<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 July 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
-------
(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 10, 1999
1,000
Class
Common Stock, $0.01 par value
<PAGE>
KSL RECREATION GROUP, INC.
INDEX
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<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed consolidated statements of operations for the three and nine months ended July 31, 1999 and 1998 ...........3
Condensed consolidated balance sheets, July 31, 1999 and October 31, 1998.............................................4
Condensed consolidated statements of cash flows for the nine months ended July 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..........................12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................................17
Signatures..............................................................................................................18
</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 SHARE AND PER SHARE DATA) 1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Rooms $ 36,439 $ 18,670 $111,282 $ 63,473
Food and beverage 28,686 19,103 80,942 55,226
Golf fees 13,158 12,498 39,856 38,280
Dues and fees 8,208 7,796 23,564 21,066
Merchandise sales 5,082 3,455 16,406 13,219
Spa revenues 4,729 1,931 13,149 4,504
Other 13,309 10,630 35,065 28,114
Real estate 13,972 341 14,613 853
--------- --------- --------- ---------
Total revenues 123,583 74,424 334,877 224,735
EXPENSES:
Payroll and benefits 37,927 26,936 105,340 73,134
Cost of real estate 5,364 286 5,738 720
Other expenses 38,737 27,692 109,891 81,355
Depreciation and amortization 14,736 9,763 40,857 26,423
Corporate fee 2,582 2,465 7,747 6,381
--------- --------- --------- -------
Total operating expenses 99,346 67,142 269,573 188,013
--------- --------- --------- -------
INCOME FROM OPERATIONS 24,237 7,282 65,304 36,722
OTHER INCOME (EXPENSE):
Interest income 746 609 2,141 1,908
Interest expense (13,709) (9,615) (38,322) (26,519)
---------- ---------- ---------- ---------
Other expense, net (12,963) (9,006) (36,181) (24,611)
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES 11,274 (1,724) 29,123 12,111
MINORITY INTERESTS IN (INCOME) LOSS OF
SUBSIDIARY (19) (46) 99 103
---------- ---------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 11,255 (1,770) 29,222 12,214
INCOME TAX EXPENSE 4,485 70 11,647 75
--------- --------- --------- --------
NET INCOME (LOSS) $ 6,770 $ (1,840) $ 17,575 $ 12,139
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ 6,770 $ (1,840) $ 17,575 $ 12,139
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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, JULY 31, OCTOBER 31,
EXCEPT SHARE DATA) 1999 1998
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,914 $ 5,248
Restricted cash 8,524 1,743
Trade receivables, net of allowance for doubtful
receivables of $847 and $718, respectively 24,846 21,276
Inventories 13,171 10,085
Current portion of notes receivable 7,655 2,387
Prepaid expenses and other current assets 9,005 5,235
--------- ---------
Total current assets 81,115 45,974
REAL ESTATE UNDER DEVELOPMENT 16,192 7,245
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $124,732 and $95,466, respectively 824,756 509,170
NOTE RECEIVABLE FROM AFFILIATE 24,891 23,450
NOTES RECEIVABLE, less current portion 3,198 5,389
RESTRICTED CASH, less current portion 8,310 91
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $24,115 and $18,314, respectively 187,198 112,521
OTHER ASSETS, net 32,311 33,753
--------- ---------
$ 1,177,971 $ 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, JULY 31, OCTOBER 31,
EXCEPT SHARE DATA) 1999 1998
-------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,467 $ 9,615
Accrued liabilities 23,717 20,504
Accrued interest payable 5,277 945
Current portion of long-term debt 1,043 1,044
Current portion of obligations under capital leases 2,602 2,802
Customer and other deposits 14,801 7,007
Deferred income and other 7,114 1,871
--------- ---------
Total current liabilities 65,021 43,788
LONG-TERM DEBT, less current portion 649,365 403,950
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 36,230 34,416
OTHER LIABILITIES 1,589 1,414
MEMBERSHIP DEPOSITS 86,455 63,024
DEFERRED INCOME TAXES 20,253 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 316,713 197,535
Retained earnings (accumulated deficit) 2,345 (15,230)
--------- ----------
Total stockholder's equity 319,058 182,305
--------- ---------
$ 1,177,971 $ 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
NINE MONTHS ENDED
JULY 31,
(AMOUNTS IN THOUSANDS) 1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,575 $ 12,139
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 40,857 26,423
Amortization of debt issuance costs 748 722
Provision for losses on trade receivables 400 479
Deferred income taxes 11,675 --
Provision for losses on notes receivables -- 40
Minority interests in loss of subsidiary (118) (103)
