utilities assets at eight of our timeshare resorts for an aggregate sales price of $13.1 million, which resulted in a pretax gain of $879,000 during the third quarter of 2005, once all conditions of the sale were met. 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 our eight timeshare resorts to which the transferred utility assets relate. The Purchasers will charge our 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 our sale of these utility assets were used to reduce senior debt in accordance with our loan agreements with our senior lenders.

Notwithstanding the closing of this sale of utilities assets, our agreement with the Purchasers contains provisions relating to the required post-closing receipt of customary governmental approvals from utility regulators in Missouri and Texas. During the third quarter of 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. However, we entered into an amendment during July 2006 in which the deadline for obtaining required approvals from the appropriate Texas regulatory agencies was extended from September 2006 to March 2007. If the Purchasers do not receive required approvals from Texas regulators relating to the utility assets in Texas (the “Texas Assets”) by March 2007, the Texas Assets will be reconveyed to us, the transaction involving the Texas Assets will be rescinded, and we will be obligated to return to the Purchasers approximately $6.2 million of the purchase price attributable to the Texas Assets.

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

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2006		2005			2006		2005
REVENUE:
Gain on sale of discontinued operations	$	—	$	879		$	—	$	879
Other income		—		—			—		438
Total revenue		—		879			—		1,317
COSTS AND OPERATING EXPENSES:
Other expense		—		—			—		278
Depreciation and amortization		—		—			—		—
Interest expense		—		—			—		—
Total costs and operating expenses		—		—			—		278
Income from discontinued operations		—		879			—		1,039
Provision for income taxes		—		(266	)		—		(298	)
Net income from discontinued operations	$	—	$	613		$	—	$	741

Note 8 - Commitments and Contingencies

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

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

Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. We will establish reserves from time to time when deemed appropriate under generally acceptable accounting principles. However, the outcome of a claim for which we have not deemed a reserve to be necessary may be decided unfavorably against us and could require us to pay damages or make other expenditures in amounts or a range of amounts that could be materially adverse to our business, results of operations, or financial condition.

Note 9 - Subsequent Events

During October 2006, we entered into an amendment with one of our senior lenders to decrease the existing line of credit we have available to us under the receivables loan agreement with this lender from $50 million to $35 million. In addition, the calculation of one of the financial covenants under this loan agreement was modified and there were amendments to the eligibility requirements of customer notes receivable that can be pledged as collateral under the receivables agreement. The inventory loan agreement with this lender was also amended to conform with the amendments made to the receivables loan agreement. We do not believe these amendments will have a material impact on our liquidity or working capital requirements.

As previously disclosed, in August 2006 we closed a $128 million term securitization transaction through a newly-formed, wholly-owned and consolidated special purpose finance subsidiary, SF-V, a Delaware limited partnership. SF-V was formed for the purpose of issuing approximately $128.0 million of its Timeshare Loan-Backed Notes Series 2006-A in a private offering and sale through UBS. Approximately $24.8 million of the proceeds received by SF-V from the sale of the Series 2006-A Notes was being held in a special pre-funding account, pending the sale of up to approximately $30 million in additional qualifying timeshare loans to SF-V by November 29, 2006. All funds held in the pre-funding account that are not used by SF-V to finance the purchase of additional qualifying customer notes receivable will be returned to the holders of the Series 2006-A Notes as a distribution of principal.

In October 2006 we sold $25.5 million in customer notes receivable to SF-V for a purchase price of $21.1 million. The proceeds from the sale were primarily used to pay down consolidated indebtedness to senior lenders. As a result of this subsequent sale, $3.7 million of the proceeds received by SF-V from the sale of the Series 2006-A Notes remains in the pre-funding account and will be returned to the holders of the Series 2006-A Notes as a distribution of principal if additional qualifying timeshare loans up to approximately $4.5 million are not sold by November 29, 2006.

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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, 2005.

As of September 30, 2006, we own and operate 13 timeshare resorts in various stages of development in Texas, Missouri, Illinois, Georgia, Massachusetts, and Florida, and a hotel in Colorado. 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 has a Vacation Interval ownership base of over 98,000 members. Our condensed consolidated financial statements include the accounts of Silverleaf Resorts, Inc. and its subsidiaries, with the exception of SF-III, all of which are wholly-owned.

As required, we adopted SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions" as of January 1, 2006. The adoption of SFAS No. 152 prospectively revises the classification of certain revenue and cost activity. However, the adoption of SFAS No. 152 did not have a material effect on our reported net income for the three and nine-month periods ended September 30, 2006, nor did it result in a cumulative effect adjustment.

