<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 April 30, 1999 .
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 June 11, 1999
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
six months ended April 30, 1999 and 1998 ............................. 3
Condensed consolidated balance sheets, April 30, 1999
and October 31, 1998.................................................. 4
Condensed consolidated statements of cash flows for the
six months ended April 30, 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............................. 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................ 16
Item 6. Exhibits and Reports on Form 8-K................................... 16
Signatures.................................................................. 17
</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 SIX MONTHS ENDED
(AMOUNTS IN THOUSANDS, APRIL 30, APRIL 30,
EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Rooms $ 47,350 $ 25,723 $ 74,902 $ 44,803
Food and beverage 29,692 19,836 52,256 36,123
Golf fees 15,704 15,202 26,698 25,782
Dues and fees 7,849 6,891 15,356 13,270
Merchandise sales 6,525 5,556 11,324 9,764
Spa revenues 5,046 1,336 8,420 2,573
Other 13,241 10,085 22,295 17,916
--------- --------- --------- ---------
Total revenues 125,407 84,629 211,251 150,231
EXPENSES:
Payroll and benefits 36,720 23,863 67,413 46,198
Other expenses 39,379 28,599 71,485 54,017
Depreciation and amortization 14,349 8,506 26,121 16,660
Corporate fee 2,582 1,951 5,165 3,916
--------- --------- --------- ---------
Total operating expenses 93,030 62,919 170,184 120,791
--------- --------- --------- ---------
INCOME FROM OPERATIONS 32,377 21,710 41,067 29,440
OTHER INCOME (EXPENSE):
Interest income 820 670 1,395 1,299
Interest expense (13,603) (8,451) (24,613) (16,904)
---------- ---------- ---------- ----------
Other expense, net (12,783) (7,781) (23,218) (15,605)
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES 19,594 13,929 17,849 13,835
MINORITY INTERESTS IN LOSS OF SUBSIDIARY 12 46 118 149
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 19,606 13,975 17,967 13,984
INCOME TAX EXPENSE 7,812 5 7,162 5
--------- --------- --------- ---------
NET INCOME $ 11,794 $ 13,970 $ 10,805 $ 13,979
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC AND DILUTED EARNINGS PER SHARE $ 11,794 $ 13,970 $ 10,805 $ 13,979
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,000 1,000 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, APRIL 30, OCTOBER 31,
EXCEPT SHARE DATA) 1999 1998
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,670 $ 5,248
Restricted cash 10,453 1,743
Trade receivables, net of allowance for doubtful
receivables of $779 and $718, respectively 28,300 21,276
Inventories 13,003 10,085
Current portion of notes receivable 6,068 2,387
Prepaid expenses and other current assets 7,484 5,235
--------- ---------
Total current assets 74,978 45,974
REAL ESTATE UNDER DEVELOPMENT 14,450 7,245
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $113,485 and $95,446, respectively 817,894 509,170
NOTE RECEIVABLE FROM AFFILIATE 24,396 23,450
NOTES RECEIVABLE, less current portion 5,583 5,389
RESTRICTED CASH, less current portion 8,320 91
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $22,018 and $18,314, respectively 188,881 112,521
OTHER ASSETS, net 34,280 33,753
--------- ---------
$ 1,168,782 $ 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, APRIL 30, OCTOBER 31,
EXCEPT SHARE DATA) 1999 1998
---------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,104 $ 9,615
Accrued liabilities 22,544 20,504
Accrued interest payable 1,878 945
Current portion of long-term debt 1,044 1,044
Current portion of obligations under capital leases 2,538 2,802
Customer and other deposits 16,636 7,007
Deferred income and other 5,809 1,871
--------- ---------
Total current liabilities 61,553 43,788
LONG-TERM DEBT, less current portion 659,178 403,950
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 36,688 34,416
OTHER LIABILITIES 1,531 1,414
MEMBER DEPOSITS 82,076 63,024
DEFERRED INCOME TAXES 15,778 8,578
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY -- 118
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 25,000 shares authorized,
1,000 outstanding -- --
Additional paid-in capital 316,403 197,535
Accumulated deficit (4,425) (15,230)
---------- ----------
Total stockholder's equity 311,978 182,305
--------- ---------
$ 1,168,782 $ 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
SIX MONTHS ENDED
APRIL 30,
(AMOUNTS IN THOUSANDS) 1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,805 $ 13,979
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 26,121 16,660
Amortization of debt issuance costs 498 475
Provision for losses on trade receivables 282 95
Deferred income taxes 7,200 --
Provision for losses on notes receivables -- 40
Minority interests in loss of subsidiary (118) (149)
Loss on sale of property and equipment, net 78 3
Changes in operating assets and liabilities, net of effects from
investments in subsidiaries:
Restricted cash 901 693
Trade receivables (4,558) (11,232)
Inventories (1,553) (997)
Prepaid expenses and other current assets (2,212) (1,602)
Notes receivable (200) (74)
Other assets (339) (129)
Accounts payable 119 (224)
Accrued liabilities 655 (1,090)
Accrued interest payable (214) (7,469)
Deferred income, customer deposits and other current liabilities 6,730 3,920
Other liabilities 117 118
--------- --------
Net cash provided by operating activities 44,312 13,017
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired (105,149) (87,673)
Acquisition of golf course facilities -- (11,479)
