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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934 For the quarterly period ended January 31, 1998.
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OR
- --- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
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Commission File Number 333-31025
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KSL RECREATION GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0747103
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
56-140 PGA Boulevard
La Quinta, California 92253
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(Address of principal executive offices) (Zip Code)
760/564-1088
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(Registrant's telephone number, including area code)
N/A
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(Former name, address and fiscal year, if changed since last report)
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 X , No .
---- ----
Shares outstanding of the Registrant's common stock
as of March 15, 1998
1,000
Class
Common Stock, $0.01 par value
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KSL RECREATION GROUP, INC.
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<CAPTION>
INDEX Page
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[caad 214]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated statements of operations for the
three months ended January 31, 1998 and 1997. . . . . . . . . . . . . 3
Condensed consolidated balance sheets, January 31, 1998
and October 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed consolidated statements of cash flows for the
three months ended January 31, 1998 and 1997. . . . . . . . . . . . . 7
Notes to condensed consolidated financial statements . . . . . . . . . . 9
Item 2. Management's discussion and analysis of financial
condition and results of operations . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
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KSL RECREATION GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
FOR THE
THREE MONTHS ENDED
(AMOUNTS IN THOUSANDS, JANUARY 31,
EXCEPT PER SHARE DATA) 1998 1997
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<S> <C> <C>
REVENUES:
Rooms $ 19,080 $ 14,892
Food and beverage 16,287 13,776
Golf fees 10,580 9,572
Dues and fees 6,379 6,082
Other 13,276 10,227
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Total revenues 65,602 54,549
EXPENSES:
Payroll and benefits 22,335 17,292
Other expenses 25,418 20,202
Depreciation and amortization 8,154 6,196
Corporate fee 1,965 813
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Total expenses 57,872 44,503
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INCOME FROM OPERATIONS 7,730 10,046
OTHER INCOME (EXPENSE):
Interest income 629 97
Interest expense (8,453) (8,279)
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Other expense, net (7,824) (8,182)
</TABLE>
See accompanying notes to consolidated financial statements.
3
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KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
(AMOUNTS IN THOUSANDS, JANUARY 31,
EXCEPT PER SHARE DATA) 1998 1997
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<S> <C> <C>
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES $ (94) $ 1,864
MINORITY INTERESTS IN LOSS OF SUBSIDIARY 103 77
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INCOME BEFORE INCOME TAXES 9 1,941
INCOME TAX EXPENSE -- 129
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NET INCOME $ 9 $ 1,812
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----- ------
BASIC AND DILUTED EARNINGS PER SHARE $ 9 $ 1,812
----- ------
----- ------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,000 1,000
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----- ------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, JANUARY 31, OCTOBER 31,
EXCEPT PER SHARE DATA) 1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,161 $ 24,056
Restricted cash 2,684 1,790
Trade receivables, net of allowance for doubtful
receivables of $840 and $722, respectively 17,907 14,185
Inventories 8,120 7,383
Current portion of notes receivable 1,909 1,946
Prepaid expenses and other current assets 4,882 3,865
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Total current assets 42,663 53,225
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $73,359 and $66,847, respectively 428,807 431,436
NOTE RECEIVABLE FROM AFFILIATE 22,093 21,653
NOTES RECEIVABLE, less current portion 5,336 5,177
RESTRICTED CASH, less current portion 101 101
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $14,783 and $13,756 respectively 89,316 90,343
OTHER ASSETS, net 34,145 34,106
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$ 622,461 $ 636,041
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, JANUARY 31, OCTOBER 31,
EXCEPT PER SHARE DATA) 1998 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,685 $ 6,948
Accrued liabilities 14,351 16,899
Accrued interest payable 6,006 10,149
Current portion of long-term debt 1,000 1,000
Current portion of obligations under capital leases 2,928 3,044
Deferred income, customer deposits and other 12,928 6,458
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Total current liabilities 44,898 44,498
