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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT
OF 1934
For the fiscal yearended October 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
KSL RECREATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0747103
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
55-880 PGA Boulevard
LA QUINTA, CALIFORNIA 92253
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(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: 760-564-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: None
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, 1,000 shares (January 15, 2000)
DOCUMENTS INCORPORATED BY REFERENCE: None
1
INDEX
Page
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Part I.
Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 9
Item 3. Legal Proceedings.............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............................................ 9
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 10
Item 6. Selected Financial Data........................................................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11
Item 8. Financial Statements and Supplementary Data.................................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 36
Part III.
Item 10. Directors and Executive Officers............................................................... 36
Item 11. Executive Compensation......................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 43
Item 13. Certain Relationships and Related Transactions................................................. 44
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 46
2
PORTIONS OF THIS ANNUAL REPORT ON FORM 10-K INCLUDE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS, WHICH COULD CAUSE ACTUAL RESULTS TO MATERIALLY DIFFER FROM THOSE
PROJECTED OR IMPLIED. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND
OTHER FACTORS ARE DESCRIBED IN THIS ANNUAL REPORT.
PART I.
ITEM 1. BUSINESS
GENERAL
KSL Recreation Group, Inc. was incorporated on March 14, 1997, under
the laws of the State of Delaware. KSL Recreation Group, Inc., together with
its subsidiaries (the "Company"), is engaged in service-based recreation
through the ownership and management of resorts, spas, golf courses, private
clubs, and activities related thereto. The Company's operations currently
include: (i) La Quinta Resort & Club ("La Quinta") and PGA WEST ("PGA WEST"),
located in the Palm Springs, California area, which together, constitute the
Company's "Desert Resorts" operations; (ii) Doral Golf Resort and Spa
("Doral"), located near Miami, Florida; (iii) a hotel and recreational
complex known as Lake Lanier Islands ("Lake Lanier") located on Lake Lanier
near Atlanta, Georgia; (iv) Grand Traverse Resort & Spa ("Grand Traverse"),
located in the northwest portion of the lower peninsula of Michigan; (v) The
Claremont Resort & Spa ("The Claremont"), located near Berkeley, California
and (vi) the Grand Wailea Resort Hotel & Spa ("Grand Wailea"), located in
Maui, Hawaii. In September 1999, the Company sold its investment in KSL
Fairways ("Fairways"), which operated 24 golf facilities located in six
states. The Company is wholly owned by KSL Recreation Corporation ("Parent"),
a Delaware corporation incorporated on May 19, 1993, of which approximately
97.3% of the common stock as of October 31, 1999, (84.1% on a fully diluted
basis) is owned by partnerships formed at the direction of Kohlberg Kravis
Roberts & Co., L.P., an affiliate of Kohlberg Kravis Roberts & Co. Shortly
after the Company's formation in March 1997, the subsidiaries of the Parent
which owned Desert Resorts, Doral and Fairways, and managed Lake Lanier,
became wholly owned subsidiaries of the Company.
In December 1998, the Company, through a subsidiary, purchased
substantially all of the assets and certain liabilities of the Grand Wailea
Resort Hotel & Spa, a 779-room resort in Maui, Hawaii for approximately $373
million, including the assumption of approximately $275 million in mortgage
financing. (SEE GRAND WAILEA).
The Company's operations comprise numerous interrelated services,
including lodging, conference services, corporate and individual guest
hospitality programs and facilities, food and beverage, private and resort
golf operations, spas, club membership programs, entertainment, athletic
focused special events, and real estate development to facilitate
participation in the activities outlined above. For related segment
information, the resort and the real estate segments, see note 18 to the
consolidated financial statements.
DESERT RESORTS
Desert Resorts is located in La Quinta, California, a golf and
recreation destination located near Palm Springs, California. Since the
acquisition of Desert Resorts in December 1993, the Company has invested
approximately $73 million in facilities-related improvements, initiated measures
designed to enhance and expand the revenue base, and introduced numerous
operating efficiencies.
Desert Resorts includes La Quinta, formerly known as the La Quinta
Hotel, which opened in 1926. La Quinta currently offers 640 "casita"-style hotel
rooms (Spanish-style cottages) spread over approximately 45 acres of grounds,
featuring indigenous architecture and a campus-like setting, and caters to
corporate groups, individual guests and recreation enthusiasts. Desert Resorts
also includes PGA WEST, which together with La Quinta encompass approximately
1,490 acres, nine championship 18-hole golf courses, including the Greg Norman
course which opened in December 1999, six clubhouses, eight restaurants, 19,500
square feet of retail space, 42 hard, clay and grass tennis courts, 66,000
square feet of conference facilities, 25 swimming pools, 38 spas/hot tubs and
the 23,000 square foot Spa La Quinta which opened in late 1998 and includes 48
treatment rooms, a salon, retail store, and extensive spa programming.
Both La Quinta's and PGA WEST's private club operations provide golf and
tennis facilities, golf and tennis instruction, fitness facilities, special
events, and dining and social activities to their members. A full golf
membership at La Quinta currently requires a $75,000 deposit, which is fully
refundable in thirty years (or sooner under certain circumstances), and annual
golf dues of $5,940. A full golf membership at PGA WEST currently requires a
$80,000 deposit, which is fully refundable in thirty years (or sooner under
certain circumstances), and annual golf dues of $6,600.
In 1999, Desert Resorts sold 42 homes for approximately $24 million in
the first two phases of its development of ninety-seven single-family "casitas"
homes adjacent to La Quinta. The third phase of this development of luxury homes
is currently under construction, with a fourth phase anticipated to commence in
2000. This development is expected to represent a total investment by Desert
Resorts of approximately $52.5 million, of which $26.2 million was incurred
through October 31, 1999.
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DORAL
Doral is a golf destination resort located approximately fifteen miles
from downtown Miami, Florida and approximately ten miles from Miami
International Airport. Since the acquisition of Doral in December 1993, the
Company has invested approximately $67 million in capital improvements, has
broadened and improved the numerous revenue sources at the resort and has
introduced significant operating efficiencies.
Doral includes 645 hotel rooms, approximately 75,000 square feet of
conference space, approximately 15,100 square feet of retail space; five
championship 18-hole golf courses including the complete renovation of the White
golf course by Greg Norman; the "Blue Monster" golf course, the home of the
Doral Ryder Open; the Silver Course, which reopened in the fall of 1998 after
extensive renovation by golf professional and designer Jerry Pate; and the Gold
Course, which was also rebuilt under the direction of golf professional and
designer Raymond Floyd; the Doral Golf Learning Center, operated by noted
instructor Jim McLean; four restaurants; the Arthur Ashe Tennis Center,
featuring ten courts; the Blue Lagoon, a $7.3 million water feature and pool
facility which opened in August 1999 and a private club members' facility, which
is currently under construction.
Facilities at Doral also include the Spa at Doral, which includes 48
guest suites, approximately 85,000 square feet of fitness and spa facilities, 52
treatment rooms, three swimming pools, two saunas and one restaurant. The Spa
at Doral offers a variety of services, including personal fitness training,
massage therapy, health and beauty amenities, stress reduction and nutrition
training.
Members of Doral's private club are provided use of the resort's golf,
tennis and fitness facilities; golf and tennis instruction; special events;
dining and social activities. A full golf membership at Doral currently requires
a $22,000 deposit which is fully refundable in thirty years (or sooner under
certain circumstances), and annual dues of approximately $4,200.
In July 1999, Doral sold for cash approximately ten acres of real
property previously utilized as a nine-hole Par 3 golf course for a sales price
of $9.5 million. After closing and selling costs, the gain on the sale was
approximately $8 million.
LAKE LANIER
Lake Lanier is a regional destination resort and recreational complex
comprised of 1,041 acres located approximately 45 miles northeast of downtown
Atlanta. It is situated on Lake Lanier, an approximately 38,000-acre lake with
approximately 520 miles of shoreline and extensive lakeside primary and
secondary homes. It is subleased from a government agency of the State of
Georgia (which leases it from the U.S. Army Corps of Engineers) under a
fifty-year sublease commencing August 1997.