Purchases of property and equipment (22,589) (10,848)
Collections on member notes receivable 2,282 2,190
Notes receivable from affiliate, net (946) (873)
Investment in real estate under development (7,205) --
Proceeds from sale of property and equipment 224 --
--------- --------
Net cash used in investing activities (133,383) (108,683)
</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
SIX MONTHS ENDED
APRIL 30,
(AMOUNTS IN THOUSANDS) 1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Parent $ 110,000 $ --
Revolving line of credit, net (18,750) 71,000
Principal payments on long-term debt and obligations
under capital leases (2,434) (2,419)
Debt financing costs (81) (336)
Member deposits 6,644 6,919
Member refunds (1,886) (1,511)
---------- ---------
Net cash provided by financing activities 93,493 73,653
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 4,422 (22,013)
CASH AND CASH EQUIVALENTS, beginning of period 5,248 24,056
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 9,670 $ 2,043
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid (net of amounts capitalized) $ 23,179 $ 24,373
--------- --------
--------- --------
Income taxes paid $ 550 $ 504
--------- --------
--------- --------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 3,571 $ 982
Notes receivable issued for member deposits 5,989 4,141
Assumption of debt of acquired properties 275,000 3,261
Trade-in of equipment under capital lease 517 --
Capital contribution of minority interest from Parent 8,868 --
</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, as included in the accompanying statements of
operations, equals comprehensive income as the Company does not have any other
items of comprehensive income for the periods presented.
In June 1998, the FASB 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 2001. The Company has
not completed the process of evaluating the impact that will result from
adopting SFAS No. 133.
8
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(AMOUNTS IN THOUSANDS)
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.
The following are the Company's unaudited pro forma consolidated results of
operations for the six months ended April 30 which assume the Grand Wailea and
The Claremont transactions occurred as of November 1, 1997:
<TABLE>
<CAPTION>
(In thousands, except per share data)
1999 1998
---- ----
<S> <C> <C>
Revenues $223,226 $214,493
Net income before income taxes 14,662 11,246
Net income 7,500 11,241
Net income per share 7,500 11,241
</TABLE>
The unaudited pro forma 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 $159,000 at April 30, 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 April 30, 1999.
In March 1999, the Company entered into interest rate swap agreements in
which $270,000 of variable rate debt was swapped for fixed rate debt bearing a
LIBOR rate of 5.57%. The agreements mature in November 2002. The amounts to be
received or paid pursuant to these agreements are accrued and recognized through
an adjustment to interest expense in the accompanying consolidated statements of
operations over the life of the agreement. The estimated fair value of the
agreement as of April 30, 1999 is $269,502.
9
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(AMOUNTS IN THOUSANDS)
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 payments 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
mortgage 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 April 30, 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 is 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 April 30, 1999, the aggregate balance of these accounts was
approximately $8,510 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 a Minority Interest Partner 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 $8,868 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 May 1999, the Company entered into a non-binding letter of intent for
the purchase of a golf facility in Northern California for approximately
$10,000.
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 APRIL 30, 1999 (1999 SECOND QUARTER) AS COMPARED TO THE
THREE MONTHS ENDED APRIL 30, 1998 (1998 SECOND QUARTER).
REVENUES - Revenues increased by $40,778 or 48.2%, from $84,629 in the
1998 Second Quarter to $125,407 in the 1999 Second Quarter. Of this increase,
$2,283 reflects the increase in revenues at operations owned in the 1998
Second Quarter, representing a 2.7% increase in 1999 Second Quarter revenues
at these properties. The other $38,495 was attributable to the acquisitions
of The Claremont Resort and Spa, the Grand Wailea Resort Hotel & Spa, two
golf facilities, and the establishment of regional sales offices
(collectively, the Additions), which substantially occurred subsequent to the
1998 Second Quarter.
During the 1999 Second 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, which in the 1999 Second Quarter
totaled $15,179, include: at Desert Resorts, the construction of a new golf
course by Greg Norman and the construction of fifty Casita style resort homes
adjacent to the La Quinta Resort; at Doral, construction of a pool/water
feature, the ongoing construction of a member clubhouse, commencement of a
complete rebuild of the White golf course by Greg Norman, and the renovation of
several new retail stores; at The Claremont, extensive room and common area
renovations; at Grand Traverse, the construction of a golf clubhouse and an
eleven thousand square foot spa, and the refurbishment and branding of six
retail stores; and at Lake Lanier, the renovation of a major restaurant, the
construction of boat rental docks and the acquisition of a new boat fleet.
