--------------------------------------------------------------------------------
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, 2000.
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)
55-880 PGA Boulevard
La Quinta, California 92253
(Address of principal executive offices) (Zip Code)
760/564-8000
(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 13, 2000
1,000
Class
Common Stock, $0.01 par value
================================================================================
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
INDEX
--------------------------------------------------------------------------------------------------------------------------
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, 2000 and 1999 ...........3
Condensed consolidated balance sheets, July 31, 2000 and October 31, 1999.............................................4
Condensed consolidated statements of cash flows for the nine months ended July 31, 2000 and 1999......................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............................................................16
Item 6. Exhibits and Reports on Form 8-K...............................................................................16
Signatures..............................................................................................................17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the
three months ended nine months ended
(amounts in thousands, July 31, July 31,
except share and per share data) 2000 1999 2000 1999
------ ------ ----- ------
<S> <C> <C> <C> <C>
REVENUES:
Rooms $ 39,554 $ 36,439 $ 132,010 $ 111,341
Food and beverage 27,902 28,686 85,515 80,942
Golf fees 6,453 13,158 27,575 39,856
Dues and fees 5,390 8,208 15,762 23,564
Merchandise sales 4,614 5,082 17,043 16,406
Spa revenues 5,884 4,729 18,079 13,149
Other 17,933 14,326 48,165 37,629
Real estate sales 5,480 13,972 16,913 14,368
-------- --------- --------- ---------
Total revenues 113,210 124,600 361,062 337,255
EXPENSES:
Payroll and benefits 39,283 38,062 113,494 105,712
Cost of real estate 4,397 5,364 14,203 5,390
Other expenses 38,938 39,469 119,548 112,181
Depreciation and amortization 13,804 14,736 38,076 40,857
Corporate fee 2,555 2,582 7,665 7,747
-------- --------- --------- ---------
Total operating expenses 98,977 100,213 292,986 271,887
-------- --------- --------- ---------
INCOME FROM OPERATIONS 14,233 24,387 68,076 65,368
OTHER INCOME (EXPENSE):
Interest income 253 746 858 2,141
Interest expense (13,078) (13,709) (37,595) (38,322)
-------- --------- --------- ---------
Other expense, net (12,825) (12,963) (36,737) (36,181)
-------- --------- --------- ---------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES 1,408 11,424 31,339 29,187
MINORITY INTERESTS IN (INCOME)
LOSS OF SUBSIDIARY -- (19) -- 99
-------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,408 11,405 31,339 29,286
INCOME TAX EXPENSE 1,013 4,485 12,536 11,647
-------- --------- --------- ---------
NET INCOME $ 395 $ 6,920 $ 18,803 $ 17,639
======== ========= ========= =========
BASIC AND DILUTED EARNINGS
PER SHARE $ 395 $ 6,920 $ 18,803 $ 17,639
======== ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 1,000 1,000 1,000 1,000
======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands, July 31, October 31,
except share data) 2000 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,323 $ 9,369
Restricted cash 6,706 10,421
Trade receivables, net of allowance for doubtful
receivables of $835 and $712, respectively 26,559 21,855
Inventories 14,062 12,467
Current portion of notes receivable 9,523 4,015
Other receivables 2,462 6,048
Prepaid expenses and other current assets 5,182 6,116
------------- -------------
Total current assets 78,817 70,291
REAL ESTATE UNDER DEVELOPMENT 3,636 8,947
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $132,531 and $102,378, respectively 748,395 736,254
NOTES RECEIVABLE, less current portion 5,795 3,754
RESTRICTED CASH, less current portion 7,885 8,150
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED ENTITIES, net of accumulated
amortization of $26,572 and $22,863, respectively 102,069 105,775
OTHER ASSETS, net 88,728 92,897
------------- -------------
$ 1,035,325 $ 1,026,068
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (continued)
(amounts in thousands, July 31, October 31,
except share data) 2000 1999
------ ------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,155 $ 13,411
Income taxes payable 5,843 10,441
Accrued liabilities 28,030 28,572
Accrued interest payable 4,825 1,642
Current portion of long-term debt 1,000 1,000
Current portion of obligations under capital leases 1,068 1,303
Customer and other deposits 16,018 18,173
Deferred income and other 5,019 2,732
------------- -------------
Total current liabilities 67,958 77,274
LONG-TERM DEBT, less current portion 542,000 549,000
OBLIGATIONS UNDER CAPITAL LEASES,
less current portion 33,049 32,806
OTHER LIABILITIES 1,813 1,705
MEMBERSHIP DEPOSITS 117,915 92,187
DEFERRED INCOME TAXES 16,286 16,286
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 25,000 shares authorized,
1,000 outstanding -- --