Lake Lanier features a 216-room hotel, 22,500 square feet of conference
space, three retail outlets, three restaurants, a swimming pool, a golf course,
three tennis courts, beach and water park facilities, a boat rental operation
including group boats, houseboats, and ski boats, a 2,000 seat outdoor
amphitheater, riding stables, campgrounds and pavilions and 30 two-bedroom lake
house rental units.
GRAND TRAVERSE
Grand Traverse is a regional destination resort located in the
northwest portion of the lower peninsula of Michigan, approximately six miles
from Traverse City, Michigan. The Resort covers approximately 1,370 acres,
and features a 426-room hotel, approximately 55,000 square feet of conference
space, three championship 18-hole golf courses, nine tennis courts, four
racquetball courts, three swimming pools, three restaurants, approximately
73,000 square feet of fitness facilities, approximately 23,000 square feet of
retail space and a private club operation. One of Grand Traverse's three
courses, "The Bear," was designed by golf professional and designer Jack
Nicklaus. The third championship 18-hole golf course, designed by
professional golfer and golf course designer Gary Player, opened in the
spring of 1999, with a 22,000 square foot golf clubhouse. Also during 1999,
Grand Traverse opened an 11,000 square foot spa and refurbished six retail
stores. Grand Traverse also operates a condominium-leasing program comprised
of approximately 234 rental units.
Grand Traverse's private club operation provides golf, tennis and
fitness facilities, sports instruction, special events, dining and social
activities to its members. A full golf membership at Grand Traverse currently
requires a $12,500 deposit which is fully refundable in thirty years (or sooner
under certain circumstances), and annual dues of approximately $2,100.
Currently Grand Traverse has approximately $1.7 million (book value) of
real estate held for sale or development. During fiscal 1999, Grand Traverse
sold approximately $600,000 of real estate.
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THE CLAREMONT
In April 1998, the Company acquired The Claremont, a historic
279-room hotel located near Berkeley, California. Located on approximately
twenty-two acres, its amenities include four restaurants, approximately
32,000 square feet of meeting space, a complete European style spa with 14
treatment rooms, two pools, ten tennis courts, and fitness facilities. During
1999 the Claremont began extensive room and common area renovations including
the expansion and relocation of its spa. The Claremont's private club
membership currently requires a $8,500 deposit, which is fully refundable in
thirty years (or sooner under certain circumstances), and annual dues ranging
from $2,760 to $3,780.
GRAND WAILEA
The Grand Wailea Resort Hotel & Spa, located in Maui, Hawaii is the
newest addition to the Company's portfolio. Acquired in December 1998, the
Grand Wailea offers an unmatched leisure and recreation experience. Nestled
on forty acres at the base of South Maui's Mount Haleakala, elaborate pools,
grottos and waterslides reflect its island surroundings. The resort features
779 luxury hotel rooms and guest suites, six restaurants, twenty-two banquet
and meeting rooms totaling 81,000 square feet, expansive water feature and
pool facilities, a wedding chapel, and a complete 50,000 square foot
European-style spa and fitness center, the largest of its kind in Hawaii.
Grand Wailea currently offers memberships which offer member
programs, room upgrade offers, and preferred room rates to its members.
Members are encouraged to plan their visits during the resort's low demand
periods based on reservation eligibility, black-out periods, special
activities and programming. These memberships currently require a $2,000
deposit, which is fully refundable in thirty years (or sooner under certain
circumstances), and annual dues of $100.
FAIRWAYS
In September 1999, the Company sold its investment in Fairways, which
was based in Manassas, Virginia and operated 24 golf course properties (22 of
which were owned and two of which were leased). These properties included
seventeen 18-hole golf courses, three 27-hole golf courses and four 36-hole golf
courses, comprising private, semi-private, and daily fee golf operations. The
Company divested Fairways in order to concentrate on its resort, spa and
golf club operations. The Company recognized a gain of approximately $22.4
million on the sale of Fairways.
MARKETING PROGRAMS
The Company attempts to position Desert Resorts, Doral, The Claremont
and Grand Wailea at the premium end of the specific markets in which they
compete. Lake Lanier is currently being positioned as an amenity-oriented,
regional resort setting for corporate and other groups seeking alternatives to
city-based conference centers, as a regional resort destination for individuals,
and as "Atlanta's Playground" for daily attractions and special events. Grand
Traverse is positioned as a regional resort for corporate groups and individuals
from the midwest.
To effectively position its operations, the Company's operating
subsidiaries use a number of marketing strategies and marketing channels. The
marketing function is largely decentralized to allow managers who are most
familiar with the guest or member population and with the specific property to
play an active role in developing the appropriate marketing strategy. The
Company uses a combination of print media, direct mail, internet, telemarketing,
local and national public relations, to develop market awareness and brand
positioning, and to market golf, lodging, memberships, food and beverage and
special events to targeted consumers. Although specific marketing activities are
largely decentralized, the Company's corporate office develops and implements
national marketing and promotional programs, controls trademarks and trademark
licensing agreements, engages public relations firms and advertising agencies,
coordinates communications with media sources, and develops video materials,
interactive CDs, and internet web sites. To promote the Company's properties to
corporations, associations and meeting managers, the Company has regional sales
offices in the following markets: greater New York City, New Jersey and
Connecticut; Washington, D.C.; Chicago, Illinois; and Atlanta, Georgia.
The Company opened regional sales offices in Los Angeles and San Francisco
during 1999.
CUSTOMERS
The Company's operations attract a broad range of customers. The
customers typically include frequent independent travelers ("FIT" guests),
corporate and other group participants as well as active users of recreational
services. At Desert Resorts, Doral and Grand Wailea, the customers are drawn
from an international, national and regional customer base and often exhibit the
higher spending patterns of affluent corporate and leisure travelers. Desert
Resorts' private clubs attract members and non-member guests on a national
scale, with higher
5
concentrations of customers from southern California. The private club at Doral
typically attracts local corporate and individual golf and fitness enthusiasts.
Lake Lanier draws customers from Georgia and the southeastern United
States. The hotel operations at Lake Lanier draw significant numbers of both
corporate and other group participants and FIT guests. Lake Lanier's other
facilities attract a mix of customers with a wide array of interests, including
active golfers and daily attraction users, such as boaters and water park
attendees.
Grand Traverse draws customers largely from Michigan and the Midwest.
Its customers include affluent FIT and corporate guests. Grand Traverse's
private club typically attracts local fitness and golf enthusiasts.
The Claremont draws customers largely from the San Francisco Bay area
and surrounding communities, including Silicon Valley. Its customers include
corporate groups, associations, and affluent FIT guests. The Claremont's private
club appeals to and attracts local spa and fitness enthusiasts.
CERTAIN FACTORS AFFECTING RESORTS AND GOLF COURSES
The Company currently operates golf courses and/or resorts in five
states, and may experience natural conditions, which are beyond its control
(such as periods of extraordinarily dry, wet, hot and cold weather, or
unforeseen natural events such as hurricanes, fires, floods, severe storms,
tornadoes or earthquakes). These conditions may occur at any time and may have a
significant impact on the condition and availability of its resort amenities and
room base.
Turf grass conditions must be satisfactory to attract play on the
Company's golf courses. Severe weather or other factors, including grass
diseases or pestilence, could cause unexpected problems with turf grass
conditions at any golf course or at courses located within the same geographic
area. Turf grass conditions at each of the Company's golf courses also depend to
a large extent on the quality and quantity of available water. The availability
of sufficient water is affected by various factors, many of which are not within
the Company's control. While the Company believes that it currently has
sufficient access to water to operate its golf courses in the manner in which
they are currently operated, there can be no assurance that certain conditions,
including weather, governmental regulation or environmental concerns, will not
materially adversely affect the supply of water to a particular golf course or
courses in the future.