These projects are scheduled to be completed at various times in fiscal
1999 and early fiscal 2000. While management believes they will enhance the
guest experience and provide future revenue growth, their short-term impact has
included some disruption in normal business levels and hence, dampened revenue
growth at these properties.
EXPENSES - Expenses of operations increased by $30,111, or 47.9%, from
$62,919 in the 1998 Second Quarter to $93,030 in the 1999 Second Quarter.
Approximately 94.1% of this increase, or $28,345, was due to the Additions.
Depreciation and amortization associated with the Additions totaled $5,141.
Excluding the effect of the Additions, expenses of operations increased 2.9%
from the Second Quarter of 1998 to the Second Quarter of 1999. The 1999 Second
Quarter expenses include incremental (over 1998 Second 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 Second Quarter expenses include the expansion of retail
outlets at three properties. The revenues resulting from these initiatives are
not anticipated to be fully realized until future periods.
NET INCOME - Net income decreased by $2,176 from net income of $13,970 in
the 1998 Second Quarter to a net income of $11,794 in the 1999 Second Quarter.
Interest expense increased by $5,152 or 61.0%, during the 1999 Second 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. Income tax expense
increased by $7,807 from income tax expense of $5 in the 1998 Second Quarter to
$7,812 in the 1999 Second Quarter. During the 1999 Second Quarter, the Company
estimated federal and state income taxes that will be paid primarily in future
years due to temporary differences in the recognition of accounting transactions
for tax and reporting purposes and from carryforwards. Excluding the Additions,
the Company's 1999 Second Quarter income before income taxes increased by
$4,059, or 28.4%, from $14,305 in 1998 Second quarter to $18,364 in 1999 Second
quarter. Excluding the Additions, the Company's 1999 Second Quarter net income
was $11,628, a decrease of $2,672 as compared to the 1998 Second Quarter, due to
the factors discussed above. Net income from the additions in the 1999 Second
Quarter was $166.
ADJUSTED EBITDA - Adjusted EBITDA increased by $16,212 or 47.5%, from
$34,108 in the 1998 Second Quarter to $50,320 in the 1999 Second Quarter.
11
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
SIX MONTHS ENDED APRIL 30, 1999 (1999 SIX MONTHS) AS COMPARED TO THE SIX
MONTHS ENDED APRIL 30, 1998 (1998 SIX MONTHS).
REVENUES - Revenues increased by $61,020 or 40.6%, from $150,231 in the
1998 Six Months to $211,251 in the 1999 Six Months. Of this increase, $5,228
reflects the increase in revenues at operations owned in the 1998 Six Months,
representing a 3.5% increase in 1999 Six Months revenues at these properties.
The other $55,792 was attributable to the Additions, which substantially
occurred subsequent to the 1998 Six Months.
During the 1999 Six Months, 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 which equaled approximately $22,589
in the 1999 Six Months include: at Desert Resorts, the completion of a
twenty-three thousand square foot spa, the recapture and renovation of
approximately four thousand square feet of retail space, and the construction of
fifty Casita style resort homes adjacent to the La Quinta Resort; at Doral,
construction of a pool/water feature, the ongoing construction of a member
clubhouse, the commencement of a complete rebuild of the White golf course by
Greg Norman, and renovation of several new retail stores; at The Claremont,
extensive room and common area renovations; at Grand Traverse, the construction
of a golf clubhouse and an eleven thousand square foot spa, and the
refurbishment and branding of six retail stores; and at Lake Lanier, the
completion of approximately ten thousand square feet of additional meeting
space, the renovation of a major restaurant, the construction of boat rental
docks, and the acquisition of a new boat fleet.
These projects are scheduled to be completed at various times in fiscal
1999 and early fiscal 2000. While management believes they will enhance the
guest experience and provide future revenue growth, their short-term impact has
included some disruption in normal business levels and hence, dampened revenue
growth at these properties.
EXPENSES - Expenses of operations increased by $49,393, or 40.9%, from
$120,791 in the 1998 Six Months to $170,184 in the 1999 Six Months.
Approximately 88.1% of this increase, or $43,535, was due to the Additions.
Depreciation and amortization associated with the Additions totaled $7,623.
Excluding the effect of the Additions, expenses of operations increased 4.9%
from the Six Months of 1998 to the Six Months of 1999.
NET INCOME - Net income decreased by $3,174 from net income of $13,979
in the 1998 Six Months to a net income of $10,805 in the 1999 Six Months.