Results of Operations

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
As a percentage of total revenues:
Vacation Interval sales	91.7	%	67.1	%	91.4	%	71.1	%
Estimated uncollectible revenue	-15.9	%	0.0	%	-15.8	%	0.0	%
Sampler sales	0.0	%	1.0	%	0.0	%	1.1	%
Total sales	75.8	%	68.1	%	75.6	%	72.2	%
Interest income	21.4	%	14.6	%	21.6	%	18.8	%
Management fee income	0.8	%	0.7	%	0.9	%	0.9	%
Gain on sale of notes receivable	0.0	%	9.3	%	0.0	%	4.2	%
Other income	2.0	%	7.3	%	1.9	%	3.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
As a percentage of Vacation Interval sales:
Cost of Vacation Interval sales	11.8	%	16.2	%	10.6	%	16.0	%
Sales and marketing	50.3	%	47.0	%	48.4	%	50.3	%
Provision for uncollectible notes	0.0	%	15.0	%	0.0	%	16.5	%
As a percentage of total revenues:
Operating, general and administrative	14.2	%	11.8	%	15.1	%	13.8	%
Depreciation and amortization	1.1	%	1.0	%	1.1	%	1.4	%
As a percentage of interest income:
Interest expense and lender fees	47.7	%	45.2	%	45.7	%	44.1	%

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Results of Operations for the Three Months Ended September 30, 2006 and 2005

Revenues

Revenues for the quarter ended September 30, 2006 were $56.1 million, representing a $6.2 million decrease from revenues of $62.3 million for the quarter ended September 30, 2005. As discussed below, the decrease is primarily attributable to an $8.9 million reduction in revenue during the third quarter of 2006 related to the classification of estimated uncollectible revenue in accordance with SFAS No. 152, a $5.8 million gain in the third quarter of 2005 related to sales of notes receivable, and a $3.6 million gain on sale of undeveloped land during the third quarter of 2005. Our primary source of revenue, Vacation Interval sales, increased $9.6 million, or 22.9%, during the third quarter of 2006 versus the same period of 2005.

In accordance with SFAS No. 152, total revenue in the third quarter of 2006 is decreased by estimated uncollectible revenue of $8.9 million, which represents estimated future gross cancellations of notes receivable prior to any recoveries of inventory. In addition, under SFAS No. 152, sampler sales are accounted for as incidental operations, which require that any such incidental revenues be recorded as a reduction of incremental costs or expenses. Accordingly, $686,000 of sampler sales, which would have been reported as revenue prior to adoption of SFAS No. 152, were accounted for as a reduction to sales and marketing expense in the quarter ended September 30, 2006. Had these two changes mandated by SFAS No. 152 not been made, revenues would have increased by 5.4% to $65.7 million.

The following table summarizes our Vacation Interval sales (dollars in thousands, except average price).

		Three Months Ended Sept 30, 2006					Three Months Ended Sept 30, 2005
					Average					Average
		$ Sales	Units		Price		$ Sales	Units		Price
Interval Sales to New Customers	$	22,400	1,960	$	11,428	$	17,429	1,630	$	10,693
Upgrade Interval Sales to Existing Customers		17,063	1,829		9,329		13,671	1,510		9,054
Additional Interval Sales to Existing Customers		11,951	1,228		9,732		10,733	1,147		9,357
Total	$	51,414				$	41,833

Overall, Vacation Interval sales increased $9.6 million during the third quarter of 2006 versus the third quarter of 2005, due to increased interval sales to both new and existing customers as a result of increased demand from our existing customers for upgraded intervals, higher closing percentages, and lower rescission rates. The number of interval sales to new customers increased 20.2% and average prices increased 6.9%, resulting in a 28.5% net increase in sales to new customers in the third quarter of 2006 versus the same period of 2005. The number of interval sales to existing customers increased 15.1% and average prices increased 3.3%, resulting in an 18.9% net increase in sales to existing customers during the third quarter of 2006 versus the same period of 2005.

Estimated uncollectible revenue was $8.9 million for the third quarter of 2006 versus $0 reported on this line for the same period of 2005. As discussed previously, SFAS No. 152 requires the estimated uncollectible revenue to be recorded as a reduction to Vacation Interval sales and no longer net of inventory recovery beginning in 2006 rather than as an expense item: provision for uncollectible notes, as it was previously recorded.

Sampler sales primarily function as a marketing program, allowing us additional opportunities to sell a Vacation Interval to a prospective customer. Sampler sales are not recognized in the condensed consolidated statement of operations until the customer uses the stay or our obligation has elapsed, which often does not occur until the sampler contract expires eighteen months after the sale is consummated. Sampler sales in the third quarter of 2006 were reported as $0 compared to $617,000 for the third quarter of 2005. Beginning in 2006 per SFAS No. 152, sampler sales and related costs are accounted for as incidental operations, whereby incremental costs in excess of incremental revenue are charged to expense as incurred and the operations are presented as a net expense in the consolidated statement of operations. Conversely, incremental revenue in excess of incremental costs is recorded as a reduction of inventory. Incremental costs include costs that would not have been incurred had we not sold samplers. During the quarter ended September 30, 2006, all sampler sales of $686,000 were recorded as a reduction to sales and marketing expense, since incremental costs of sampler sales exceeded incremental sampler sales.

Interest income increased $3.0 million, or 32.6%, to $12.0 million during the third quarter of 2006 from $9.1 million during the same period of 2005. The increase primarily resulted from a higher average notes receivable balance during the third quarter of 2006 versus the same period of 2005, a $676,000 increase in interest accretion related to the investment in special purpose entity during the third quarter of 2006 versus the third quarter of 2005, and an increase in the average yield on our outstanding notes receivable to 15.7% at September 30, 2006 from 15.2% at September 30, 2005.