CERTAIN UNINSURED RISKS
The Company currently carries comprehensive liability, fire, flood
(for certain resorts) and extended coverage insurance with respect to its
resorts and all of the golf courses owned or leased by it, with policy
specifications and insured limits and deductibles customarily carried for
similar properties. There are, however, certain types of losses (such as
those losses incurred as a result of earthquakes, which are of particular
concern with respect to Desert Resorts and The Claremont, or hurricanes,
which are of particular concern with respect to Doral and Grand Wailea) which
may be either uninsurable, only partially insurable or not economically
insurable. As a result, in the event of such a loss, the Company could lose
all or a significant portion of both its capital invested in, and anticipated
profits from, one or more of the Company's resorts and/or certain resort
amenities.
FACTORS AFFECTING RESORT VISITORS AND GOLF PARTICIPATION
The success of efforts to attract visitors to resorts is dependent upon
discretionary spending by consumers, which may be adversely affected by general
and regional economic conditions. In the case of the Company's resorts, the
regional economies of southern and northern California, south Florida, and the
states of Michigan, Georgia and Hawaii are significant to its operations,
although Desert Resorts, Doral and Grand Wailea attract customers from
throughout the United States and abroad. A decrease in tourism or in consumer
spending on travel and/or recreation could have an adverse effect on the
Company's business, financial condition and results of operations.
The success of efforts to attract and retain members at a private or
semi-private club are dependent upon discretionary spending by consumers, which
may be adversely affected by general and regional economic conditions. A
decrease in the number of golfers or their rates of participation or in consumer
spending on golf could have an adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The recreation industry is highly competitive. The Company's resorts
compete with other golf and recreation-based resorts. These include premier
independent resorts as well as national hotel chains. In addition, the Company's
resorts compete with other recreational businesses, such as cruise ships and
gaming casinos. The Company believes that it competes based on brand name
recognition, location, room rates and the quality of its services and amenities.
The number and quality of competing resorts and/or hotels
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in a particular area could have material effect on the Company's revenues. There
can be no assurance that the competition of competing facilities will not
adversely affect the Company's future financial performance.
Golf courses compete for players and members with other golf courses
located in the same geographic areas. The Company's golf courses compete based
on the overall quality of their facilities (including the quality of its
customer service), the maintenance of their facilities, available amenities,
location and overall value. The number and quality of golf courses in a
particular area could have a material effect on the revenue of any of the
Company's golf courses, which could in turn affect the Company's financial
performance and results of operations. There can be no assurance that continued
construction of competing facilities, or renewed or strong and sustained
interest in existing competing facilities, will not adversely affect the
Company's future financial performance.
SEASONALITY
The operations of some of the Company's properties are seasonal.
Primarily due to the popularity of Desert Resorts and Doral during the winter
and early spring months, approximately 60% of these properties' revenues are
recognized in the first two quarters of the fiscal year, while Lake Lanier and
Grand Traverse generate approximately 70% of their revenue during the summer and
fall months, thereby being recorded in the last two quarters of the fiscal year.
The Claremont and Grand Wailea generally reflect less seasonality in their
operations.
LICENSES AND TRADEMARKS
The Company is a party to the Professional Golfers' Association License
Agreement ("PGA License Agreement") pursuant to which it is permitted and
licensed to use the PGA WEST name and logos in sales, promotion, advertising,
development and/or operations of certain property located in the city of La
Quinta, California, known as "PGA WEST" (the "PGA WEST Property"). The PGA
License Agreement provides the Company with (i) the exclusive rights in the
United States to the name "PGA WEST" in connection with the PGA WEST Property
and (ii) the exclusive rights in the states of California and Arizona to the
names "PGA" and "PGA of America" in connection with the PGA WEST Property. The
term of the PGA License Agreement extends through the later of (i) the date on
which all of the residential units located on the PGA WEST Property have been
sold and (ii) the date on which the Company ceases to use the name "PGA WEST" in
the name of golf clubs, golf courses, hotels and/or any other commercial, office
or residential developments then located on the PGA WEST Property. The Company
believes that the PGA WEST logo is an important aspect of the Company's business
because of the prestige associated with the Professional Golfers' Association.
The PGA License Agreement provides for royalty payments on an annual basis
through 2005, although the exact amount of any royalty payments with respect to
the PGA mark will be determined by reference to the number and sales of
residential units in the PGA West community.
KSL Land Corporation and its subsidiaries ("KSL Land"), an affiliate
of the Company, has in the past made royalty payments attributable to sales
of residential units. Third party acquirors of land at PGA West have agreed
to make PGA royalty payments (through KSL Land) upon the closing of each
residential unit. KSL Land is expected to continue to pay the royalty
payments in the future; however, KSL Land has not agreed in writing to do so,
is not controlled by the Company and no assurance can be given that KSL Land
will pay any future royalty owing under the PGA License Agreement. Failure to
comply with the terms of the PGA License Agreement, including any failure to
pay royalties arising out of sales of residential units by KSL Land, could
result in the payment of monetary damages by the Company. Such occurrence
could have a material adverse effect on the Company.
The Company is also a licensee under a license agreement with the PGA
TOUR. The PGA TOUR license agreement provides the Company with the exclusive
rights to use the names "PGA TOUR" and "TPC" in connection with the sales,
promotion, marketing and operation of PGA WEST. The PGA TOUR agreement is
expected to terminate no earlier than January 1, 2006.
The Company owns the "Blue Monster" name and has an irrevocable,
perpetual license for the "Doral" name in connection with the Company's
operation, marketing and promotion of the facilities located at Doral. The
licensor of the Doral mark is prohibited from licensing the Doral mark for any
purpose anywhere in southern Florida, but retains the right to license the Doral
mark elsewhere. Although failure by the Company to comply with the terms of the
Doral license agreement could result in monetary damages, the licensor does not
have the right to terminate the Doral license agreement in the event of a breach
by the Company.
KSL Grand Wailea Resort, Inc. owns certain trademarks which are integral
to its business and operations. The most significant of these include Grand
Wailea Resort Hotel & Spa (words and design) and Spa Grande. Such trademarks are
currently registered in the State of Hawaii and applications for registration of
these trademarks have been filed in the United States Patent and Trademark
Office.
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EMPLOYEES
For the year ended October 31, 1999, the Company employed approximately
6,000 persons during its peak seasons and approximately 4,800 persons during its
off-peak seasons. In addition, Parent employs approximately 40 persons who
render services in connection with the Company's operations at its corporate
headquarters. The Company believes that its employee relations are good. Other
than at The Claremont and Grand Wailea, none of the Company's employees is
represented by a labor union. At The Claremont, three unions represent
approximately 51% of employees. Grand Wailea is currently negotiating a
collective bargaining agreement with the union representing 76% of Grand
Wailea's employees.
GOVERNMENTAL REGULATION
ENVIRONMENTAL MATTERS. Operations at the Company's facilities involve
the use and storage of various hazardous materials such as herbicides,
pesticides, fertilizers, batteries, solvents, motor oil and gasoline. Under
various federal, state and local laws, ordinances and regulations, an owner or
operator of real property may become liable for the costs of removing hazardous
substances that are released on or in its property and for remediation of its
property. Such laws often impose liability regardless of whether a property
owner or operator knew of, or was responsible for, the release of hazardous
materials. In addition, the failure to remediate contamination at a property may
adversely affect the ability of a property owner to sell such real estate or to
pledge such property as collateral for a loan. The Company believes that it is
in compliance in all material respects with applicable federal, state and local
environmental laws and regulations.
GENERAL. The Company is subject to the Fair Labor Standards Act and
various state laws governing such matters as minimum wage requirements, overtime
and other working conditions and citizenship requirements. Some of the Company's
resort and golf course employees receive the federal minimum wage and any
increase in the federal minimum wage would increase the Company's labor costs.
