Item 1. Business
Saddlebrook Resorts, Inc., (the “Company”) was incorporated in the State of Florida on June 20, 1979. It was formed to acquire an existing golf course and tennis club located in Pasco County, Florida, and develop it into a condominium resort and residential homes project named Saddlebrook Resort (the “Resort”). In November 1988, the Company transferred its real estate development division to its prior parent company and retained only its operation of the Resort.
The Company is currently owned by Saddlebrook Holdings, Inc., which is ultimately owned by Thomas L. Dempsey and his family. Mr. Dempsey acquired the Company from its prior parent company in November 1988.
Based on its numerous awards, the Resort has a reputation as a world-class facility that caters to corporate meeting planners and sports enthusiasts at all skill levels. As a destination resort, it offers luxury accommodations, convention facilities, restaurants, two golf courses, tennis courts, a spa and other recreational areas. An accredited preparatory school at the Resort and an on-site real estate sales office are operated by affiliates of the Company.
The Resort’s accommodations are condominium units that have been sold to third parties or to affiliates of the Company. The majority of the condominium units 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 either 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.
All of the Resort’s condominium units are governed by the Saddlebrook Resort Condominium Association, Inc. (the “Association”) in accordance with Florida statutes. The Board of Directors for the Association is elected by the condominium unit owners. The condominium unit owners also approve an annual budget of common expenses for the Association that determines their quarterly assessments that must be paid regardless of the units’ participation in rental programs.
A Resort condominium unit’s participation in a rental program also requires a club membership at the Resort with its separate initiation fees and quarterly dues. The club membership is directed by a Board of Governors appointed by the Company’s management.
The Company’s operation of the Resort is not considered to be dependent upon the availability of raw materials, nor the effect of the duration of patents, licenses, franchises or concessions held.
The Resort’s business is considered to be seasonal with a higher volume of sales during the winter and spring seasons.
Although the Resort’s reputation in the conference-hosting industry is excellent, the market for these services is extremely competitive. Consequently, it aggressively competes against numerous resort hotels and convention facilities both in central Florida and nationwide.
At December 31, 2004, there were approximately 760 persons employed by the Company. The Company’s management relationship with employees is excellent and there are no collective bargaining agreements.
Additional information may be obtained on the Resort’s website at www.saddlebrookresort.com.
- 2 -
Item 2.
Item 2. Properties
Saddlebrook Resort is located in Wesley Chapel, Florida, which is in south central Pasco County, immediately north of Tampa, Florida.
The Resort is inside the gated community of Saddlebrook. The Resort’s property includes approximately 450 acres of land that are owned by the Company and an affiliate. Located on the Resort’s property are convention facilities with approximately 82,000 square feet of meeting and function space, three restaurants, two 18-hole golf courses, 45 tennis courts, a 7,000-square foot luxury health spa, a 3,300-square foot fitness center, three swimming pools, shops and other operational and recreation areas.
A total of 556 condominium units are at the Resort comprised of one-, two- and three-bedroom suites. Of these condominium units, 408 are designed for hotel occupancy and located in an area called the Walking Village. The remaining 148 are slightly larger, designed for longer-termed rental, and are located in an area called the Lakeside Village. At December 31, 2004, there were 543 hotel accommodations participating in the Rental Pool. The three-bedroom condominium units become hotel accommodations as a two-bedroom suite with a separate adjoining hotel room. Some two-bedroom condominium units become hotel accommodations as a one-bedroom suite with a separate adjoining hotel room.
Item 3.
Item 3. 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. The effect, if any, of these claims is considered immaterial to the Company’s financial condition and results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s stock is privately held and there is no established market for the stock.
The right to participate in a rental pool that accompanies the condominium units that were developed and sold by the Company is deemed to be a security. However, there is no market for such securities other than the normal real estate market.
Since the security is the participation right in a rental pool, no dividends have been paid or will be paid to condominium unit owners. However, the condominium unit owners participating in the Rental Pool receive a contractual distribution of rent from the Company quarterly.
- 3 -
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the financial statements and related notes in Item 8 hereof.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The Company operates the Resort, 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 the Rental Pool. Other resort facilities owned by the Company and its affiliates include golf courses, tennis courts, a spa, restaurants and a conference center.
