SADDLEBROOK RESORTS INC - Quarter Report: 2006 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

þ		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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

SADDLEBROOK RESORTS, INC.

(Exact name of registrant as specified in its charter)

Florida		59-1917822
(State of incorporation)		(IRS employer identification no.)

(Address of principal executive offices)

813-973-1111

(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 þ       NO o

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. (Check one) :

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

		Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Saddlebrook Resorts, Inc.
Balance Sheets at September 30, 2006 and December 31, 2005			3
Statements of Operations and Accumulated Earnings for the three months and nine months ended September 30, 2006 and 2005			4
Statements of Cash Flows for the nine months ended September 30, 2006 and 2005			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation
Balance Sheets at September 30, 2006 and December 31, 2005			9
Statements of Operations for the three months and nine months ended September 30, 2006 and 2005			10
Statements of Changes in Participants’ Fund Balance for the nine months ended September 30, 2006 and 2005			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Market Risk			14
Item 4. Controls and Procedures			14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			14
Item 6. Exhibits			15
Signature			15
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

		September 30,
		2006				December 31,
		(Unaudited)				2005
Assets
Current assets:
Cash and cash equivalents		$	868,645			$	1,030,283
Escrowed cash			480,139				468,956
Short-term investments			375,000				375,000
Short-term escrowed investments			197,566				—
Accounts receivable, net			1,666,017				2,514,867
Due from related parties			4,873,090				3,235,465
Inventory and supplies			1,403,270				1,381,747
Prepaid expenses and other current assets			1,005,859				777,460
Total current assets			10,869,586				9,783,778
Property, buildings and equipment, net			24,089,370				23,378,224
Deferred charges, net			52,407				64,638
Total assets		$	35,011,363			$	33,226,640
Liabilities and Shareholder’s Equity
Current liabilities:
Current portion of note payable		$	800,004			$	800,004
Current portion of capital leases			152,711				178,854
Escrowed deposits			677,705				468,956
Accounts payable			591,561				1,091,700
Accrued rental distribution			568,611				767,165
Accrued expenses and other liabilities			2,373,315				2,326,927
Current portion of deferred income			833,372				714,587
Guest deposits			1,021,006				1,245,190
Due to related parties			1,458,066				1,675,965
Total current liabilities			8,476,351				9,269,348
Note payable due after one year			9,666,655				10,266,658
Capital lease obligations due after one year			167,239				290,863
Long-term portion of deferred income			1,663,474				1,618,060
Total liabilities			19,973,719				21,444,929
Shareholder’s equity:
Common stock, $1.00 par value, 100,000 shares authorized and outstanding			100,000				100,000
Additional paid-in capital			1,013,127				1,013,127
Accumulated earnings			13,924,517				10,668,584
Total shareholder’s equity			15,037,644				11,781,711
		$	35,011,363			$	33,226,640

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

SADDLEBROOK RESORTS, INC.

STATEMENTS OF OPERATIONS

AND ACCUMULATED EARNINGS

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
						(Restated)								(Restated)
Revenues		$	6,744,842			$	6,700,931			$	35,408,176			$	32,618,013
Costs and expenses:
Operating costs			6,082,452				6,081,033				25,170,310				23,809,134
Sales and marketing			597,336				518,432				1,985,625				1,899,953
General and administrative			1,013,751				873,402				3,131,822				2,844,194
Depreciation			452,151				467,320				1,362,255				1,375,933
Total costs and expenses			8,145,690				7,940,187				31,650,012				29,929,214
Net operating income (loss) before
Other expenses and (income)			(1,400,848	)			(1,239,256	)			3,758,164				2,688,799
Other expenses & (income)
Interest income			(22,612	)			(14,754	)			(71,694	)			(42,130	)
Other income			(2,996	)			(1,129	)			(22,720	)			(23,297	)
Interest expense			207,638				171,915				596,644				476,520
Total other expenses & (income)			182,030				156,032				502,230				411,093
Net income (loss)			(1,582,878	)			(1,395,288	)			3,255,934				2,277,707
Accumulated earnings at beginning of period			15,507,396				13,120,906				10,668,584				9,447,912
Accumulated earnings at end of period		$	13,924,518			$	11,725,619			$	13,924,518			$	11,725,619