In addition, the Company is subject to certain state "dram-shop" laws, which
provide a person injured by an intoxicated individual the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated individual. The Company is also subject to the Americans with
Disabilities Act of 1990 and the Equal Employment Opportunity Act. The Company
believes it is operating in substantial compliance with applicable laws and
regulations governing its operations.
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ITEM 2. PROPERTIES
PROPERTIES CITY/STATE OWNED OR LEASED
Desert Resorts
La Quinta Resort & Club La Quinta, California Owned
PGA WEST La Quinta, California Owned
Doral Golf Resort and Spa Miami, Florida Owned
Lake Lanier Islands Resort Lake Lanier Islands, Georgia Leased
Grand Traverse Resort & Spa Acme, Michigan Owned
The Claremont Resort & Spa Berkeley, California Owned
Grand Wailea Resort Hotel & Spa Maui, Hawaii Owned
Descriptions of the Company's significant properties are provided in the
"Business" section. All properties are owned or leased by subsidiaries of the
Company. The corporate office is located in La Quinta, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings generally
incidental to its normal business activities. Management of the Company does
not believe that the outcome of any of these proceedings will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of
fiscal year 1999.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no market for the common stock of the Company or its
Parent.
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
1999(3) 1998(2) 1997(1) 1996 1995
------- ------- ------- ---- ----
Revenues ............................. $ 451,349 $ 296,270 $ 226,070 $ 182,249 $ 159,266
Net income (loss) .................... 23,332 14,114 (363) 19,741 (16,172)
Cash and cash equivalents ............ 9,369 5,248 24,056 9,329 10,112
Total assets ......................... 1,026,068 737,593 636,041 578,852 578,955
Debt and capital leases (including
current portion) .................. 584,109 442,212 366,020 271,436 324,604
Earnings (Loss) Per Share:
Before extraordinary item ........ $ 23,332 $ 14,114 $2,801 $ (12,379) $ (16,172)
Extraordinary gain (loss) ........ - - (3,164) 32,120 -
---------- ---------- ---------- ---------- ----------
Total Earnings (Loss) Per Share ...... $ 23,332 $ 14,114 $ (363) $ 19,741 $ (16,172)
========== ========== ========== ========== ==========
Weighted average number of common
shares and common share equivalents 1,000 1,000 1,000 1,000 1,000
========== ========== ========== ========== ==========
Other Data:
Net Membership Deposits (4) .......... $ 27,174 $ 17,544 $ 8,311 $ 4,391 $ 6,347
Adjusted Net Membership Deposits (5) . 19,054 17,544 8,311 4,391 234
Other non-cash and non-recurring items 2,371 1,820 563 873 885
Ratio of earnings to fixed charges (6) 1.7x 1.2x 1.1x - -
1) Full operations of Lake Lanier and Grand Traverse commenced in August 1997.
Accordingly, the Company's operating results for fiscal 1997 included
management fees for Lake Lanier through July, and approximately three months
of operations of both Lake Lanier and Grand Traverse.
2) The Claremont was acquired in April 1998. Accordingly, the Company's
operating results for fiscal 1998 include approximately six months of
operations for The Claremont.
3) Grand Wailea was acquired on December 28, 1998. Accordingly, the Company's
operating results for fiscal 1999 include approximately ten months of
operations for Grand Wailea. Includes a pretax gain of $22,393 from the
sale of a subsidiary. Fiscal 1999 also includes an increase from real
estate segment activity.
4) 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.
5) Adjusted Net Membership Deposits is defined as Net Membership Deposits,
excluding $6.1 million in fiscal 1995 and $8.3 million in fiscal 1999,
because these amounts were considered non-recurring in nature.
6) For purposes of these ratios, (i) earnings have been calculated by adding
interest expense, the estimated interest portion of rental expense, and
minority interests in losses of subsidiaries to earnings before income taxes
and extraordinary items and (ii) fixed charges are comprised of interest
expense and capitalized interest. The estimated interest portion of rental
expense was insignificant. Earnings for fiscal 1996 and 1995 were
insufficient to cover fixed charges by $12,980 and $17,014, respectively.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS DOCUMENT. DOLLAR AMOUNTS INCLUDED IN THIS SECTION ARE
IN THOUSANDS.
The Company generates revenues at Desert Resorts, Doral, Grand Traverse,
The Claremont and Grand Wailea from room revenues, greens fees (except for The
Claremont and Grand Wailea), food and beverage sales and, to a lesser extent,
membership dues, merchandise (pro shop and retail) sales, spa services and other
sources. Rooms revenue, water park and other daily recreation revenues, food and
beverage sales and to a lesser extent, golf fees, merchandise sales, and
admission fees drive revenues at Lake Lanier.
Revenues at Desert Resorts, Doral, Grand Traverse, The Claremont, and
Grand Wailea do not include Net Membership Deposits, which are 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
each case 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. These membership deposits are fully refundable in thirty years (or
sooner under certain circumstances). In accordance with generally accepted
accounting principles (GAAP), the Company accounts for membership deposits as
"cash provided from financing activities" in its statements of cash flows and
reports a liability in its balance sheets equal to the amount of such membership
deposits.
In addition to statements of operations data in accordance with GAAP,
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations" includes a discussion of the Company's Adjusted EBITDA, which is
defined as net income before income tax expense (benefit), net interest expense,
depreciation and amortization, loss on sale of facility, gain on sale of
subsidiary, extraordinary items, non-recurring charges and non-cash items, plus
Adjusted Net Membership Deposits. Adjusted Net Membership Deposits is defined as
Net Membership Deposits, excluding amounts which were paid in connection with
the initial conversion of members to new membership, and excluding Net
Membership Deposits (and subsequent refunds of such deposits) that are purchased
as part of an acquisition. 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 its 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 as 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 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.
11
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
1999 (3) 1998 (2) 1997 (1) 1996 1995
--------- -------- -------- ---- ----
Net income (loss) ....................... $ 23,332 $ 14,114 $ (363) $ 19,741 $ (16,172)
Adjustments to net income (loss):
Income tax expense (benefit) .......... 17,618 (6,997) 143 (82) -
Net interest expense .................. 48,665 33,125 30,037 27,711 18,492
Depreciation and amortization ......... 55,569 36,354 27,665 23,799 20,340
Extraordinary (gain) loss ............. - - 3,164 (32,120) -
--------- --------- --------- --------- ---------
EBITDA .................................. 145,184 76,596 60,646 39,049 22,660
Adjustments to EBITDA:
Net Membership Deposits (4) ........... 27,174 17,544 8,311 4,391 6,347
Excluded Membership Refunds ........... 194 - - - -
Excluded Conversion Membership Deposits (8,314) - - - (6,113)
--------- --------- --------- --------- ---------
Adjusted Net Membership Deposits (5) .. 19,054 17,544 8,311 4,391 234
Non-cash and non-recurring items ...... 2,371 1,820 563 873 885
Gain on sale of subsidiary ............ (22,393) - - - -
Loss on sale of golf facility ......... - - - - 2,684
--------- --------- --------- --------- ---------
Total Adjustments to EBITDA ............. (968) 19,364 8,874 5,264 3,803
--------- --------- --------- --------- ---------
ADJUSTED EBITDA ......................... $ 144,216 $ 95,960 $ 69,520 $ 44,313 $ 26,463
========= ========= ========= ========= =========
1) Full operations of Lake Lanier and Grand Traverse commenced in August 1997.
Accordingly, the Company's operating results for fiscal 1997 included
management fees for Lake Lanier through July, and approximately three months
of operations for both Lake Lanier and Grand Traverse.
2) The Claremont was acquired in April 1998. Accordingly, the Company's
operating results for fiscal 1998 include approximately six months of
operations for The Claremont.
3) Grand Wailea was acquired on December 28, 1998. Accordingly, the Company's
operating results for fiscal 1999 include approximately ten months of
operations for Grand Wailea.
4) 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.
5) Adjusted Net Membership Deposits is defined as Net Membership Deposits,
excluding $6.1 million in fiscal 1995 and $8.3 million in fiscal 1999,
because these amounts were considered non-recurring in nature.