LONG-TERM DEBT, less current portion 309,000 326,500
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 35,180 35,476
OTHER LIABILITIES 1,232 1,168
MEMBER DEPOSITS 48,605 44,759
DEFERRED INCOME TAXES 15,202 15,202
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY 144 247
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares authorized
and outstanding -- --
Additional paid-in capital 197,535 197,535
Accumulated deficit (29,335) (29,344)
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Total stockholder's equity 168,200 168,191
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$622,461 $636,041
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</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
(AMOUNTS IN THOUSANDS) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9 $ 1,812
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 8,154 6,196
Amortization of debt issuance costs 240 676
Provision for losses on trade receivables 118 (160)
Minority interests in loss of subsidiary (103) (77)
(Gain) loss on sales of property, net (2) 163
Changes in operating assets and liabilities, net of effects from
Restricted cash (894) (2,244)
Trade receivables (3,840) (5,356)
Inventories (737) (63)
Prepaid expenses and other current assets (1,017) 204
Notes receivable (81) 151
Receivable from Parent -- 1,500
Other assets (719) (347)
Accounts payable 737 (870)
Accrued liabilities (2,548) (1,009)
Accrued interest payable (4,142) 263
Deferred income, customer deposits and other 6,470 4,737
Other liabilities 64 79
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Net cash provided by (used in) operating activities 1,709 5,655
CASH FLOWS FROM INVESTING:
Purchases of property and equipment (3,651) (2,863)
Notes receivable from affiliate, net (440) --
Collections on member notes receivable 1,047 760
Proceeds from sales of property and equipment -- 146
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Net cash (used in) provided by investing activities (3,044) (1,957)
</TABLE>
See accompanying notes to consolidated financial statements.
7
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KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
(AMOUNTS IN THOUSANDS) 1998 1997
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance $ -- $ 220
Principal payments on long-term debt and obligations
under capital leases (18,269) (631)
Member deposits, net 2,758 655
Debt financing costs (49) --
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Net cash (used in) provided by financing activities (15,560) 244
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (16,895) 3,942
CASH AND CASH EQUIVALENTS, beginning of period 24,056 9,329
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CASH AND CASH EQUIVALENTS, end of period $ 7,161 $ 13,271
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 12,355 $ 5,384
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Income taxes paid $ 504 $ --
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NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 356 $ 1,277
Notes receivable issued for member deposits 1,088 771
</TABLE>
See accompanying notes to consolidated financial statements.
8
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KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
KSL Recreation Group, Inc. and subsidiaries (the Company) is engaged in
the ownership and management of golf courses, private clubs, resorts and
activities related thereto.
The unaudited interim condensed consolidated financial statements
presented herein have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission for reporting on Form
10-Q and do not include all of the information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. In the opinion of management, these condensed
consolidated financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position, results of operations and cash flows. These
unaudited interim condensed consolidated financial statements should be read
in conjunction with the other disclosures contained herein and with the
Company's audited consolidated financial statements and notes thereto
contained in the Company's Form 10-K for the year ended October 31, 1997.
Operating results for interim periods are not necessarily indicative of
results that may be expected for the entire fiscal year. Certain
reclassifications have been made in the consolidated financial statements to
conform to the 1998 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily 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 periods. Actual results could differ from these
estimates.
NOTE 2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share (EPS)," which requires the Company to disclose basic EPS and diluted
EPS for all periods for which an income statement is presented. The Company
has adopted this standard effective November 1, 1997. The EPS data for the
current reporting and comparable periods in the prior year have been computed
in accordance with SFAS No. 128 and are included in the accompanying
unaudited interim condensed consolidated financial statements. There was no
difference between reported EPS computed in accordance with SFAS No. 128 and
amounts that were or would have been reported using the Company's previous
method of accounting for EPS.