Critical Accounting Policies and Estimates
In 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 which requires the consolidation of a Variable Interest Entity (“VIE”), if any, in the Company’s financial statements if the Company is at risk for the VIE’s expected losses or receives a majority of its gains. The adoption of the provisions of this interpretation in 2004 did not have an effect on the Company’s financial statements.
- 4 -
The following accounting policies are considered critical by the Company’s management. These and other accounting policies require that estimates be made, based on assumptions and judgment, that affect revenues, expenses, assets, liabilities and disclosure of contingencies in the Company’s financial statements. These estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. However, actual results may differ from these estimates due to different conditions.
Asset Impairments - The Company’s management periodically evaluates whether there has been a permanent impairment of long-lived assets, in accordance with Financial Accounting Standard (“FAS”) No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. The Company’s management believes that the accounting estimates related to asset impairments are critical estimates for the following reasons: (1) the ongoing changes in management’s expectations regarding future utilization of assets; and (2) the impact of an impairment on reported assets and earnings could be material. During the year ended December 31, 2004, the Company’s management evaluated assets for impairment in accordance with FAS 144 and concluded that the sum of the undiscounted expected future cash flows (excluding interest charges) from its assets exceeded its then current carrying values. Accordingly, the Company did not recognize an impairment charge.
Depreciation Expense - The Company provides for depreciation by the straight-line method at annual rates that amortize the original costs, net of salvage values, of depreciable assets over their estimated useful lives. Management’s estimation of assets’ useful lives are critical estimates for the following reasons: (1) forecasting the salvage value for long-lived assets over a long period of time is subjective; (2) changes may take place that could render an asset obsolete or uneconomical; and (3) a change in the useful life of a long-lived asset could have a material impact on reported results of operations and reported asset values. The Company’s management believes the estimated useful life corresponds to the anticipated physical life for most assets. Although it is difficult to predict values far into the future, the Company has a long history of actual costs and values that are considered in reaching a conclusion as to the appropriate useful life of an asset.
See the Notes to the Financial Statements for Saddlebrook Resorts, Inc. in Item 8 hereof for additional accounting policies used in the preparation of the financial statements.
Liquidity and Capital Resources
Construction of the Resort was substantially completed by December of 1982 and sales of existing condominium units were substantially completed by November of 1988.
During 2004, the Company has completed several projects including the refurbishing of the swimming pools with a total cost of $307,000 and the renovation of the greens on the Palmer golf course with a total cost of $447,000. There are several other capital projects to be completed during 2005. These projects include; installation of a new clear-span structure with an estimated cost of $250,000 and the enclosure of the open air pavilion at the fitness facility with an estimated cost of $250,000. The Company will also be entering into 36 month lease arrangements for both a new golf cart fleet for an estimated $475,000 and new computer equipment for an estimated $125,000.
The Company had no significant capital expenditures during the fiscal year ended December 31, 2003.
During April of 2002, the Company completed construction on new laundry and warehouse facilities to replace a structure that was damaged by fire in January of 2001. The aggregate cost for this project’s buildings and equipment was approximately $1,907,000 before application of related insurance proceeds of approximately $601,000. There were no other significant capital expenditures during the fiscal year ended December 31, 2002.
- 5 -
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, cash generated by the Resort’s operations or by additional funds, if available, from the Company’s current lender discussed below.
On November 1, 2004, the Company refinanced $12 million of the prior debt. As part of the refinancing, the Company paid the remaining principle balance due under the prior note. The new term note is due November 1, 2009, requires monthly principal payments of $66,667, together with monthly payments of all accrued interest at the rate of 2 points over the one month LIBOR index. The debt agreement also contains a provision for additional financing from the same lender of $5,000,000, subject to specific covenants, until November 1, 2006.
During January 2004, the Company and Honeywell Corporation (the owner of the Company’s former parent company), settled a legal dispute with a prior insurance provider. The case involved the Company and its former parent company seeking reimbursement for defense and settlement costs incurred in connection with a lawsuit that alleged damages covered by policies issued by the insurance company. A favorable settlement of $4,950,000 was agreed to and received by the Company in 2004.
Regarding the Company’s operation of the Rental Pool, the related condominium units’ kitchens, bathrooms and carpeting are currently being renovated and upgraded. This project commenced in 1998 and has been completed for unit Clusters One through Ten with an aggregate billing to the maintenance escrow fund of $6,235,000. The project is currently underway in the Resort’s Lakeside Village units and the Company’s management expects the related billing to the condominium owners’ maintenance escrow fund accounts to occur in 2005. Additionally, the Company’s management has commenced a project to replace and upgrade unit furniture packages. The aggregate cost to be billed to the condominium owners’ maintenance escrow fund accounts is expected to be approximately $7,700,000.