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

SADDLEBROOK RESORTS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine months ended
		September 30,
		2006				2005
						(Restated)
Operating activities:
Net income		$	3,255,934			$	2,277,707
Non-cash items included in net income:
Provision for doubtful accounts			1,516				10,080
Depreciation			1,362,255				1,375,933
Amortization of debt financing costs			12,231				12,231
Loss (gain) on sale of assets			(17,638	)			17,360
Decrease (increase) in:
Accounts receivable			847,335				1,009,928
Inventory and supplies			(21,523	)			190,043
Prepaid expenses and other assets			(228,400	)			(61,235	)
Increase (decrease) in:
Accounts payable			(500,139	)			(182,918	)
Accrued rental distribution			(198,554	)			(203,941	)
Guest deposits			(224,185	)			(388,064	)
Accrued expenses and other liabilities			46,387				(184,198	)
Deferred Income			164,199				181,711
Cash flow provided by operating activities			4,499,418				4,054,638
Investing activities:
Proceeds from sale of asset			71,471				100
Capital expenditures			(2,127,234	)			(886,039	)
Cash flow used in investing activities			(2,055,763	)			(885,939	)
Financing activities:
Payments on notes payable			(600,003	)			(600,003	)
Payments on capital lease obligations			(149,767	)			(116,143	)
Net payments to related parties			(1,855,523	)			(2,603,981	)
Cash flow used in financing activities			(2,605,293	)			(3,320,127	)
Net increase in cash			(161,638	)			(151,428	)
Cash at beginning of period			1,030,283				723,131
Cash at end of period		$	868,645			$	571,703
Supplemental disclosure of cash flow information:
Cash paid for interest		$	584,413			$	464,288
Supplemental disclosure of non-cash items:
Equipment acquired for capital lease		$	—			$	559,592

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

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 September 30, 2006, and its statements of operations and accumulated earnings and cash flows for the periods ended September 30, 2006 and 2005, 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, 2005.

Note 2. Accounts Receivable

		September 30,
		2006				December 31,
		(Unaudited)				2005
Trade accounts receivable		$	1,712,952			$	2,560,286
Less reserve for bad debts			(46,935	)			(45,419	)
		$	1,666,017			$	2,514,867

Note 3. Property, Buildings and Equipment

		September 30,
		2006				December 31,
		(Unaudited)				2005
Land and land improvements		$	4,859,372			$	4,859,372
Buildings and recreational facilities			26,822,068				26,597,059
Machinery and equipment			15,131,487				14,942,049
Construction in progress			1,945,381				441,874
			48,758,308				46,840,354
Less accumulated depreciation			(24,668,938	)			(23,462,130	)
		$	24,089,370			$	23,378,224

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

Note 4. Deferred Charges

		September 30,
		2006				December 31,
		(Unaudited)				2005
Debt issue costs		$	83,730			$	83,730
Less accumulated amortization			(31,323	)			(19,092	)
		$	52,407			$	64,638

Note 5. Note Payable

The Company’s term note is due November 1, 2009, and requires monthly principal payments of $66,667, together with monthly payment of all accrued interest. The term note bears interest at 2% over the one month LIBOR index. The rate as of September 30, 2006 was 7.33%.

The Company has the ability to obtain an additional $5 million under a line of credit facility from the same lender under the terms of the agreement subject to specific covenants. This line of credit facility was originally scheduled to mature on November 1, 2006, however the lender extended that maturity date to February 1, 2007 while a new agreement was executed. On January 31, 2007 a new agreement, with the same terms and conditions closed with a maturity date of January 31, 2008.

Note 6. Related Party Receivables and Payables

Related party receivables and payables at September 30, 2006 and December 31, 2005 are the result of net intercompany transactions and cash transfers between the Company and its shareholder company and affiliated companies.

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. Restatements

As announced in the Company’s Form 10-K for the year ended December 31, 2005, the Company revised its accounting for the recognition of revenue from initiation fees related to the sale of memberships. The Company is now recognizing revenue over the average life of the memberships, which was calculated to be 12 years. Previously, the Company had recognized the revenue from the initiation fees in the fiscal year in which the fees were received. In addition, the Company also reclassified certain amortization costs, interest and other income. This quarterly report on form 10-Q for the period ending September 30, 2006 reflects such revised accounting for all periods presented.

