<PAGE>
- -------------------------------------------------------------------------------
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 July 31, 1998 .
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 For the transition period from _____ to _____.
Commission File Number 333-31025
KSL RECREATION GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0747103
-------- ----------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
56-140 PGA Boulevard
La Quinta, California 92253
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
760/564-1088
------------
(Registrant's telephone number, including area code)
N/A
------------
(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 September 11, 1998
1,000
Class
Common Stock, $0.01 par value
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
KSL RECREATION GROUP, INC.
<TABLE>
<CAPTION>
INDEX
- -----------------------------------------------------------------------------------------------------------------------------
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated statements of operations for the three and nine months ended July 31, 1998 and 1997...............3
Condensed consolidated balance sheets, July 31, 1998 and October 31, 1997................................................5
Condensed consolidated statements of cash flows for the nine months ended July 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...............................................................15
Item 6. Exhibits and Reports on Form 8-K..................................................................................15
Signatures.................................................................................................................16
</TABLE>
2
<PAGE>
KSL RECREATION GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
(AMOUNTS IN THOUSANDS, JULY 31, JULY 31,
EXCEPT PER SHARE DATA) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rooms $ 18,670 $ 8,770 $ 63,473 $ 44,757
Food and beverage 19,103 10,143 55,226 39,822
Golf fees 12,498 9,765 38,280 33,245
Dues and fees 7,796 6,373 21,066 18,551
Other 16,357 8,478 46,610 32,267
--------- --------- --------- ---------
Total revenues 74,424 43,529 224,655 168,642
EXPENSES:
Payroll and benefits 26,936 16,773 73,134 52,099
Other expenses 27,978 18,938 81,995 62,822
Depreciation and amortization 9,763 6,500 26,423 19,454
Corporate fee 2,465 1,372 6,381 2,997
--------- --------- --------- ---------
Total expenses 67,142 43,583 187,933 137,372
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 7,282 (54) 36,722 31,270
OTHER INCOME (EXPENSE):
Interest income 609 750 1,908 996
Interest expense (9,615) (7,394) (26,519) (23,245)
---------- ---------- --------- ----------
Other expense, net (9,006) (6,644) (24,611) (22,249)
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
(AMOUNTS IN THOUSANDS, JULY 31, JULY 31,
EXCEPT PER SHARE DATA) 1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE MINORITY
INTEREST, INCOME TAXES AND
EXTRAORDINARY ITEM $ (1,724) $ (6,698) $ 12,111 $ 9,021
MINORITY INTERESTS IN (INCOME) LOSS
OF SUBSIDIARY (46) (45) 103 137
---------- ---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (1,770) (6,743) 12,214 9,158
INCOME TAX (EXPENSE) (70) (28) (75) (2,223)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (1,840) (6,771) 12,139 6,935
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT, net of income
tax benefit of ($2,007) in 1997 (31) (3,169)
--------- ---------- --------- ----------
NET INCOME (LOSS) $ (1,840) $ (6,802) $ 12,139 $ 3,766
--------- ---------- --------- ----------
--------- ---------- --------- ----------
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
Before extraordinary item $ (1,840) $ (6,771) $ 12,139 $ 6,935
Extraordinary loss (31) (3,169)
--------- ---------- --------- ----------
TOTAL BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ (1,840) $ (6,802) $ 12,139 $ 3,766
--------- ---------- --------- ----------
--------- ---------- --------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,000 1,000 1,000 1,000
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, JULY 31, OCTOBER 31,
EXCEPT PER SHARE DATA) 1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,428 $ 24,056
Restricted cash 2,363 1,790
Trade receivables, net of allowance for doubtful
receivables of $831 and $722, respectively 16,451 14,185
Inventories 9,309 7,383
Current portion of notes receivable 3,941 1,946
Prepaid expenses and other current assets 4,828 3,865
--------- ---------
Total current assets 39,320 53,225