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.
12
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
REVENUES. Revenues increased by $155,079, or 52%, from $296,270 in
fiscal 1998 to $451,349 in fiscal 1999. Rooms revenue increased by $61,665,
or 74%; food and beverage sales increased by $29,178, or 39%; dues and fees
increased by $1,886, or 7%; merchandise sales increased by $4,195, or 26%;
spa revenue increased by $10,616, or 160%; real estate sales increased by
$33,533 and other revenue increased by $13,943, or 38%. Of the total increase
in revenues, $48,206 reflects the increase in revenues at operations owned
for all of fiscal 1998 (collectively, "the Existing Properties"); real estate
operations contributed $33,533, with resort and golf operations adding
$14,673, representing a 5% increase in fiscal 1999 over fiscal 1998 for
resort and golf operations at the Existing Properties. The other $106,873
increase in revenues was attributable to the acquisition of The Claremont in
April 1998 and Grand Wailea in late December 1998 (collectively, the
"Additions"). Fairways, which was sold in September 1999, had revenues of
$45,207.
During fiscal 1999, 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 $64,019 in
fiscal 1999 and include: at Desert Resorts, 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 Grande 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.
While management believes these capital improvements will enhance the
guest experience and provide future revenue growth, their short-term impact
included some disruption in normal business levels and hence, dampened
revenue growth at these properties.
OPERATING EXPENSES. Operating expenses increased by $128,088, or 50%,
from $256,157 in fiscal 1998 to $384,245 in fiscal 1999. Operating expenses
(excluding depreciation and amortization and corporate fee) increased by
$107,823, or 51%, from $211,053 in fiscal 1998 to $318,876 in fiscal 1999. Of
this increase $71,715 is due to the Additions, $22,371 is due to real estate
operations, and the Existing Properties added $13,737 a 6% increase over
fiscal 1998 for the Existing Properties. Fairways, which was sold in
September 1999, had total operating expenses (excluding corporate fee) of
$42,581.
OPERATING INCOME. Operating income increased $26,991, or 67%, from
$40,113 in fiscal 1998 to $67,104 in fiscal 1999 as a result of the factors
discussed above.
NET INTEREST EXPENSE. Net interest expense increased by $15,540, or 46%
from $33,125 in fiscal 1998 to $48,665 in fiscal 1999. Of this increase $28,015
was attributable to the Additions, offset by a $12,475 reduction in the Existing
Properties due to reduced borrowings.
NET INCOME. Net income increased by $9,218 or 65% from $14,114 in
fiscal 1998 to $23,332 in fiscal 1999. Included in fiscal 1999 net income is
a $22,393 pre-tax gain from the sale of a subsidiary. Additionally, income
taxes changed from a $6,997 income tax benefit in fiscal 1998 (resulting
primarily from the reversal of valuation allowances) to $17,618 income tax
expense in fiscal 1999.
ADJUSTED EBITDA. Adjusted EBITDA increased by $48,256 or 50% from
$95,960 in fiscal 1998 to $144,216 in fiscal 1999 primarily due to the factors
described above and an increase in Adjusted Net Membership Deposits of $1,510,
or 8%, from $17,544 in fiscal 1998 to $19,054 in fiscal 1999.
13
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
REVENUES. Revenues increased by $70,200, or 31%, from $226,070 in
fiscal 1997 to $296,270 in fiscal 1998. Rooms revenue increased by $24,499,
or 41%; food and beverage sales increased by $20,108, or 37%; golf fees
increased by $5,888, or 14%; dues and fees increased by $3,890, or 16%;
merchandise sales increased by $1,863, or 13%; spa revenue increased by
$2,595, or 64%; and real estate and other revenue increased by $11,357, or
43%. Revenue increases at Desert Resorts and Doral equaled $9,367; adjusted
for a non-cash loss on the disposal of fixed assets associated with the
renovation of Doral's Silver Course, their revenue increases equaled $10,864.
Revenues at Fairways (excluding 1998 course acquisitions) were substantially
unchanged, largely reflecting adverse weather conditions experienced in 1998
at Fairways' clubs, most notably in central and northern Florida and the
Florida Panhandle. The Company's 1998 acquisitions added $23,333 in revenues,
while revenue increases at Grand Traverse and Lake Lanier equaled $37,821.
OPERATING EXPENSES. Operating expenses increased by $62,925, or 33%,
from $193,232 in fiscal 1997 to $256,157 in fiscal 1998. Operating expenses,
excluding depreciation and amortization, increased by $54,236, or 33%, from
$165,567 in fiscal 1997 to $219,803 in fiscal 1998, primarily from the full
fiscal year effect of Grand Traverse and Lake Lanier, as well as the
partial-year addition of The Claremont. Of those properties owned throughout
fiscal 1997, Desert Resorts' operating expenses increased 3%, Doral's operating
expenses increased less than 1%, and Fairways' operating expenses (excluding the
two golf course acquisitions) increased 4%. For the Company as a whole, the
primary components of the increase were (i) an increase in payroll and benefits
of $28,404, or 39%, from $71,935 in fiscal 1997 to $100,339 in fiscal 1998, of
which $22,655, or 80% of the total increase, reflected 1998 acquisitions and
year to year increases in those properties not owned for all of fiscal 1997,
(ii) an increase in other expenses of $22,188, or 25%, from $88,526 in fiscal
1997 to $110,714 in fiscal 1998, of which $22,824, or 103% of the increase
reflected 1998 acquisitions and the partial year effect of 1997 acquisitions,
and (iii) an increase in corporate fees of $3,644, or 71%, from $5,106 in fiscal
1997 to $8,750 in fiscal 1998, largely reflecting the partial year effect of the
Company's formation in 1997. As a percentage of revenues, operating expenses,
excluding depreciation and amortization, increased from 73% of revenues in
fiscal 1997 to 74% of revenues in fiscal 1998. Depreciation and amortization
increased by $8,689, or 31%, from $27,665 in fiscal 1997 to $36,354 in fiscal
1998. This increase was primarily attributable to the full-year addition of
Grand Traverse and Lake Lanier, and the partial-year addition of The Claremont.
OPERATING INCOME. Operating income increased $7,275, or 22%, from
$32,838 in fiscal 1997 to $40,113 in fiscal 1998 as a result of the factors
discussed above.
NET INTEREST EXPENSE. Net interest expense increased by $3,088, or 10%,
from $30,037 in fiscal 1997 to $33,125 in fiscal 1998. This increase was
primarily attributable to increased indebtedness of the Company due to
acquisitions, partially offset by interest income received on a note receivable
from an affiliate.
EXTRAORDINARY ITEMS. The Company incurred an extraordinary loss, net of
income tax benefits, on the early extinguishment of indebtedness of $3,164 in
fiscal 1997.
NET INCOME. Net income increased by $14,477, from a net loss of $363 in
fiscal 1997 to net income of $14,114 in fiscal 1998 as a result of the factors
described above. Excluding extraordinary items in 1997, net income would have
increased by $11,313, or 404%, from net income of $2,801 in fiscal 1997 to net
income of $14,114 in fiscal 1998.
ADJUSTED EBITDA. Adjusted EBITDA increased by $26,440, or 38%, from
$69,520 in fiscal 1997 to $95,960 in fiscal 1998. This increase was primarily
attributable to the factors described above and an increase in Adjusted Net
Membership Deposits of $9,233, or 111%, from $8,311 in fiscal 1997 to $17,544 in
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its capital and operating
requirements with a combination of operating cash flow, borrowings under its
credit facilities, and equity investments from its Parent. The Company has
utilized these sources of funds to make acquisitions, to fund significant
capital expenditures at its properties, to fund operations and to service debt
under its credit facilities. The Company presently expects to fund its future
capital and operating requirements at its existing operations through a
combination of borrowings under its credit facility and cash generated from
operations.
