SADDLEBROOK RESORTS INC - Quarter Report: 2008 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, 2008

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

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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, 2008 and December 31, 2007			3
Statements of Operations and Accumulated Earnings for the three months and nine months ended September 30,2008 and 2007			4
Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation
Balance Sheets at September 30, 2008 and December 31, 2007			9
Statements of Operations for the three months and nine months ended September 30, 2008 and 2007			10
Statements of Changes in Participants’ Fund Balance for the nine months ended September 30, 2008 and 2007			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
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

		September 30,
		2008				December 31,
		(Unaudited)				2007
Assets
Current assets:
Cash and cash equivalents		$	4,529,664			$	991,320
Escrowed cash			442,238				890,069
Short-term investments			175,000				175,000
Short-term escrowed investments			199,057				—
Accounts receivable, net			1,522,990				3,200,585
Due from related parties			3,308,810				2,228,553
Inventory and supplies			1,759,206				1,679,645
Prepaid expenses and other current assets			876,588				756,956
Total current assets			12,813,553				9,922,128
Property, buildings and equipment, net			25,025,897				25,493,141
Deferred charges, net			19,791				32,022
Total assets		$	37,859,241			$	35,447,291
Liabilities and Shareholder’s Equity
Current liabilities:
Current portion of note payable		$	800,004			$	800,004
Current portion of capital leases			29,691				127,845
Current portion of line of credit			2,500,000				1,750,000
Escrowed deposits			641,295				890,069
Accounts payable			799,863				1,668,050
Accrued rental distribution			472,108				905,234
Accrued expenses and other liabilities			2,432,028				2,411,566
Current portion of deferred income			774,023				814,861
Guest deposits			1,575,213				1,657,194
Due to related parties			137,772				—
Total current liabilities			10,161,997				11,024,823
Note payable due after one year			8,066,647				8,666,650
Long-term portion of deferred income			1,557,944				1,609,632
Total liabilities			19,786,588				21,301,105
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			16,959,526				13,033,059
Total shareholder’s equity			18,072,653				14,146,186
		$	37,859,241			$	35,447,291

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,
		2008				2007				2008				2007
Revenues		$	5,594,686			$	7,029,033			$	38,596,767			$	34,627,515
Costs and expenses:
Operating costs			5,710,973				6,516,547				27,443,049				25,597,501
Sales and marketing			509,048				600,284				2,385,878				2,072,833
General and administrative			959,509				1,070,328				3,066,213				3,329,636
Depreciation			528,058				497,919				1,587,037				1,475,196
Total costs and expenses			7,707,588				8,685,078				34,482,177				32,475,166
Net operating income (loss) before
Other expenses (income)			(2,112,902	)			(1,656,045	)			4,114,590				2,152,349
Other expenses (income)
Interest income			(16,252	)			(9,680	)			(28,909	)			(43,154	)
Other income			(254,362	)			(16,909	)			(232,632	)			(41,622	)
Interest expense			136,054				211,661				449,664				653,153
Total other (income) expenses			(134,560	)			185,072				188,123				568,377
Net (loss) income			(1,978,342	)			(1,841,117	)			3,926,467				1,583,972
Accumulated earnings at beginning of period			18,937,868				15,927,086				13,033,059				12,501,997
Accumulated earnings at end of period		$	16,959,526			$	14,085,969			$	16,959,526			$	14,085,969

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,
		2008				2007
Operating activities:
Net income		$	3,926,467			$	1,583,972
Non-cash items included in net income:
Provision for doubtful accounts			3,300				—
Depreciation			1,587,037				1,475,196
Amortization of debt financing costs			12,231				12,231
(Gain) loss on sale of assets			(2,665	)			60,639
Decrease (increase) in:
Accounts receivable			1,674,295				375,670
Inventory and supplies			(79,561	)			14,184
Prepaid expenses and other assets			(119,632	)			(270,227	)
(Decrease) increase in:
Accounts payable			(868,186	)			(203,138	)
Accrued rental distribution			(433,126	)			(14,249	)
Guest deposits			(81,981	)			(82,430	)
Accrued expenses and other liabilities			20,462				262,935
Deferred income			(92,526	)			(135,051	)
Cash flow provided by operating activities			5,546,115				3,079,732
Investing activities:
Proceeds from sale of property and equipment			9,396				5,700
Proceeds from maturity of short term investment			—				375,000
Purchase of short term investment			—				(175,000	)
Capital expenditures			(1,126,525	)			(1,648,258	)
Cash flow used in investing activities			(1,117,129	)			(1,442,558	)
Financing activities:
Proceeds from line of credit			750,000				—
Payments on notes payable			(600,003	)			(600,003	)
Payments on capital lease obligations			(98,154	)			(115,251	)
Net payments to related parties			(942,485	)			(1,310,307	)
Cash flow used in financing activities			(890,642	)			(2,025,561	)
Net increase in cash			3,538,344				(388,387	)
Cash at beginning of period			991,320				977,849
Cash at end of period		$	4,529,664			$	589,462
Supplemental disclosure of cash flow information:
Cash paid for interest		$	437,433			$	640,921

