<PAGE>
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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, 1999.
----------------
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
----------- -----------------------
(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
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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 17, 1999
1,000
Class
Common Stock, $0.01 par value
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KSL RECREATION GROUP, INC.
INDEX
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<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated statements of operations for the three months
ended January, 31 1999 and 1998 3
Condensed consolidated balance sheets, January 31, 1999 and
October 31, 1998 4
Condensed consolidated statements of cash flows for the three months
ended January 31, 1999 and 1998 6
Notes to condensed consolidated financial statements 8
Item 2. Management's discussion and analysis of financial condition and
results of operations 10
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
<PAGE>
KSL RECREATION GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
(AMOUNTS IN THOUSANDS, JANUARY 31,
EXCEPT PER SHARE DATA) 1999 1998
---- ----
<S> <C> <C>
REVENUES:
Rooms revenue $ 27,552 $ 19,080
Food and beverage sales 22,564 16,287
Golf fees 10,994 10,580
Dues and fees 7,507 6,379
Merchandise sales 4,799 4,208
Spa revenues 3,374 1,237
Other 9,054 7,831
--------- ---------
Total revenues 85,844 65,602
EXPENSES:
Payroll and benefits 30,693 22,335
Other expenses 32,106 25,418
Depreciation and amortization 11,772 8,154
Corporate fee 2,583 1,965
--------- ---------
Total expenses 77,154 57,872
--------- ---------
INCOME FROM OPERATIONS 8,690 7,730
OTHER INCOME (EXPENSE):
Interest income 575 629
Interest expense (11,010) (8,453)
--------- ---------
Other expense, net (10,435) (7,824)
LOSS BEFORE MINORITY INTERESTS AND
INCOME TAXES (1,745) (94)
MINORITY INTERESTS IN LOSS OF SUBSIDIARY 106 103
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (1,639) 9
INCOME TAX BENEFIT 650 -
--------- ---------
NET INCOME (LOSS) $ (989) $ 9
--------- ---------
--------- ---------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE $ (989) $ 9
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,000 1,000
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) JANUARY 31, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,678 $ 5,248
Restricted cash 23,925 1,743
Trade receivables, net of allowance for doubtful
receivables of $787 and $718, respectively 26,966 21,276
Inventories 12,375 10,085
Current portion of notes receivable 2,889 2,387
Prepaid expenses and other current assets 6,585 5,235
---------- ---------
Total current assets 76,418 45,974
REAL ESTATE UNDER DEVELOPMENT 9,823 7,184
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $102,828 and $95,219, respectively 812,866 508,812
NOTE RECEIVABLE FROM AFFILIATE 23,926 23,450
NOTES RECEIVABLE, less current portion 5,511 5,389
RESTRICTED CASH, less current portion 8,345 91
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $19,865 and $18,314, respectively 191,117 112,521
OTHER ASSETS, net 36,078 34,172
---------- ---------
$1,164,084 $ 737,593
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) JANUARY 31, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,246 $ 9,615
Accrued liabilities 20,312 20,504
Accrued interest payable 5,254 945
Current portion of long-term debt 1,045 1,044
Current portion of obligations under capital leases 2,692 2,802
Customer and other deposits 20,900 7,007
Deferred income and other 6,001 1,871
---------- ---------
Total current liabilities 66,450 43,788
LONG-TERM DEBT, less current portion 675,439 403,950
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 36,209 34,416
OTHER LIABILITIES 1,483 1,414
MEMBER DEPOSITS 75,614 63,024
DEFERRED INCOME TAXES 8,578 8,578
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY 12 118
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares authorized
and outstanding -- --
Additional paid-in capital 316,518 197,535
Accumulated deficit (16,219) (15,230)
---------- ---------
Total stockholder's equity 300,299 182,305
---------- ---------
$1,164,084 $ 737,593
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
(AMOUNTS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (989) $ 9
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,772 8,154
Amortization of debt issuance costs 249 240
Provision for losses on trade receivables 159 118
Minority interests in loss of subsidiary (106) (103)
(Gain) loss on sales of property, net 1 (2)
Changes in operating assets and liabilities, net of effects from
investments in subsidiaries:
Restricted cash (12,597) (894)
Trade receivables (3,101) (3,840)
Inventories (925) (737)
Prepaid expenses and other current assets (1,316) (1,017)
Notes receivable 37 (81)
Other assets (585) (719)
Accounts payable (737) 737
Accrued liabilities (1,574) (2,548)
Accrued interest payable 3,162 (4,142)
Deferred income, customer deposits and other current liabilities 11,181 6,470
Other liabilities 69 64
---------- ----------
Net cash provided by operating activities 4,700 1,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired (105,149) --
Investment in real estate under development (2,639) --
Purchases of property and equipment (7,410) (3,651)
Collections on member notes receivable 1,086 1,047
Notes receivable from affiliate, net (476) (440)
Proceeds from sales of property and equipment 23 --
---------- ----------
Net cash used in investing activities (114,565) (3,044)
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
(AMOUNTS IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Parent $ 110,000 $ --
Revolving line of credit, net (3,500) (17,500)
Member deposits 3,180 3,150
Member refunds (669) (392)
Principal payments on long-term debt and obligations
under capital leases (716) (769)
Debt financing costs -- (49)
---------- ----------
Net cash provided by (used in) financing activities 108,295 (15,560)
---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,570) (16,895)
CASH AND CASH EQUIVALENTS, beginning of period 5,248 24,056
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 3,678 $ 7,161
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of amounts capitalized) $ 6,452 $ 12,355
---------- ----------
---------- ----------
Income taxes paid $ 615 $ 504
---------- ----------
---------- ----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 2,577 $ 356
Notes receivable issued for member deposits 1,778 1,088
Trade-in of equipment under capital lease 517 --
Capital contribution of minority interest from
Parent 8,983 --
Assumption of debt of acquired properties 275,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
7
<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 its subsidiaries (collectively the
Company) is engaged in the ownership and management of resorts, spas, 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, 1998. 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 1999 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.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which is effective for annual periods beginning after
December 15, 1997. This statement requires that all items that are required to
be recognized under accounting standards as comprehensive income be reported in
a financial statement that is displayed with the same prominence as other items
reported in a financial statement. The Company's adoption of this standard,
effective November 1, 1998, did not have a material impact on the Company's
financial statements. Net income (loss), as included in the accompanying
statements of operations, equal comprehensive income (loss) as the Company does
not have any other items of comprehensive income for the periods presented.
NOTE 2. ACQUISITIONS
On December 29, 1998, the Company, through a wholly-owned subsidiary,
acquired substantially all the assets and certain liabilities of the Grand
Wailea Resort Hotel & Spa (Grand Wailea), a 781-room resort in Maui, Hawaii for
approximately $375,000 (exclusive of closing costs), including the assumption of
approximately $275,000 in mortgage financing. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the operating results of
the Grand Wailea have been included in the Company's consolidated financial
statements since acquisition. The excess of the purchase price over the debt
assumed, acquisition related costs, and working capital were funded with
a $110,000 equity investment by the Parent to the Company.
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 (The Claremont), a 279-room luxury hotel and spa located in the Berkeley
Hills, near San Francisco, 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.
8
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(AMOUNTS IN THOUSANDS)
The following are the Company's unaudited pro forma consolidated results of
operations for the three months ended January 31 which assume the Grand Wailea
and The Claremont transactions occurred as of November 1, 1997:
<TABLE>
<CAPTION>
(In thousands, except share data)
1999 1998
---- ----
<S> <C> <C>
Revenues $ 97,819 $ 94,665
Net loss (4,294) (3,683)
Net loss per share (4,294) (3,683)
</TABLE>
The unaudited proforma results do not necessarily represent results which
would have occurred if the acquisitions 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.
