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
nine months ended September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2007.
These
condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and footnotes included in our
Form
10-K for the year ended December 31, 2006 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.
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 position, 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 III, LLC, our 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 —
We adopted Statement of Financial Accounting Standards
No. 152 “Accounting for Real Estate Time Sharing Transactions” (“SFAS No. 152”)
effective January 1, 2006. However, we did not record a cumulative effect of
a
change in accounting principle as our adoption of SFAS No. 152 had an immaterial
impact on our results for periods prior to 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.
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 to complete
the development of the phase. The remaining amount is deferred and recognized
as
the remaining costs are incurred. We had $352,000 in unearned Vacation Interval
sales at September 30, 2007 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 type of 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 evaluate the estimated cost of sales percentage using updated
information for 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.
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 Silverleaf Club and Orlando
Breeze Resort Club. These revenues are recognized on an accrual basis in the
period the services are provided if collection is deemed probable.
Services
and other income are recognized on an accrual basis in the period service is
provided.
Sales
and
marketing costs are charged to expense in the period incurred. Commissions,
however, are recognized in the same period as the related 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.
Allowance
for Uncollectible Notes —
Estimated uncollectible revenue is recorded at an
amount sufficient to maintain the allowance for uncollectible notes at a level
management considers adequate to provide for anticipated losses resulting from
customers' failure to fulfill their obligations under the terms of their notes.
The allowance for uncollectible notes is adjusted based upon a periodic
static-pool analysis of the notes receivable portfolio, which tracks
uncollectible notes for each year’s sales over the life of these notes. Other
factors considered in the assessment of uncollectibility are the aging of notes
receivable, historical collection 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 on sales of customer notes receivable is governed by
the agreements between the purchasers and the Company.
Investment
in Special Purpose Entity
— 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. This
transaction qualified as a sale for accounting purposes. The Series 2005-A
Notes
are secured by timeshare receivables we sold to SF-III pursuant to a transfer
agreement between us and SF-III. Under that agreement, we sold SF-III
approximately $132.8 million in timeshare receivables that were previously
pledged as collateral under revolving credit facilities with our senior lenders
and Silverleaf Finance I, Inc., (“SF-I”), our former qualified special purpose
entity which was dissolved during the third quarter of 2005. 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 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 the investment in our special purpose entity in
accordance with Statement of Financial Accounting Standards No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS No. 140”), EITF 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets”, and
Statement of Financial Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” as applicable. SFAS No. 140 was
amended in March 2006 by Statement of Financial Accounting Standards No. 156,
“Accounting for Servicing of Financial Assets” (“SFAS No. 156”) and is to be
applied prospectively to new transactions occurring after the effective
date. The adoption of SFAS No. 156 as of January 1, 2007, did not
affect the manner in which we account for our investment in our special purpose
entity. The gain or loss on the sale of notes receivable is determined based
on
the proceeds received, the fair value assigned to the investment in our special
purpose entity, and the recorded value of notes receivable sold. The fair value
of the investment in our special purpose entity is estimated based on the
present value of future cash flows we expect to receive from the notes
receivable sold. We utilized the following key assumptions to
estimate the fair value of such cash flows related to SF-III: customer
prepayment rate (including expected accounts paid in full as a result of
upgrades) – 15.9%; expected credit losses – 8.81% to 11.38%; discount rate –
12.9% to 21.5%; base interest rate – 5.37%; and loan servicing fees – 1.75%. Our
assumptions are based on experience with our notes receivable portfolio,
available market data, estimated prepayments, the cost of servicing, and net
transaction costs. Such assumptions are assessed quarterly and, if necessary,
adjustments are made to the carrying value of the investment in our special
purpose entity on a prospective basis as a change in accounting estimate, with
the amount of periodic interest accretion adjusted over the remaining life
of
the beneficial interest. The carrying value of the investment in our special
purpose entity represents our maximum exposure to loss regarding our involvement
with our special purpose entity.
Inventories
—
Inventories are stated at the lower of cost or market value. Cost
includes amounts for land, construction materials, amenities and common costs,
direct labor and overhead, taxes, and capitalized interest incurred in the
construction or through the acquisition of resort dwellings held for timeshare
sale. Timeshare unit costs are capitalized as inventory and are allocated to
cost of Vacation Interval sales 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, 2007, the estimated costs not yet incurred, which are expected
to
complete promised amenities was $2.4 million. We allocate the estimated cost
of
promised and completed amenities 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. The relative sales
value
method is used to allocate inventory costs 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 revenues 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. Each time estimated
revenue or cost is adjusted, the effects of changes in estimate are accounted
for in each period on a retrospective basis using a current-period adjustment,
such that the balance sheet at the end of the period of change and the
accounting in subsequent periods are as they would have been if the revised
estimates had been the original estimates.
