Silverleaf Resorts, Inc. Reports Fourth Quarter and Annual 2010 Results

Silverleaf Resorts, Inc. (NASDAQ: SVLF) reported the following results for its fourth quarter and year ended December 31, 2010.

2010 Annual Results

Net income for the year ended December 31, 2010 was $5.8 million, or diluted earnings per share of $0.15, compared to net income of $5.5 million, or diluted earnings per share of $0.14, for the year ended December 31, 2009. Excluding the recognition of $18.5 million additional provision for estimated uncollectible revenue in the third quarter of 2009, net income and diluted earnings per share for 2009 would have been $16.6 million and $0.43, respectively.

Vacation Interval sales were $206.3 million in 2010 compared to $241.0 million in 2009. The decrease in Vacation Interval sales is primarily attributable to a reduction in marketing to existing customers which resulted in lower sales of upgrade intervals. The Company implemented more stringent underwriting policies at the end of 2009 to improve the collection of notes receivable. Vacation Interval sales to existing customers comprised 59.3% and 62.0% of total Vacation Interval sales in the years ended December 31, 2010 and 2009.

The provision for estimated uncollectible revenue as a percentage of Vacation Interval sales was 28.3% for the year ended December 31, 2010 compared to 33.3% for the year ended December 31, 2009. Cancellations during 2009, and most notably during the third quarter of 2009, exceeded cancellations projected under the Company’s static-pool analysis of the notes receivable portfolio, which tracks uncollectible notes for each year's sales over the lives of the notes. Considering an increase in future cancels beyond that previously estimated, the allowance for uncollectible notes was increased by $18.5 million in the third quarter of 2009 above the 25.9% provision rate estimated in the second quarter of 2009. The allowance for uncollectible notes was 20.2% of the gross notes receivable portfolio as of December 31, 2010 compared to 21.0% as of December 31, 2009. Factors considered in the assessment of uncollectibility include the aging of notes receivable, historical collection experience and credit losses, customer credit scores (FICO® scores), and current economic factors. The Company believes its notes receivable are adequately reserved, however, there can be no assurance that defaults have stabilized or that they will not increase further. Management reviews the allowance for uncollectible notes quarterly and makes adjustments as necessary.

Overall, total revenues for the year ended December 31, 2010 were $226.0 million compared to $236.8 million for the year ended December 31, 2009, primarily attributable to the $12.8 million reduction in net sales.

Cost of Vacation Interval sales was 9.2% of Vacation Interval sales for each of the years ended December 31, 2010 and 2009.

Sales and marketing expense as a percentage of Vacation Interval sales was 55.0% for the year ended December 31, 2010 compared to 52.2% for the same period of 2009. The increase was primarily attributable to the decrease in sales to existing customers in 2010 as compared to 2009, which have relatively lower related sales and marketing costs compared to new customer sales.

Total positive net interest spread (interest income less interest expense and lender fees) decreased to $32.6 million during 2010 compared to $35.8 million during 2009. Overall, interest expense and lender fees increased $7.0 million in 2010 compared to 2009 primarily due to an increase in lender fees amortized during 2010 related to the Silverleaf Finance VII, LLC (“SF-VII”) securitization and amendments to the Company’s other senior loan agreements during 2010. In addition, the weighted average cost of borrowings increased to 7.2% for the year ended December 31, 2010 from 6.0% for the year ended December 31, 2009.

2010 Fourth Quarter Results

Net loss for the quarter ended December 31, 2010 was $857,000, or a loss per share of $0.02, compared to net income of $2.0 million, or diluted earnings per share of $0.05, for the quarter ended December 31, 2009.

Vacation Interval sales were $48.7 million in the fourth quarter of 2010 compared to $46.7 million in the comparable prior-year period due to an increase in sales of upgrade intervals in the fourth quarter of 2010 as compared to the fourth quarter of 2009. Vacation Interval sales to existing customers comprised 64.7% and 61.3% of total Vacation Interval sales in the quarters ended December 31, 2010 and 2009, respectively, which maintains the Company’s favorable sales-mix trend toward upgrades and second-week sales to existing customers as such sales have relatively lower associated sales and marketing costs.