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Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income remained fairly constant at $465,000 during the third quarter of 2006 versus $450,000 during the same period of 2005.

There were no sales of notes receivable during the third quarter of 2006. Gain on sale of notes receivable was $5.8 million during the third quarter of 2005, resulting from the sale of $132.8 million of notes receivable to SF-III.

Other income consists of marina income, golf course and pro shop income, land sales, and other miscellaneous items. Other income decreased $3.4 million to $1.1 million for the third quarter of 2006 from $4.5 million during the same period of 2005, due to a $3.6 million gain on the sale of undeveloped land located in Pennsylvania during the third quarter of 2005.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 11.8% during the third quarter of 2006 versus 16.2% reported for the same period of 2005. This decrease is primarily due to the implementation of SFAS No. 152 effective January 1, 2006, which amends the relative sales value method of recording Vacation Interval cost of sales to include an estimate of future defaults of uncollectible revenue, both actual to date plus expected future revenue. The relative sales value method is used to allocate inventory cost and determine cost of sales in conjunction with a sale. Under the relative sales value method, cost of sales is estimated as a percentage of net sales using a cost of sales percentage which represents the ratio of total estimated cost, including both costs already incurred plus costs to complete the phase, if any, to total estimated Vacation Interval revenue under the project, including amounts already recognized and future revenues. Common costs, including amenities, are allocated to inventory cost among the phases that those costs are expected to benefit. The estimate of total revenue for a phase, which includes both actual to date revenues and expected future revenues, incorporates factors such as actual or estimated uncollectibles, changes in sales mix and unit sales prices, repossessions of intervals, effects of upgrade programs, and past and expected future sales programs to sell slow moving inventory units.

For comparability, assuming SFAS No. 152 had been in place during 2005, cost of sales as a percentage of Vacation Interval sales during the third quarter of 2005 would have been 11.9%, approximately the same as the third quarter of 2006.

Sales and Marketing

Sales and marketing expenses as a percentage of Vacation Interval sales increased to 50.3% during the third quarter of 2006 versus 47.0% for the third quarter of 2005. In accordance with SFAS No. 152 and as discussed in sampler sales above, $686,000 of sampler revenues were recorded as a reduction to sales and marketing expense since the incremental costs of our sampler sales exceeded incremental sampler revenue. Had sales and marketing expense not been reduced by sampler sales, sales and marketing expense would have been 51.7% of Vacation Interval sales during the third quarter of 2006. The increase compared to the previous year’s quarter is due in large part to our costs associated with our newly opened off-site sales centers as well as the investment in securing additional personnel and processes ahead of the expected growth for which we are planning.

Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales was reported as 0% in the provision expense line for the third quarter of 2006. In accordance with SFAS No. 152 and as discussed previously, estimated losses on Vacation Interval notes receivable are recorded as a reduction to Vacation Interval sales beginning in 2006 rather than as an expense item: provision for uncollectible notes, as it was recorded prior to 2006.

Our estimated uncollectible revenue as a percentage of Vacation Interval sales was 17.3% during the third quarter of 2006. Our provision for uncollectible notes as a percentage of Vacation Interval sales was 15.0% during the third quarter of 2005. As noted above, an estimate for the value of inventory recoveries was included as a reduction to the provision for uncollectible notes prior to 2006 but is now included as a component in the relative sales value method of our inventory costing and allocation accounting. Considering the estimate for inventory recoveries of approximately 4.3% of Vacation Interval sales, our net provision for expected credit losses was 13.0% during the third quarter of 2006, which compares favorably to 15.0% during the third quarter of 2005. The net percentage improvement is due to the improved performance of notes originated in 2003 through 2006 as compared to notes originated in earlier years, before we implemented programs focused on selling to customers with a higher quality of credit. We will continue our current collection programs and seek new programs to reduce note defaults and improve the credit quality of our customers. However, there can be no assurance that these efforts will be successful.

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Operating, General and Administrative

Operating, general and administrative expenses as a percentage of total revenues increased to 14.2% for the third quarter of 2006 versus 11.8% for the same period of 2005. Excluding the impact of SFAS No. 152 on our revenues during the third quarter of 2006 as described above, operating, general and administrative expenses as a percentage of total revenues would have been 12.1% during the third quarter of 2006. Overall, operating, general and administrative expense increased by $614,000 for the third quarter of 2006, as compared to the same period of 2005, primarily due to increased salaries, professional fees, and higher recording fees due to higher Vacation Interval sales volume.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues remained fairly unchanged at 1.1% for the quarter ended September 30, 2006 versus 1.0% for the same quarter of 2005. Overall, depreciation and amortization expense increased $11,000 for the third quarter of 2006 versus the same period of 2005.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income increased to 47.7% for the third quarter of 2006, compared to 45.2% for the same period of 2005. This increase is primarily the result of an increase in our weighted average cost of borrowings from 7.4% for the quarter ended September 30, 2005 to 7.9% for the quarter ended September 30, 2006. Overall, interest expense and lender fees increased $1.6 million for the third quarter of 2006 versus the same period of 2005, primarily due to a larger average debt balance outstanding during 2006.