We
also
periodically review the carrying value of our inventory on an individual project
basis for impairment, to ensure that the carrying value does not exceed market
value.
Land,
Equipment, Buildings, and Leasehold Improvements
— Land, equipment
(including equipment under capital lease), buildings, and leasehold improvements
are stated at cost. When assets are disposed of, the cost and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Maintenance and repairs are charged to
expense as incurred; significant betterments and renewals, which extend the
useful life of a particular asset, are capitalized. Depreciation is calculated
for all fixed assets, other than land, using the straight-line method over
the
estimated useful life of the assets, 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 consist primarily of prepaid
insurance, prepaid postage, commitment fees, debt issuance costs, deferred
commissions, novelty inventories, deposits, collected cash in lender lock boxes
which has not yet been applied to the loan balances by our lenders, and
miscellaneous receivables. Commitment fees and debt issuance costs are amortized
over the life of the related debt.
Income
Taxes
— Deferred income taxes are recorded for temporary differences between
the 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 would be recorded. Although we do not currently have
any
material charges for interest and penalties, if these costs were incurred,
they
would be reported within the provision for income taxes. Our federal tax return
includes all items of income, gain, loss, expense, and credit of SF-III, which
is a non-consolidated subsidiary for reporting purposes and a disregarded entity
for federal income tax purposes. We have a tax sharing agreement with
SF-III.
We
file
U.S. federal income tax returns as well as income tax returns in various states.
We are no longer subject to income tax examinations by the Internal Revenue
Service for years prior to 2004, although carryforward attributes that were
generated prior to 2004 may still be subject to examination. For the majority
of
state tax jurisdictions, we are no longer subject to income tax examinations
for
years prior to 2004. In the state of Texas, we are no longer subject to
franchise tax examinations for years prior to 2003.
Derivative
Financial Instruments
— We follow Statement of Financial Accounting
Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 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.
To
partially offset an increase in interest rates, we have engaged in two interest
rate hedging transactions, or derivatives, related to our conduit loan through
Silverleaf Finance II, Inc., (“SF-II”), a Delaware corporation, for a notional
amount of $25.0 million at September 30, 2007, that expire between September
2011 and March 2014. Our variable funding note with Silverleaf Finance IV,
LLC,
(“SF-IV”) also acts as an interest rate hedge since it contains a provision for
an interest rate cap. The balance outstanding under this line of credit at
September 30, 2007 is $46.1 million.
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
—We adopted Statement of Financial Accounting Standards No.
123R, “Share Based Payment” (“SFAS No. 123R”), as of January 1, 2006, using the
modified prospective method. Under this transition method, for all stock options
granted on or prior to December 31, 2005 that were outstanding as of that date,
compensation cost is recognized for the unvested portion over the remaining
requisite service period, using the fair value for these options as estimated
at
the date of grant using the Black-Scholes option-pricing model under the
original provisions of SFAS No. 123 for pro-forma disclosure purposes.
Accordingly, we recognized $106,000 and $217,000 of stock-based compensation
expense for the nine months ended September 30, 2007 and 2006, respectively.
At
September 30, 2007, there is $124,000 of unamortized compensation expense
related to stock options granted prior to 2006, which will be fully recognized
by August 31, 2008.
At
September 30, 2007, we have options outstanding under two stock-based
compensation plans. Readers should refer to “Stock-Based Compensation” under
Note 2 – “Significant Accounting Policies Summary” and Note 10 – “Equity” of our
financial statements, which are included in our Annual Report on Form 10-K
for
the year ended December 31, 2006, for additional information related to these
stock-based compensation plans.
The
following table summarizes our outstanding stock options for the nine months
ended September 30, 2007 and 2006:
|
|
|
2007
|
|
|
2006
|
|
|
Options
outstanding, January 1
|
|
|
2,823,807
|
|
|
|
3,137,657
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
(191,093
|
)
|
|
Expired
|
|
|
(297,000
|
)
|
|
|
—
|
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
Options
outstanding, September 30
|
|
|
2,515,807
|
|
|
|
2,946,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30
|
|
|
2,426,807
|
|
|
|
2,768,564
|
|
The
weighted average exercise price of the 10,000 shares exercised during the first
nine months of 2007 and the 191,093 shares exercised during the first nine
months of 2006 was $0.315 per share, and the intrinsic value was $54,000 and
$632,000, respectively.