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $87,613 and $66,847, respectively 510,513 431,436
NOTE RECEIVABLE FROM AFFILIATE 22,984 21,653
NOTES RECEIVABLE, less current portion 5,674 5,177
RESTRICTED CASH, less current portion 102 101
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $17,149 and $13,756 respectively 113,270 90,343
OTHER ASSETS, net 33,203 34,106
--------- ---------
$ 725,066 $ 636,041
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, JULY 31, OCTOBER 31,
EXCEPT PER SHARE DATA) 1998 1997
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,541 $ 6,948
Accrued liabilities 18,623 16,899
Accrued interest payable 3,732 10,149
Current portion of long-term debt 1,042 1,000
Current portion of obligations under capital leases 2,780 3,044
Deferred income, customer deposits and other 9,829 6,458
--------- ---------
Total current liabilities 43,547 44,498
LONG-TERM DEBT, less current portion 391,260 326,500
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 34,741 35,476
OTHER LIABILITIES 1,341 1,168
MEMBER DEPOSITS 58,501 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 (17,205) (29,344)
--------- ---------
Total stockholder's equity 180,330 168,191
--------- ---------
$725,066 $636,041
--------- ---------
--------- ---------
</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
NINE MONTHS ENDED
JULY 31,
(AMOUNTS IN THOUSANDS) 1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,139 $ 3,766
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 26,423 19,454
Extraordinary loss on early extinguishment of debt -- 5,176
Amortization of debt issuance costs 722 1,519
Provision for losses on trade receivables 479 (879)
Provision for losses on notes receivables 40 --
Minority interests in loss of subsidiary (103) (137)
(Gain) Loss on sales of property, net 32 192
Changes in operating assets and liabilities, net of effects from
investments in subsidiaries:
Restricted cash (574) 10,728
Trade receivables (2,477) 3,321
Inventories (990) 842
Prepaid expenses and other current assets (823) 491
Notes receivable (253) 228
Other assets (568) (308)
Receivable from parent -- 43,743
Receivable from affiliates (124) 3,106
Accounts payable 587 (3,844)
Accrued liabilities 590 (712)
Accrued interest payable (6,417) 3,225
Deferred income, customer deposits and other current liabilities 2,826 (1,844)
Other liabilities 173 210
--------- ----------
Net cash provided by operating activities 31,682 88,277
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired (87,899) --
Acquisition of golf course facilities (11,479) --
Purchases of property and equipment (22,936) (6,266)
Collections on member notes receivable 3,640 2,350
Notes receivable from affiliate, net (1,331) (21,222)
Investment in partnerships -- (515)
Proceeds from sale of investment in partnership -- 1,621
Proceeds from sales of property and equipment -- 186
--------- ---------
Net cash used in investing activities (120,005) (23,846)
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
JULY 31,
(AMOUNTS IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance $ -- $ 300,362
Revolving line of credit, net 62,600 (40,000)
Member deposits, net 7,825 3,145
Principal payments on long-term debt and obligations
under capital leases (3,378) (267,541)
Debt financing costs (352) (10,896)
Capital distributions and dividends to parent -- (60,199)
Proceeds from capital contributions -- 9,000
--------- ---------
Net cash provided by (used in) financing activities 66,695 (66,129)
--------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (21,628) (1,698)
CASH AND CASH EQUIVALENTS, beginning of period 24,056 9,329
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 2,428 $ 7,631
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 32,309 $ 18,500
--------- ---------
--------- ---------
Income taxes paid $ 504 $ 424
--------- ---------
--------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 1,320 $ 3,539
Notes receivable issued for member deposits 5,919 4,378
Assumption of debt on golf course facility acquisition 3,261 --
Note receivable issued from sale of assets -- 211
Dividend to parent of investments in partnerships -- 2,155
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
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 resorts, golf courses, private clubs, 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. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and
measure those instruments at fair value. The Company believes that adoption
of SFAS No. 133, which is required in fiscal 2000, will not have a material
impact on the Company's consolidated financial statements.