Income before Provision for Income Taxes and Discontinued Operations

Income before provision for income taxes and discontinued operations decreased to $9.8 million for the quarter ended September 30, 2006, as compared to $17.6 million for the quarter ended September 30, 2005, 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 38.5% for the third quarter of 2006 as compared to 30.2% for the third quarter of 2005. The higher effective income tax rate during the third quarter of 2006 was the result of utilizing a sufficient level of the NOL carryforward and other deferred tax assets during 2005, which caused us to move into a net deferred tax liability position at year-end.

Income from Continuing Operations

Income from continuing operations decreased to $6.0 million for the quarter ended September 30, 2006, as compared to $12.3 million for the quarter ended September 30, 2005, as a result of the above-mentioned operating results.

Net Income from Discontinued Operations

We recognized a gain on sale of discontinued operations, net of income taxes, of $613,000 during the third quarter of 2005 related to the sale of our water distribution and waste water treatment utilities assets at eight of our timeshare resorts during the first quarter of 2005. This gain was deferred until certain conditions of the sale were met, which occurred during the third quarter of 2005. There has been no income from discontinued operations since the third quarter of 2005.

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Net Income

Net income was $6.0 million for the quarter ended September 30, 2006, as compared to $12.9 million for the quarter ended September 30, 2005, as a result of the above-mentioned operating results.

Results of Operations for the Nine Months Ended September 30, 2006 and 2005

Revenues

Revenues for the nine months ended September 30, 2006 were $154.8 million, representing a $1.1 million increase from revenues of $153.7 million for the nine months ended September 30, 2005. As discussed below, we had a $24.5 million reduction in revenue during the first nine months of 2006 related to the classification of estimated uncollectible revenue in accordance with SFAS No. 152, a $6.5 million gain in the first nine months of 2005 related to sales of notes receivable, and a $3.6 million gain on sale of undeveloped land during the third quarter of 2005. Our primary source of revenue, Vacation Interval sales, increased $32.2 million, or 29.5%, during the first nine months of 2006 versus the same period of 2005.

Total revenue in the first nine months of 2006 is decreased by estimated uncollectible revenue of $24.5 million in accordance with SFAS No. 152, representing estimated future gross cancellations of notes receivable prior to any recoveries of inventory. In addition, under SFAS No. 152, sampler sales are accounted for as incidental operations, which require that any such incidental revenues be recorded as a reduction of incremental costs or expenses. Accordingly, $2.1 million of sampler sales, which would have been reported as revenue prior to adoption of SFAS No. 152, were accounted for as a reduction to sales and marketing expense in the nine months ended September 30, 2006. Had these two changes mandated by SFAS No. 152 not been made, revenues would have increased by 18.0% to $181.5 million.

The following table summarizes our Vacation Interval sales (dollars in thousands, except average price).

		Nine Months Ended Sept 30, 2006					Nine Months Ended Sept 30, 2005
					Average					Average
		$ Sales	Intervals		Price		$ Sales	Intervals		Price
Interval Sales to New Customers	$	64,350	5,808	$	11,079	$	48,471	4,224	$	11,475
Upgrade Interval Sales to Existing Customers		43,960	4,821		9,118		27,589	3,183		8,668
Additional Interval Sales to Existing Customers		33,206	3,461		9,594		33,244	3,649		9,110
Total	$	141,516				$	109,304

Overall, Vacation Interval sales increased $32.2 million during the first nine months of 2006 versus the same period of 2005, due to increased interval sales to both new and existing customers as a result of increased demand from our existing customers for upgraded intervals, higher closing percentages, and lower rescission rates. The number of interval sales to new customers increased 37.5%, but average prices decreased 3.5%, resulting in a 32.8% net increase in sales to new customers in the first nine months of 2006 versus the same period of 2005. The number of interval sales to existing customers increased 21.2% and average prices increased 4.6%, resulting in a 26.8% net increase in sales to existing customers during the first nine months of 2006 versus the same period of 2005.

Estimated uncollectible revenue was $24.5 million for the first nine months of 2006 versus $0 reported on this line for the same period of 2005. As discussed previously, SFAS No. 152 requires the estimated uncollectible revenue to be recorded as a reduction to Vacation Interval sales and no longer net of inventory recovery beginning in 2006 rather than as an expense item: provision for uncollectible notes, as it was previously recorded.

Sampler sales primarily function as a marketing program, allowing us additional opportunities to sell a Vacation Interval to a prospective customer. Sampler sales are not recognized in the consolidated statement of operations until the customer uses the stay or our obligation has elapsed, which often does not occur until the sampler contract expires eighteen months after the sale is consummated. Sampler sales in the first nine months of 2006 were reported as $0 compared to $1.8 million for the same period of 2005. Beginning in 2006, per SFAS No. 152, sampler sales and related costs are accounted for as incidental operations, whereby incremental costs in excess of incremental revenue are charged to expense as incurred and the operations are presented as a net expense in the condensed consolidated statement of operations. Conversely, incremental revenue in excess of incremental costs is recorded as a reduction of inventory. Incremental costs include costs that would not have been incurred had we not sold samplers. During the nine months ended September 30, 2006, all sampler sales of $2.1 million were recorded as a reduction to sales and marketing expense, since incremental costs of sampler sales exceeded incremental sampler sales.

