SADDLEBROOK RESORTS INC - Quarter Report: 2006 March (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 March 31, 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.)

5700 Saddlebrook Way, Wesley Chapel, Florida 33543-4499
(Address of principal executive offices)

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 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 March 31, 2006 and December 31, 2005			3
Statements of Operations and Accumulated Earnings for the three months ended March 31, 2006 and 2005			4
Statements of Cash Flows for the three months ended March 31, 2006 and 2005			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation
Balance Sheets at March 31, 2006 and December 31, 2005			9
Statements of Operations for the three months ended March 31, 2006 and 2005			10
Statements of Changes in Participants’ Fund Balance for the three months ended March 31, 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

- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

		March 31,
		2006				December 31,
		(Unaudited)				2005
Assets
Current assets:
Cash and cash equivalents		$	3,149,125			$	1,030,283
Escrowed cash			415,249				468,956
Short-term investments			375,000				375,000
Accounts receivable, net			6,026,012				2,514,867
Due from related parties			3,540,369				3,235,465
Inventory and supplies			1,394,633				1,381,747
Prepaid expenses and other current assets			1,289,116				777,460
Total current assets			16,189,504				9,783,778
Property, buildings and equipment, net			22,994,498				23,378,224
Deferred charges, net			60,561				64,638
Total assets		$	39,244,563			$	33,226,640
Liabilities and Shareholder’s Equity
Current liabilities:
Current portion of notes payable		$	800,004			$	800,004
Current portion of capital leases			181,385				178,854
Escrowed deposits			415,249				468,956
Accounts payable			1,072,159				1,091,700
Accrued rental distribution			2,344,255				767,165
Accrued expenses and other liabilities			2,649,255				2,326,927
Current portion of deferred income			1,046,619				714,587
Guest deposits			1,430,331				1,245,190
Due to related parties			1,745,471				1,675,965
Total current liabilities			11,684,728				9,269,348
Notes payable due after one year			10,066,657				10,266,658
Capital lease obligations due after one year			244,556				290,863
Long-term portion of deferred income			1,651,577				1,618,060
Total liabilities			23,647,518				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			14,483,918				10,668,584
Total shareholder’s equity			15,597,045				11,781,711
		$	39,244,563			$	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
		March 31,
		2006				2005
						(Restated)
Resort revenues		$	16,788,146			$	14,911,065
Costs and expenses:
Operating costs			10,559,512				9,574,313
Sales and marketing			700,826				726,380
General and administrative			1,069,948				1,034,454
Depreciation			473,230				448,324
Total costs and expenses			12,803,516				11,783,471
Net operating income before other expenses and (income)			3,984,630				3,127,594
Other expenses & (income)
Interest income			(14,035	)			(9,213	)
Other expense			(6,256	)			(21,022	)
Interest expense			189,587				147,307
Total other expenses & (income)			169,296				117,072
Net income			3,815,334				3,010,522
Accumulated earnings at beginning of period			10,668,584				9,447,912
Accumulated earnings at end of period		$	14,483,918			$	12,458,434

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

SADDLEBROOK RESORTS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

		Three months ended
		March 31,
		2006				2005
						(Restated)
Operating activities:
Net income		$	3,815,334			$	3,010,522
Non-cash items included in net income:
Provision for doubtful accounts			2,112				3,360
Depreciation			473,230				448,324
Amortization of debt financing costs			4,077				4,077
Loss on sale of assets			190				13,418
Decrease (increase) in:
Accounts receivable			(3,513,257	)			(1,553,634	)
Inventory and supplies			(12,886	)			74,238
Prepaid expenses and other assets			(511,656	)			(100,468	)
Increase (decrease) in:
Accounts payable			(19,541	)			84,936
Guest deposits			185,141				(342,036	)
Accrued expenses and other liabilities			1,899,418				1,302,106
Deferred income			365,550				33,903
Cash flow provided by operating activities			2,687,712				2,978,746
Investing activities:
Proceeds from sale of asset			—				100
Capital expenditures			(89,695	)			(378,023	)
Cash flow used in investing activities			(89,695	)			(377,923	)
Financing activities:
Payments on notes payable			(200,001	)			(200,001	)
Payments on capital lease obligations			(43,776	)			(39,812	)
Net payments (to) from related parties			(235,398	)			230,176
Cash flow used in financing activities			(479,175	)			(9,637	)
Net increase in cash			2,118,842				2,591,186
Cash at beginning of period			1,030,283				723,131
Cash at end of period		$	3,149,125			$	3,314,317
Supplemental disclosure of cash flow information:
Cash paid for interest		$	186,000			$	143,000
Supplemental disclosure of non-cash items:
Equipment acquired for capital lease		$	—			$	432,448

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 March 31, 2006, and its statements of operations and accumulated earnings and cash flows for the periods ended March 31, 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

		March 31,
		2006				December 31,
		(Unaudited)				2005
Trade accounts receivable		$	6,073,543			$	2,560,286
Less reserve for bad debts			(47,531	)			(45,419	)
		$	6,026,012			$	2,514,867

Note 3. Property, Buildings and Equipment

		March 31,
		2006				December 31,
		(Unaudited)				2005
Land and land improvements		$	4,859,372			$	4,859,372
Buildings and recreational facilities			26,709,719				26,597,058
Machinery and equipment			15,157,727				14,942,049
Construction in progress			200,378				441,875
			46,927,196				46,840,354
Less accumulated depreciation			(23,932,698	)			(23,462,130	)
		$	22,994,498			$	23,378,224

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

Note 4. Deferred Charges

		March 31,
		2006				December 31,
		(Unaudited)				2005
Debt issue costs		$	83,730			$	83,730
Less accumulated amortization			(23,169	)			(19,092	)
		$	60,561			$	64,638

Note 5. Notes 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 at March 31, 2006 was 6.63%.

