SADDLEBROOK RESORTS INC - Quarter Report: 2010 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

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

COMMISSION FILE NUMBER: 2-65481

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o 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:

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company 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, 2010 and December 31, 2009			3
Statements of Operations and Accumulated Earnings for the three months and nine months ended September 30,2010 and 2009			4
Statements of Cash Flows for the nine months ended September 30, 2010 and 2009			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation Balance Sheets at September 30, 2010 and December 31, 2009			9
Statements of Operations for the three months and nine months ended September 30, 2010 and 2009			10
Statements of Changes in Participants’ Fund Balance for the nine months ended September 30, 2010 and 2009			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
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

		September 30,
		2010				December 31,
		(Unaudited)				2009
Assets
Current assets:
Cash and cash equivalents		$	575,061			$	1,044,573
Escrowed cash			743,813				777,729
Accounts receivable, net			899,991				1,872,364
Due from related parties			338,959				1,319,304
Inventory and supplies			1,600,553				1,566,950
Prepaid expenses and other current assets			785,093				704,088
Total current assets			4,943,470				7,285,008
Property, buildings and equipment, net			22,155,637				23,448,520
Deferred charges, net			39,102				47,482
Total assets		$	27,138,209			$	30,781,010
Liabilities and Shareholder’s Equity
Current liabilities:
Current portion of long-term debt		$	1,060,000			$	1,060,000
Current portion of capital lease obligation			93,283				89,697
Escrowed deposits			743,813				777,729
Accounts payable			476,057				687,585
Accrued rental distribution			252,438				544,090
Accrued expenses and other liabilities			2,242,547				1,622,891
Current portion of deferred income			839,421				852,864
Guest deposits			841,807				1,266,157
Total current liabilities			6,549,366				6,901,013
Long-term debt			7,950,000				8,745,000
Capital lease obligation			132,230				202,648
Deferred income			1,252,209				1,371,871
Other liabilities			149,000				149,000
Total liabilities			16,032,805				17,369,532
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			12,723,833				14,589,264
Due from related parties			(2,731,556	)			(2,290,913	)
Total shareholder’s equity			11,105,404				13,411,478
		$	27,138,209			$	30,781,010

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,
		2010				2009				2010				2009
Revenues		$	3,824,289			$	4,291,516			$	20,544,157			$	21,040,715
Costs and expenses:
Operating costs			4,337,760				4,074,870				17,337,775				16,513,618
Sales and marketing			355,452				291,486				1,169,596				1,151,525
General and administrative			763,889				625,988				2,230,498				2,235,021
Net gain on assets sold			—				(404,416	)			—				(403,009	)
Depreciation			480,614				502,413				1,460,043				1,540,319
Total costs and expenses			5,937,715				5,090,341				22,197,912				21,037,474
Net operating (loss) income before other (income) expenses			(2,113,426	)			(798,825	)			(1,653,755	)			3,241
Other (income) expenses
Interest income			(960	)			(1,440	)			(2,252	)			(8,083	)
Other expense (income)			4,234				(15,484	)			(8,979	)			(189,595	)
Interest expense			73,463				83,213				222,907				282,041
Total other (income) expenses			76,737				66,289				211,676				84,363
Net loss			(2,190,163	)			(865,114	)			(1,865,431	)			(81,122	)
Accumulated earnings at beginning of period			14,913,996				16,387,587				14,589,264				15,603,595
Accumulated earnings at end of period		$	12,723,833			$	15,522,473			$	12,723,833			$	15,522,473

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,
		2010				2009
Operating activities:
Net loss		$	(1,865,431	)		$	(81,122	)
Non-cash items included in net loss:
Provision for doubtful accounts			(14,492	)			(759	)
Depreciation			1,460,043				1,540,319
Amortization of debt financing costs			8,380				41,290
Gain on sale of assets			—				(403,009	)
Decrease (increase) in:
Accounts receivable			986,865				588,464
Inventory and supplies			(33,603	)			253,387
Prepaid expenses and other current assets			(81,005	)			106,289
(Decrease) increase in:
Accounts payable			(211,528	)			(373,811	)
Accrued rental distribution			(291,652	)			(369,507	)
Guest deposits			(424,350	)			(1,326,185	)
Accrued expenses and other liabilities			619,656				105,344
Deferred income			(133,105	)			(224,313	)
Cash flow provided by (used in) operating activities			19,778				(143,613	)
Investing activities:
Proceeds from sale of property and equipment			—				505,528
Proceeds from maturity of short term investment			—				175,000
Capital expenditures			(167,160	)			(281,490	)
Cash flow (used in) provided by investing activities			(167,160	)			399,038
Financing activities:
Payments on long-term debt			(795,000	)			(1,096,649	)
Payments on capital lease obligations			(66,832	)			(56,500	)
Debt costs to be amortized			—				(55,895	)
Net repayments from (advances to) related parties			539,702				(130,044	)
Cash flow used in financing activities			(322,130	)			(1,339,088	)
Net decrease in cash			(469,512	)			(1,083,663	)
Cash at beginning of period			1,044,573				3,752,278
Cash at end of period		$	575,061			$	2,668,618
Supplemental disclosure of cash flow information:
Cash paid for interest		$	216,280			$	224,976

Non-Cash Investing Activities

In February 2009, the Company acquired $370,542 of vehicles through a capital lease obligation.