NOTE 3. LONG-TERM DEBT
The Company has a revolving credit line which allows maximum borrowings
of $175,000. The Company's outstanding borrowings under the revolving credit
line was $85,000 as of January 31, 1998. The terms of the Company's credit
facility, including the revolving credit line, contain certain financial
covenants. The company is in compliance with all required financial covenants
at January 31, 1998.
9
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KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(AMOUNTS IN THOUSANDS)
NOTE 4. SUBSEQUENT EVENTS
On December 1, 1997, the Company, through a subsidiary, entered into an
agreement to purchase the assets of Silver Spring Country Club (Silver
Spring), a 36-hole golf facility in Menomonee Falls, Wisconsin, for
approximately $9,000. The acquisition transaction was completed in February
1998 and will be accounted for using the purchase method of accounting. The
purchase price was financed under the revolving credit portion of the
Company's credit facility.
In March 1998, the Company entered into an agreement to acquire the
assets and certain liabilities of a resort facility for approximately
$90,000. The acquisition, if successfully completed, will be accounted for
using the purchase method of accounting. It is anticipated that the purchase
price would be financed under the revolving credit portion of the Company's
credit facility.
In March 1998, the Company entered into an agreement to purchase the
assets of an 18-hole golf facility in Fredricksburg, Virginia, for
approximately $5,600. The acquisition, if successfully completed, will be
accounted for using the purchase method of accounting. The Company currently
plans to assume debt of approximately $3,300, with the remainder of the
purchase price of approximately $2,300 to be financed under the revolving credit
portion of the Company's credit facility.
10
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KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(amounts in thousands)
THREE MONTHS ENDED JANUARY 31, 1998 (1998 FIRST QUARTER) AS COMPARED TO
THE THREE MONTHS ENDED JANUARY 31, 1997 (1997 FIRST QUARTER).
REVENUES - Revenues increased by $11,053, or 20.3% from $54,549 in the
1997 First Quarter to $65,602 in the 1998 First Quarter. Approximately 60% of
this increase, or $6,698 was attributable to the acquisition of Grand
Traverse Resort and the sublease of Lake Lanier Islands (referred to
collectively as the Additions). Additionally, increased average daily rates
resulted in increased rooms revenues. Approximately 80% of the increase in
both food and beverage and other revenue was also attributable to the
Additions. Golf fees increased by 10.5% from the 1997 First Quarter to the
1998 First Quarter.
EXPENSES OF OPERATIONS - Expenses of operations increased by $13,369 or
30% from $44,503 in the 1997 First Quarter to $57,872 in the 1998 First
Quarter. Approximately 70% of this increase, or $9,485 was due to the
Additions. Depreciation and amortization associated with the Additions
totaled $1,521. Due to increased corporate support of the Additions, and
increased corporate resources in the treasury, membership and retail
functions focused on operations, the corporate fee increased by $1,152 from
the 1997 First Quarter.
NET INTEREST EXPENSE - Net interest expense decreased by $358, or 4.4%
from $8,182 in the 1997 First Quarter to $7,824 in the 1998 First Quarter.
This was primarily due to an increase in interest income as a result of a
loan of approximately $20,800 made to an affiliate in April 1997, offset by a
$174 increase in interest expense which was the net result of lower non-lease
Company debt at lower rates and higher lease debt from the Lake Lanier
sublease.
NET INCOME - Net income decreased by $1,803, from $1,812 in the 1997
First Quarter to $9 in the 1998 First Quarter as a result of the factors
discussed above. Excluding the Additions, net income increased in the 1998
First Quarter by $2,932 or 162%; that increase was offset by a decrease in
net income of $4,735, attributable to the Additions, for which the First
Quarter is off-season.