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, the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements, and the reported amounts for certain revenues
and expenses during the reporting period. Actual results could differ from
those
estimated. Significant management estimates include the allowance for
uncollectible notes, estimates for income taxes, valuation of SF-III, and the
future sales plan and estimated recoveries used to allocate certain costs to
inventory phases and cost of sales.
Other
Recent Accounting Pronouncements
—
SFAS
No. 156
– In March 2006, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards No. 156, “Accounting for
Servicing of Financial Assets.” 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. The
adoption of SFAS No. 156 did not impact our consolidated financial position,
results of operations, or cash flows.
FIN
No. 48
–
In July 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards 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
adopted the provisions of FIN No. 48 on January 1, 2007. The adoption of FIN
No.
48 did not impact our consolidated financial position, results of operations,
or
cash flows.
SFAS
No. 157
–
In September 2006, the FASB 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. We are
currently assessing the financial impact the adoption of SFAS No. 157 will
have
on our consolidated financial position, results of operations, and cash
flows.
SFAS
No. 159
–
In February 2007, the FASB issued Statement
of Financial Accounting Standards No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”), which allows an irrevocable
election to measure certain financial assets and financial liabilities at fair
value on an instrument-by-instrument basis, with unrealized gains and losses
recognized currently in earnings. Under SFAS No. 159, the fair value option
may
only be elected at the time of initial recognition of a financial asset or
financial liability or upon the occurrence of certain specified events.
Additionally, SFAS No. 159 provides that application of the fair value option
must be based on the fair value of an entire financial asset or financial
liability and not selected risks inherent in those assets or liabilities. SFAS
No. 159 requires that assets and liabilities which are measured at fair value
pursuant to the fair value option be reported in the financial statements in
a
manner that separates those fair values from the carrying amounts of similar
assets and liabilities which are measured using another measurement attribute.
SFAS No. 159 also provides expanded disclosure requirements regarding the
effects of electing the fair value option on the financial statements. SFAS
No.
159 is effective prospectively for fiscal years beginning after November 15,
2007, with early adoption permitted for fiscal years in which interim financial
statements have not been issued, provided that all of the provisions of SFAS
No.
157 are early adopted as well. We are currently assessing the financial impact
the adoption of SFAS No. 159 will have on our consolidated financial position,
results of operations, and cash flows.
Note
3 – Earnings Per Share
The
following table illustrates the reconciliation between basic and diluted
weighted average common shares outstanding for the three and nine months ended
September 30, 2007 and 2006:
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted
average shares outstanding - basic
|
|
|
37,810,980
|
|
|
|
37,590,168
|
|
|
|
37,809,106
|
|
|
|
37,528,924
|
|
|
Issuance
of shares from stock options exercisable
|
|
|
2,028,981
|
|
|
|
2,174,793
|
|
|
|
2,030,855
|
|
|
|
2,236,037
|
|
|
Repurchase
of shares from stock options proceeds
|
|
|
(407,270
|
)
|
|
|
(531,382
|
)
|
|
|
(432,912
|
)
|
|
|
(532,482
|
)
|
|
Weighted
average shares outstanding - diluted
|
|
|
39,432,691
|
|
|
|
39,233,579
|
|
|
|
39,407,049
|
|
|
|
39,232,479
|
|
Outstanding
stock options totaling approximately 494,000 and 867,000 were not dilutive
at
September 30, 2007 and 2006, 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, 2007 and 2006 was approximately
16.2% and 15.7%, respectively, with individual rates ranging from 0% to 17.9%.
The Vacation Interval notes receivable with interest rates of 0% originated
primarily between 1997 and 2003, and have an outstanding balance at September
30, 2007 of approximately $113,000. In connection with the sampler program,
we
routinely enter into notes receivable with terms of 10 months. Notes receivable
from sampler sales were $3.8 million and $3.1 million at September 30, 2007
and
2006, respectively, and are non-interest bearing.
We
consider accounts over 60 days past due to be delinquent. As of
September 30, 2007, $4.8 million of notes receivable, net of accounts charged
off, were considered delinquent. An additional $26.2 million of notes, of which
$23.6 million is pledged to senior lenders, would have been considered to be
delinquent, had we not granted payment concessions to the customers, which
brings a delinquent note current and extends the maturity date if two
consecutive payments are made.