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. The line of credit facility was scheduled to expire on November 1, 2006. It was extended until February 1, 2007 so that a new agreement could be executed. On January 31, 2007 a new agreement, with the same terms and conditions was closed with a maturity of January 31, 2008.

Note 6. Related Party Receivables and Payables

Related party receivables and payables at March 31, 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 March 31, 2006 reflects such revised accounting for all periods presented.

The total impact of the restatement and prior period adjustments for the quarter ending March 31, 2005 included in this filing 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
Statements of Operations and Accumulated Earnings
Resort revenue		$	14,975,203			$	14,911,065				-0.42	%
Total costs and expenses		$	11,787,548			$	11,783,471				-0.034	%
Operating income before other expenses and (income)		$	3,187,655			$	3,127,594				-1.88	%
Total other expense & (income)		$	143,230			$	117,072				-18.2	%
Net income		$	3,044,425			$	3,010,522				-1.11	%
Accumulated Earnings:
At beginning of period		$	11,022,246			$	9,447,912				-16.0	%
At end of period		$	14,066,671			$	12,458,434				-12.9	%

SADDLEBROOK RENTAL POOL OPERATION

BALANCE SHEETS

DISTRIBUTION FUND

		March 31,
		2006				December 31,
		(Unaudited)				2005
Assets
Receivable from Saddlebrook Resorts, Inc.		$	2,278,286			$	719,793
Liabilities and Participants’ Fund Balance
Due to participants for rental pool distribution		$	1,876,038			$	607,008
Due to maintenance escrow fund			402,248				112,785
Participants’ fund balance			—				—
		$	2,278,286			$	719,793

MAINTENANCE ESCROW FUND

		March 31,
		2006				December 31,
		(Unaudited)				2005
Assets
Cash and cash equivalents		$	387,726			$	441,433
Investments			—				—
Receivables:
Distribution fund			402,248				112,785
Owner payments			4,786				31,108
Interest			—				—
Linen inventory			17,542				26,498
Prepaid expenses and other assets			16,751				16,186
		$	829,053			$	628,010
Liabilities and Participants’ Fund Balance
Accounts payable		$	65,890			$	61,560
Participants’ fund balance			763,163				566,450
		$	829,053			$	628,010

SADDLEBROOK RENTAL POOL OPERATION
STATEMENTS OF OPERATIONS
(Unaudited)

DISTRIBUTION FUND

		Three months ended
		March 31,
		2006				2005
Rental pool revenue		$	5,531,242			$	5,094,551
Deductions:
Marketing fee			414,843				382,091
Management fee			691,405				636,819
Travel agent commissions			164,247				211,901
Credit card expense			90,773				79,950
Provision for bad debts			1,000				1,500
			1,362,268				1,312,261
Net rental income			4,168,974				3,782,290
Less operator share of net rental income			(1,876,038	)			(1,702,031	)
Other revenues (expenses):
Complimentary room revenues			20,613				28,150
Minor repairs and replacements			(35,263	)			(31,812	)
Amount available for distribution		$	2,278,286			$	2,076,597

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

		Three months ended
		March 31,
		2006				2005
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			2,278,286				2,076,597
Reductions:
Amount withheld for maintenance escrow fund			(402,248	)			(374,566	)
Amount accrued or paid to participants			(1,876,038	)			(1,702,031	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

		Three months ended
		March 31,
		2006				2005
Balance at beginning of period		$	566,450				3,735,449
Additions:
Amount withheld from distribution fund			402,248				374,566
Unit owner payments			28,871				812,867
Interest earned			2,505				7,179
Reductions:
Escrow account refunds			(8,952	)			(9,798	)
Maintenance charges			(56,741	)			(123,723	)
Unit renovations			(160,222	)			(3,034,442	)
Linen replacement			(10,996	)			(112,704	)
Balance at end of period		$	763,163			$	1,649,394

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

There were no significant capital additions or improvements during the three months ended March 31, 2006. Subsequently, the Company has renovated the greens on the Saddlebrook golf course, including replacement of the irrigation system. The total amount expended on this project at the time of this filing is approximately $2,000,000 and the project is substantially complete. Also subsequent to the end of the first quarter, the Company modified an area previously containing a seldom used roadway into additional outdoor function space to be known as the Royal Palm Commons. At the time of this filing, the project was complete 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 the Company’s and its affiliates’ 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

First quarter 2006 compared to first quarter 2005

The Company’s total revenues for the three months ended March 31, 2006 increased approximately $1,877,000, about 12%, from the first quarter of the prior year. Although the number of guests on property was down about 10% when compared with the first quarter of 2005, 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 most significant increase was seen in our Banquet department where revenues were up $1,040,000, or about 30% over the same period last year. Total revenues for the Rental Pool Operation increased $437,000, or about 9% over the first quarter of 2005.

The increases of $1,020,000 in operating costs and expenses for the Company, and $50,000 in operating costs and expenses for the Rental Pool Operation are consistent with the increases in revenues.

Net Income for the Company increased $805,000 over the comparable period last year. Amounts available for distribution for the Rental Pool Operation increased $202,000 over the first quarter of 2005. These increases are directly related to the increases in revenues, offset by the increases in operating costs.

Seasonality

The Company’s operations are seasonal with the highest volume of revenue 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 quarter ended March 31, 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.