SADDLEBROOK RESORTS INC - Quarter Report: 2004 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

COMMISSION FILE NUMBER: 2-65481

SADDLEBROOK RESORTS, INC.

5700 Saddlebrook Way, Wesley Chapel, Florida 33543-4499

813-973-1111

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 an accelerated filer (as defined in Rule 12b-2 of the Act).

YES   [   ]   NO   [X]

Registrant has 100,000 shares of common stock outstanding, all of which are held by an affiliate of the Registrant.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

The accompanying Notes to Financial Statements are
an integral part of these financial statements

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SADDLEBROOK RESORTS, INC.

The accompanying Notes to Financial Statements are
an integral part of these financial statements

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SADDLEBROOK RESORTS, INC.

The accompanying Notes to Financial Statements are
an integral part of these financial statements.

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SADDLEBROOK RESORTS, INC.

Note 1. Basis of Presentation

Saddlebrook Resorts, Inc. (the “Company”) developed and operates Saddlebrook Resort, which is a condominium hotel and resort located in Wesley Chapel, Florida.

The Company’s accompanying balance sheet for September 30, 2004, and its statements of operations and cash flows for the periods ended September 30, 2004 and 2003, are unaudited but reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

The Company’s business is seasonal. Therefore, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year.

These financial statements and related notes are presented for interim periods in accordance with the requirements of Form 10-Q and, consequently, do not include all disclosures normally provided in the Company’s Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note 2. Accounts Receivable

Note 3. Property, Buildings and Equipment

The Company’s property, buildings and equipment are pledged as security for its debt (see Note 5).

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Note 4. Deferred Charges

The remaining deferred debt issue costs will be expensed during the fourth quarter of 2004 due to the refinancing of the debt. See Note 9.

Note 5. Notes Payable

The Company’s financing from a third-party lender has an annual interest rate fixed at 7.7% and monthly payments for principal and interest of $243,988. The debt is secured by the Company’s real and personal property.

An additional $5,000,000 is available from the same lender if the Company is in compliance with certain financial covenants. If received, the additional financing will be due with the existing debt on June 30, 2013. For the debt’s reporting period ended June 30, 2004, the Company was in compliance with the financial covenants related to both the existing debt and the additional financing.

This financing was refinanced on November 1, 2004. See Note 9.

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Note 6. Related Party Receivables and Payables

Related party receivables and payables at September 30, 2004 and December 31, 2003 are the result of net intercompany transactions and cash transfers between the Company and its shareholder company and affiliated companies. There are no advances from the Company to its Directors or Officers.

Amounts due from related parties as of September 30, 2004 and December 31, 2003 are comprised of the following:

Amounts due to related parties as of September 30, 2004 and December 31, 2003 are comprised of the following:

Dempsey and Daughters, Inc. owns 23 individual condominium units, 9 of which participate in the Rental Pool Operation.

Note 7. Income Taxes

The Company is currently a member of a Qualified Subchapter S Subsidiary Group. Accordingly, no income tax expense was reflected in the Company’s operating results as the tax is assessed to the shareholders of its parent company.

Note 8. Litigation Settlement

During January 2004, the Company and Honeywell Corporation (the owner of the Company’s former parent company), settled a legal dispute with a prior insurance provider. The case involved the Company and its former parent company seeking reimbursement for the defense and settlement costs incurred in connection with a lawsuit that alleged damages covered by the policies issued by the insurance company. A favorable settlement of $4,950,000 was received by the Company in February 2004. Certain related expenses for legal services and bonuses have been netted against this amount resulting in a net litigation settlement of $3,177,832.

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Note 9. Debt Refinancing

Subsequent to the period ending September 30, 2004, on November 1, 2004, the Company refinanced $12 million of the note payable to Textron Financial due June 30, 2013 with a new term note payable to SunTrust. As part of the refinancing, the Company paid the remaining principal balance due under the Textron note. The new term note is due November 1, 2009, requires monthly principal payments of $66,667, together with monthly payments of all accrued interest. The new term note bears interest at 2% over the one month LIBOR index. The debt is secured by all of the Company’s real and personal property. In accordance with the original terms of the Textron obligation, a pre-payment penalty of $372,000 was paid at the time of refinancing.