The Company’s management is not aware of any environmental matters that are currently present.
The Company’s operation of the Resort is not considered to be dependent on any individual or small group of customers, the loss of whom would have a material adverse effect.
- 6 -
Results of Operations
The following chart highlights changes in the sources of Company revenues:
2004 Compared to 2003
The Company’s total revenues increased approximately $3,229,000, which is an increase of 9% over the prior year. The revenues for the Rental Pool increased $1,122,000 or 10% from the prior year. These increases were primarily due to an 11% increase in paid room nights. Total resort revenues were also positively affected by an increase of 10% in the number of individual guests staying at the Resort.
Although the Company did experience an improvement in occupied room nights over the prior year, the slowdown in the nation’s economy and concerns about national security still make it difficult to project future business. The Company’s management believes the occupied room nights for the year 2005 should remain at the current year’s level.
The net income for the year 2004 of $3,158,000 is a $3,291,000 improvement over the prior year’s net loss. This change from a net loss to a net income is the result of higher revenues along with receipt of the litigation settlement discussed previously in Liquidity and Capital Resources.
- 7 -
2003 Compared to 2002
The Company’s total revenues decreased approximately $1,482,000, which was 4% down from the prior year. Total revenues for the Rental Pool decreased $1,135,000 or 10% from the prior year. These reductions were primarily due to a 4% decrease in the average daily room rate and a 6% decrease in paid room nights for the condominium units that participated in the Rental Pool. Paid room nights were down 8% for the Resort’s group business and off 4% for social hotel stays. However, the reduction in the Company’s total resort revenues was partially offset by business in its food and beverage and other areas of operations that resulted from a 6% increase in the number of individual guests that stayed at the Resort.
The 2003 year reductions in business are attributed to the continued slowdown in the nation’s economy and concerns about national security that have adversely affected travel.
The net loss for 2003 of $132,000 was a $256,000 reduction from the profit in the prior year. This change from a net income to net loss was a direct result of lower revenues partially offset by management’s continued efforts to control the Company’s costs throughout all areas of operations. Depreciation and amortization expense was effectively unchanged. Interest expense decreased approximately 6% as the Company continued to pay down its self-amortizing debt discussed in Liquidity and Capital
Resources above.
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. Income tax expense was not reflected in the Company’s Rental Pool financial statements as the related income tax is assessed to its participating condominium unit owners.
Off-Balance Sheet Arrangements
The Company does not have any material Off-Balance Sheet Arrangements that have or are reasonably likely to have a current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as defined in Regulation S-K Item 303(a)(4).
Contractual Obligations
- 8 -
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risk exposure is to change in interest rate as a result of its variable interest rate long term debt.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements, including the Reports of Independent Registered Certified Public Accountants, for Saddlebrook Resorts, Inc. are included on pages 17 to 29 and for Saddlebrook Rental Pool Operation on pages 30 to 34. An index to the financial statements is on page 16.
Financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
As of December 31, 2004, the Company’s management, under the direction of its 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 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 are effective in timely alerting them to material information required to be included in the Company’s periodic SEC filings.
There were no significant changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
- 9 -
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Directors and Executive Officers of the Company are as follows:
Name
Position and Background
Thomas L. Dempsey
Age 78
Chairman of the Board and Chief Executive Officer of the Company for more than five years. President of the Company until November 2000. Chairman of the Board and President of Saddlebrook Holdings, Inc. for more than five years.
Eleanor Dempsey
Vice Chairman of the Board of the Company for more than five years. Director and Executive Vice President of Saddlebrook Holdings, Inc. for more than five years. Wife of Thomas Dempsey.
Richard Boehning
Age 70
Director and President of the Company since November 2000. Previously, Director and Executive Vice President of the Company for more than five years.
Gregory R. Riehle
Age 48
Director, Vice President and Secretary of the Company for more than five years. Director and Executive Vice President of Saddlebrook Holdings, Inc. for more than five years. Son-in-law of Thomas Dempsey.
Maureen Dempsey
Age 46
Director, Vice President and Assistant Secretary of the Company for more than five years. Director and Executive Vice President of Saddlebrook Holdings, Inc. for more than five Years. Daughter of Thomas Dempsey.