During fiscal 1999, cash flow provided by operating activities was
$83,152 compared to $33,820 for fiscal 1998 due primarily to (i) a $9,218
increase in net income, (ii) a $19,215 increase in depreciation and
amortization, (iii) a $14,793 increase in deferred income taxes (iv) an
increase in accrued liabilities and income taxes payable of $14,813, and (v)
a reduction of accrued interest payable of $8,754; offset by gains on the
sale of a subsidiary and land of $30,463 and the net effect of other changes
in operating accounts. During fiscal 1999, cash flow used in investing
activities was $1,521 as compared to $135,198, for fiscal 1998. This decrease
of $133,677 was primarily due to (i) $135,432 of proceeds from the sale of a
subsidiary and land, (ii) collection of the note receivable from affiliate of
14
$23,450, and (iii) increased collections on member notes of $2,862; offset by an
increase in investment in subsidiaries of $16,855 and increases in purchases
of property and equipment of $35,147. Cash used by financing activities was
$77,510 in fiscal 1999 as compared to cash provided from financing activities of
$82,570 in fiscal 1998. This decrease is primarily attributable (i) to a
decrease on the revolving line of credit of $125,750 in fiscal 1999 as compared
to borrowings on the revolving line of credit of $72,250 in fiscal 1998, (ii) a
capital contribution from Parent of $110,000 in fiscal 1999 with no contribution
in fiscal 1998, offset by a $68,005 capital distribution and dividend to Parent.
In April 1997, the Company sold $125,000 of senior subordinated
redeemable notes ("the Notes") and entered into a new credit facility providing
for term loans of up to $100,000 and a revolving credit line of up to $175,000.
The Notes are redeemable beginning May 2002 at the Company's option at various
rates ranging from 105.125% at May 2002, decreasing to 100% at May 2005 and
thereafter. The Company is required to offer to buy the Notes at 101% upon a
change of control, as defined in the Notes agreement.
The proceeds from the Notes, together with $100,000 of term loans under
the new credit facility and a $75,000 drawing under the revolving credit portion
of the new credit facility (collectively, "the Refinancings") were used on April
30, 1997, (i) to repay approximately $265,000 of outstanding indebtedness of the
Company, (ii) to make a loan of approximately $20,800 to KSL Land, which was
used to repay indebtedness of KSL Land with respect to which a subsidiary of the
Company was a co-obligor, (iii) to pay prepayment penalties and fees and
expenses incurred in connection with the Refinancings and (iv) for general
corporate purposes.
In December 1998, the Company, through a subsidiary, purchased
substantially all of the assets and certain liabilities of the Grand Wailea
Resort Hotel & Spa, a 779-room resort in Maui, Hawaii for approximately
$372,775, including the assumption of approximately $275,000 in mortgage
financing. The acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the debt assumed, acquisition
related costs, and working capital were funded with an $110,000 equity
investment by the Parent in the Company.
In September 1999, the Company sold all of the common stock of KSL
Fairways Golf Corporation, an indirectly wholly-owned subsidiary which
operated 24 golf course properties for $133,200. The gain on sale of the
subsidiary was $22,393.
The Company is continually engaged in evaluating potential acquisition
candidates to add to its portfolio of properties. The Company expects that
funding for future acquisitions may come from a variety of sources, depending on
the size and nature of any such acquisitions. Potential sources of capital
include cash generated from operations, borrowings under the credit facility,
additional equity investments from Parent or partnerships formed at the
direction of KKR, or other external debt or equity financings. There can be no
assurance that such additional capital sources will be available to the Company
on terms which the Company finds acceptable, or be available at all.
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. However, a variety of factors could
impact the Company's ability to fund capital expenditures, working capital
requirements and interest and principal payments, including a prolonged or
severe economic recession in the United States, departures from currently
expected demographic trends (for example, if the total number of golf rounds
played and golf spending are not as great as currently anticipated) or the
Company's inability to achieve operating improvements at existing and acquired
operations at currently expected levels. Moreover, 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. In the event that the Company incurs such additional indebtedness,
its ability to make principal and interest payments on its indebtedness,
including the Notes, may be adversely impacted.
The Company believes that inflation does not materially impact its
business operations.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognizes all derivatives as
either assets or liabilities in the statements of financial position and
measures those instruments at fair value. The Company has not completed the
process of evaluating the impact that will result from adopting SFAS No. 133,
which is required in fiscal 2001.
OTHER MATTERS
The Company believes that its modifications or replacements of computer
equipment and software were completed on a timely basis so as to avoid potential
year-2000 related disruptions or malfunctions it had identified. As of January
26, 2000, the Company has experienced no significant year 2000-related operating
difficulties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's most significant "market risk" exposure is the effect of
changing interest rates. The Company manages its interest expense by using a
combination of fixed and variable rate debt and interest rate cap and swap
agreements. At October 31, 1999, the Company's debt consisted of approximately
$125 million of fixed rate debt at a weighted average interest rate of
10.25% and $425 million of variable rate debt at a weighted average interest
rate of 8.06%. The amount of variable rate debt fluctuates during the year
based on the Company's cash requirements. If interest rates were to increase
one eighth of one percent at October 31, 1999, the net impact on the
Company's pre-tax earnings would be approximately $68 thousand.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
KSL Recreation Group, Inc.
We have audited the accompanying consolidated balance sheets of KSL
Recreation Group, Inc. and subsidiaries (the Company) (a wholly-owned
subsidiary of KSL Recreation Corporation) as of October 31, 1999 and 1998,
and the related consolidated statements of operations, stockholder's equity
and cash flows for each of the three years in the period ended October 31,
1999. Our audits also included the financial statement schedule listed in the
index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KSL
Recreation Group, Inc. and subsidiaries as of October 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Costa Mesa, California
January 29, 2000
16
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
REVENUES:
Rooms ................................................. $145,557 $ 83,892 $ 59,393
Food and beverage ..................................... 103,884 74,706 54,598
Golf fees ............................................. 48,592 48,529 42,641
Dues and fees ......................................... 30,602 28,716 24,826
Merchandise ........................................... 20,495 16,300 14,437
Spa ................................................... 17,255 6,639 4,044
Real estate (Note 12) ................................ 34,416 887 493
Other ................................................. 50,548 36,601 25,638
--------- --------- ---------
Total revenues ..................................... 451,349 296,270 226,070
EXPENSES:
Cost of real estate ................................... 23,117 803 67
Payroll and benefits .................................. 143,507 100,339 71,935
Other expenses ........................................ 152,252 109,911 88,459
Depreciation and amortization ......................... 55,569 36,354 27,665
Corporate fee (Note 14) ............................... 9,800 8,750 5,106
--------- --------- ---------
Total operating expenses ........................... 384,245 256,157 193,232
--------- --------- ---------
INCOME FROM OPERATIONS ................................ 67,104 40,113 32,838
OTHER INCOME (EXPENSE):
Gain on sale of subsidiary (Note 16) .................. 22,393 - -
Interest income (Notes 3 and 14) ...................... 3,114 2,527 1,672
Interest expense ...................................... (51,779) (35,652) (31,709)
--------- --------- ---------
Other expense, net ................................. (26,272) (33,125) (30,037)
INCOME BEFORE MINORITY INTERESTS, INCOME TAXES, AND
EXTRAORDINARY ITEM ................................. 40,832 6,988 2,801
MINORITY INTERESTS IN LOSSES OF SUBSIDIARY ............ 118 129 143
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................................ 40,950 7,117 2,944
INCOME TAX EXPENSE (BENEFIT) (Note 9) ................. 17,618 (6,997) 143
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM ...................... 23,332 14,114 2,801
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT (net
of income tax benefit of $2,007) (Note 13) ......... - - (3,164)
--------- --------- ---------
NET INCOME (LOSS) ..................................... $ 23,332 $ 14,114 $ (363)
========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Before extraordinary item ............................. $ 23,332 $ 14,114 $ 2,801
Extraordinary (loss) .................................. - - (3,164)
--------- --------- ---------
TOTAL BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note
10) ................................................ $ 23,332 $ 14,114 $ (363)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES .............. 1,000 1,000 1,000
========= ========= =========
See accompanying notes to consolidated financial statements.