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, 2008, and its statements of operations and accumulated earnings and cash flows for the periods ended September 30, 2008 and 2007, 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, 2007.

Note 2. Accounts Receivable

		September 30,
		2008				December 31,
		(Unaudited)				2007
Trade accounts receivable		$	1,539,066			$	3,245,106
Less allowance for bad debts			(16,076	)			(44,521	)
		$	1,522,990			$	3,200,585

Note 3. Property, Buildings and Equipment

		September 30,
		2008				December 31,
		(Unaudited)				2007
Land and land improvements		$	6,809,179			$	6,809,179
Buildings and recreational facilities			28,942,407				27,520,130
Machinery and equipment			17,010,899				16,090,540
Construction in progress			734,017				1,982,166
			53,496,502				52,402,015
Less accumulated depreciation			(28,470,605	)			(26,908,874	)
		$	25,025,897			$	25,493,141

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

Note 4. Deferred Charges

		September 30,
		2008				December 31,
		(Unaudited)				2007
Debt issue costs		$	83,730			$	83,730
Less accumulated amortization			(63,939	)			(51,708	)
		$	19,791			$	32,022

Note 5. Note Payable and Line of Credit

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, 2008 was 4.49%. At September 30, 2008, the outstanding balance on this term note was $8,866,651.

The Company has the ability to obtain an additional $5 million under a line of credit facility from the same lender under the same terms as the term note subject to specific covenants. The Company had an outstanding balance of $2,500,000 on the line of credit at September 30, 2008.

Note 6. Related Party Receivables and Payables

Related party receivables and payables at September 30, 2008 and December 31, 2007 are the result of net intercompany transactions and cash transfers between the Company and its shareholder and affiliated companies. Related party receivables and payables are unsecured and non-interest bearing and expected to be fully collected/paid within one year.

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.

SADDLEBROOK RENTAL POOL OPERATION

BALANCE SHEETS

DISTRIBUTION FUND

		September 30,
		2008				December 31,
		(Unaudited)				2007
Assets
Receivable from Saddlebrook Resorts, Inc.		$	472,108			$	905,234
Liabilities and Participants’ Fund Balance
Due to participants for rental pool distribution		$	399,208			$	758,745
Due to maintenance escrow fund			72,900				146,489
		$	472,108			$	905,234

MAINTENANCE ESCROW FUND

		September 30,
		2008				December 31,
		(Unaudited)				2007
Assets
Cash and cash equivalents		$	626,894			$	869,796
Receivables:
Distribution fund			72,900				146,489
Accrued interest receivable			425				—
Linen inventory			17,118				84,317
Prepaid expenses and other assets			2,494				1,774
		$	719,831			$	1,102,376
Liabilities and Participants’ Fund Balance
Accounts payable		$	133,217			$	120,702
Participants’ fund balance			586,614				981,674
		$	719,831			$	1,102,376

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
Rental pool revenues		$	1,210,015			$	1,696,494			$	11,803,836			$	9,980,354
Deductions:
Marketing fee			90,751				127,237				885,288				748,526
Management fee			151,252				212,062				1,475,480				1,247,545
Travel agent commissions			46,901				39,722				574,046				360,321
Credit card expense			33,982				41,126				223,231				185,487
			322,886				420,147				3,158,045				2,541,879
Net rental income			887,129				1,276,347				8,645,791				7,438,475
Less operator share of net rental income			(399,208	)			(574,356	)			(3,890,606	)			(3,347,313	)
Other revenues (expenses):
Complimentary room revenues			8,350				16,101				48,113				52,468
Minor repairs and replacements			(24,163	)			(41,908	)			(130,698	)			(139,716	)
Amount available for distribution		$	472,108			$	676,184			$	4,672,600			$	4,003,914