Additional paid-in capital 256,304 256,810
Retained earnings -- --
------------- -------------
Total stockholder's equity 256,304 256,810
------------- -------------
$ 1,035,325 $ 1,026,068
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the
nine months ended
July 31,
(amounts in thousands) 2000 1999
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,803 $ 17,639
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 38,076 40,857
Amortization of debt issuance costs 762 748
Provision for losses on trade receivables 384 400
Deferred income taxes -- 11,675
Provision for losses on notes receivables 128 --
Minority interests in loss of subsidiary -- (118)
Loss on sale of property and equipment, net 247 184
Gain on sales of land, net -- (8,309)
Changes in operating assets and liabilities, net of effects from
investments in subsidiaries:
Restricted cash 3,980 2,839
Trade receivables (5,088) (1,221)
Inventories (1,595) (1,721)
Prepaid expenses and other current assets 4,520 (3,732)
Notes receivable 922 (173)
Other assets 27 22
Accounts payable (7,256) (516)
Accrued liabilities (542) 1,833
Income taxes payable (4,598) --
Accrued interest payable 3,183 3,185
Customer and other deposits (2,155) 958
Deferred income and other current liabilities 2,288 5,243
Other liabilities 108 175
--------- --------
Net cash provided by operating activities 52,194 69,968
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired -- (105,149)
Purchases of property and equipment (44,295) (39,623)
Collections on member notes receivable 4,930 3,304
Notes receivable from affiliate, net -- (1,441)
Proceeds from (investment in) real estate under development 5,311 (8,947)
Proceeds from sales of land, net 77 9,125
Proceeds from sale of property and equipment 655 214
--------- --------
Net cash used in investing activities (33,322) (142,517)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
KSL RECREATION GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (continued)
For the
nine months ended
July 31,
(amounts in thousands) 2000 1999
------ ------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Dividends and return of capital to) capital contributions from Parent $ (19,309) $ 110,000
Revolving line of credit, net (6,000) (28,550)
Principal payments on long-term debt and obligations
under capital leases (1,833) (3,184)
Debt financing costs -- (81)
Member deposits 19,046 9,921
Member refunds (5,822) (2,827)
---------- ---------
Net cash (used in) provided by financing activities (13,918) 85,279
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,954 12,730
CASH AND CASH EQUIVALENTS, beginning of period 9,369 5,248
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 14,323 $ 17,978
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid (net of amounts capitalized) $ 33,651 $ 33,241
========== =========
Income taxes paid $ 16,034 $ 550
========== =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases $ 841 $ 3,913
Notes receivable issued for member deposits 12,505 8,006
Note receivable issued for sales of assets 1,100 --
Assumption of debt of acquired properties -- 275,000
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.
<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)
are 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, 1999. 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 2000 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.
The Company has adopted AICPA Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities," effective November 1, 1999. The
adoption of SOP 98-5 did not have a material impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued Statements of Financial Accounting Standards
(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 is in the process of evaluating the adoption of this
standard, but does not believe that it will have a material effect on the
consolidated financial statements.
<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 779-room resort in Maui, Hawaii for
approximately $372,775 (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.
The following are the Company's unaudited consolidated results of
operations for the nine months ended July 31, 2000, compared to the pro forma
consolidated results of operations for the nine months ended July 31, 1999,
which assume the Grand Wailea transaction occurred as of November 1, 1998:
<TABLE>
<CAPTION>
(In thousands, except per share data)
2000 1999
<S> <C> <C>
Revenues $361,062 $349,230
Income before income taxes 31,339 25,981
Net income 18,803 14,334
Net income per share 18,803 14,334
</TABLE>
The unaudited pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place as of the beginning of
the fiscal periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
NOTE 3. Long-term Debt and Restricted Cash
The Company has a revolving credit line which currently allows maximum
borrowings of $257,320. The Company's outstanding borrowings under the revolving
credit line were $46,000 at July 31, 2000. Borrowings under the credit facility
bear interest at either Prime plus 0.125% or LIBOR plus 0.625% (approximately
7.25% at July 31, 2000). 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 and
other debt instruments at July 31, 2000.