17
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1999 AND 1998
(In thousands, except share data)
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 9,369 $ 5,248
Restricted cash (Note 7) ......................................... 10,421 1,743
Trade receivables, net of allowance for doubtful receivables of
$712 and $718 respectively ....................................... 21,855 21,276
Inventories (Note 4) ............................................. 12,467 10,085
Current portion of notes receivable (Note 3) ..................... 4,015 2,387
Other receivables (Notes 12 and 19) .............................. 6,048 1,825
Prepaid expenses and other current assets......................... 4,593 2,418
Deferred income taxes (Note 9) ................................... 1,523 992
---------- ----------
Total current assets ......................................... 70,291 45,974
REAL ESTATE UNDER DEVELOPMENT (Note 14) ............................... 8,947 9,074
PROPERTY AND EQUIPMENT, net (Notes 5, 7 and 8) ........................ 736,254 507,452
NOTES RECEIVABLE FROM AFFILIATES (Note 14) ............................ - 23,450
NOTES RECEIVABLE, less current portion (Notes 3 and 16) ............... 3,754 5,389
RESTRICTED CASH, less current portion (Note 7) ........................ 8,150 91
EXCESS OF COST OVER NET ASSETS OF ACQUIRED ENTITIES, net of
accumulated amortization of $22,863 and $18,314 , respectively ... 105,775 112,521
OTHER ASSETS, net (Note 6) ............................................ 92,897 33,642
---------- ----------
$1,026,068 $ 737,593
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 13,411 $ 9,615
Income taxes payable (Note 9) .................................... 10,441 882
Accrued liabilities .............................................. 28,572 19,622
Accrued interest payable ......................................... 1,642 945
Current portion of long-term debt (Note 7) ....................... 1,000 1,044
Current portion of obligations under capital leases (Note 8) ..... 1,303 2,802
Customer and other deposits ...................................... 18,173 7,007
Deferred income and other ........................................ 2,732 1,871
---------- ----------
Total current liabilities .................................... 77,274 43,788
LONG-TERM DEBT, less current portion (Note 7) ......................... 549,000 403,950
OBLIGATIONS UNDER CAPITAL LEASES, less current portion (Note 8) ....... 32,806 34,416
OTHER LIABILITIES ..................................................... 1,705 1,414
MEMBER DEPOSITS ....................................................... 92,187 63,024
DEFERRED INCOME TAXES (Note 9) ........................................ 16,286 8,578
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY (Note 1 and 16) ............ - 118
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY (Note 10):
Common stock, $.01 par value, 25,000 shares authorized, 1,000
outstanding .................................................. - -
Additional paid-in capital ....................................... 256,810 197,535
Accumulated deficit .............................................. - (15,230)
---------- ----------
Total stockholder's equity ................................... 256,810 182,305
---------- ----------
$1,026,068 $ 737,593
========== ==========
See accompanying notes to consolidated financial statements.
18
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(In thousands)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----- ------- ------- -----
BALANCE October 31, 1996 ............... $ - $ 227,424 $ (5,060) $ 222,364
Capital contributions (Note 10) ........ - 9,144 - 9,144
Dividends (Note 10) .................... - - (23,921) (23,921)
Capital distributions (Note 10) ........ - (39,033) - (39,033)
Net loss ............................... - - (363) (363)
--------- --------- --------- ---------
BALANCE October 31, 1997 ............... - 197,535 (29,344) 168,191
Net income ............................. - - 14,114 14,114
--------- --------- --------- ---------
BALANCE, October 31, 1998 .............. - 197,535 (15,230) 182,305
Capital contributions (Note 10) ........ - 119,178 - 119,178
Dividends (Note 10) .................... - (8,102) (8,102)
Capital distributions (Note 10) ........ - (59,903) - (59,903)
Net income ............................. - - 23,332 23,332
--------- --------- --------- ---------
BALANCE, October 31, 1999 .............. $ - $ 256,810 $ - $ 256,810
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
19
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ 23,332 $ 14,114 $ (363)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................................ 55,569 36,354 27,665
Amortization of debt issuance costs .......................................... 1,010 969 1,720
Extraordinary loss on debt extinguishment .................................... - - 5,171
Deferred income taxes ........................................................ 7,177 (7,616) (1,558)
Provision for losses on trade receivables .................................... 615 495 1,193
Minority interests in losses of subsidiary ................................... (118) (129) (143)
Gain on sales of land ........................................................ (8,070) - -
Gain on sale of subsidiary ................................................... (22,393) - -
Loss (Gain) on sales and disposals of property, net .......................... 2,095 1,483 (141)
Changes in operating assets and liabilities, net of effects from investment in
subsidiaries:
Restricted cash .......................................................... 1,102 162 11,910
Trade receivables ........................................................ 1,552 (7,337) 1,901
Inventories .............................................................. (1,017) (1,447) 386
Prepaid expenses and other receivables ................................... (6,361) (407) 1,813
Notes receivable ......................................................... (1,605) 68 347
Receivable from Parent ................................................... - - 43,442
Receivables from affiliates .............................................. - - 3,004
Other assets ............................................................. 5,676 (760) (542)
Accounts payable ......................................................... 2,428 2,667 (532)
Accrued liabilities and income taxes payable ............................. 17,130 2,317 (2,433)
Accrued interest payable ................................................. (450) (9,204) 7,435
Deferred income, customer deposits and other ............................. 5,189 1,845 (453)
Other liabilities ........................................................ 291 246 282
--------- --------- ---------
Net cash provided by operating activities ............................. 83,152 33,820 100,104
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired .............................. (105,150) (88,265) (58,575)
Purchases of property and equipment .......................................... (63,712) (32,282) (12,135)
Notes receivable from affiliate, net ......................................... 23,450 (1,797) (21,653)
Investment in real estate under development .................................. (307) (7,184) -
Acquisition of golf course facilities ........................................ - (11,448) -
Proceeds from sales of property and equipment ................................ 126 - 277
Collections on member notes receivable ....................................... 8,640 5,778 3,704
Net proceeds from sale of subsidiary ......................................... 126,639 - -
Net proceeds from sale of land ............................................... 8,793 - -
Investment in partnerships ................................................... - - (515)
Proceeds from sale of investment in partnership............................... - - 1,621
--------- --------- ---------
Net cash used in investing activities ................................. (1,521) (135,198) (87,276)
See accompanying notes to consolidated financial statements.
20
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 (CONTINUED)
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance .......................... $ - $ - $ 300,362
Revolving line of credit, net ........................ (125,750) 75,250 27,500
Principal payments on long-term debt and obligations
under capital leases............................... (3,895) (4,092) (268,081)
Member deposits ...................................... 14,165 14,347 6,371
Membership refunds ................................... (3,944) (2,581) (1,763)
Capital contributions from Parent .................... 110,000 - 9,144
Capital distributions and dividends to Parent ........ (68,005) - (60,799)
Debt financing costs ................................. (81) (354) (10,835)
--------- --------- ---------
Net cash (used in) provided by financing activities .. (77,510) 82,570 1,899
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................... 4,121 (18,808) 14,727
CASH AND CASH EQUIVALENTS, beginning of period ....... 5,248 24,056 9,329
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period ............. $ 9,369 $ 5,248 $ 24,056
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of amounts capitalized) ....... $ 54,501 $ 43,887 $ 22,555
========= ========= =========
Income taxes paid ................................ $ 925 $ 1,123 $ 424
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases ..................... $ 3,997 $ 2,927 $ 35,154
Notes receivable issued for member deposits .......... 10,610 6,499 5,210
Assumption of debt of acquired properties ............ 275,000 3,261 -
Capital contribution of minority interest from Parent 9,178 - -
Golf course received in lieu of foreclosure .......... 1,576 - -
Trade-in of equipment under capital lease ............ 517 1,154 -
Notes receivable issued from sale of assets .......... 625 - 412
Development of golf course from undeveloped land ..... 3,717 - -
Dividend to Parent of investments in partnerships .... - - 2,155
See accompanying notes to consolidated financial statements.