Notes
receivable are scheduled to mature as follows at September 30, 2007 (in
thousands):
|
For
the 12-Month Period Ending September 30,
|
|
|
|
|
2008
|
|
$
|
40,109
|
|
|
2009
|
|
|
39,474
|
|
|
2010
|
|
|
42,777
|
|
|
2011
|
|
|
45,723
|
|
|
2012
|
|
|
48,829
|
|
|
Thereafter
|
|
|
128,849
|
|
|
|
|
|
345,761
|
|
|
Less
allowance for uncollectible notes
|
|
|
(71,328
|
)
|
|
Notes
receivable, net
|
|
$
|
274,433
|
|
The
activity in gross notes receivable is as follows for the three and nine-month
periods ended September 30, 2007 and 2006 (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
328,823
|
|
|
$
|
270,601
|
|
|
$
|
297,835
|
|
|
$
|
230,051
|
|
|
Sales
|
|
|
48,357
|
|
|
|
42,376
|
|
|
|
134,126
|
|
|
|
127,599
|
|
|
Collections
|
|
|
(21,088
|
)
|
|
|
(17,598
|
)
|
|
|
(60,421
|
)
|
|
|
(50,562
|
)
|
|
Receivables
charged off
|
|
|
(10,331
|
)
|
|
|
(7,245
|
)
|
|
|
(25,779
|
)
|
|
|
(18,954
|
)
|
|
Balance,
end of period
|
|
$
|
345,761
|
|
|
$
|
288,134
|
|
|
$
|
345,761
|
|
|
$
|
288,134
|
|
The
activity in the allowance for uncollectible notes is as follows for the three
and nine months ended September 30, 2007 and 2006 (in thousands):
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
70,583
|
|
|
$
|
68,171
|
|
|
$
|
68,118
|
|
|
$
|
52,479
|
|
|
Reclassification
of estimated inventory recoveries on future charge offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,786
|
|
|
Estimated
uncollectible revenue
|
|
|
11,076
|
|
|
|
8,910
|
|
|
|
28,989
|
|
|
|
24,525
|
|
|
Receivables
charged off
|
|
|
(10,331
|
)
|
|
|
(7,245
|
)
|
|
|
(25,779
|
)
|
|
|
(18,954
|
)
|
|
Balance,
end of period
|
|
$
|
71,328
|
|
|
$
|
69,836
|
|
|
$
|
71,328
|
|
|
$
|
69,836
|
|
Note
5 – Debt
The
following table summarizes our notes payable, capital lease obligations, and
senior subordinated notes at September 30, 2007 and December 31, 2006 (in
thousands):
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
Revolving
Term
|
|
Maturity
|
|
Interest
Rate
|
|
|
$100
million Textron receivable-based revolver ($100 million maximum combined
receivable, inventory and acquisition commitments, see inventory
/
acquisition component below)
|
|
$
|
63,414
|
|
|
$
|
28,903
|
|
|
1/31/10
|
|
1/31/13
|
|
Prime
|
|
|
$50
million CapitalSource receivable-based revolver
|
|
|
16,026
|
|
|
|
22,831
|
|
|
4/29/08
|
|
4/29/08
|
|
Prime
+ 0.75%
|
|
|
$35
million Wells Fargo Foothill receivable-based revolver
|
|
|
5,451
|
|
|
|
93
|
|
|
12/31/08
|
|
12/31/11
|
|
Prime
|
|
|
$150
million SF-IV receivable-based revolver
|
|
|
46,058
|
|
|
|
—
|
|
|
9/3/09
|
|
9/3/11
|
|
LIBOR+1.25%
|
|
|
$37.5
million Liberty Bank receivable-based revolver
|
|
|
—
|
|
|
|
—
|
|
|
9/28/09
|
|
9/28/12
|
|
LIBOR+2.40%
|
|
|
$66.4
million Textron receivable-based non-revolving conduit
loan
|
|
|
15,931
|
|
|
|
25,090
|
|
|
|
—
|
|
3/22/14
|
|
|
7.035%
|
|
|
$26.3
million Textron receivable-based non-revolving conduit
loan
|
|
|
9,107
|
|
|
|
14,210
|
|
|
|
—
|
|
9/22/11
|
|
|
7.90%
|
|
|
$128.1
million Silverleaf Finance V, L.P. receivable-based
non-revolver
|
|
|
77,637
|
|
|
|
113,138
|
|
|
|
—
|
|
7/16/18
|
|
|
6.70%
|
|
|
$10
million Textron inventory loan agreement
|
|
|
—
|
|
|
|
10,000
|
|
|
8/31/08
|
|
8/31/10
|
|
LIBOR+3.25%
|
|
|
$6
million Textron inventory loan agreement
|
|
|
—
|
|
|
|
5,000
|
|
|
8/31/08
|
|
8/31/10
|
|
Prime
+ 3.00%
|
|
|
$5
million Textron inventory loan agreement
|
|
|
—
|
|
|
|
1,115
|
|
|
|
—
|
|
3/31/07
|
|
Prime
+ 3.00%
|
|
|
Textron
inventory / acquisition loan agreement (see receivable-based revolver
above)
|
|
|
22,500
|
|
|
|
—
|
|
|
1/31/10
|
|
1/31/12
|
|
Prime
+ 1.00%
|
|
|
$30
million CapitalSource inventory loan agreement
|
|
|
19,376
|
|
|
|
18,876
|
|
|
4/29/09
|
|
4/29/11
|
|
Prime
+ 1.50%
|
|
|
$15
million Wells Fargo Foothill inventory loan agreement
|
|
|
10,000
|
|
|
|
5,985
|
|
|
12/31/08
|
|
12/31/10
|
|
Prime
+ 2.00%
|
|
|
Various
notes, due from January 2009 through August 2016, collateralized
by
various assets with interest rates ranging from 6.0% to
8.5%
|
|
|
7,539
|
|
|
|
7,590
|
|
|
|
—
|
|
various
|
|
various
|
|