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Interest income increased $4.5 million, or 15.6%, to $33.4 million during the first nine months of 2006 from $28.9 million during the same period of 2005. The increase primarily resulted from a higher average notes receivable balance during the first nine months of 2006 versus the same period of 2005, a $1.8 million increase in interest accretion related to the investment in special purpose entity during the first nine months of 2006 versus the first nine months of 2005, and the increase in average yield on our outstanding notes receivable from 15.2% at September 30, 2005 to 15.7% at September 30, 2006.

Management fee income, which consists of management fees collected from the resorts’ management clubs, cannot exceed the management clubs’ net income. Management fee income remained fairly constant at $1.4 million for each of the nine-month periods ended September 30, 2006 and 2005.

There was no gain on sales of notes receivable during the first nine months of 2006. Gain on sales of notes receivable was $6.5 million for the first nine months of 2005, resulting from the sale of $8.0 million of notes receivable to SF-I and $132.8 million of notes receivable to SF-III.

Other income consists of marina income, golf course and pro shop income, land sales, and other miscellaneous items. Other income decreased approximately $3.0 million during the first nine months of 2006 versus the same period of 2005. We recognized a $499,000 gain on the sale of two parcels of Mississippi land during the first nine months of 2006, and we recognized a $3.6 million gain on the sale of undeveloped land located in Pennsylvania during the first nine months of 2005. Other than these two land sales, other income remained fairly constant for the nine-month periods ended September 30, 2006 and 2005.

Cost of Sales

Cost of sales as a percentage of Vacation Interval sales decreased to 10.6% during the first nine months of 2006 versus 16.0% reported for the same period of 2005. This decrease is primarily due to the implementation of SFAS No. 152 effective January 1, 2006, which amends the relative sales value method of recording Vacation Interval cost of sales to include an estimate of future defaults of uncollectible revenue, both actual to date plus expected future revenue. The relative sales value method is used to allocate inventory cost and determine cost of sales in conjunction with a sale. Under the relative sales value method, cost of sales is estimated as a percentage of net sales using a cost of sales percentage which represents the ratio of total estimated cost, including both costs already incurred plus costs to complete the phase, if any, to total estimated Vacation Interval revenue under the project, including amounts already recognized and future revenues. Common costs, including amenities, are allocated to inventory cost among the phases that those costs are expected to benefit. The estimate of total revenue for a phase, which includes both actual to date revenues and expected future revenues, incorporates factors such as actual or estimated uncollectibles, changes in sales mix and unit sales prices, repossessions of intervals, effects of upgrade programs, and past and expected sales programs to sell slow moving inventory units.

For comparability, assuming SFAS No. 152 had been in place during 2005, cost of sales as a percentage of Vacation Interval sales during 2005 would have been 11.7%. The decrease in cost of sales as a percentage of Vacation Interval sales during 2006 versus adjusted 2005 is primarily due to a larger percentage of sales being made at phases having lower amenity and land cost of sales.

Sales and Marketing

Sales and marketing expenses as a percentage of Vacation Interval sales decreased to 48.4% for the nine-month period ended September 30, 2006, from 50.3% for the same period of 2005. In accordance with SFAS No. 152 and as discussed in sampler sales above, $2.1 million of sampler revenues were recorded as a reduction to sales and marketing expense during the first nine months of 2006 since the incremental costs of our sampler sales exceeded incremental sampler revenue. Had sales and marketing expense not been reduced by sampler sales, sales and marketing expense would have been 49.9% of Vacation Interval sales during the first nine months of 2006, representing a 0.4% decrease versus the first nine months of 2005. The decrease is primarily due to improved closing percentages on sales to both new and existing customers and increased average sales prices on sales to existing customers, partially offset by increased costs associated with our newly opened off-site sales centers as well as the investment in securing additional personnel and processes ahead of the expected growth for which we are planning.

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Provision for Uncollectible Notes

The provision for uncollectible notes as a percentage of Vacation Interval sales was reported as 0% in the provision expense line for the first nine months of 2006. In accordance with SFAS No. 152 and as discussed previously, estimated losses on Vacation Interval notes receivable are recorded as a reduction to Vacation Interval sales beginning in 2006 rather than as an expense item: provision for uncollectible notes, as it was recorded prior to 2006.

Our estimated uncollectible revenue as a percentage of Vacation Interval sales was 17.3% during the first nine months of 2006. Our provision for uncollectible notes as a percentage of Vacation Interval sales was 16.5% during the first nine months of 2005. As noted above, an estimate for the value of inventory recoveries was included as a reduction to the provision for uncollectible notes prior to 2006 but is now included as a component in the relative sales value method of our inventory costing and allocation accounting. Considering the estimate for inventory recoveries of approximately 4.3% of Vacation Interval sales, our net provision for expected credit losses was 13.0% during the first nine months of 2006, which compares favorably to 16.5% during the same period of 2005.

The net percentage improvement is due to the improved performance of notes originated in 2003 through 2006 as compared to notes originated in earlier years, before we implemented programs focused on selling to customers with a higher quality of credit. We will continue our current collection programs and seek new programs to reduce note defaults and improve the credit quality of our 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 nine months of 2006 versus 13.8% for the same period of 2005. Excluding the impact of SFAS No. 152 on our revenues during the first nine months of 2006 as described above, operating, general and administrative expenses as a percentage of total revenues would have been 12.9% during the first nine months of 2006. Overall, operating, general and administrative expense increased by $2.2 million for the first nine months of 2006, as compared to the same period of 2005, primarily due to increased title and recording fees, which resulted from higher Vacation Interval sales, and increased salaries and professional fees.