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, 2010, and its statements of operations and accumulated earnings and cash flows for the periods ended September 30, 2010 and 2009, 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, 2009.

Note 2. Accounts Receivable

		September 30,
		2010				December 31,
		(Unaudited)				2009
Trade accounts receivable		$	940,726			$	1,927,591
Less allowance for bad debts			(40,735	)			(55,227	)
		$	899,991			$	1,872,364

Note 3. Property, Buildings and Equipment

		September 30,
		2010				December 31,
		(Unaudited)				2009
Land and land improvements		$	6,802,067			$	6,802,067
Buildings and recreational facilities			29,731,135				29,702,374
Machinery and equipment			17,427,033				17,332,183
Construction in progress			238,510				194,960
			54,198,745				54,031,584
Less accumulated depreciation			(32,043,108	)			(30,583,064	)
		$	22,155,637			$	23,448,520

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

Note 4. Deferred Charges

		September 30,
		2010				December 31,
		(Unaudited)				2009
Debt issue costs		$	55,895			$	55,895
Less accumulated amortization			(16,793	)			(8,413	)
		$	39,102			$	47,482

Note 5. Long-term debt and Capital Lease Obligation

Long-term debt is a bank note payable which is due March 12, 2014, and requires monthly principal payments of $88,333, plus monthly payments of all accrued interest. The term note bears interest at 2.5% over the one month LIBOR index. The rate as of September 30, 2010 was 2.76%. The note is collateralized by all current and subsequently acquired real and personal property. At September 30, 2010, the outstanding balance on this term note was $9,010,000.

The Company has the ability to obtain an additional $2,500,000 under a line of credit facility from the same lender, with the same rate of interest, subject to meeting certain financial covenants on an annual basis. The line of credit expires in March 2011. At September 30, 2010, the Company has no borrowings on the line of credit.

On February 11, 2009, the Company entered into a capital lease for the purchase of vehicles in the amount of $370,542. The capital lease is secured by the vehicles purchased, matures in January 2013 and requires monthly payments of $8,574, including interest at 5.24%.

Note 6. Due from Related Parties

Due from related parties at September 30, 2010 and December 31, 2009 are the result of net intercompany transactions and cash transfers between the Company and its shareholder and affiliated companies, which are unsecured and non-interest bearing.

The Company currently funds expenditures for its parent company, Saddlebrook Holdings, Inc. (“SHI”). SHI’s expenditures include dividends to its shareholders, which are primarily for income taxes related to the operations of SHI and its subsidiaries. Until such time as definitive repayment terms are established and collectability of the amounts due can be assessed, the Company has reclassified the amounts due from SHI as a component of shareholders’s equity in the accompanying balance sheets.

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,
		2010				December 31,
		(Unaudited)				2009
Assets
Receivable from Saddlebrook Resorts, Inc.		$	252,438			$	544,090
Liabilities
Due to participants for rental pool distribution		$	226,739			$	456,994
Due to maintenance escrow fund			25,699				87,096
			252,438				544,090
Participants’ Fund Balance			—				—
		$	252,438			$	544,090

MAINTENANCE ESCROW FUND

		September 30,
		2010				December 31,
		(Unaudited)				2009
Assets
Cash and cash equivalents		$	725,613			$	761,829
Receivable from Distribution Fund			25,699				87,096
Furniture Inventory			60,775				60,174
Prepaid expenses and other assets			8,520				7,816
		$	820,607			$	916,915
Liabilities and Participants’ Fund Balance
Accounts payable		$	96,173			$	112,455
Participants’ fund balance			724,434				804,460
		$	820,607			$	916,915