SunTrust has also made available a $5,000,000 revolving line of credit until November 1, 2006, subject to the Company’s compliance with specific covenants set forth in the loan agreement. All borrowings under the line of credit will bear interest at the same interest rate as the new term note, with interest being payable monthly.

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SADDLEBROOK RENTAL POOL OPERATION

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

The accompanying Notes to Financial Statements are
an integral part of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

The accompanying Notes to Financial Statements are
an integral part of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

The accompanying Notes to Financial Statements are
an integral part of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

Note 1. Basis of Presentation

Saddlebrook Rental Pool Operation’s accompanying balance sheet for September 30, 2004 and its statements of operations and changes in participants fund balance for the periods ended September 30, 2004 and 2003, are unaudited but reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

These financial statements and related notes are presented for interim periods in accordance with the requirements of Form 10-Q and, consequently, do not include all disclosures normally provided in the Company’s Annual Report on Form 10-K. Accordingly, these financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

General

The Company operates Saddlebrook Resort (the “Resort”) in Wesley Chapel, Florida, which contains condominium units that have been sold to third parties or to affiliates of the Company. The majority of the condominium units are hotel accommodations that participate in a rental-pooling program (the “Rental Pool”) that provides its owners with a percentage distribution of related room revenues minus certain fees and expenses. The remainder of the condominium units either participate in a non-pooling rental program, are owner-occupied or are designated as hospitality suites or housing for young athletes independent of the rental programs. Other resort property owned by the Company and its affiliates include golf courses, tennis courts, a spa, restaurants and conference center facilities.

Liquidity and Capital Resources

The Company’s operations are seasonal with the highest volume of sales generally occurring in the first quarter of each calendar year. The third quarter has historically produced the lowest volume of sales. Consequently, the Company’s financial condition declined during the third quarter of 2004. However, due to the earlier seasonal period, and the receipt of the litigation settlement in February 2004, the Company’s financial condition at September 2004 is improved when compared to the financial condition at fiscal year end of December 2003.

At September 30, 2004, the Company was indebted to Textron Financial in the amount of approximately $18.6 million under a term note with a fixed annual interest rate of 7.7%, requiring monthly principal and interest payments of approximately $244,000, and with a maturity date of June 30, 2013. Subsequent to the period ending September 30, 2004, on November 1, 2004, the Company refinanced $12 million of the note payable to Textron Financial with a new term note payable to SunTrust. As part of the refinancing, the Company paid the remaining principal balance due under the Textron note. The new term note is due November 1, 2009, requires monthly principal payments of $66,667, together with monthly payments of all accrued interest. The new term note bears interest at 2% over the one month LIBOR index. The debt is secured by all of the Company’s real and personal property. In accordance with the original terms of the Textron obligation, a pre-payment penalty of $372,000 was paid at the time of refinancing.

SunTrust has also made available a $5,000,000 revolving line of credit until November 1, 2006, subject to the Company’s compliance with specific covenants set forth in the loan agreement. All borrowings under the line of credit will bear interest at the same interest rate as the new term note, with interest being payable monthly.

The Company has completed the refurbishing of the swimming pools with a total cost of $307,000. The renovation of the greens on the Palmer golf course is currently underway with $400,000 of the estimated $450,000 total cost already completed. There are several other capital projects to be completed during the remainder of 2004 and early 2005. These projects include; installation of a new clear-span structure with an estimated cost of $250,000 and the enclosure of the open air pavilion at the fitness facility with an estimated cost of $250,000. The Company will also be entering into 36 month lease arrangements for both a new golf cart fleet for an estimated $475,000 and new computer equipment for an estimated $125,000. Future operating costs and planned expenditures for capital additions and improvements are expected to be adequately funded by the Company’s and its affiliates’ current cash reserves and cash generated by resort operations.