Depreciation and Amortization

Depreciation and amortization expense as a percentage of total revenues decreased to 1.1% for the nine months ended September 30, 2006 versus 1.4% for the same period of 2005. Overall, depreciation and amortization expense decreased $408,000 for the first nine months of 2006 versus the same period of 2005 due to a general reduction in capital expenditures since 2000, partially offset by an increase in capital expenditures during the third quarter of 2006.

Interest Expense and Lender Fees

Interest expense and lender fees as a percentage of interest income increased to 45.7% for the first nine months of 2006, compared to 44.1% for the same period of 2005. This increase is primarily the result of an increase in our weighted average cost of borrowings during the nine-month period ended September 30, 2005 versus the same period of 2006, from 7.1% to 8.0%. Overall, interest expense and lender fees increased $2.5 million for the first nine months of 2006 versus the comparable 2005 period, primarily due to a larger average debt balance outstanding during 2006.

Income before Provision for Income Taxes and Discontinued Operations

Income before provision for income taxes and discontinued operations increased to $30.9 million for the nine months ended September 30, 2006, as compared to $27.1 million for the nine months ended September 30, 2005, 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 38.5% for the first nine months of 2006 as compared to 30.3% for the same period of 2005. The higher effective income tax rate during 2006 was the result of utilizing a sufficient level of the NOL carryforward and other deferred tax assets during 2005, which caused us to move into a net deferred tax liability position at year-end.

25

Income from Continuing Operations

Income from continuing operations increased to $19.0 million for the nine months ended September 30, 2006, as compared to $18.9 million for the nine months ended September 30, 2005, as a result of the above-mentioned operating results.

Net Income from Discontinued Operations

We sold the water distribution and waste water treatment utilities assets at eight of our timeshare resorts during the first quarter of 2005. Before we sold these assets we recognized $128,000 of income from discontinued operations, net of taxes, during the first quarter of 2005. We also recognized a gain on sale of discontinued operations, net of income taxes, of $613,000 during the third quarter of 2005 related to the first quarter sale of these assets, once certain conditions of the sale were met. There has been no income (loss) from discontinued operations since the third quarter of 2005.

Net Income

Net income was $19.0 million for the nine months ended September 30, 2006, as compared to $19.6 million for the nine months ended September 30, 2005, as a result of the above-mentioned operating results.

Liquidity and Capital Resources

Sources of Cash. We generate cash primarily from the cash received on the sale of Vacation Intervals, the financing and collection of customer notes receivable from Vacation Interval owners, the sale of notes receivable to our special purpose entities, management fees, sampler sales, marina income, and golf course and pro shop income. We typically receive a 10% down payment on sales of Vacation Intervals and finance the remainder with the issuance of a seven-year to ten-year customer promissory note. We generate cash from customer notes receivable by (i) borrowing at an advance rate of up to 85% 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 we use significant amounts of cash in the development and marketing of Vacation Intervals, but collect 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 nine months ended September 30, 2006, our operating activities used $38.8 million of cash compared to providing $82.1 million of cash during the same period of 2005. This $120.9 million difference in cash used in operating activities during the first nine months of 2006 versus cash provided by operating activities during the comparable 2005 period was primarily the result of $104.2 million of proceeds from sale of notes receivable during 2005. We had no proceeds from the sale of notes receivable during 2006. Other factors contributing to the increase in cash used in operating activities was the increase in gross customer notes receivable during the first nine months of 2006 versus the same period of 2005 and an increase in cash spent on inventories during the first nine months of 2006 versus the same period of 2005, largely due to the acquisition of approximately 30 acres of undeveloped land contiguous to our Orlando Breeze resort in Florida for $4.0 million, and a general expansion of timeshare units and amenities at several other resorts.

Although it appears we have adequate liquidity to meet our needs through 2007, we are continuing to identify additional financing arrangements into 2008 and beyond. To finance our growth, development, and any future expansion plans, we may at some time be required to consider the issuance of other debt, equity, or collateralized mortgage-backed securities. Any debt we incur or issue may be secured or unsecured, have fixed or variable rate interest, and may be subject to such terms as we deem prudent.

Uses of Cash. During the first nine months of 2006, investing activities used $12.8 million of cash, primarily due to $13.6 million of purchases related to property, equipment, and leasehold improvements, partially offset by net proceeds of $791,000 received from the sale of two parcels of land in Mississippi. However during the first nine months of 2005, investing activities provided cash of $18.8 million. The reduction in the amount of cash provided by investing activities was primarily due to $13.1 million of proceeds received from the sale of our water distribution and waste water treatment utilities assets at eight of our resorts during the first quarter of 2005 and net proceeds of $6.1 million related to the sale of undeveloped land located in Pennsylvania during the third quarter of 2005. We evaluate sites for additional new resorts or acquisitions on an ongoing basis.