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
agreements as of July 31, 2000 is $7,586.
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
(amounts in thousands)
NOTE 4. Real Estate and Other Transactions
During the nine month period ended July 31, 2000, the Company sold
twenty-six single family detached units (Casitas) for $16,811. Sixty-eight
Casitas have been completed and sold on a site adjacent to La Quinta Resort &
Club in California. A remaining thirty Casitas are planned on the site and are
currently under construction. During the nine month period ended July 31, 2000,
the Company incurred marketing and project management expenses of $1,074 to an
affiliate in connection with this development.
On September 30, 1999, the Company sold all of the common stock of its
indirectly wholly-owned subsidiary KSL Fairways Golf Corporation (Fairways Golf)
pursuant to a stock purchase agreement with a third party. Revenue and loss
before income taxes for Fairways Golf were approximately $35,802 and $2,832,
respectively, for the nine month period ended July 31, 1999.
NOTE 5. Segment Information
The Company's reportable operating segments include the Resort segment and
the Real Estate segment. The Resort segment provides service-based recreation
through resorts, spas, golf courses, private clubs and activities related
thereto. The Real Estate segment develops and sells real estate in and around
the Company's Resort operations. The Company utilizes the expertise of an
affiliate in determining real estate projects to undertake.
The Company evaluates segment performance based on income from operations.
Because the Company does not evaluate performance based on net income at the
operating segment level, the Company's other income and expenses and income
taxes are not tracked internally by segment. Therefore, such information is not
presented.
Operating segment information for the three and nine months ended July 31,
are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
July 31, July 31,
--------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Resort
Revenues $107,418 $120,115 $342,883 $332,369
Income from Operations 13,144 23,973 64,912 64,990
Real Estate
Revenues 5,792 4,485 18,179 4,886
Income from Operations 1,089 414 3,164 378
Consolidated
Revenues 113,210 124,600 361,062 337,255
Income from Operations 14,233 24,387 68,076 65,368
</TABLE>
The Real Estate segments' identifiable assets were $3,937 and $13,918 at
July 31, 2000 and October 31, 1999, respectively. All of the remaining assets of
the Company are related to the Resort segment, other than the deferred income
taxes which is considered a corporate asset and is not identifiable to either
segment. Substantially all of the depreciation and amortization expense relates
to the Resort segment.
<PAGE>
KSL RECREATION GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
(amounts in thousands)
NOTE 6. Dividends
In June 2000, the Company's Board of Directors declared a cash dividend
and return of capital of $19,309 to KSL Recreation Corporation ("Parent"), which
was paid in July 2000.
<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, 2000 ("2000 Third Quarter") as compared to the
three months ended July 31, 1999 ("1999 Third Quarter").
Revenues - Revenues decreased by $11,390 or 9.1%, from $124,600 in the 1999
Third Quarter to $113,210 in the 2000 Third Quarter. The decrease can be
attributed to the disposition of Fairways Golf (the "Disposition") on September
30, 1999. The disposition resulted in a decrease of $15,815 in revenue in the
2000 Third Quarter as compared to the 1999 Third Quarter. The decrease in
quarter over quarter revenue can also be attributed to lower real estate sales
in the 2000 Third Quarter. During this period real estate sales were $5,480 as
compared to $13,972 in the 1999 Third Quarter. (Real estate sales in the 1999
Third Quarter included the sale of a ten-acre parcel of land near the Doral
Resort and Spa for $9,500.) The revenue decreases from the disposition and lower
real estate sales were offset by increases of $12,917 or 13.6% at resort
operations owned in both the 2000 Third Quarter and the 1999 Third Quarter.
During the 2000 Third Quarter, the Company was engaged in ongoing capital
improvements at several of its resorts, which the Company believes will add to
future revenues. These capital improvements include: at Desert Resorts the
ongoing construction of the Casitas single family homes; at Doral, the
renovation of the White course by Greg Norman; and at the Claremont, the ongoing
construction of a new spa. While management believes these capital improvements
will enhance the guest experience and provide future revenue growth, their
short-term impact has included some disruption in normal business levels.
Expenses - Expenses of operations decreased by $1,236, or 1.2%, from
$100,213 in the 1999 Third Quarter to $98,977 in the 2000 Third Quarter.