Diane L. Riehle
Age 44
Director, Vice President and Assistant Secretary of the Company for more than five years. Director and Executive Vice President of Saddlebrook Holdings, Inc. for more than five Years. Daughter of Thomas Dempsey.
Donald L. Allen
Age 65
Vice President and Treasurer of the Company and Saddlebrook Holdings, Inc. for more than five years.
Code of Ethics
The Board of Directors of the Company has adopted a Code of Ethics that covers the Company’s principal financial officer, principal accounting officer and controller, as well as its Executive Committee. The Board did not provide for the Code to cover the Company’s principal executive officer, Mr. Thomas Dempsey, as Mr. Dempsey is the owner of 87% of the stock of Saddlebrook Holdings, Inc., which owns all of the stock of the Company, and the remainder of the stock of Saddlebrook Holdings is owned by two trusts for the benefit of Mr. Dempsey’s daughters and his grandchildren; therefore, it is primarily for the benefit of Mr. Dempsey that the Code has been adopted.
- 10 -
Audit Committee Financial Expert
The Board of Directors of the Company has determined that it does not have an “audit committee financial expert,” as defined by the rules of the Securities and Exchange Commission, serving on the Board of Directors. The Board, and Mr. Thomas Dempsey, the Company’s principal shareholder, believe that there is adequate financial expertise on the Board and within the senior management of the Company to serve the interests of the shareholders of Saddlebrook Holdings, Inc., which owns all of the stock of the Company, such shareholders being Mr. Dempsey and two trusts for the benefit of his daughters and grandchildren.
Item 11.
Item 11. Executive Compensation
The following table sets forth the remuneration paid, distributed or accrued to the Company’s executive officers by the Company and its parent, Saddlebrook Holdings, Inc. consolidated, during the three years ended December 31, 2004.
The Company commenced a 401(k) plan effective January 1, 2001. Compensation paid thereunder is included in Other Annual Compensation above. In addition, corporate officers and executive staff are allowed to use the Resort’s facilities and are provided various discounts on related purchases in accordance with hospitality industry standards. The Company had no other compensation plans for directors and officers at December 31, 2004.
- 11 -
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
In December 1994, the Company’s Articles of Incorporation were amended to increase the number of shares of authorized common stock from 25,000 to 100,000 shares. Each of the 500 shares of stock that was previously outstanding was then exchanged for 100 shares of voting stock and 100 shares of nonvoting stock. The par value of each share remains unchanged at $1. On October 1, 1995, 6,500 shares of nonvoting stock were gifted by Thomas L. Dempsey to each of two family trusts.
In June 1998, each share of the Company’s outstanding capital stock was exchanged for one share of Saddlebrook Holdings, Inc. stock. After the exchange, Thomas L. Dempsey and the family trusts own 100% of Saddlebrook Holdings, Inc. which owns 100% of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Company currently funds a portion of the expenditures for Saddlebrook Holdings, Inc. (“SHI”), its sole shareholder, which is offset by dividends declared thereto if necessary. SHI’s expenditures include dividends to its shareholders, which are primarily amounts that approximate their income taxes related to the operations of SHI and its subsidiaries.
Saddlebrook International Tennis, Inc. (“SIT”) operates a tennis training facility and preparatory school at the Resort and is solely owned by SHI. SIT owns 10 condominium units at the Resort, none of which participate in the Rental Pool Operation. The Company receives revenue for services provided to SIT’s guests. In addition, the Company is reimbursed for actual expenses and other costs incurred on behalf of SIT.
Saddlebrook Investments, Inc. is a broker/dealer for the Resort’s condominium units. Saddlebrook Realty, Inc. is a broker for sales of other general real estate in the area. Both companies are owned by Thomas L. Dempsey. These companies collectively operate an on-site real estate office at the Resort and the Company is reimbursed for actual expenses and other costs incurred on their behalf.
Dempsey and Daughters, Inc. hold certain tracts of real estate and owns 23 individual condominium units at the Resort, 9 of which participate in the Rental Pool Operation. This company is solely owned by SHI. The Company is reimbursed for actual expenses and other costs incurred on behalf of this company.