Loss on sale of property and equipment, net 184 32
Gain on sales of land, net (8,309) --
Changes in operating assets and liabilities, net of effects from
investments in subsidiaries:
Restricted cash 2,839 (574)
Trade receivables (1,221) (2,477)
Inventories (1,721) (990)
Prepaid expenses and other current assets (3,732) (823)
Notes receivable (173) (253)
Other assets 22 (376)
Receivable from affiliates 211 (124)
Accounts payable (516) 587
Accrued liabilities 1,833 590
Accrued interest payable 3,185 (6,417)
Deferred income, customer deposits and other current liabilities 5,990 2,826
Other liabilities 175 173
--------- --------
Net cash provided by operating activities 69,904 31,874
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary, net of cash acquired (105,149) (87,899)
Acquisition of golf course facilities -- (11,479)
Purchases of property and equipment (39,623) (23,128)
Collections on member notes receivable 3,304 3,640
Notes receivable from affiliate, net (1,441) (1,331)
Investment in real estate under development (8,947) --
Proceeds from sales of land, net 9,125 --
Proceeds from sale of property and equipment 214 --
--------- --------
Net cash used in investing activities (142,517) (120,197)
</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
NINE MONTHS ENDED
JULY 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 (28,550) 62,600
Principal payments on long-term debt and obligations
under capital leases (3,184) (3,378)
Debt financing costs (81) (352)
Member deposits 9,921 10,010
Member refunds (2,827) (2,185)
---------- ---------
Net cash provided by financing activities 85,279 66,695
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 12,666 (21,628)
CASH AND CASH EQUIVALENTS, beginning of period 5,248 24,056
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 17,914 $ 2,428
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid (net of amounts capitalized) $ 33,241 $ 32,309
---------- ---------
---------- ---------
Income taxes paid $ 550 $ 504
---------- ---------
---------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 3,913 $ 1,320
Notes receivable issued for member deposits 8,006 5,919
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 9,178 --
Foreclosure on note receivable, golf course facility acquired 1,821 --
</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, equals comprehensive income (loss) as the Company does
not have any other items of comprehensive income (loss) 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 recognizes all derivatives as either assets or liabilities in the
statements of financial position and measures 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 nine months ended July 31 which assume the Grand Wailea and
The Claremont transactions occurred as of November 1, 1997:
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues $346,852 $310,444
Net income before income taxes 25,917 8,182
Net income 14,270 8,107
Net income per share 14,270 8,107
</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 $149,200 at July 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 July 31, 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 July 31, 1999 is $275,979.
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 July 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 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 are paid to the Company. As
of July 31, 1999, the aggregate balance of these accounts was approximately
$7,282 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 $9,178 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. REAL ESTATE TRANSACTION
On July 8, 1999, KSL Hotel Corp. ("Doral"), a wholly-owned indirect
subsidiary of the Company and owner of Doral Golf Resort and Spa, sold for cash
approximately ten acres of real property previously utilized by Doral as a
nine-hole, Par 3 golf course for a sales price of $9,500. After closing and
selling costs, the gain on sale is approximately $8,000.
During the nine month period ended July 31, 1999, a wholly-owned indirect
subsidiary of the Company, KSL Desert Resorts, Inc. ("Desert Resorts"), sold
nine single family detached units for $4,626. A total of ninety-seven single
family detached units are planned or under construction on this site, which is
adjacent to Desert Resorts' La Quinta Resort & Club in California. During the
nine month period ended July 31, 1999, marketing and project management expenses
of $1,700 have been incurred by Desert Resorts with an affiliate in connection
with this development.
10
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
(AMOUNTS IN THOUSANDS)
NOTE 6. SUBSEQUENT EVENTS
On August 9, 1999, the Company entered into a purchase and sale agreement
for the disposition of its community golf operations (located in Virginia,
Maryland, Pennsylvania, Florida, Tennessee, and Wisconsin) for approximately
$145,000, reduced by assumed long-term liabilities and adjusted by working
capital (as defined). The transaction is expected to close before November 1999.