The provision for estimated uncollectible revenue as a percentage of Vacation Interval sales was 28.3% in the fourth quarter of 2010 versus 25.9% in the fourth quarter of 2009.

Overall, total revenues for the fourth quarter of 2010 were $54.3 million compared to $53.1 million for the fourth quarter of 2009.

Cost of Vacation Interval sales was 10.6% of Vacation Interval sales for the fourth quarter of 2010 compared to 7.0% in the 2009 comparable period. This increase primarily resulted from revisions made to future relative sales value for the fourth quarters of both 2010 and 2009 which had a greater impact on decreasing cost of sales in the fourth quarter of 2009.

Sales and marketing expense as a percentage of Vacation Interval sales was 57.9% for the fourth quarter of 2010 versus 61.6% for the comparable prior-year period. The decrease was primarily attributable to the increase in sales to existing customers during the fourth quarter of 2010 which have relatively lower associated sales and marketing costs.

Total positive net interest spread (interest income less interest expense and lender fees) decreased to $7.1 million for the fourth quarter of 2010 from $9.5 million for the fourth quarter of 2009. Overall, interest expense and lender fees increased $2.8 million for the fourth quarter of 2010 compared to the same period of 2009 primarily due to an increase in lender fees amortized during 2010 related to the SF-VII securitization, which closed in the second quarter of 2010, and amendments to the Company’s other senior loan agreements during 2010. The weighted average cost of borrowings increased to 7.8% for the three months ended December 31, 2010 from 6.0% for the three months ended December 31, 2009 which was primarily related to SF-VII.

Balance Sheet

At December 31, 2010, the Company’s senior credit facilities provided for loans of up to $628.5 million, of which $227.5 million was unused. In June 2010, the Company completed a term securitization transaction involving the issuance of approximately $151.5 million of Timeshare Loan-Backed Notes Series 2010-A. In December 2010, the Company completed two term securitization transactions involving the issuance of approximately $104.4 million and $48.4 million of Timeshare Loan-Backed Notes Series 2010-B and Series 2010-C, respectively. In addition, the Company completed the extension of five of its senior revolving credit facilities in 2010 and further extension of one of its senior revolving credit facilities in February 2011. Considering the completion of the new term securitizations, the extension of the five senior credit facilities in 2010, and conservative business decisions and cash flow management during 2010, the Company’s senior credit facilities provide adequate liquidity through 2011. At December 31, 2010, the Company’s senior debt consisted of 73% fixed-rate debt and 27% variable-rate debt. The majority of the Company’s variable-rate debt is subject to interest-rate floors between 6.00% and 8.00%.

Pending Merger

Effective February 3, 2011, Silverleaf entered into a definitive agreement to be acquired by SL Resort Holdings Inc., an affiliate of Cerberus Capital Management, L.P. ("Cerberus"). The transaction has been approved by Silverleaf's Board of Directors, and the Board will be recommending that Silverleaf's shareholders approve the transaction. Under the agreement, Silverleaf shareholders will receive, at the closing, $2.50 in cash for each share of Silverleaf common stock they own, representing a premium of approximately 75% based on the closing trading price of $1.43 of Silverleaf common stock on February 3, 2011. Cerberus has agreed to provide equity financing for the full amount of the merger consideration. The Silverleaf Board of Directors has received an opinion from its financial advisor, Gleacher & Company Securities, Inc., that the consideration to be paid to Silverleaf shareholders in the transaction is fair from a financial point of view. Completion of the transaction is subject to customary closing conditions, including approval by the Company's shareholders. Silverleaf intends to hold a special meeting of its shareholders for the purpose of approving the merger as promptly as possible. Consummation of the merger is subject to certain terms and conditions customary for transactions of this type, including receipt of shareholder approvals. Upon completion of the transaction, Silverleaf will become a private company, wholly-owned by SL Resort Holdings, Inc., and its common stock will no longer be traded on NASDAQ.

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