Saddlebrook Resort Condominium Association, Inc. is a nonprofit corporation whose membership is comprised of the Resort’s condominium unit owners pursuant to Florida statutes. The company is compensated by this entity for various services provided and is reimbursed for actual expenses and other costs incurred on its behalf.
The Company’s management and ownership are involved with other related entities and operations that are considered minor.
- 12 -
Item 14.
Item 14. Principal Accounting Fees and Services
PricewaterhouseCoopers LLP served as the Company’s independent auditors for the fiscal year ended December 31, 2004 and has been appointed to serve in that capacity again for fiscal 2005.
The following fees were paid to PricewaterhouseCoopers LLP for services rendered during the Company’s last two fiscal years:
Audit Fees: $124,275 and $120,700 for the fiscal years ended December 31, 2004 and 2003, respectively, for professional services rendered for the audit of the Company’s annual financial statements, review of financial statements included in its Forms 10-Q and services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements for those fiscal years. All of these audit fees relate to the Rental Pool Operation.
Audit-Related Fees: None
Tax Fees: $14,150 and $15,350 for the fiscal years ended December 31, 2004 and 2003, respectively, for tax compliance, tax advice and tax planning services. None of these tax fees relate to the Rental Pool Operation.
All Other Fees: None
Effective May 6, 2003, the Board of Directors has implemented a policy requiring the Board of Directors, which functions as the Company’s audit committee, to approve the engagement of the Company’s independent auditors prior to the engagement of the independent auditor to render audit or non-audit related services in accordance with the rules of the Securities and Exchange Commission. The Board of Directors has not adopted any pre-approval policies or procedures.
- 13 -
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and schedules required to be filed are listed in Item 8 of this Form 10-K.
(b) Reports on Form 8-K: None
(c) Exhibits:
- 14 -
14.1 Code of Ethics
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Identification of exhibit incorporated by reference from the Registration Statement No. 2-65481 previously filed by Registrant, effective December 28, 1979.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 30, 2005.
- 15 -
Saddlebrook Resorts, Inc.
Financial Statements
December 31, 2004 and 2003
- 16 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Saddlebrook Resorts, Inc:
In our opinion, the accompanying balance sheets and the related statements of operations, shareholder’s equity and of cash flows present fairly, in all material respects, the financial position of Saddlebrook Resorts, Inc. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP
Tampa, Florida
March 31, 2005
- 17 -
Saddlebrook Resorts, Inc.
Balance Sheets
December 31, 2004 and 2003
The accompanying notes are an integral part of these financial statements.
- 18 -
Saddlebrook Resorts, Inc.
Statements of Operations
For the years ended December 31, 2004, 2003 and 2002
The accompanying notes are an integral part of these financial statements.
- 19 -
Saddlebrook Resorts, Inc.
Statements of Changes in Shareholder’s Equity
For the years ended December 31, 2004, 2003 and 2002
The accompanying notes are an integral part of these financial statements.
- 20 -
Saddlebrook Resorts, Inc.
Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002
The accompanying notes are an integral part of these financial statements.
- 21 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
1. Organization and Business
Saddlebrook Resorts, Inc. (the “Company”), a wholly-owned subsidiary of Saddlebrook Holdings, Inc. (“SHI” or the “Parent Company”), was incorporated in the State of Florida in June 1979 at which time it purchased a golf course and tennis complex, as well as certain undeveloped land, located in Pasco County, Florida, which was developed as a resort-condominium and residential homes project. Property improvements for the resort include condominiums, of which most were sold to outside parties. The majority of the condominium units sold are provided as hotel accommodations by their owners under a Rental Pool and Agency Appointment Agreement (the “Rental Pool”). Other resort facilities include two 18 hole golf courses, 45 tennis courts, three swimming pools, three restaurants, a convention facility with approximately 82,000 square feet of meeting and function space, a health spa, a fitness center, shops and other facilities necessary for the operation of a resort.
2. Significant Accounting Policies
A summary of the Company’s significant accounting policies are as follows:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
All short-term highly liquid instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
Investments
Investments held at December 31, 2004 consist of U.S. Treasury Securities and a Certificate of Deposit yielding interest ranging between 1.18% and 1.36%, which mature through June 2005. Investments are held to maturity and recorded at amortized cost, which approximates fair market value. Escrowed investments relate to Rental Pool unit owner deposits for the maintenance reserve fund.