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During the first nine months of 2006, net cash provided by financing activities was $49.4 million compared to net cash used in financing activities of $104.3 million in the comparable 2005 period. The net cash of $49.4 million provided by financing activities during the first nine months of 2006 was primarily the result of $291.4 million of proceeds received from borrowings against pledged notes receivable, partially offset by $209.5 million of payments on borrowings against pledged notes receivable and $32.5 million of increases in restricted cash for repayment of debt, all of which were primarily due to our transactions with SF-IV and SF-V. During 2005 we paid in full the $50.4 million balance under the SF-1 credit facility, our two non-revolving loans with one of our senior lenders for an aggregate amount of $12.5 million, and our $20.7 million of term notes with one of our senior lenders, largely due to receiving $26.3 million in a conduit term loan transaction through SF-II during the first quarter of 2005.

At September 30, 2006, our senior credit facilities provided for loans of up to $519.0 million of which approximately $251.8 million of principal related to advances under the credit facilities was outstanding. As of September 30, 2006, the weighted average cost of funds for all borrowings was 7.6%. Customer defaults have a significant impact on our cash available from financing customer notes receivable in that notes more than 60 days past due are not eligible as collateral. As a result, we must repay borrowings against such delinquent notes. As of September 30, 2006, $4.8 million of notes were more than 60 days past due.

Certain debt agreements include restrictions on our ability to pay dividends based on minimum levels of net income and cash flow. Our ability to pay dividends might also be restricted by the Texas Business Corporation Act.

Off-Balance Sheet Arrangements. We entered into a $100 million revolving credit agreement to finance Vacation Interval notes receivable through SF-I, our off-balance-sheet special purpose entity during 2000. We agreed to reduce the principal amount of the facility from $100 million to $85 million in 2003, and during the first quarter of 2005 the facility amount was further reduced to $75 million. During 2005, we sold $8.0 million of notes receivable to SF-I and recognized pre-tax gains of $669,000. In conjunction with this sale, we received cash consideration of $6.0 million, which was used to pay down borrowings under our revolving loan facilities. SF-I funded this purchase through advances under a credit agreement arranged for this purpose. We receive fees for servicing sold receivables to SF-I, calculated based on 1% of eligible receivables held by the facility. Such fees were $355,000 for the nine months ended September 30, 2005. Such fees received approximate our internal cost of servicing such receivables, and approximates the fee a third party would receive to service such receivables. As a result, the related servicing asset or liability was estimated to be insignificant. SF-I was dissolved in July 2005.

During the third quarter of 2005, we closed a term securitization transaction with a newly-formed, wholly-owned off-balance sheet qualified special purpose finance subsidiary, SF-III, a Delaware limited liability company, which was formed for the purpose of issuing $108.7 million of its Series 2005-A Notes in a private placement through UBS Securities LLC. The Series 2005-A Notes were issued pursuant to an Indenture ("Indenture") between Silverleaf, 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;

$28,522,000 5.158% Timeshare Loan-Backed Notes, Series 2005-A, Class B;

$16,299,000 5.758% Timeshare Loan-Backed Notes, Series 2005-A, Class C; and

$16,977,000 6.756% Timeshare Loan-Backed Notes, Series 2005-A, Class D.

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 receivables sold to SF-III by us pursuant to a transfer agreement between SF-III and us. Under that agreement, we sold to SF-III approximately $132.8 million in timeshare receivables that were previously pledged as collateral under revolving credit facilities with our senior lenders and SF-I, and recognized a pre-tax gain of $5.8 million. In connection with this sale, we received cash consideration of $108.7 million, which was primarily used to pay off in full the credit facility of SF-I and to pay down amounts we owed under credit facilities with our senior lenders. We dissolved SF-I simultaneously with the sale of the timeshare receivables to SF-III. The timeshare receivables we sold to SF-III are without recourse to us, except for breaches of certain representations and warranties at the time of sale. We are responsible for servicing the timeshare receivables purchased by SF-III pursuant to the terms of the Indenture and will receive a fee for our services equal to 1.75% of eligible timeshare receivables held by the facility. Such fees were $1.2 million for the nine months ended September 30, 2006. Such fees received approximate our internal cost of servicing such timeshare receivables, and approximates the fee a third party would receive to service such receivables. As a result, the related servicing asset or liability was estimated to be insignificant.

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At September 30, 2006, SF-III held notes receivable totaling $71.9 million, with related borrowings of $60.1 million. Except for the repurchase of notes that fail to meet initial eligibility requirements, we are not obligated to repurchase defaulted or any other contracts sold to SF-III. As the Servicer of the notes receivable sold to SF-III, we are obligated by the terms of the conduit facility to foreclose upon the Vacation Interval securing a defaulted note receivable. We may, but are not obligated to, purchase the foreclosed Vacation Interval for an amount equal to the net fair market value of the Vacation Interval if the net fair market value is no less than fifteen percent of the original acquisition price that the customer paid for the Vacation Interval. For the nine months ended September 30, 2006, we paid approximately $1.7 million to repurchase the Vacation Intervals securing defaulted contracts to facilitate the re-marketing of those Vacation Intervals. Total investment in SF-III was valued at $15.0 million at September 30, 2006, which represents our maximum exposure to loss regarding our involvement with SF-III.