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

		Nine months ended
		September 30,
		2008				2007
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			4,672,600				4,003,914
Reductions:
Amount withheld for maintenance escrow fund			(781,994	)			(656,601	)
Amount accrued or paid to participants			(3,890,606	)			(3,347,313	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

		Nine months ended
		September 30,
		2008				2007
Balance at beginning of period		$	981,674				769,905
Additions:
Amount withheld from distribution fund			781,994				656,601
Unit owner payments			306,155				11,154
Interest earned			10,604				20,059
Reductions:
Escrow account refunds			(35,885	)			(37,658	)
Maintenance charges			(256,965	)			(186,118	)
Unit renovations			(1,050,827	)			(165,577	)
Linen replacement			(150,136	)			(137,498	)
Balance at end of period		$	586,614			$	930,868

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, swimming pools, a fitness center, an executive challenge course, a spa, restaurants and conference center facilities.

Impact of Current Economic Conditions

The Company believes that the reduced occupancy rates in 2008 are due in large part to the current state of the United States’ economy and higher oil and gasoline prices that have impacted travel costs. Businesses appear to have altered their spending patterns in response to the current economic conditions, resulting in fewer group bookings.

Given the current economic conditions we have increased our focus on managing costs. For example, we have reduced our salaried management positions and are managing staffing levels across the Company. We will continue to review costs to identify future opportunities for cost reduction.

Liquidity and Capital Resources

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, of which $2,500,000 was outstanding at September 30, 2008, 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 (4.49% at September 30, 2008) and matures on November 1, 2009.

Results of Operations

Third quarter 2008 compared to third quarter 2007

The Company’s total revenues decreased approximately $1,434,000, or about 20%, for the three months ended September 30, 2008 compared to the same period in the prior year. This decrease is directly related to a 30% decrease in occupancy over the prior period. Total revenues for the Rental Pool decreased approximately $486,000, or about 29%. This decrease is directly related to the decrease in occupancy, partially offset by a 3% increase in the average room rate.

The decreases of $977,000 in total costs and expenses for the Company, and $97,000 in total costs and expenses for the Rental Pool Operation, are consistent with the decreases in revenues.

Net loss for the Company increased $137,000 over the comparable period last year. Amounts available for distribution for the Rental Pool Operation decreased $204,000 over the comparable period last year.

On August 12, 2007 the Company experienced lightning damage that impacted our fire alarm, electrical and HVAC systems. The damage to the fire alarm system not only affected the Company’s property but also resulted in the need to replace and upgrade the fire alarm system for the condominium units which are governed by Saddlebrook Resorts Condominium Association, Inc., (the “Association”). This event resulted in the filing of an insurance claim for an estimated total of $871,000 in damages, to be reduced by a $100,000 deductible. As of this filing, the Company and the Association have received a total of $636,669 in settlement on this claim. The Association received approximately $271,000 of such amount. The Company received approximately $150,000 in the fourth quarter of 2007 and approximately $215,000 in the third quarter of 2008. Such amounts, net of non-capital expenses have been recorded as a component of Other Income for the Company in such quarters. The replacement of the damaged systems is substantially completed and we expect to receive reimbursement for the remaining balance on the claim of approximately $135,000 prior to the end of this year.

First nine months 2008 compared to first nine months 2007

The Company’s total revenues increased approximately $3,969,000, or about 11% for the nine months ended September 30, 2008 compared to the same period in the prior year. This increase is directly related to a 4% increase in occupancy over the prior year. The total revenues for the Rental Pool increased approximately $1,823,000, or about 18%. This increase is directly related to the increase in occupancy, along with a 14% increase in the average room rate.

The increases of $2,007,000 in total costs and expenses for the Company, and $616,000 in total costs and expenses for the Rental Pool Operation, are consistent with the increases in revenues.

Net income for the Company increased $2,342,000 over the comparable period last year. Amounts available for distribution for the Rental Pool Operation increased $669,000 over the same period in the prior year.

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, is 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 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, 2008, pursuant to Exchange Act Rule 15d-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 September 30, 2008 in timely alerting them to material information required to be included in the Company’s periodic SEC filings.

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.

There were no significant changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2008 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 from time to time 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