Approximately $12,902 of expenses of operations in the 1999 Third Quarter were
associated with the Disposition. Continuing real estate operations accounted for
a decrease of $967 due primarily to the lower real estate sales discussed above.
Excluding the effect of real estate and the Disposition, expenses of resort
operations increased $12,613 or 15.5% primarily due to business volume and
expanded services from the 1999 Third Quarter to the 2000 Third Quarter.
Other Income (Expense) Other income (expense) decreased by $138 from net
expense of $12,963 for the 1999 Third Quarter to net expense of $12,825 for the
2000 Third Quarter. Interest expense decrease $1,788 related to the reduction of
debt from the Disposition. This decrease was offset by an increase in net
interest expense of $1,650 due primarily to higher interest rates on outstanding
borrowings on the Company's credit facility in the 2000 Third Quarter.
Net Income - Net income decreased by $6,525 from $6,920 in the 1999 Third
Quarter to $395 in the 2000 Third Quarter. Excluding the Disposition, the
Company's 2000 Third Quarter income before income taxes decreased $9,997 from
the 1999 Third Quarter. Income tax expense decreased by $3,472 from $4,485 for
the 1999 Second Quarter to $1,013 to the in the 2000 Third Quarter.
Adjusted EBITDA - Adjusted EBITDA decreased by $9,279 or 21.7%, from
$42,786 in the 1999 Third Quarter to $33,507 in the 2000 Third Quarter.
Adjusted EBITDA for the 1999 Third Quarter includes a gain of $8,000 on the
sale of a ten-acre parcel of land near the Doral Resort and Spa as well as
Adjusted EBITDA related to the Disposition of $4,956. Excluding these two
components. Adjusted EBITDA in the 2000 Third Quarter increased 12.3% from the
1999 Third Quarter. Adjusted Net Membership Deposits increased from $3,492 in
the 1999 Third Quarter to $5,092 in the 2000 third quarter, reflecting strong
membership growth at Desert Resorts and Grand Wailea.
<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, 2000 ("2000 Nine Months") as compared to the
nine months ended July 31, 1999 ("1999 Nine Months").
Revenues - Revenues increased by $23,807 or 7.1%, from $337,255 in the
1999 Nine Months to $361,062 in the 2000 Nine Months. Of this increase, $26,846
reflects the increase in revenues at operations owned during the 2000 Nine
Months and the 1999 Nine months, representing an 11.4% increase in the 2000 Nine
Months revenues at these properties; real estate sales accounted for $2,545 of
this increase over the 1999 Nine Months. (Real estate sales in the 1999 Nine
Months included the sale of a ten-acre parcel of land near the Doral Resort and
Spa for $9,500.) The remainder of the change in revenue is a $32,539 increase
attributable to the acquisition of the Grand Wailea Resort Hotel & Spa (the
"Addition") on December 28, 1998, offset by a decrease of $35,578 attributable
to the Disposition.
During the 2000 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 include: at Desert Resorts, the
completion of the Greg Norman golf course and the ongoing construction of the
Greg Norman clubhouse and ninety-eight Casita style resort homes adjacent to the
La Quinta Resort: at Doral, the completion of a member clubhouse and the
complete rebuild of the White golf course by Greg Norman; at The Claremont,
completion of extensive room and common area renovations and the ongoing
construction of a new spa; and at Grand Traverse and Lake Lanier, the completion
of substantial room renovations. While management believes these capital
improvements will enhance the guest experience and provide future revenue
growth, their short-term impact has included some disruption in normal business
levels.
Expenses - Expenses of operations increased by $21,099 or 7.8%, from
$271,887 in the 1999 Nine Months to $292,986 in the 2000 Nine Months. An
increase of approximately $23,492 was due to the Addition, offset by $32,687
associated with the Disposition. Real estate operations accounted for an
increase of $8,465 in operating expenses. Excluding the effect of the Addition,
Disposition and real estate, expenses of resort operations increased 16.1%,
primarily due to an increase in business volume and expanded services, from the
1999 Nine Months to the 2000 Nine Months.
Other Income (Expense) - Other income (expense) increased $556 from net
expense of $36,181 for the 1999 Nine Months to net expense of $36,737 for the
2000 Nine Months. Net interest expense increased $7,702 related to debt
associated with the Addition. This increase was offset by interest reductions of
$5,308 and $1,838 related to the reduction of debt from the Disposition and the
reduction of debt by the ongoing operations, respectively.