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS — DISTRIBUTION FUND

(Unaudited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
Rental pool revenues		$	696,591			$	818,833			$	5,532,612			$	5,736,574
Deductions:
Marketing fee			52,244				61,412				414,945				430,243
Management fee			87,074				102,354				691,577				717,071
Travel agent commissions			31,424				29,282				182,750				203,512
Credit card expense			21,984				18,354				130,362				129,602
			192,726				211,402				1,419,634				1,480,428
Net rental income			503,865				607,431				4,112,978				4,256,146
Less operator share of net rental income			(226,739	)			(273,344	)			(1,850,840	)			(1,915,265	)
Other revenues (expenses):
Complimentary room revenues			2,639				6,466				15,007				30,846
Minor repairs and replacements			(27,327	)			(35,913	)			(107,769	)			(91,969	)
Amount available for distribution		$	252,438			$	304,640			$	2,169,376			$	2,279,758

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

		Nine months ended
		September 30,
		2010				2009
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			2,169,376				2,279,758
Reductions:
Amount withheld for maintenance escrow fund			(318,536	)			(364,493	)
Amount accrued or paid to participants			(1,850,840	)			(1,915,265	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

		Nine months ended
		September 30,
		2010				2009
Balance at beginning of period		$	804,460				555,680
Additions:
Amount withheld from distribution fund			318,536				364,493
Unit owner payments			24,311				23,370
Interest earned			3,084				2,668
Reductions:
Escrow account refunds			(25,555	)			(3,390	)
Maintenance charges			(244,999	)			11,866
Unit renovations			(46,397	)			(212,580	)
Linen replacement			(109,006	)			(22,827	)
Balance at end of period		$	724,434			$	719,280

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.

Critical Accounting Policies

The Company’s critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.

Results of Operations

Third quarter 2010 compared to third quarter 2009

The Company’s total revenues decreased approximately $467,000, or about 11%, for the three months ended September 30, 2010 compared to the same period in the prior year. This decrease is directly related to a 1% decrease in occupancy, a 1% decrease in the average room rate over the prior period and a $360,000 decrease in cancellation revenue compared to the prior period. Total revenues for the Rental Pool decreased approximately $122,000, or about 15%.

Total costs and expenses for the Company increased by $847,000 when compared to the same period in the prior year. The increase relates to the $404,000 gain on the sale of land in August 2009 (see discussion below). The remaining change is the result of increases in various operating costs during the three months ended September 30, 2010 compared to the same period in the prior year. The decrease of $19,000 in total costs and expenses for the Rental Pool Operation is consistent with the decreases in revenues.

The Company experienced a net loss for the quarter of approximately $2,190,000, compared with a net loss of approximately $865,000 in the same period in the prior year. Amounts available for distribution for the Rental Pool Operation decreased $52,000 from the comparable period last year.

In August 2009, the Company recorded a gain of approximately $404,000 in connection with the transfer of a strip of land at the entrance to the resort property to the county in connection with a planned road widening project by the county. The total settlement was approximately $607,000, which includes proceeds for the land, land improvements and net damages and/or cost to cure such damages.

First nine months 2010 compared to first nine months 2009

The Company’s total revenues decreased approximately $497,000, or about 2% for the nine months ended September 30, 2010 compared to the same period in the prior year. This decrease is directly related to a $771,000 decrease in cancellation revenue, which is offset by a 17% increase in occupancy and a 2% increase in food and beverage sales. The total revenues for the Rental Pool decreased approximately $204,000, or about 4%.

Total costs and expenses for the Company increased approximately $1,160,000. The decrease of approximately $61,000 in costs and expenses for the Rental Pool Operation are directly related to the decrease in revenues.

Net loss for the Company increased $1,784,000 over the comparable period last year. Amounts available for distribution for the Rental Pool Operation decreased $110,000 over the same period in the prior year.

In August 2009, the Company recorded a gain of approximately $404,000 in connection with the transfer of a strip of land at the entrance to the resort property to the county in connection with a planned road widening project by the county. The total settlement was approximately $607,000, which includes proceeds for the land, land improvements and net damages and/or cost to cure such damages.

Impact of Current Economic Conditions

The Company believes that the lower occupancy rates, when compared years prior to 2009, are due to the current state of the United States’ economy, and the fact that businesses appear to have altered their spending patterns in response. This has resulted in fewer group (corporate) bookings.

In response to this trend the Company has increased its marketing efforts toward the social clientele by developing packages designed to target more social guests, including families. These social packages are being promoted through the Company’s website as well as through travel wholesalers and with emphasis on e-commerce sites.

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 allows for the Company to borrow an additional $2,500,000, provided the Company is in compliance with certain financial covenants. The Company’s financing from a third-party lender bears interest at 2.5% over the one month LIBOR index (2.76% at September 30, 2010) and matures in March 2014.

Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet arrangements as it is not the Company’s business practice to do so.

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 cash 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 2.5% over the one month LIBOR index and matures on March 12, 2014.

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, 2010, 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, 2010 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 changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2010 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

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.