SADDLEBROOK RESORTS INC - Quarter Report: 2010 June (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.)

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 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 June 30, 2010 and December 31, 2009			3
Statements of Operations and Accumulated Earnings for the three months and six months ended June 30,2010 and 2009			4
Statements of Cash Flows for the six months ended June 30, 2010 and 2009			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation
Balance Sheets at June 30, 2010 and December 31, 2009			9
Statements of Operations for the three months and six months ended June 30, 2010 and 2009			10
Statements of Changes in Participants’ Fund Balance for the six months ended June 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			15
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

		June 30,
		2010				December 31,
		(Unaudited)				2009
Assets
Current assets:
Cash and cash equivalents		$	1,990,038			$	1,044,573
Escrowed cash			790,777				777,729
Accounts receivable, net			2,306,943				1,872,364
Due from related parties			214,431				1,319,304
Inventory and supplies			1,605,070				1,566,950
Prepaid expenses and other current assets			836,764				704,088
Total current assets			7,744,023				7,285,008
Property, buildings and equipment, net			22,576,475				23,448,520
Deferred charges, net			41,895				47,482
Total assets		$	30,362,393			$	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			92,070				89,697
Escrowed deposits			790,777				777,729
Accounts payable			559,779				687,585
Accrued rental distribution			759,244				544,090
Accrued expenses and other liabilities			2,388,052				1,622,891
Current portion of deferred income			875,329				852,864
Guest deposits			798,579				1,266,157
Due to related parties			137,916				—
Total current liabilities			7,461,746				6,901,013
Long-term debt			8,215,000				8,745,000
Long-term capital lease obligation			156,011				202,648
Deferred income			1,299,072				1,371,871
Other liabilities			149,000				149,000
Total liabilities			17,280,829				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
Retained earnings			14,913,996				14,589,264
Due from related parties			(2,945,559	)			(2,290,913	)
Total shareholder’s equity			13,081,564				13,411,478
		$	30,362,393			$	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								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues		$	7,653,977			$	6,986,775			$	16,719,868			$	16,749,199
Costs and expenses:
Operating costs			6,446,607				5,630,075				13,000,015				12,438,748
Sales and marketing			409,835				389,537				814,144				860,039
General and administrative			743,547				800,313				1,466,609				1,610,440
Depreciation			483,842				506,667				979,429				1,037,905
Total costs and expenses			8,083,831				7,326,592				16,260,197				15,947,132
Net operating (loss) income before other income (expenses)			(429,854	)			(339,817	)			459,671				802,067
Other income (expenses)
Interest income			1,089				1,176				1,292				6,643
Other income			6,346				167,099				13,213				174,111
Interest expense			(74,936	)			(88,772	)			(149,444	)			(198,829	)
Total other (expenses) income			(67,501	)			79,503				(134,939	)			(18,075	)
Net (loss) income			(497,355	)			(260,314	)			324,732				783,992
Accumulated earnings at beginning of period			15,411,351				16,647,901				14,589,264				15,603,595
Accumulated earnings at end of period		$	14,913,996			$	16,387,587			$	14,913,996			$	16,387,587

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

SADDLEBROOK RESORTS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

		Six months ended
		June 30,
		2010				2009
Operating activities:
Net income		$	324,732			$	783,992
Non-cash items included in net income:
Provision for doubtful accounts			(60	)			(759	)
Depreciation			979,429				1,037,905
Amortization of debt financing costs			5,587				38,497
Gain on sale of assets			—				(593	)
(Increase) decrease in:
Accounts receivable			(434,519	)			246,325
Inventory and supplies			(38,120	)			229,773
Prepaid expenses and other assets			(132,676	)			86,890
(Decrease) increase in:
Accounts payable			(127,806	)			(100,184	)
Accrued rental distribution			215,154				4,590
Guest deposits			(467,578	)			(1,043,393	)
Accrued expenses and other liabilities			765,161				243,058
Deferred income			(50,334	)			(84,689	)
Cash flow provided by operating activities			1,038,970				1,441,412
Investing activities:
Capital expenditures			(107,384	)			(254,046	)
Proceeds from short term investment maturity			—				175,000
Proceeds from the sale of property and equipment			—				94,900
Cash flow (used in) provided by investing activities			(107,384	)			15,854
Financing activities:
Payments on long-term debt			(530,000	)			(831,650	)
Payments on capital lease obligations			(44,264	)			(35,079	)
Debt cost to be amortized			—				(55,895	)
Net collections from (advances to) related parties			588,143				(172,146	)
Cash flow provided by (used in) financing activities			13,879				(1,094,770	)
Net increase in cash			945,465				362,496
Cash at beginning of period			1,044,573				3,752,278
Cash at end of period		$	1,990,038			$	4,114,774
Supplemental disclosure of cash flow information:
Cash paid for interest		$	150,515			$	144,556

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

		June 30,
		2010				December 31,
		(Unaudited)				2009
Trade accounts receivable		$	2,362,110			$	1,927,591
Less allowance for bad debts			(55,167	)			(55,227	)
		$	2,306,943			$	1,872,364

Note 3. Property, Buildings and Equipment

		June 30,
		2010				December 31,
		(Unaudited)				2009
Land and land improvements		$	6,802,067			$	6,802,067
Buildings and recreational facilities			29,723,896				29,702,374
Machinery and equipment			17,404,001				17,332,183
Construction in progress			209,004				194,960
			54,138,968				54,031,584
Less accumulated depreciation			(31,562,493	)			(30,583,064	)
		$	22,576,475			$	23,448,520

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

Note 4. Deferred Charges

		June 30,
		2010				December 31,
		(Unaudited)				2009
Debt issue costs		$	55,895			$	55,895
Less accumulated amortization			(14,000	)			(8,413	)
		$	41,895			$	47,482

Note 5. Long-term debt and Capital Lease Obligation

Long-term debt is a bank note payable and 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 June 30, 2010 was 2.85%. The note is collateralized by all current and subsequently acquired real and personal property. At June 30, 2010, the outstanding balance on this term note was $9,275,000.