Net Income - Net income increased by $1,164 from net income of $17,639 in
the 1999 Nine Months to net income of $18,803 in the 2000 Nine Months. Income
tax expense increased from $11,647 to $12,536. Excluding the Addition and
Disposition, the Company's 2000 Nine Months net income was $19,568 an 8.9%
decrease as compared to the 1999 Nine Months.
Adjusted EBITDA - Adjusted EBITDA increased by $7,718 or 6.6%, from
$117,312 in the 1999 Nine Months to $125,030 in the 2000 Nine Months. Adjusted
EBITDA included a gain of $8,000 on the sale of a ten-acre parcel of land near
Doral Resort and Spa as well as Adjusted EBITDA related to the Disposition of
$9,101. Excluding these two components as well as the impact of the Addition,
Adjusted EBITDA in the 2000 Nine Months increased 13.6% from the 2000 Nine
Months. Adjusted Net Membership Deposits increased by $7,830, or 74.9% from the
1999 Nine Months.
<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.
<TABLE>
<CAPTION>
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
For the For the
Three Months ended Nine months ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 395 $ 6,920 $ 18,803 $ 17,639
Adjustments to net income (loss):
Income tax expense 1,013 4,485 12,536 11,647
Net interest expense 12,825 12,963 36,737 36,181
Depreciation and amortization 13,804 14,736 38,076 40,857
---------- ---------- --------- ---------
EBITDA 28,037 39,104 106,152 106,324
---------- ---------- --------- ---------
Adjustments to EBITDA:
Net Membership Deposits 4,982 3,358 18,154 10,398
Excluded Membership Refunds 110 134 265 191
---------- ---------- --------- ---------
Adjusted Net Membership Deposits 5,092 3,492 18,419 10,589
Non-cash items 378 190 459 399
---------- ---------- --------- ---------
Adjusted EBITDA $ 33,507 $ 42,786 $ 125,030 $ 117,312
========== ========== ========= =========
</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.
<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 2000 Nine Months, cash flow provided by operating activities
was $52,194 compared to $69,968 for the 1999 Nine Months. This change was
primarily due to decreases in deferred income taxes and income taxes payable of
$16,273, decreases in accounts payable of $6,740 and increases in accounts
receivable of $3,867; offset by decreases in prepaid expenses and other current
assets of $8,252. During the 2000 Nine Months, cash flow used in investing
activities aggregated $33,322 as compared to $142,517 for the 1999 Nine Months.
This change was primarily due to the Addition comprising a cash investment of
$105,149 in the 1999 Nine Months. The change in cash used in investing
activities can also be attributed to the Company's net proceeds of $5,311
related to real estate under development in the 2000 Nine Months compared to a
net investment of $8,947 in the 1999 Nine Months. In addition, the Company
invested $44,295 in property and equipment in the 2000 Nine Months compared to
$39,623 in the 1999 Nine Months. Cash used in financing activities was $13,918
in the 2000 Nine Months as compared to $85,279 of cash provided by financing
activities in the 1999 Nine Months. This change is primarily due to a capital
contribution of $110,000 associated with the purchase of Grand Wailea in the
1999 Nine Months. In the 2000 Nine Months, dividends and return of capital
totaling $19,309 were paid to the Parent. Additionally, borrowings under the
revolving credit facility were decreased by a net $6,000 in the 2000 Nine
Months. These cash uses were offset by a $19,046 increase in member deposits in
the 2000 Nine Months.
The Company believes that its liquidity, capital resources and cash flows
from existing operations will be sufficient to fund capital expenditures,
working capital requirements and interest and principal payments on its
indebtedness for the foreseeable future. The Company currently expects that it
will acquire additional resorts, golf facilities or other recreational
facilities, and in connection therewith, expects to incur additional
indebtedness. There can be no assurances that additional indebtedness or funding
will be available in the future.
<PAGE>
KSL RECREATION GROUP, INC.
ITEM 2. 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 July 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. (a) Financial Data Schedule for the period ended July 31, 2000.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the
quarter ended July 31, 2000, dated June 22, 2000, reporting the
declaration and payment of a cash dividend to KSL Recreation
Corporation.
<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, 2000 By: /s/ John K. Saer, Jr.
----------------------------------------
Vice President, Chief Financial Officer
and Treasurer