11
<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, 1999 (1999 THIRD QUARTER) AS COMPARED TO THE
THREE MONTHS ENDED JULY 31, 1998 (1998 THIRD QUARTER).
REVENUES - Revenues increased by $49,159 or 66.1%, from $74,424 in the 1998
Third Quarter to $123,583 in the 1999 Third Quarter. Of this increase, $21,650
reflects the increase in revenues at operations owned in the 1998 Third Quarter.
Real estate operations contributed $13,631 of this increase, with resort and
golf operations adding $8,019, representing a 10.8% increase in 1999 Third
Quarter non-real estate revenues at these properties. The other $27,509 was
attributable to the acquisition of the Grand Wailea Resort Hotel & Spa (the
Addition), which occurred subsequent to the 1998 Third Quarter.
During the 1999 Third 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 Third Quarter
totaled $18,776, 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, and commencement of a
complete rebuild of the White golf course by Greg Norman; 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 $32,204, or 48.0%, from
$67,142 in the 1998 Third Quarter to $99,346 in the 1999 Third Quarter.
Approximately 65.3% of this increase, or $21,028, was due to the Addition.
Depreciation and amortization associated with the Addition totaled $3,980.
Approximately 15.8% of this increase, or $5,078 was associated with real estate
operations. Excluding the effect of real estate and the Addition, expenses of
operations increased 9.1% from the Third Quarter of 1998 to the Third Quarter of
1999.
NET INCOME - Net income increased by $8,610 from a net loss of $1,840 in
the 1998 Third Quarter to net income of $6,770 in the 1999 Third Quarter.
Interest expense increased by $4,094 or 42.6%, during the 1999 Third Quarter
due to the assumption of $275,000 of mortgage financing for the Grand Wailea
acquisition. Income tax expense increased by $4,415 from $70 in the 1998
Third Quarter to $4,485 in the 1999 Third Quarter. Excluding the Addition,
the Company's 1999 Third Quarter income before income taxes increased by
$13,776, from a loss of $1,770 in 1998 Third quarter to income of $12,006 in
1999 Third quarter. Excluding the Addition, the Company's 1999 Third Quarter
net income was $7,557, an increase of $9,397 as compared to the 1998 Third
Quarter, due to the factors discussed above. Net loss from the Addition in
the 1999 Third Quarter was $787.
ADJUSTED EBITDA - Adjusted EBITDA increased by $21,673 or 103.4%, from
$20,963 in the 1998 Third Quarter to $42,636 in the 1999 Third Quarter. Adjusted
Net Membership Deposits decreased by $374, or 9.7% from the 1998 Third Quarter.
12
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) (CONTINUED)
NINE MONTHS ENDED JULY 31, 1999 (1999 NINE MONTHS) AS COMPARED TO THE NINE
MONTHS ENDED JULY 31, 1998 (1998 NINE MONTHS).
REVENUES - Revenues increased by $110,142 or 49.0%, from $224,735 in the
1998 Nine Months to $334,877 in the 1999 Nine Months. Of this increase,
$25,506 reflects the increase in revenues at operations owned in the 1998
Nine Months. Real estate operations contributed $13,760 of this increase,
with resort and golf operations adding $11,746, which represents a 5.5%
increase in 1999 Nine Months non-real estate revenues at these properties.
The other $84,636 of the overall increase in revenues was attributable to the
acquisitions of The Claremont, the Grand Wailea Resort Hotel & Spa, and two
golf facilities (collectively, the Nine Month Additions).
During the 1999 Nine 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 equaled approximately $48,570 in the
1999 Nine Months and include: at Desert Resorts, the completion of a
twenty-three thousand square foot spa, the construction of a new golf course by
Greg Norman, 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 $81,560, or 43.4%, from
$188,013 in the 1998 Nine Months to $269,573 in the 1999 Nine Months.
Approximately 80.0% of this increase, or $65,280, was due to the Nine Month
Additions. Approximately 6.2% of this increase, or $5,018, was associated with
real estate operations. Depreciation and amortization associated with the Nine
Month Additions totaled $12,764. Corporate fees increased by $1,366, or 21.4%
due to expanded support in the retail, legal, and marketing functions. Excluding
the effect of real estate expenses and Nine Month Additions, expenses of
operations increased 6.3% from the Nine Months of 1998 to the Nine Months of
1999 due to expanded operations (such as spa, retail, and golf) resulting from
capital improvements.