Accounts Receivable
Substantially all of the Company’s accounts receivable are due from direct billings to companies or individuals who hold conferences or large group stays at the resort. Other receivables include quarterly membership fees and credit card charges. The Company performs ongoing credit evaluations of its customers’ financial conditions and establishes an allowance for doubtful accounts based upon factors surrounding specific customers, historical trends and other information.
Resort Inventory and Supplies
Inventory includes operating materials and supplies and is accounted for at the lower of first-in, first-out cost or market.
- 22 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
- 23 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. In December 2003, the FASB issued FIN No. 46 (Revised) (“FIN 46-R”) to address certain FIN No. 46 implementation issues and clarify the application of Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements for companies that have interests in entities that are Variable Interest Entities (“VIE”), as defined under FIN No. 46. According to this interpretation, if a company has an interest in a VIE and is at risk for a majority of the VIE’s expected losses or receives a majority of the VIE’s expected gains it shall consolidate the VIE. This interpretation is effective no later than the end of the reporting period ending after March 15, 2004. The adoption of the provisions of this interpretation had no effect on the Company’s financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform with current year presentation.
3. Escrowed Cash
Escrowed cash, restricted as to use, as of December 31, is comprised of the following:
4. Property, Buildings and Equipment, Net
Property, buildings and equipment as of December 31, consist of the following:
- 24 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of December 31, consist of the following:
- 25 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
6. Notes Payable
Notes payable consist of the following:
7. Resort Revenues and Operating Costs of Resort
Resort revenues and operating costs of resort are comprised of the following:
- 26 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
8. Related Party Transactions
Amounts due from related parties as of December 31, are comprised of the following:
Amounts due to related parties as of December 31, are comprised of the following:
The Company currently funds expenditures for SHI, the Company’s parent, which are offset by dividends declared to SRI, if necessary. SHI’s expenditures include dividends to its shareholders, which are primarily income taxes related to the operations of SHI and its subsidiaries.
Saddlebrook International Tennis, Inc. (“SIT”) operates is a tennis training facility and preparatory school operating at the resort. SIT is solely owned by SHI. SIT owns 10 condominium units at the Resort, none of which participate in the Rental Pool Operation. The Company received revenue from SIT for services provided to SIT guests, which amounted to approximately $1,443,000, $1,371,000 and $2,019,000, for the years ended December 31, 2004, 2003 and 2002, respectively. In addition, the Company was reimbursed for actual expenses and other costs incurred on behalf of SIT.
Saddlebrook Investments, Inc. is a broker/dealer for sales of Saddlebrook Resort condominium units. Saddlebrook Realty, Inc. is a broker for the sale of other general real estate. These companies are solely owned by the shareholder of the Company’s parent. The Company was reimbursed for actual expenses and costs incurred on behalf of these entities.
- 27 -
Saddlebrook Resorts, Inc.
Notes to Financial Statements
December 31, 2004 and 2003
Dempsey and Daughters, Inc. hold certain tracts of real estate and owns 23 individual condominium units at the Resort, 9 of which participate in the Rental Pool Operation. This company is solely owned by SHI. The Company was reimbursed for actual expenses incurred on behalf of Dempsey and Daughters, Inc.
The Company performs certain accounting and property management activities on behalf of the Saddlebrook Resort Condominium Association (the “Association”) and is reimbursed for expenses paid on behalf of the Association. Expenses paid on behalf of and services provided to the Association amounted to approximately $1,382,000, $1,365,000 and $1,330,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
Other related party receivables and payables consist of transactions with several other entities, along with receivables from employees for resort charges and travel advances.
9. Commitments and Contingencies
The Company is involved in litigation in the ordinary course of business. In the opinion of management, these matters are adequately covered by insurance or indemnification from other third parties and/or the effect, if any, of these claims is not material to the reported financial condition or results of operations of the Company as of December 31, 2004.
Insurance pool
The Company has pooled its risks with other resorts by forming an insurance purchasing group in which they retain an equity interest and to which they pay insurance premiums. The Company’s ownership is less than 10% and all amounts contributed as capital ($122,950 as of December 31, 2004) and the increase in equity cumulative to date ($121,629 as of December 31, 2004) were recorded as a component of Prepaid expenses and other assets. Any change in equity is reflected as a component of other income in the Statements of Operations. The Company’s investment approximates the proportionate net book value of the insurance company at December 31, 2004. The Company may withdraw from the risk pool annually at any renewal date.