NOTE 3. LONG-TERM DEBT AND RESTRICTED CASH
The Company has a revolving credit line which allows maximum borrowings
of $275,000. The Company's outstanding borrowings under the revolving credit
line were $174,250 at January 31, 1999. The terms of the Company's credit
facility, including the revolving credit line, contain certain financial
covenants. The Company is in compliance with the required financial covenants
of the credit facility at January 31, 1999.
In connection with the Grand Wailea acquisition (Note 2), the Company
assumed approximately $275,000 in mortgage financing. The terms of this
financing include interest only payment at 30 day LIBOR plus 275 basis
points, with a maturity of November 2002. As the Company established its
Grand Wailea Subsidiary as an unrestricted subsidiary under the terms of the
Company's credit facility, Grand Wailea is not considered in the Company's
financial ratio tests under the credit facility. In connection with this
financing the Company entered into an interest rate cap agreement with a
third party whereby the LIBOR rate incurred by the Company on its long-term
debt would not exceed 8.5%. In the event the LIBOR rate exceeds 8.5%, the
third party would pay the interest in excess of 8.5%. The agreement expires
in November 2000. The Company is in compliance with the required financial
covenants of the mortgage financing at January 31, 1999.
Pursuant to a cash management agreement underlying the $275,000 of
mortgage financing assumed in the Grand Wailea acquisition, the Company was
required to establish certain cash accounts for taxes, insurance, debt
service, capital assets, working capital and operating expenses. Accordingly,
the cash generated from operations of Grand Wailea are deposited into these
accounts, which are maintained by a third-party servicer, and used to fund
and replenish the required balances. Disbursements by the third-party servicer
from these accounts are made pursuant to the terms of the agreement, which
include disbursements for management fees and excess cash (as defined), which
would be paid to the Company. As of January 31, 1999. the aggregate balance
of these accounts was approximately $20,630 and is included in restricted
cash in the accompanying unaudited condensed consolidated balance sheet.
Management believes that the cash management agreement will not restrict its
ability to meet the operational and capital needs of its subsidiary.
NOTE 4. ADDITIONAL PAID-IN CAPITAL
In January 1999, the Company's Parent exercised a put/call agreement it
had with one of the Minority Interest Partners in one of the Company's
subsidiaries. As a result, the Parent acquired an additional 7.61% interest in
the Company's subsidiary, which it contributed to the Company. The Company
recorded approximately $8,983 of goodwill related to the Parent's exercise of
the put/call agreement.
In connection with the Grand Wailea acquisition (Note 2), the Company's
Parent contributed $110,000 in equity to the Company.
NOTE 5. SUBSEQUENT EVENTS
In March 1999, the Company entered into an interest rate swap agreement
in which $270,000 of variable rate debt was swapped for fixed rate debt
being a LIBOR rate of 5.56% for a term maturing in November 2002.
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 is required to adopt SFAS No. 133
in fiscal 2000. The Company has not completed the process of evaluating the
impact that will result from adopting SFAS No. 133 to this instrument.
9
<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 JANUARY 31, 1999 (1999 FIRST QUARTER) AS COMPARED TO THE
THREE MONTHS ENDED JANUARY 31, 1998 (1998 FIRST QUARTER).
REVENUES - Revenues increased by $20,242 or 30.8%, from $65,602 in the 1998
First Quarter to $85,844 in the 1999 First Quarter. Of this increase, $3,607
reflects the increase in revenues at operations owned in the 1998 First Quarter,
representing a 5.5% increase in 1999 First Quarter revenues at these properties.
The other $16,635 was attributable to the acquisitions of The Claremont Resort
and Spa and the Grand Wailea Resort Hotel & Spa (collectively the Additions)
which occurred subsequent to the 1998 First Quarter.
During the 1999 First Quarter the Company was engaged in ongoing capital
improvements at all of its resorts, which the Company believes will add to
future revenues. These capital improvements include: at Desert Resorts, the
completion of a 23,000 square foot spa, the recapture and renovation of
approximately four thousand square feet of retail space, and the current
construction of fifty Casita style resort homes adjacent to the La Quinta
Resort; at Doral, the ongoing construction of a member clubhouse, and the
final planning of a complete rebuild of the White golf course by Greg Norman;
at The Claremont the extensive room and common area renovations; at Grand
Traverse, the construction of a golf clubhouse and eleven thousand square
foot spa; and at Lake Lanier the construction of approximately ten thousand
square feet of additional meeting space and the renovation of a major
restaurant.