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Regarding the Company’s operation of the Rental Pool, the related condominium units’ kitchens, bathrooms and carpeting are being renovated and upgraded. The project is currently underway in the Resort’s Lakeside Village units and the Company’s management expects the related billing to the condominium owners’ maintenance escrow fund account to occur in early 2005. Additionally, the Company’s management has commenced a project to replace and upgrade unit furniture packages to be completed in late 2004. The aggregate cost to be billed to the condominium owners’ maintenance escrow fund accounts to fund these expenditures is expected to be approximately $7,700,000. As of the end of the third quarter approximately $2,000,000 of these cost have been paid.

Results of Operations

Third quarter 2004 compared to third quarter 2003

The Company’s total revenues increased approximately $791,000 or about 14%, for the three months ended September 30, 2004 compared to the same period in the prior year. Total revenues for the Rental Pool increased approximately $494,000, or 45%, from the same period in the prior year. These increases were primarily due to a 51% increase in the number of paid room nights. Paid room nights increased 66% for the Resort’s group business and 28% for social hotel stays. During August and September, the state of Florida experienced an unusually high number of named hurricanes. The Company and its surrounding areas were unaffected, however, the Company did experience an increase in occupancy due to serving as a staging area for a utility company and its workers who were brought into the state, and some evacuees from other areas. Due to the type of business generated during this period, the average daily room rate decreased by 2% when compared with the same quarter of the prior year. Also, the Company’s total resort revenues, while still increased, were not as dramatically affected as these guests, for the most part, did not utilize the Company’s other amenities, such as golf and spa.

Regarding the projection of future revenues, concerns about the nation’s economy and national security have created a trend in the booking of resort business where reservations for both group and social guests are now generally occurring closer to their arrival dates instead of several months in advance as in previous years. Although this trend makes it difficult to project future business, the Company’s management believes the occupied room nights for the remainder of the year 2004 will approximate the prior year’s level. Similarly, projections for occupied room nights in the year 2005 and subsequent fiscal periods are expected to remain at the resort’s current volume of business pending an improvement in the nation’s economy and less concern about national security.

The net loss for the third quarter of 2004 was $1,545,000 compared to a net loss for the same period of 2003 of $1,712,000.

First nine months 2004 compared to first nine months 2003

The Company’s total revenues increased approximately $2,193,000 or 8% for the first nine months of 2004 compared to the same period in the prior year. Total revenues for the Rental Pool increased approximately $831,000, or 10%, from the same period in the prior year. These increases were primarily due to an 11% increase in the number of paid room nights for the condominium units that participated in the Rental Pool during the nine month period. Paid room nights increased 12% for the Resort’s group business and 6% for social hotel stays. The Company’s total resort revenues also reflected sales in its food and beverage and most other areas of operations that resulted from a 13% increase in the number of individual guests that stayed at the Resort for the period when compared to the first nine months of 2003.

The Company’s operating net income for the current period increased $961,000, which was a 155% increase from the operating net income for the first nine months of 2003. This increase was primarily a result of increased revenues. Interest expense decreased approximately 7% as the Company continued to pay down its self-amortizing debt discussed in Liquidity and Capital Resources above.

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Due to the seasonal business of the Company, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s invested cash, including investments escrowed on behalf of the condominium unit owners in the Rental Pool’s Maintenance Escrow Fund, are subject to changes in market interest rates. Otherwise, the Company does not have significant market risk with respect to foreign currency exchanges or other market rates.

Through September 30, 2004, the Company’s debt was self-amortizing and had a fixed contractual interest rate. Accordingly, fluctuations in related market costs of capital were not expected to affect its financial results. As of November 1, 2004, the new $12 million term note bears interest at 2% over the one month LIBOR index. Accordingly, the Company will be subject to interest rate risk due to the variable rate structure of the note.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2004, pursuant to Securities Exchange Act Rule 15d-14. Based upon that evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2004, in timely alerting them to material information required to be included in the Company’s periodic SEC filings.

There were no significant changes in the Company’s internal controls over financial reporting or in other factors during the quarter ended September 30, 2004 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in litigation in the ordinary course of business. In the opinion of the Company’s management, insurance or indemnification from other third parties adequately covers these matters. Accordingly, the effect, if any, of these claims is considered immaterial to the Company’s financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

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Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

     The following exhibits are included in this Form 10-Q:

SIGNATURE

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.

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