10. Litigation Settlement
During January 2004, the Company and Honeywell Corporation (the owner of the Company’s former parent company), settled a legal dispute with a prior insurance provider. The case involved the Company and its former parent company seeking reimbursement for the defense and settlement costs incurred in connection with a lawsuit that alleged damages covered by the policies issued by the insurance company. A favorable settlement of $4,950,000 was received by the Company in February 2004. Certain related expenses for legal services and bonuses have been netted against this amount resulting in a net litigation settlement of $3,177,832.
- 28 -
Report of Independent Registered Certified Public Accountants
To the Board of Directors of Saddlebrook
Resorts, Inc., as Operators under the Saddlebrook
Rental Pool and Agency Appointment Agreement
In our opinion, the accompanying balance sheets and the related statements of operations, and of changes in participants’ fund balance present fairly, in all material respects, the financial position of Saddlebrook Rental Pool Operation (funds created for participants who have entered into a rental pool agreement as explained in Note 1) at December 31, 2004 and 2003, and the results of its operations and the changes in participants’ fund balance for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the rental pool operator’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP
Tampa, Florida
March 31, 2005
- 29 -
Saddlebrook Rental Pool Operation
Balance Sheets
December 31, 2004 and 2003
The accompanying notes are an integral part of these financial statements.
- 30 -
Saddlebrook Rental Pool Operation
Statement of Operations
For the years ended December 31, 2004, 2003 and 2002
DISTRIBUTION FUND
The accompanying notes are an integral part of these financial statements.
- 31 -
Saddlebrook Rental Pool Operation
Statement of Changes in Participants’ Fund Balance
For the years ended December 31, 2004, 2003 and 2002
The accompanying notes are an integral part of these financial statements.
- 32 -
Saddlebrook Rental Pool Operation
Notes to Financial Statements
December 31, 2004 and 2003
1. Rental Pool Operations and Rental Pool Agreement
Condominium units are provided as rental (hotel) accommodations by their owners under the Rental Pool and Agency Appointment Agreement (the “Agreement”) with Saddlebrook Resorts, Inc. (collectively, the “Rental Pool”). Saddlebrook Resorts, Inc. (“Saddlebrook”) acts as operator of the Rental Pool which provides for the distribution of a percentage of net rental income, as defined, to the owners.
The Saddlebrook Rental Pool Operation consists of two funds: the Rental Pool Income Distribution Fund (“Distribution Fund”) and the Maintenance and Furniture Replacement Escrow Fund (“Maintenance Escrow Fund”). The operations of the Distribution Fund reflect the earnings of the Rental Pool. The Distribution Fund balance sheets reflect amounts due from Saddlebrook for the rental pool distribution payable to participants and amounts due to the Maintenance Escrow Fund. The amounts due from Saddlebrook are required to be distributed no later than forty-five days following the end of each calendar quarter. The Maintenance Escrow Fund reflects the accounting for escrowed assets used to maintain unit interiors and replace furniture as it becomes necessary.
Rental pool participants and Saddlebrook share rental revenues according to the provisions of the Agreement. Net Rental Income shared consists of rentals received less a marketing surcharge of 7.5%, a 12.5% management fee, travel agent commissions, credit card expense and provision for bad debts, if warranted. Saddlebrook receives 45% of Net Rental Income as operator of the Rental Pool. The remaining 55% of Net Rental Income, after adjustments for complimentary room revenues (ten percent of the normal unit rental price paid by Saddlebrook for promotional use of the unit) and certain minor repair and replacement charges, is available for distribution to the participants and maintenance escrow fund based upon each participant’s respective participation factor (computed using the value of a furnished unit and the number of days it was available to the pool). Quarterly, 45% of Net Rental Income is distributed to participants and 10%, as adjusted for complimentary room revenues and minor interior maintenance and replacement charges, is deposited in an escrow account until a maximum of 20% of the set value of the individual owner’s furniture package has been accumulated. Excess escrow balances are refunded to participants.
2. Summary of Significant Accounting Policies
Basis of accounting
The accounting records of the funds are maintained on the accrual basis of accounting.
Investments
Investments consist of U.S. Treasury Securities which bear interest ranging from 1.006% to 1.179% with maturity dates through June 2005.
Income taxes
No federal or state taxes have been reflected in the accompanying financial statements as the tax effect of fund activities accrues to the rental pool participants and Saddlebrook.
- 33 -