These projects are scheduled to be completed at various times in fiscal 1999.
While management believes they will enhance the guest experience and provide
future revenue growth, their short-term impact has included some disruptions
in normal business levels and hence, dampened revenue growth at these
properties.
EXPENSES - Expenses of operations increased by $19,282 or 33.3%, from
$57,872 in the 1998 First Quarter to $77,154 in the 1999 First Quarter.
Approximately 76% of this increase, or $14,698, was due to the Additions.
Depreciation and amortization associated with the Additions totaled $2,265.
Excluding the effect of the Additions, expenses of operations increased 7.9%
from the First Quarter of 1998 to the First Quarter of 1999. The 1999 First
Quarter expenses include incremental (over 1998 First Quarter) sales and
marketing costs associated with the establishment of regional sales offices,
the revenue impact of which is substantially targeted for future periods.
Additionally, 1999 First Quarter expenses include expenses for the expansion
of retail outlets at two properties and increased expenses due to the
initial months of operations of The Spa at La Quinta. The revenue resulting
from these initiatives are not anticipated to be fully realized until
future periods.
NET INCOME - Net loss increased by $998 from net income of $9 in the 1998
First Quarter to a net loss of $989 in the 1999 First Quarter. Interest expense
increased by $2,557 or 30.2%, during the 1999 First Quarter due to increased
borrowings under the Company's revolving line of credit necessary for The
Claremont acquisition and the assumption of $275,000 of mortgage financing for
the Grand Wailea acquisition. Excluding the Additions, the Company's 1999 First
Quarter net income was $1,234, an increase of $1,225 as compared to the 1998
First Quarter, due to the factors discussed above. Net loss from the additions
in the 1999 First Quarter was $2,223.
ADJUSTED EBITDA - Adjusted EBITDA increased by $4,437 or 22.3%, from
$19,855 in the 1998 First Quarter to $24,292 in the 1999 First Quarter.
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 Adjusted Net Membership
Deposits. Adjusted Net Membership Deposits is defined as Net Membership
Deposits, excluding Net Membership Deposits which were paid in connection
with the initial conversion of members to new membership plans, and excluding
Net Membership Deposits (and subsequent refunds of such deposits) that are
purchased as part of an acquisition. 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. Also, the significant payroll and operating expenses necessary to
create, sell and maintain a private club operation are treated as ongoing
expenses in the Company's Statements of Operations and therefore recognizing
the cash flow from sales is an appropriate match in determining the overall
performance of the club operation. It is important to note that the
membership cash flow included in Adjusted EBITDA is only the cash amount
collected net of financed sales and refunds. From the Company's perspective,
EBITDA and net membership cash flow, which along with certain non-cash items
comprise Adjusted EBITDA, provide the most accurate measure of the recurring
cash flow performance of the operations. As structured these private club
membership sales are not treated as revenue for Generally Accepted Accounting
Principles ("GAAP") purposes and therefore do not appear in the Company's
Statements of Operations, but are reflected in the Company's Statements of
Cash Flows.