Interest expense increased by $7,709 or 45.6%, during the 1999 Six Months 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. Income tax expense
increased from $5 to $7,162. Excluding the Additions, income before income
taxes increased by $4,879 or 34.1% from $14,316 in 1998 Six Months to $19,195
in 1999 Six Months. Excluding the Additions, the Company's 1999 Six Months
net income was $12,797, a decrease of $1,514 as compared to the 1998 Six
Months, due to the factors discussed above. Net loss from the additions in
the 1999 Six Months was $1,992.
ADJUSTED EBITDA - Adjusted EBITDA increased by $20,577 or 38.1%, from
$54,035 in the 1998 Second Quarter to $74,612 in the 1999 Second Quarter.
Adjusted Net Membership Deposits decreased by $500 or 6.6% from the 1998 Six
Months; however, Gross Membership Deposits (which includes Deposits which are
financed by the Company) increased by $1,533 or 13.6%, from the 1998 Six Months.
12
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
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 together, 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.
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 11,794 $ 13,970 $ 10,805 $ 13,979
Adjustments to net income:
Income tax expense 7,812 5 7,162 5
Net interest expense 12,783 7,781 23,218 15,605
Depreciation and amortization 14,349 8,506 26,121 16,660
-------- --------- --------- ---------
EBITDA 46,738 30,262 67,306 46,249
-------- --------- --------- ---------
Adjustments to EBITDA:
Net Membership Deposits 3,443 3,793 7,040 7,597
Excluded Membership Refunds - - 57 -
-------- --------- --------- ---------
Adjusted Net Membership Deposits 3,443 3,793 7,097 7,597
Non-cash items 139 53 209 189
-------- --------- --------- ---------
Adjusted EBITDA $ 50,320 $ 34,108 $ 74,612 $ 54,035
-------- --------- --------- ---------
-------- --------- --------- ---------
</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.
13
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
During the 1999 Six Months, cash flow provided by operating activities
was $44,312 compared to $13,017 for the 1998 Six Months. This change was
primarily due to increases in depreciation and amortization of $9,461;
increases in deferred income tax of $7,200; and decreases of $6,674 in trade
receivables and $7,255 in accrued interest payable. During the 1999 Six
Months, cash flow used in investing activities aggregated $133,383 for the
1999 Six Months as compared to $108,683 for the 1998 Six Months. This change
was primarily due to the Company's acquisition of the Grand Wailea Resort
Hotel & Spa comprising an investment of $105,149, the Company's investment in
real estate under development of $7,205, and an additional $11,741 in
purchases of property and equipment, during the 1999 Six Months. These
investments were offset by the purchase of the Claremont of $87,673 and of
golf facilities of $11,479 during the 1998 Six Months. Cash provided by
financing activities was $93,493 in the 1999 Six Months compared to $73,653
in the 1998 Six Months. This change is primarily attributable to capital
contributions of $110,000, offset by a decrease in net usage of the revolving
line of credit of $89,750.
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.
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 and completed a Y2K assessment
of all major, mission-critical systems. A few upgrades remain and will be
completed by November 30, 1999. The remaining systems include point of sale
software upgrades and two voice mail system replacements. Additionally,
non-computer system issues have been addressed. 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 over 80% complete in its
assessment of non-computer systems and is not expected to have material exposure
in this area.
14
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
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 from previous estimates 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 in place contingency plans to handle
worst case scenarios that the Company believes reasonably could occur. Those
systems involve primarily the property management, point of sale and
scheduling systems at the various properties. Departments at each property
regularly face situations in which portions of these contingency plans are
executed. Results from those situations are used to improve the plan.
Information systems staff at each property has been informed that they will
be expected to be on property during much of the New Year's holiday in order
to react to any unexpected events.
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.
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.
15
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
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 April 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. (a) Financial Data Schedule for the period ended April 30, 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.
16
<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: June 11, 1999 By: /s/ John K. Saer, Jr.
----------------------------------------
Vice President, Chief Financial Officer
and Treasurer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 9,670
<SECURITIES> 0
<RECEIVABLES> 29,079
<ALLOWANCES> 779
<INVENTORY> 13,003
<CURRENT-ASSETS> 74,978
<PP&E> 931,379
<DEPRECIATION> 113,485
<TOTAL-ASSETS> 1,168,782
<CURRENT-LIABILITIES> 61,553
<BONDS> 695,866
0
0
<COMMON> 0
<OTHER-SE> 311,978
<TOTAL-LIABILITY-AND-EQUITY> 1,168,782
<SALES> 63,580
<TOTAL-REVENUES> 211,251
<CGS> 19,692
<TOTAL-COSTS> 170,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 282
<INTEREST-EXPENSE> 24,613
<INCOME-PRETAX> 17,967
<INCOME-TAX> 7,162
<INCOME-CONTINUING> 10,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,805
<EPS-BASIC> 10,805
<EPS-DILUTED> 10,805
</TABLE>