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 June 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. Related Party Receivables

Related party receivables and payables at June 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. Related party receivables and payables 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 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

		June 30,
		2010				December 31,
		(Unaudited)				2009
Assets
Receivable from Saddlebrook Resorts, Inc.		$	759,244			$	544,090
Liabilities and Participants’ Fund Balance
Due to participants for rental pool distribution		$	653,931			$	456,994
Due to maintenance escrow fund			105,313				87,096
		$	759,244			$	544,090

MAINTENANCE ESCROW FUND

		June 30,
		2010				December 31,
		(Unaudited)				2009
Assets
Cash and cash equivalents		$	774,477			$	761,829
Receivable from Distribution Fund			105,313				87,096
Furniture Inventory			60,775				60,174
Prepaid expenses and other assets			8,475				7,816
		$	949,040			$	916,915
Liabilities and Participants’ Fund Balance
Accounts payable		$	63,956			$	112,455
Participants’ fund balance			885,084				804,460
		$	949,040			$	916,915

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS

(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
Rental pool revenues		$	1,947,069			$	1,688,626			$	4,836,021			$	4,917,741
Deductions:
Marketing fee			146,030				126,647				362,701				368,831
Management fee			243,384				211,078				604,503				614,717
Travel agent commissions			57,958				42,659				151,326				174,229
Credit card expense			46,518				47,213				108,378				111,248
			493,890				427,597				1,226,908				1,269,025
Net rental income			1,453,179				1,261,029				3,609,113				3,648,716
Less operator share of net rental income			(653,931	)			(567,463	)			(1,624,101	)			(1,641,922	)
Other revenues (expenses):
Complimentary room revenues			6,207				12,587				12,368				24,381
Minor repairs and replacements			(46,211	)			(27,416	)			(80,442	)			(56,056	)
Amount available for distribution		$	759,244			$	678,737			$	1,916,938			$	1,975,119

SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

		Six months ended
		June 30,
		2010				2009
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			1,916,938				1,975,119
Reductions:
Amount withheld for maintenance escrow fund			(292,837	)			(333,197	)
Amount accrued or paid to participants			(1,624,101	)			(1,641,922	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

		Six months ended
		June 30,
		2010				2009
Balance at beginning of period		$	804,460				555,680
Additions:
Amount withheld from distribution fund			292,837				333,197
Unit owner payments			14,015				21,143
Interest earned			2,165				1,211
Reductions:
Escrow account refunds			(25,555	)			(2,901	)
Maintenance charges			(142,435	)			15,758
Unit renovations			—				(131,916	)
Linen replacement			(60,403	)			(14,410	)
Balance at end of period		$	885,084			$	777,762

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

Second quarter 2010 compared to second quarter 2009

The Company’s total revenues increased approximately $667,000, or about 10%, for the three months ended June 30, 2010 compared to the same period in the prior year. This increase is directly related to a 34% increase in occupancy over the prior period. Total revenues for the Rental Pool increased approximately $258,000, or about 15%. These changes are directly related to the increase in occupancy, and partially offset by a decrease of approximately 7% in the average room rate.

Total costs and expenses increased $757,000, or about 10%, for the Company, and $66,000 for the Rental Pool Operation.

The Company experienced a net loss for the quarter of approximately $497,000. Amounts available for distribution for the Rental Pool Operation increased $81,000 from the comparable period last year.

On August 12, 2007 the Company experienced lightning damage that impacted the 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 a total of $901,000 in damages, to be reduced by a $100,000 deductible. As of this filing, the Company and the Association have received a total of $801,000 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, approximately $215,000 in the third quarter of 2008, and the remaining $165,000 in the second quarter of 2009. Such amounts, net of non-capital expenses have been recorded as a component of Other Income for the Company in such quarters.

First six months 2010 compared to first six months 2009

The Company’s total revenues decreased approximately $29,000, less than 1%, for the six months ended June 30, 2010 compared to the same period in the prior year. Although occupancy for the current period has increased over the prior period, this increase is partially offset by a decrease of approximately 17% in the average room rate during the same period. The total revenues for the Rental Pool decreased approximately $82,000, or about 2%.

Total costs and expenses for the Company increased approximately $313,000 or 2%. Total costs and expenses for the Rental Pool Operation decreased by about $42,000.

Net income for the Company decreased $459,000 over the comparable period last year. Amounts available for distribution for the Rental Pool Operation decreased $58,000 over the same period in the prior year.

Impact of Current Economic Conditions

Occupancy rates, while increased during the current period when compared to the same period in the prior year, are still reduced when compared to historical periods. The Company believes this trend has continued as a result of the current state of the United States’ economy, and the fact that businesses have altered their spending patterns in response. While we did experience some increase in group (corporate) bookings, the average room rate continues to decline.

In response to this trend, although overall marketing expenses have decreased, 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 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 debt agreement allows for the Company to borrow an additional $2,500,000 under a line of credit facility maturing in March 2011, provided the Company is in compliance with certain annual financial covenants. The Company’s term note obtained from a third-party lender bears interest at 2.5% over the one month LIBOR index (2.85% at June 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 and cash equivalents, including cash 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 2.5% over the one month LIBOR index and matures on March 12, 2014.

Item 4.T.		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 June 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 June 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 June 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.