10
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
JANUARY 31,
1999 1998
---- ----
<S> <C> <C>
Net income (loss) $ (989) $ 9
Adjustment to net income (loss):
Income tax benefit (650) -
Net interest expense 10,435 7,824
Depreciation and amortization 11,772 8,154
-------- --------
EBITDA 20,568 15,987
Adjustments to EBITDA:
Net Membership Deposits 3,597 3,804
Excluded Membership Deposits (refunds) (57) -
Adjusted Net Membership Deposits 3,654 3,804
Non-cash items 70 64
-------- --------
Adjusted EBITDA $ 24,292 $ 19,855
-------- --------
-------- --------
</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 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. The Company's Adjusted EBITDA may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
During the 1999 First Quarter, cash flow provided by operating
activities was $4,700 compared to $1,709 for the 1998 First Quarter. This
change was primarily due to increases in depreciation and amortization of
$3,618; accrued interest payable of $7,304; and $4,711 in deferred income,
customer deposits and other current liabilities offset by an increase in
restricted cash of $11,703, primarily related to the Grand Wailea
acquisition. This increase in restricted cash associated with the Grand
Wailea acquisition reflects the capture of cash received into the third-party
loan servicer's bank accounts, (as required under the mortgage financing
agreement), and no disbursements, other than the interest payment, during the
1999 First Quarter. During the 1999 First Quarter, cash flow used in
investing activities aggregated $114,565 for the 1999 First Quarter as
compared to $3,044 for the 1998 First Quarter. This change was primarily due
to the Company's acquisition of the Grand Wailea Resort Hotel & Spa of
$105,149, its investment in real estate under development of $2,639, and an
additional $3,759 in purchases of property and equipment. Cash provided by
financing activities was $108,295 in the 1999 First Quarter compared to cash
used in financing activities of $15,560 in the 1998 First Quarter. This
change is primarily attributable to capital contributions of $110,000, offset
by a decrease in net payments under the revolving line of credit of $14,000.
In December 1998, the Company, through a wholly-owned subsidiary, purchased
substantially all the assets and certain liabilities of the Grand Wailea Resort
Hotel & Spa for approximately $375,000, including the assumption of
approximately $275,000 in mortgage financing. The excess of the purchase price
over the debt assumed, acquisition related costs and working capital was funded
with a $110,000 capital contribution by the Parent.
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.
11
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
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 is approximately 60% complete in its assessment of
non-computer systems and is not expected to have material exposure in this area.
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 does not have material exposure in this area. In
addition, in the ordinary course of business, the Company periodically replaces
computer equipment and software, and in so doing, seeks to acquire only Year
2000-compliant software and hardware. The Company presently believes that its
planned modifications or replacements of certain existing computer equipment and
software will be completed on a timely basis so as to avoid potential Year
2000-related disruptions or malfunctions that it has identified.
As part of due diligence in acquiring properties, a review of the
properties' Year 2000 readiness is conducted. The Company has begun to replace
non-compliant systems at Grand Wailea and expects that all major systems at
Grand Wailea will be Year 2000-compliant by November 1999.
COSTS RELATED TO THE YEAR 2000 ISSUE - To date, the Company has incurred
relatively insignificant costs to upgrade its systems to Year 2000
specifications. It is estimated that total costs for systems and service
providers will be approximately $1,200, increased for the cost of correcting
non-compliant systems purchased in the Grand Wailea acquisition. The Company
plans to have all major systems Year 2000-compliant by November 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. In addition, Year 2000-related
issues may lead to possible third party claims, the impact of which cannot
yet be estimated. No assurance can be given that the aggregate cost of
defending and resolving such claims, if any, would not have a material effect
on the Company.
12
<PAGE>
KSL RECREATION GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
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.
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 January 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. (a) Financial Data Schedule for the period ended January 31, 1999.
(b) Reports on Form 8-K
On or about March 16, 1999 Amendment No. 1 on Form 8-K/A was filed to amend
a Form 8-K filing dated January 12, 1999. The January filing reported the
acquisition of substantially all the assets and certain liabilities of the
Grand Wailea Resort Hotel & Spa pursuant to an Agreement of Purchase and
Sale and Joint Escrow Instructions between International Hotel
Acquisitions, LLC, and KSL Recreation Corporation, dated November 5, 1998.
The acquisition closed on December 29, 1998. The Amendment filing included
financial statements, pro forma financial information and exhibits related
to the acquisition.
13
<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: March 17, 1999 By: /s/ John K. Saer, Jr.
-----------------------------------------
Vice President, Chief Financial Officer
and Treasurer
14
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JANUARY 31, 1999 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-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
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<SECURITIES> 0
<RECEIVABLES> 27,753
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