NET INCOME - Net income increased by $5,436 from net income of $12,139 in
the 1998 Nine Months to net income of $17,575 in the 1999 Nine Months. Interest
expense increased by $11,803 or 44.5%, during the 1999 Nine 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 $75 to
$11,647. Excluding the Nine Month Additions, income before income taxes
increased by $18,256 or 149.5% from $12,211 in 1998 Nine Months to $30,467 in
1999 Nine Months. Excluding the Nine Month Additions, the Company's 1999 Nine
Months net income was $19,620, an increase of $7,484 as compared to the 1998
Nine Months, due to the factors discussed above. Net loss from the Nine Month
Additions in the 1999 Nine Months was $2,045.
ADJUSTED EBITDA - Adjusted EBITDA increased by $42,246 or 56.3%, from
$75,002 in the 1998 Third Quarter to $117,248 in the 1999 Third Quarter.
Adjusted Net Membership Deposits decreased by $876, or 7.6% from the 1998 Nine
Months.
13
<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, 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 NINE MONTHS ENDED
JULY 31, JULY 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 6,770 $ (1,840) $ 17,575 $ 12,139
Adjustments to net income (loss):
Income tax expense 4,485 70 11,647 75
Net interest expense 12,963 9,006 36,181 24,611
Depreciation and amortization 14,736 9,763 40,857 26,423
-------- -------- -------- --------
EBITDA 38,954 16,999 106,260 63,248
-------- -------- -------- --------
Adjustments to EBITDA:
Net Membership Deposits 3,358 3,866 10,398 11,465
Excluded Membership Refunds 134 -- 191 --
-------- -------- -------- --------
Adjusted Net Membership Deposits 3,492 3,866 10,589 11,465
Non-cash items 190 98 399 289
-- -- -- --
-------- -------- -------- --------
Adjusted EBITDA $ 42,636 $ 20,963 $ 117,248 $ 75,002
-------- -------- --------- --------
-------- -------- --------- --------
</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.
14
<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 Nine Months, cash flow provided by operating activities was
$69,904 compared to $31,874 for the 1998 Nine Months. This change was primarily
due to increases in depreciation and amortization of $14,434; increases in
deferred income tax of $11,675; and a decrease of $9,602 in accrued interest
payable. During the 1999 Nine Months, cash flow used in investing activities
aggregated $142,517 for the 1999 Nine Months as compared to $120,197 for the
1998 Nine 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 $8,947, an additional
$16,495 in purchases of property and equipment, and $9,125 of proceeds from land
sales, during the 1999 Nine Months. These investments were offset by the
purchase of The Claremont of $87,899 and of golf facilities of $11,479 during
the 1998 Nine Months. Cash provided by financing activities was $85,279 in the
1999 Nine Months compared to $66,695 in the 1998 Nine 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 $91,150.
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 one voice mail system replacement. 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 has completed its assessment of
non-computer systems and has no material exposure in this area.
15
<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. 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 periodically
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.
16
<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 July 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. (a) Financial Data Schedule for the period ended July 31, 1999.
(b) Reports on Form 8-K
None
17
<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, 1999 By: /s/ John K. Saer, Jr.
----------------------------
Vice President, Chief Financial Officer
and Treasurer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JULY 31, 1999. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 17,914
<SECURITIES> 0
<RECEIVABLES> 25,693
<ALLOWANCES> 847
<INVENTORY> 13,171
<CURRENT-ASSETS> 81,115
<PP&E> 949,488
<DEPRECIATION> 124,732
<TOTAL-ASSETS> 1,177,971
<CURRENT-LIABILITIES> 65,021
<BONDS> 685,595
0
0
<COMMON> 0
<OTHER-SE> 319,433
<TOTAL-LIABILITY-AND-EQUITY> 1,177,971
<SALES> 97,348
<TOTAL-REVENUES> 334,877
<CGS> 30,291
<TOTAL-COSTS> 269,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 400
<INTEREST-EXPENSE> 38,322
<INCOME-PRETAX> 29,222
<INCOME-TAX> 11,272
<INCOME-CONTINUING> 17,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,950
<EPS-BASIC> 17.950
<EPS-DILUTED> 17.950
</TABLE>