NOTE 3. ACQUISITIONS
On April 21, 1998, the Company, through a wholly owned subsidiary, acquired
substantially all the assets and certain liabilities of the Claremont Resort and
Spa, a 279 room luxury hotel and spa located in Oakland, California for
approximately $88,000. The purchase was financed under the revolving credit
portion of the Company's credit facility and has been accounted for using the
purchase method of accounting. Accordingly, the operating results of the
Claremont have been included in the Company's consolidated financial statements
since acquisition. The Company acquired assets at fair value of approximately
$64,700 net of assumed liabilities of approximately $1,700. The excess of the
aggregate purchase price over the fair value of the net assets acquired of
approximately $25,000 is being amortized over 30 years.
9
<PAGE>
The following are the Company's unaudited proforma consolidated results of
operations for the nine months ended July 31 which assume the Claremont
transaction occurred as of November 1, 1996:
<TABLE>
<CAPTION>
(In thousands, except share data)
1998 1997
---- ----
<S> <C> <C>
Revenues........................................ $239,752 $190,890
Income before extraordinary item................ 9,510 3,577
Net income ..................................... 9,510 (408)
Net earnings per share.......................... 9,510 (408)
</TABLE>
The unaudited proforma results do not necessarily represent results which
would have occurred if the acquisition had taken place as of the beginning of
the fiscal periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
Also, in the quarter ended April 30, 1998 the Company acquired, in
separate transactions, two golf course facilities for an aggregate purchase
price of approximately $14,800, including the assumption of certain
liabilities of approximately $3,300. The acquisitions were financed under the
revolving credit portion of the Company's credit facility and have been
accounted for using the purchase method of accounting. Accordingly, the
operating results of the two facilities have been included in the Company's
consolidated financial statements since acquisition. The proforma results of
operations of these two facilities were not material to the Company.
NOTE 4. LONG-TERM DEBT
During fiscal 1998, the Company's maximum borrowings under its revolving credit
facility was increased to $275,000. The Company's outstanding borrowings under
the revolving credit line was $165,000 as of July 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 July 31, 1998.
NOTE 5. RELATED PARTY TRANSACTION
Effective April 1, 1998, a wholly owned subsidiary of the Company, KSL Desert
Resorts, Inc. ("Desert Resorts"), entered into a management agreement with an
unconsolidated affiliate, KSL Land II Corporation ("Land"), whereby Land will
provide development services for the entitlement, subdivision, construction,
marketing, and sale of approximately 97 single family detached units on
approximately eleven acres of real estate currently owned by Desert Resorts.
The development site is adjacent to the Desert Resorts' La Quinta Resort &
Club. The contractor and project management fees for these services are
calculated as 6.0% of the Project Sales Revenues, as defined, and are
expected to total approximately $3,400. Also, Land is to be paid by Desert
Resorts a marketing fee in an amount equal to 2.75% of the Project Sales
Revenues. Such marketing fee will be used by Land primarily to pay marketing,
sales and promotional expenses to third parties. The project is expected to
have an eighteen-month build out ending in fiscal 1999.
NOTE 6. REAL ESTATE TRANSACTION
On May 29, 1998, KSL Hotel Corp. ("Doral"), a wholly-owned indirect
subsidiary of the Company and owner of Doral Golf Resort and Spa, entered
into a non-binding letter of intent for the sale, development, construction
and marketing of interval ownership units on approximately ten acres of real
property currently being utilized by Doral as a golf course. If a definitive
agreement is reached, the sales price for the real estate would be $9,500,
and the transaction would be expected to close no earlier than March 1999,
subject to due diligence review and obtaining certain land use approvals.
10
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED JULY 31, 1998 (1998 THIRD QUARTER) AS COMPARED TO
THE THREE MONTHS ENDED JULY 31, 1997 (1997 THIRD QUARTER).
REVENUES - Revenues increased by $30,895 or 71%, from $43,529 in the
1997 Third Quarter to $74,424 in the 1998 Third Quarter. Of this increase,
$2,112 reflects the increase in revenues at operations owned in 1997,
representing a 5% increase in Third Quarter revenues at these properties. The
other $28,783, was attributable to the acquisitions of Grand Traverse Resort
and Claremont Resort and Spa, and the sublease of Lake Lanier Islands
(referred to collectively as the Additions) which occurred subsequent to the
1997 Third Quarter. For Grand Traverse Resort and Lake Lanier Islands the
third quarter is high season.