Our special purpose entities allow us to realize the benefit of additional credit availability we have with our current senior lenders. We require credit facilities to have the liquidity necessary to fund our costs and expenses, therefore it is vitally important to our liquidity plan to have financing available to us in order to finance future sales, since we finance the majority of our timeshare sales over seven to ten years.

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

In addition, we are subject to current alternative minimum tax ("AMT") as a result of the deferred income that results from the installment sales treatment. Payment of AMT creates a deferred tax asset in the form of a minimum tax credit, which, unless otherwise limited, reduces the future regular tax liability attributable to Vacation Interval sales. Due to AMT losses in certain years prior to 2003, which offset all AMT income for years prior to 2003, no minimum tax credit exists for years prior to 2003. Nevertheless, we had significant AMT for the three and nine months ended September 30, 2006 and anticipate that we will pay significant AMT in future periods.

The federal net operating losses (“NOLs”) expire between 2019 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.

Due to the exchange offer that took place during 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 our 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 that includes the change date. The annual limitation is equal to the value of our stock 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 three and nine month periods ended September 30, 2006, we had no foreign operations. Interest on our notes receivable portfolio, senior subordinated debt, capital leases, and miscellaneous notes is fixed, whereas interest on our primary loan agreements, which totaled $251.8 million at September 30, 2006, is partially fixed and partially variable. The impact of a one-point effective interest rate change on the $80.5 million balance of variable-rate financial instruments at September 30, 2006, would be approximately $603,000 on our results of operations for the nine months ended September 30, 2006, or approximately $0.02 per diluted share.

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At September 30, 2006, the carrying value of our notes receivable portfolio approximates fair value because the weighted average interest rate on the portfolio approximates current interest rates received on similar notes. If interest rates on our notes receivable are increased or perceived to be above market rates, the fair market value of our fixed-rate notes will decline, which may negatively impact our ability to sell new notes. The impact of a one-point interest rate change on the portfolio at September 30, 2006, could result in a fair value impact of approximately $9.0 million over the weighted average remaining life of our notes receivable portfolio.

Credit Risk— We are exposed to on-balance sheet credit risk related to our notes receivable. We are exposed to off-balance sheet credit risk related to notes sold.

We offer financing to the buyers of Vacation Intervals at our resorts. These buyers generally make a down payment of at least 10% of the purchase price and deliver a promissory note to us for the balance. The promissory notes generally bear interest at a fixed rate, are payable over a seven to ten year period, and are secured by a first mortgage on the Vacation Interval. We bear the risk of defaults on these promissory notes.

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

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

To partially offset an increase in interest rates, we have engaged in two interest rate hedging transactions, or derivatives, related to our conduit loan with Silverleaf Finance II, Inc., (“SF-II”), a Delaware corporation, for a notional amount of $45.4 million at September 30, 2006, that expires between September 2011 and March 2014. Our VFN with SF-IV also acts as an interest rate hedge since it contains a provision for an interest rate cap, however there are no amounts outstanding under this line of credit at September 30, 2006. The Series 2005-A Notes related to our off-balance sheet special purpose finance subsidiary, SF-III, with a balance of $60.1 million at September 30, 2006, bear interest at fixed rates ranging from 4.857% to 6.756%, and the Series 2006-A Notes related to SF-V bear interest at a fixed blended rate of 6.7%.

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

Geographic Concentration — Our 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. Our Vacation Interval inventories are concentrated in Texas, Missouri, Illinois, Massachusetts, Georgia, and Florida. The risk inherent in such concentrations is in the continued popularity of the resort destinations, which affects the marketability of our 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 our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness and design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information we are required to disclose in the report we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms. There were no changes made in our internal control over financial reporting during the first nine months of 2006 that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed under the heading “Risk Factors” beginning on page 22 of our annual report on Form 10-K for the year ended December 31, 2005.

Item 6. Exhibits and Reports on Form 8-K

(a)           Exhibits filed herewith:

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

31.2Certification 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

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

(b)           Reports on Form 8-K:

We filed the following Current Reports on Form 8-K with the SEC during the quarter ended September 30, 2006:

Current report on Form 8-K filed with the SEC on July 7, 2006 relating to the inclusion of the Company’s stock on the Russell Microcap Index.

Current report on Form 8-K filed with the SEC on August 4, 2006 relating to the Company’s earnings release for the quarter ended June 30, 2006.

Current report on Form 8-K filed with the SEC on August 31, 2006 relating to a securitization transaction with Silverleaf Finance V, LP.

Current report on Form 8-K filed with the SEC on September 7, 2006 relating to the Company’s participation at Oppenheimer’s Third Annual Beauty, Lifestyle & Leisure Conference.

Current report on Form 8-K filed with the SEC on September 11, 2006 relating to the presentation materials for Oppenheimer’s Third Annual Beauty, Lifestyle & Leisure Conference.

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SIGNATURES

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

Dated: November 13, 2006	By: /s/ ROBERT E. MEAD
	Robert E. Mead
	Chairman of the Board and
	Chief Executive Officer
Dated: November 13, 2006	By: /s/ HARRY J. WHITE, JR.
	Harry J. White, Jr.
	Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit No.	Description
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

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