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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

OR

COMMISSION FILE NUMBER: 2-65481

SADDLEBROOK RESORTS, INC.

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 þ     NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES o   NO þ

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.
BALANCE SHEETS

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

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SADDLEBROOK RESORTS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

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

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SADDLEBROOK RESORTS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

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

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SADDLEBROOK RESORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)

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 March 31, 2004, and its statements of operations and cash flows for the periods ended March 31, 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

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Note 3. Property, Buildings and Equipment

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

Note 4. Deferred Charges

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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, 2003, the Company was not in compliance with the financial covenants related to this additional financing. However, the Company was in compliance with the financial covenants related to its existing debt.

Note 6. Related Party Receivables and Payables

Related party receivables and payables at March 31, 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.

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 were netted against this amount resulting in a net litigation settlement of $3,286,051.

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SADDLEBROOK RENTAL POOL OPERATION
BALANCE SHEETS

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

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SADDLEBROOK RENTAL POOL OPERATION
STATEMENTS OF OPERATIONS
(Unaudited)

DISTRIBUTION FUND

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SADDLEBROOK RENTAL POOL OPERATION
STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES
(Unaudited)

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

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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. Accordingly, the Company experienced an improvement in its financial condition as of March 31, 2004 when compared with its fiscal year-end of December 2003.

The Company’s financing from a third-party lender has a fixed annual interest rate of 7.7%, monthly principal and interest payments of approximately $244,000 and matures on June 30, 2013. The current debt agreement contains additional financing from the same lender of $5,000,000 provided the Company is in compliance with certain financial covenants. For the debt’s reporting period ended June 30, 2003, the Company was not in compliance with the financial covenants related to this additional financing. However, the Company was in compliance with the financial covenants related to its existing debt.

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 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 were netted against this amount resulting in a net litigation settlement of $3,286,051.

There were no significant capital additions or improvements during the three months ended March 31, 2004. The Company plans a four year lease of 140 golf carts and 23 service carts at a cost of $425,000. The Company also plans a three year lease of computer equipment at a cost of $190,000. In addition, the Company is planning a refurbishment of the swimming pools at a cost of $225,000. Future operating costs and planned expenditures for minor 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.

Regarding the Company’s operation of the Rental Pool, the related condominium units’ kitchens, bathrooms and carpeting are currently being renovated and upgraded. This project commenced in 1998 and has been completed for unit Clusters One through Ten with an aggregate billing to the maintenance escrow fund of $6,071,000. 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 accounts to occur in 2004. Additionally, the Company’s management has commenced a project to replace and upgrade unit furniture packages to be completed in mid to late 2004. The aggregate cost to be billed to the condominium owners’ maintenance escrow fund accounts is expected to be approximately $7,700,000.

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Results of Operations

First quarter 2004 compared to first quarter 2003

The Company’s total revenues for the months ended March 31, 2004 increased by approximately $2,313,000, or 17%, from the first quarter of the prior year. Total revenues for the Rental Pool increased approximately $736,000, or 17%, from the same period the prior year. These increases were primarily due to a 19% increase in paid room nights for the condominium units that participated in the Rental Pool. The average daily room rate for the current quarter decreased by approximately 3% from the average daily room rate for the same period prior year. The Company’s total resort revenues were also affected by increased sales in its food and beverage and other areas of operations that resulted from an 11% increase in the number of individual guests that stayed at the Resort for the current quarter when compared to the same period in the prior year.

Although the Company experienced an increase in revenues for the first quarter when compared to the prior year, the slowdown in the nation’s economy and concerns about national security are still adversely affecting travel. Regarding the projection of future revenues, these negative events 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 prior 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.

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.

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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. Consequently, the related yields for these investments continue to have a downward trend. Otherwise, the Company does not have significant market risk with respect to foreign currency exchanges or other market rates.

The Company’s debt is self-amortizing and has a fixed contractual interest rate through September of 2013. Accordingly, fluctuations in related market costs of capital are not expected to affect its financial results.

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 March 31, 2004, pursuant to Exchange Act Rule 13a-15. 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 March 31, 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 or in other factors during the quarter ended March 31, 2004 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls.

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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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 and Reports on Form 8-K

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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