The Company's core property strategy in 1998 is to focus on organic growth
initiatives by improving resort and outside guest demographic profiles,
targeting more profitable group and corporate business, expanding the club
membership base, and increasing the overall capture of guest and member
spending at the Company's properties through broader programming and upgraded
facilities. Excluding the Additions, non-lodging revenues improved in the
1998 Third Quarter as resort patronage by outside guests and members, and
membership program participation increased. Food and beverage revenues
improved by 14% in the Third Quarter, and golf fees increased by 13% over the
1997 Third Quarter resulting from increases in golf rounds and greens fees.
Effective membership sales efforts increased the number of golf and social
dues paying members, and increased dues and fees revenue by 7%. As a result
of the Company pursuing higher value customers and the third quarter being
off season for two of the Company's flagship resorts, La Quinta Resort and
Club and the Doral Golf Resort and Spa, rooms revenue declined by 6%,
primarily from decreased occupancy.
EXPENSES - Expenses of operations increased by $23,559 or 54%, from $43,583
in the 1997 Third Quarter to $67,142 in the 1998 Third Quarter. Approximately
90% of this increase, or $21,332, was due to the Additions. Depreciation and
amortization associated with the Additions totaled $2,890, which was 89% of the
quarter to quarter increase. Due to increased corporate support of the Additions
the corporate fee increased by $1,093 from the 1997 Third Quarter.
Excluding the effect of the Additions, expenses of operations increased 5% from
the Third Quarter of 1997 to the Third Quarter of 1998 reflecting the overall
higher volume of business.
NET LOSS - Net loss decreased by $4,962 from $6,802 in the 1997 Third
Quarter to $1,840 in the 1998 Third Quarter as a result of the factors
discussed above. Interest expense increased by $2,221 during the 1998 Third
Quarter due to increased borrowings necessary for the Additions under the
Company's revolving line of credit. Excluding the Additions, net loss
decreased in the 1998 Third Quarter by $1,044 or 15%, primarily due to a
reduction in interest expense. Net income from the Additions in the 1998
Third Quarter was $4,362.
ADJUSTED EBITDA - Adjusted EBITDA increased by $12,688 or 153% from
$8,275 in the 1997 Third Quarter to $20,963 in the 1998 Third Quarter. Of
this increase $3,378 was attributable to growth at properties owned in the
1997 Third Quarter where adjusted EBITDA grew, net of corporate fee, from
$9,173 to $12,551, reflecting a 37% increase in Adjusted EBITDA at these
properties.
11
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED JULY 31, 1998 (1998 NINE MONTHS) AS COMPARED TO THE
NINE MONTHS ENDED JULY 31, 1997 (1997 NINE MONTHS).
REVENUES - Revenues increased by $56,013 or 33% from $168,642 in the
1997 Nine Months to $224,655 in the 1998 Nine Months. Of this increase,
$12,245 reflects the increase in revenues at properties owned throughout the
first nine months of 1997, representing a 7% increase. The other $43,768 of
increased revenues was attributable to the Additions.
The Company's core property strategy in 1998 is to focus on organic growth
initiatives by improving resort and outside guest demographic profiles,
targeting more profitable group and corporate business, expanding the club
membership base and increasing the overall capture of guest and member
spending at the Company's properties through broader programming and upgraded
facilities. Excluding the effect of the Additions, non-lodging revenues in
the 1998 Nine Months improved over the 1997 Nine Months from execution of
this strategy as resort patronage by outside guests and members, and
membership program participation increased. Food and beverage revenue
increased by 8% with golf fees increasing by 10%. Dues and fees improved by
6% as enhanced membership efforts resulted in an increase in both new
memberships sold and higher retention of existing members. Retail revenues
increased by 7% while cost of sales percentage decreased by 3%. As a result
of the Company pursuing higher value customers, RevPar increased 4%.