|
Total
notes payable
|
|
|
293,039
|
|
|
|
252,831
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations
|
|
|
1,312
|
|
|
|
1,719
|
|
|
|
—
|
|
various
|
|
various
|
|
|
Total
notes payable and capital lease obligations
|
|
|
294,351
|
|
|
|
254,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0%
senior subordinated notes, due 2007
|
|
|
—
|
|
|
|
3,796
|
|
|
|
—
|
|
4/1/07
|
|
|
6.00%
|
|
|
10½%
senior subordinated notes, due 2008
|
|
|
2,146
|
|
|
|
2,146
|
|
|
|
—
|
|
4/1/08
|
|
|
10.50%
|
|
|
8.0%
senior subordinated notes, due 2010
|
|
|
24,671
|
|
|
|
24,671
|
|
|
|
—
|
|
4/1/10
|
|
|
8.00%
|
|
|
Interest
on the 6.0% senior subordinated notes, due 2007
|
|
|
—
|
|
|
|
854
|
|
|
|
—
|
|
4/1/07
|
|
|
6.00%
|
|
|
Total
senior subordinated notes
|
|
|
26,817
|
|
|
|
31,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
321,168
|
|
|
$
|
286,017
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007, our senior credit facilities provided for loans of up to
$520.2 million, of which $234.7 million is available for future advances. The
LIBOR rate on our senior credit facilities was 5.12% (1 month) and the Prime
rate on these facilities was 7.75% at September 30, 2007.
On
September 12, 2007, we amended our revolving credit facility through our
wholly-owned and fully consolidated special purpose finance subsidiary SF-IV.
The amendments increase the availability under the facility from $125 million
to
$150 million. The scheduled funding period under the variable funding note
(“VFN”) issued by SF-IV to UBS Real Estate Securities Inc. ("UBS") was extended
from December 2008 to September 2009, and the revised facility will mature
in
September 2011. The interest rate on advances to SF-IV under the VFN will remain
the same at LIBOR plus 1.25%. 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. We will continue to service the customer notes sold to
SF-IV.
Effective
September 28, 2007, we entered into a $37.5 million revolving loan agreement
with Liberty Bank as agent for itself and other lenders. The loan is secured
by
notes receivable from timeshare sales at an advance rate of up to 75% of the
aggregate outstanding principal balance of all eligible notes receivable pledged
as security. The revolving loan period will expire on September 28,
2009, and the principal balance of the loan facility will be due on September
28, 2012,
or if the
revolving period is extended, 36 months from the expiration of the revolving
period. The outstanding principal balance on the facility will bear
interest at LIBOR plus 2.40%. Proceeds from the loan will be used to
fund normal business operations and for general working capital
purposes.
Note
6 – Subsidiary Guarantees
All
subsidiaries of the Company, except SF-II, SF-III, SF-IV, and Silverleaf Finance
V, L.P., (“SF-V”) have guaranteed the $26.8 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,
2007 and 2006. Combined summarized balance sheet information as of September
30,
2007 and December 31, 2006 for the Guarantor Subsidiaries is as follows (in
thousands):
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
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
–
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 position.
Various
legal actions and claims may be instituted or asserted in the future against
us
and our subsidiaries, including those arising out of our sales and marketing
activities and contractual arrangements. Some of the matters may
involve claims, which, if granted, could be materially adverse to our financial
position.
Litigation
is subject to many uncertainties, and the outcome of individual litigated
matters is not predictable with assurance. We will establish reserves from
time
to time when deemed appropriate under generally acceptable accounting
principles. However, the outcome of a claim for which we have not deemed a
reserve to be necessary may be decided unfavorably against us and could require
us to pay damages or make other expenditures in amounts or a range of amounts
that could be materially adverse to our business, results of operations, or
financial position.