The total impact of the restatement and prior period adjustments included in this filing for the quarter ending September 30, 2005 as compared to the previously reported financial statements is summarized below (only line items that were impacted are presented):

		Previously				As				Percentage
		Reported				Restated				Change
Three months ended 9/30/2005 Statements of Operations and Accumulated Earnings
Resort revenue		$	6,793,218			$	6,700,931				-1.35	%
Operating income before other expenses and (income)		$	(1,146,969	)		$	(1,239,256	)			-8.04	%
Total other expense & (income)		$	171,915			$	156,032				-9.23	%
Net income		$	(1,318,884	)		$	(1,395,288	)			-5.79	%
Accumulated earnings:
At beginning of period		$	14,800,547			$	13,120,906				-11.35	%
At end of period		$	13,481,663			$	11,725,619				-13.03	%
Nine months ended 9/30/2005 Statements of Operations and Accumulated Earnings
Resort revenue		$	32,865,150			$	32,618,013				-0.75	%
Operating income before other expenses and (income)		$	2,935,936			$	2,688,799				-8.42	%
Total other expense & (income)		$	476,519			$	411,093				-15.9	%
Net income		$	2,459,417			$	2,277,707				-7.39	%
Accumulated earnings:
At beginning of period		$	11,022,246			$	9,447,912				-14.28	%
At end of period		$	13,481,663			$	11,725,619				-13.03	%

SADDLEBROOK RENTAL POOL OPERATION

BALANCE SHEETS

DISTRIBUTION FUND

		September 30,
		2006				December 31,
		(Unaudited)				2005
Assets
Receivable from Saddlebrook Resorts, Inc.		$	574,936			$	719,793
Liabilities and Participants’ Fund Balance
Due to participants for rental pool distribution		$	485,946			$	607,008
Due to maintenance escrow fund			88,990				112,785
Participants’ fund balance			—				—
		$	574,936			$	719,793

MAINTENANCE ESCROW FUND

		September 30,
		2006				December 31,
		(Unaudited)				2005
Assets
Cash and cash equivalents		$	461,339			$	441,433
Investments			197,566				—
Receivables:
Distribution fund			88,990				112,785
Owner payments			—				31,108
Interest			241				—
Linen inventory			5,560				26,498
Prepaid expenses and other assets			21,652				16,186
		$	775,348			$	628,010
Liabilities and Participants’ Fund Balance
Accounts payable		$	76,314			$	61,560
Participants’ fund balance			699,034				566,450
		$	775,348			$	628,010

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Rental pool revenues		$	1,428,304			$	1,498,900			$	10,180,731			$	9,744,114
Deductions:
Marketing fee			107,123				112,418				763,555				730,809
Management fee			178,538				187,363				1,272,591				1,218,015
Travel agent commissions			36,176				39,727				302,283				351,364
Credit card expense			26,588				30,056				185,059				163,899
Provision for bad debts			—				1,500				1,000				4,500
			348,425				371,064				2,524,488				2,468,587
Net rental income			1,079,879				1,127,836				7,656,243				7,275,527
Less operator share of net rental income			(485,946	)			(507,526	)			(3,445,310	)			(3,273,987	)
Other revenues (expenses):
Complimentary room revenues			11,065				9,355				45,836				58,166
Minor repairs and replacements			(30,063	)			(31,668	)			(107,758	)			(107,453	)
Amount available for distribution		$	574,935			$	597,997			$	4,149,011			$	3,952,253

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

		Nine months ended
		September 30,
		2006				2005
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			4,149,013				3,952,253
Reductions:
Amount withheld for maintenance escrow fund			(703,703	)			(678,267	)
Amount accrued or paid to participants			(3,445,310	)			(3,273,986	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

		Nine months ended
		September 30,
		2006				2005
Balance at beginning of period		$	566,450			$	3,735,449
Additions:
Amount withheld from distribution fund			703,703				678,267
Unit owner payments			35,746				1,124,314
Interest earned			12,220				12,883
Reductions:
Escrow account refunds			(22,369	)			(29,628	)
Maintenance charges			(206,121	)			(246,945	)
Unit renovations			(301,833	)			(4,341,869	)
Linen replacement			(88,762	)			(247,200	)
Balance at end of period		$	699,034			$	685,271

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 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

Two significant projects began during the three months ending September 30, 2006 and were subsequently completed. The Company has renovated the greens on the Saddlebrook golf course, including replacement of the irrigation system. The total amount expended on this project is approximately $2,000,000. Also, the Company modified an area previously containing a seldom used roadway into additional outdoor function space to be known as the Royal Palm Commons. The project was completed with the total cost of approximately $550,000. The Company is also currently participating in a project to redesign the shared entrance to its property, including the installation of a traffic light, widening of the existing entry and exit roads and installation of a new security welcome center. The Company’s share of this joint project is expected to be approximately $370,000.