EXPENSES - Expenses of operations increased by $50,561, or 37%, from $137,372
in the 1997 Nine Months to $187,933 in the 1998 Nine Months. Approximately
82% of this increase, or $41,407, was due to the Additions. Due to increased
corporate support of the Additions, the corporate fee increased by $3,384
from the 1997 Nine Months.
Excluding the effect of the Additions, expenses of operations increased 7% from
the 1997 Nine Months to the 1998 Nine Months, reflecting a higher volume of
business.
NET INCOME - Net income increased by $8,373 from $3,766 in the 1997 Nine
Months to $12,139 in the 1998 Nine Months as a result of the factors
discussed above. Interest expense increased by $3,274 during the 1998 Nine
Months due to increased borrowings for the Additions under the Company's
revolving line of credit. Additionally, the Company incurred in the 1997 Nine
Months an extraordinary loss of $3,169, net of income tax benefit of $2,007,
from a loss on extinguishment of debt consisting of prepayment penalties and
financing costs associated with borrowings that were refinanced in April
1997. Excluding the Additions, net income increased in the 1998 Nine Months
by $13,850, or 368%; that increase was offset by a net loss attributable to
the Additions of $5,477.
ADJUSTED EBITDA - Adjusted EBITDA increased by $18,342, or 32% from
$56,658 in the 1997 Nine Months to $75,000 in the 1998 Nine Months as a
result of the factors discussed above. Of this increase, $12,929 was
attributable to growth at properties owned in the 1997 Nine Months, where
Adjusted EBITDA grew, excluding the corporate fee, from $58,230 to $71,159,
or 22%.
12
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
The foregoing discussion includes comparative financial information on the
Company's Adjusted EBITDA, which is defined as net income before income tax
expense (benefit), net interest expense, depreciation and amortization,
extraordinary items and certain non-cash items, plus Net Membership Deposits.
Net Membership Deposits is defined as the amount of refundable membership
deposits paid by new and upgraded resort club members and by existing members
who have converted to new membership plans, in cash, plus principal payments in
cash received on notes in respect thereof, minus the amount of any refunds paid
in cash with respect to such deposits. Information regarding Adjusted EBITDA has
been provided because the Company believes that it assists in understanding the
Company's operating results. The Company views cash flow from membership sales
as an important component of operating cash flow measure, as membership sales
are recurring in nature as the club builds its membership and replaces the
natural turnover.
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
------------------ -----------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(1,840) $(6,802) $12,139 $ 3,766
Adjustment to net income (loss):
Income tax expense 70 28 75 2,223
Net interest expense 9,006 6,644 24,611 22,249
Depreciation and amortization 9,763 6,500 26,423 19,454
Extraordinary loss 0 31 0 3,169
------- ------- ------- -------
EBITDA 16,999 6,401 63,248 50,861
Adjustments to EBITDA:
Adjusted Net Membership Deposits 3,866 1,802 11,463 5,395
Non-cash items 98 72 289 402
------- ------- ------- -------
Adjusted EBITDA $20,963 $ 8,275 $75,000 $56,658
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Adjusted EBITDA should not be construed as an indicator of the Company's
operating performance or as an alternative to operating income as determined in
accordance with Generally Accepted Accounting Principles ("GAAP"). Additionally,
Adjusted EBITDA should not be construed by investors as a measure of the
Company's liquidity or ability to meet all cash needs or as an alternative to
cash flows from operating, investing and financing activities as determined in
accordance with GAAP, nor should Adjusted EBITDA be construed by investors as an
alternative to any other determination under GAAP.