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 First Quarter, cash flow provided by operating
activities was $1,709 compared to $5,655 for the 1997 First Quarter. This
decrease in the 1998 First Quarter was primarily due to the scheduled six
month interest payment on the Senior Note portion of the Company's debt
issued in April 1997. During the 1998 First Quarter, cash flow used in
investing activities aggregated to $3,044 as compared to cash used in
investing activities of $1,957 for the 1997 First Quarter. This change in
cash flows from investing activities was primarily due to an increase in
capital expenditures of $788 and an increase in notes receivable of $440 from
an affiliate. Cash used in financing activities was $15,560 in the 1998 First
Quarter compared to cash provided by financing activities of $244 in the 1997
First Quarter. This change in cash flows from financing activities was due
primarily to principal payments on the revolving credit line of $17,500,
partially offset by an increase in net member deposits of $2,103.
11
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KSL RECREATION GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
(AMOUNTS IN THOUSANDS)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes that its liquidity, capital resources and cash
flows from existing operations will be sufficient to fund capital
expenditures, working capital requirements and interest and principal
payments on its indebtedness for the foreseeable future. The Company
currently expects that it will acquire additional resorts, golf facilities or
other recreational facilities, and in connection therewith, expects to incur
additional indebtedness. There can be no assurances that additional
indebtedness or funding will be available in the future.
OTHER MATTERS
The Company relies heavily on computer technology throughout its
businesses to effectively carry out its day-to-day operations. As the
millennium approaches, the Company is assessing all of its computer systems
to ensure that they are "Year 2000"-compliant. In this process, the Company
expects to both replace some systems and upgrade others which are not Year
2000-compliant, in order to meet its internal needs and those of its
customers. The Company expects its Year 2000 project to be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Company may rely also will be timely converted or that
such failure to convert by another company would not have an adverse effect
on the Company's systems. Costs related to this project will continue through
calendar 1999. These costs are difficult to estimate accurately and they will
not necessarily be incremental. The Company's stated expectations regarding
its Year 2000 project constitute forward-looking statements. Actual results
could differ materially from the Company's expectations due to unanticipated
technological difficulties, project vendor delays and project vendor cost
overruns. Reference is also made to the safe harbor statement below.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations concerning future events, activities,
conditions and any and all statements that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projected. Forward-looking statements involve risks and uncertainties. A
change in any one or a combination of factors could affect the Company's
future financial performance. Also, the Company's past performance is not
necessarily evidence of or an indication of the Company's future financial
performance.
12
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous consent of the shareholders in lieu of annual meeting dated
November 1, 1997, the sole shareholder of the Company, KSL Recreation
Corporation, re-elected the following directors of the Company to serve until
the next annual election of directors and until his or her successor is
elected and qualified, or until his or her earlier death, resignation,
retirement, disqualification or removal:
Henry R. Kravis George R. Roberts
Paul E. Raether Michael T. Tokarz
Scott M. Stuart Alexander Navab, Jr.
Michael S. Shannon Larry E. Lichliter
No other matters were submitted to a vote of security holders of the
Company during the quarterly period ended January 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule for the period ended January 31, 1998
13
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SIGNATURES
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.
KSL RECREATION GROUP, INC.
Dated: March 16, 1998 By: /s/ John K. Saer, Jr.
---------------------------------------
Vice President, Chief Financial Officer
and Treasurer
14
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 7,161
<SECURITIES> 0
<RECEIVABLES> 18,747
<ALLOWANCES> 840
<INVENTORY> 8,120
<CURRENT-ASSETS> 42,663
<PP&E> 502,166
<DEPRECIATION> 73,359
<TOTAL-ASSETS> 622,461
<CURRENT-LIABILITIES> 44,898
<BONDS> 344,180
0
0
<COMMON> 0
<OTHER-SE> 168,200
<TOTAL-LIABILITY-AND-EQUITY> 622,461
<SALES> 20,495
<TOTAL-REVENUES> 65,602
<CGS> 8,436
<TOTAL-COSTS> 57,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 256
<INTEREST-EXPENSE> 8,453
<INCOME-PRETAX> 9
<INCOME-TAX> 0
<INCOME-CONTINUING> 9
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9
<EPS-PRIMARY> 9
<EPS-DILUTED> 9
</TABLE>