Future operating costs and planned expenditures for minor capital additions and improvements are expected to be adequately funded by current cash reserves and cash generated by resort operations. The Company’s current debt agreement also contains a commitment for an additional $5,000,000 provided the Company is in compliance with certain financial covenants. The Company’s financing from a third-party lender bears interest at 2% over the one month LIBOR index (7.32% at March 1, 2007) and matures on November 1, 2009.

Results of Operations

Third quarter 2006 compared to third quarter 2005

The Company’s total revenues increased approximately $43,000 or about .6%, for the three months ended September 30, 2006 compared to the same period in the prior year. Although the total number of guests on property during the third quarter of 2006 decreased from the same period in the prior year by 12%, the Company did still experience an increase in revenue in our various areas of operations. The completion of the total furniture upgrade in our units participating in the rental pool operation gave us the ability to not only improve room rates but also increase revenue per check in our food and beverage outlets. The food and beverage operations saw an increase of approximately $167,000, or about 6%, when compared to the same period in the prior year. This also relates to an increase in overall food and beverage pricing that went into effect on January 1, 2006 averaging about 20%. Total revenues for the Rental Pool decreased approximately $71,000, or about 5% from the same period in the prior year. This relates to a decrease in paid unit nights over the comparable period last year of approximately 11%, partially offset by an increase in the average room rate of 10%.

The increase of $205,000 in total costs and expenses for the Company is a result of increases related to the increases in revenue, and also relates to an increase in the Company’s property insurance premiums. The decrease of $23,000 in total costs and expenses for the Rental Pool Operation is consistent with the decrease in revenues.

Net loss for the Company increased $188,000 over the comparable period last year. This change is directly related to the increase in total operating costs and expenses, partially offset by the increase in revenues. Amounts available for distribution for the Rental Pool Operation decreased $23,000 over the third quarter of 2005. This change is directly related to the decrease in revenues.

First nine months 2006 compared to first nine months 2005

The Company’s total revenues increased approximately $2,789,000 or 8% for the first nine months of 2006 compared to the same period in the prior year. Again, the most significant increases are being noted in our food and beverage operation, where the total increases for the first nine months of 2006 over the first nine months of 2005 are approximately $1,421,000, or about 13%. Total revenues for the Rental Pool increased approximately $437,000, or 4%, from the same period in the prior year. These increases were primarily due to a 10% increase in the average room rate, partially offset by a decrease 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 decreased 6% for the Resort’s group business while there was no change in social hotel stays.

The increases of $1,720,000 in costs and expenses for the Company, and $56,000 in costs and expenses for the Rental Pool Operation are consistent with the increases in revenues.

The Company’s net operating income for the first nine months of 2006 increased approximately $978,000 over the first nine months of 2005. This increase was primarily a result of increased revenues, offset by the increases in operating costs and expenses.

Seasonality

The Company’s operations are seasonal with the highest volume of revenues generally occurring in the first quarter of each calendar year.

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.

The Company’s term note bears interest at 2% over the one month LIBOR index and matures on November 1, 2009.

Item 4. Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures over internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected.

During the first quarter of 2006, a deficiency was identified related to our control over initiation fee revenue recognition. This control deficiency resulted in the restatement of the Company’s 2003 and 2004 annual and interim financial statements and restatement of the 2005 interim financial statements. Accordingly, management determined that this control deficiency constituted a material weakness as defined in standards by the Public Company Accounting Oversight Board. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We now have developed control procedures to ensure that initiation fees are properly recorded in the financial statements in accordance with generally accepted accounting principles. These procedures ensure that initiation fees are identified when received and are recorded in a template designed to calculate revenue to be recognized and revenue to be deferred to future periods. We have also instituted a review process that ensures the amounts calculated in the template are appropriately included in the financial statements on an interim and annual basis.

There were no significant changes in the Company’s internal controls, other than those discussed above, or in other factors during the period ended September 30, 2006 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 6. Exhibits

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

	31.1	–	Chief Executive Officer Rule 15d-14(a) Certification
	31.2	–	Chief Financial Officer Rule 15d-14(a) Certification
	32.1	–	Chief Executive Officer Section 1350 Certification
	32.2	–	Chief Financial Officer Section 1350 Certification

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.

		SADDLEBROOK RESORTS, INC.
		(Registrant)
Date: March 19, 2007		/s/ Donald L. Allen
		Donald L. Allen
		Vice President and Treasurer
		(Principal Financial and
		Accounting Officer)