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 Nine Months, cash flow provided by operating activities
was $31,700 compared to $88,300 for the 1997 Nine Months. This decrease was
primarily due to a number of transactions completed in conjunction with the
refinancing of the Company in 1997, including the settlement of receivables
due from Parent and its affiliates of $46,800, and the release of restricted
cash to operating cash of $9,400. During the 1998 Nine Months, cash flow used
in investing activities aggregated $120,000 as compared to cash used in
investing activities of $23,800 for the 1997 Nine Months. This change in cash
flows from investing activities was primarily due to: the acquisition of the
Claremont Resort and Spa for approximately $88,000; the acquisition of two
golf course facilities in the 1998 Nine Months for approximately $11,500 and
related assumption of approximately $3,300 in debt; purchases of property and
equipment in the 1998 Nine Months of $22,900; and in conjunction with the
refinancing of the Company in the 1997 Nine Months the advance to an
unconsolidated affiliate of $20,800. Cash provided by financing activities
was $66,700 in the 1998 Nine Months compared to cash used in financing
activities of $66,100 in the 1997 Nine Months. This change is attributable to
approximately $62,600 increase in principal amounts on net debt, period to
period, and $10,900 of debt refinancing costs and $51,200 of dividends and
net capital contributions, both occurring in the 1997 Nine Months.
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.
13
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
OTHER MATTERS
The "Year 2000" issue is the result of computer programs using two
digits rather than four to define the applicable year. Because of this
programming convention, software or hardware may recognize a date using "00"
as the year 1900 rather than the year 2000. Use of non-Year 2000 compliant
programs could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among
others, a temporary inability to process transactions and invoices or engage
in similar normal business transactions.
ASSESSMENT AND IMPLEMENTATION PHASE -- In 1998 the Company undertook an
examination of its systems for Year 2000 compliance with a view to replacing
non-compliant systems. The Company has identified substantially all of its
major computer hardware platforms and related software in use as well as the
relevant non-system areas. These non-computer systems include; (i) network
switching, (ii) the Company's non-information technology systems (such as
buildings, plant, equipment and other infrastructure systems that may contain
embedded microcontroller technology); and (iii) the status of major vendors
and service providers. The Company employs distributed network technology
that allows its properties to operate independently and with little reliance
on other parts of the system. These stand-alone networks use personal
computer workstations and file servers to store and process information. As
the underlying technology for these systems is relatively new, the Company's
technology base is relatively modern and, consequently, the Company does not
have material exposure in this area. The Company is finalizing its assessment
of non-computer systems and is not expected to have material exposure in this
area.
COSTS RELATED TO THE YEAR 2000 ISSUE -- To date, the Company has
incurred only insignificant costs to upgrade its systems to Year 2000
specifications. It is estimated that total costs for systems and service
providers will be approximately $600. The Company plans to have all major
systems Year 2000 compliant by October, 1999.
CONTINGENCY PLANS -- The Company has begun to analyze contingency plans
to handle worst case Year 2000 scenarios that the Company believes reasonably
could occur and, if necessary, will develop a timetable for completing such
contingency plans.
RISKS RELATED TO YEAR 2000 ISSUE -- Although the Company's efforts to be
Year 2000 compliant are intended to minimize the adverse effects of the Year
2000 issue on the Company's business and operations, the actual effects of
the issue will not be known until 2000. Difficulties in implementing computer
and non-computer systems by the Company or the failure of its major vendors,
service providers, and customers to adequately address their respective Year
2000 issues in a timely manner could have an adverse effect on the Company's
business, results of operations, and financial condition, although the amount
is not expected to be material. The Company's capital requirements may differ
materially from the foregoing estimate as a result of regulatory,
technological and competitive developments (including market developments and
new opportunities) in the Company's industry.
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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarterly period ended July 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. (a) Financial Data Schedule for the period ended July 31, 1998
(b) Reports on Form 8-K
On or about July 6,1998, Amendment No. 1 on Form 8-K/A was filed to
amend a Form 8-K filing dated April 20, 1998. The April filing reported
the acquisition of substantially all the assets and certain liabilities
of the Claremont Resort & Spa pursuant to an Agreement of Purchase and
Sale between Claremont Hotel, LLC, a Delaware limited liability company
and Harsch Investment Corp., an Oregon corporation (the sellers), and
the Company, dated March 5, 1998, and as amended April 6 and April 20,
1998. The acquisition closed on April 21, 1998. The Amendment filing
included financial statements, pro forma financial information and
exhibits related to the acquisition.
15
<PAGE>
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: September 14, 1998 By: /s/ John K. Saer, Jr.
--------------------------------
Vice President, Chief Financial Officer
and Treasurer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
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<SECURITIES> 0
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