21
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1. GENERAL
KSL Recreation Group, Inc. (Group), is a wholly-owned subsidiary of KSL
Recreation Corporation (the Parent). Group and its subsidiaries (collectively,
the Company) are engaged in the ownership and management of resorts, golf
courses, private clubs, spas and activities related thereto. At the completion
of certain financing transactions (as described in Note 7) on April 30, 1997,
KSL Desert Resorts, Inc. (previously KSL Landmark Corporation), KSL Florida
Holdings, Inc., KSL Georgia Holdings, Inc. and KSL Golf Holdings, Inc. became
wholly-owned subsidiaries of Group in a transaction accounted for in a manner
similar to a pooling of interests. Prior to April 30, 1997, these subsidiaries
were wholly-owned by the Parent.
On October 31, 1997, certain wholly-owned subsidiaries of the Parent,
KSL Travel, Inc. (KTI), KSL Vacation Resorts, Inc. (VRI) and Wild West Desert
Properties, Inc. (Wild West), became wholly-owned subsidiaries of Group in a
transaction accounted for in a manner similar to a pooling of interests. The
accompanying consolidated financial statements have been restated to reflect
this transaction. The effects on income before extraordinary item, net income
(loss) and related per share amounts were not material.
As of October 31, 1999, the Company has six principal wholly-owned
investments: (1) KSL Florida Holdings, Inc. (Doral), a Delaware corporation; (2)
KSL Desert Resorts, Inc. (Desert Resorts), a Delaware corporation; (3) KSL
Georgia Holdings, Inc. (Lake Lanier), a Delaware corporation; (4) KSL Grand
Traverse Holdings, Inc. (Grand Traverse), a Delaware Corporation; (5) KSL
Claremont Resort, Inc. (The Claremont), a Delaware corporation; and (6) KSL
Grand Wailea Resort, Inc. (Grand Wailea), a Delaware Corporation. Doral owns and
operates the Doral Golf Resort and Spa in Miami, Florida. Desert Resorts owns
and operates the PGA WEST golf courses, the La Quinta Resort & Club and related
activities in La Quinta, California. Lake Lanier leases and manages a resort
recreation area known as Lake Lanier, outside of Atlanta, Georgia. Grand
Traverse owns and operates the Grand Traverse Resort & Spa and related
activities outside of Traverse City, Michigan. The Claremont owns and operates
The Claremont Resort & Spa and related activities in the Berkeley Hills area
near San Francisco, California (Note 15). Grand Wailea owns and operates the
Grand Wailea Resort Hotel & Spa in Maui, Hawaii (Note 15).
In December 1998, the Company, through a wholly-owned subsidiary,
acquired substantially all the assets and certain liabilities of 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. (Notes 7 and 15).
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. The Company owned
100% of Fairways Golf, which in turn owned an approximate 95.8% majority
interest in the Fairways Group L.P., (TFG L.P.). TFG L.P. and Fairways Golf
operated 24 golf facilities, 22 of which were owned, principally in the
mid-Atlantic, southeast and mid-western United States. The Company recognized a
gain of approximately $22,393 (Note 16).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION- The consolidated financial statements include
the accounts of Group and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in the accompanying
consolidated financial statements.
CASH EQUIVALENTS- The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
RESTRICTED CASH- Certain cash balances are restricted primarily to uses
for debt service, capital expenditures, real estate taxes, insurance payments,
membership deposits and letters of credit required for construction in progress
(Note 7).
INVENTORIES- Inventories are stated primarily at the lower of cost,
determined on the weighted average method, or market. Base stock consisting of
china, silver, glassware and linens is recorded using the base stock inventory
method.
REAL ESTATE UNDER DEVELOPMENT- All direct and indirect land costs,
offsite and onsite improvements, and applicable interest and carrying costs are
capitalized to real estate under development. Capitalized costs are included in
real estate under development and
22
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
expensed as real estate is sold; marketing costs are expensed in the period
incurred. Land and land development costs are accumulated by project and are
allocated to individual residential units, principally using the relative sales
value method. Profit from sales of residential units is recognized upon closing
using the full accrual method of accounting, provided that all the requirements
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 66,
"Accounting for Sales of Real Estate", have been met.
PROPERTY AND EQUIPMENT- Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Generally, the estimated useful lives are 15
to 40 years for buildings and improvements and 3 to 10 years for furniture,
fixtures and equipment. Improvements are capitalized while maintenance and
repairs are charged to expense as incurred. Assets under capital leases are
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets. Depreciation of assets under capital
leases is included in depreciation and amortization expense in the accompanying
consolidated statements of operations.
LONG-LIVED ASSETS- Management reviews real estate and other long-lived
assets, including certain identifiable intangibles and goodwill, for possible
impairment whenever events or circumstances indicate the carrying amount of an
asset may not be recoverable. If there is an indication of impairment,
management prepares an estimate of future cash flows (undiscounted and without
interest charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows are less than the carrying amount of the asset,
an impairment loss is recognized to write down the asset to its estimated fair
value. The fair value is estimated at the present value of future cash flows
discounted at a rate commensurate with management's estimate of the business
risks. Real estate assets, if any, for which management has committed to a plan
to dispose of the assets, whether by sale or abandonment, are reported at the
lower of carrying amount or fair value less cost to sell. Preparation of
estimated expected future cash flows is inherently subjective and is based on
management's best estimate of assumptions concerning expected future conditions.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED ENTITIES- The excess of the
cost over the fair value of acquired entities (goodwill) is capitalized and
amortized on a straight-line basis over 15 to 30 years. Amortization expense
related to goodwill was approximately $5,253, $4,558 and $3,749 for fiscal years
1999, 1998 and 1997, respectively. The Company periodically evaluates the
recoverability of goodwill by comparing the carrying value of goodwill to
undiscounted estimated future cash flows from related operations.
DEBT ISSUE COST- Debt issue costs are amortized over the life of the
related debt and the associated amortization expense is included in interest
expense in the accompanying consolidated financial statements.
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY- Minority interests in
equity of subsidiary represented minority shareholders' proportionate share
of the equity in TFG L.P. The Company owned approximately 88.1% of TFG L.P.
at October 31, 1998 and 1997 and increased its ownership to approximately
95.8% in January 1999 (Note 10). A minority interest partner (the Partner) in
TFG L.P. had a partner deficit balance of approximately $3,555 and $3,322 as
of October 31, 1998 and 1997, respectively. The Company has reduced the
minority interest allocation of TFG L.P.'s net loss by the Partner's share of
$118, $233 and $257 in fiscal years 1999, 1998 and 1997, respectively. The
Company sold its investment in TFG L..P. in September 1999 (Note 16).
MEMBER DEPOSITS- Member deposits represent the required deposits for
certain membership plans which entitle the member to the usage of various golf,
tennis and social facilities and services. Member deposits are refundable,
without interest, in thirty years or sooner under certain criteria and
circumstances.
INCOME TAXES- The Company accounts for income taxes using an asset
and liability approach. Under this method, a deferred tax liability or asset
is recognized for the estimated future tax effects attributable to temporary
differences in the recognition of accounting transactions for tax and
reporting purposes and from carryforwards. Measurement of the deferred items
is based on enacted tax laws. In the event the future consequence of
differences result in a deferred tax asset, management determines the
probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded when
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The Company is included in the consolidated federal and
combined state income tax returns filed by the Parent. Pursuant to the terms
of an agreement between the Company and the Parent, current and deferred
income tax expenses and benefits are provided to the members of the tax
sharing group, including the Company, based on their allocable share of the
consolidated taxable income or loss. To the extent that the Federal tax
losses of the Company are utilized by the Parent or other of the Parent's
subsidiaries, the Company is compensated. The combined state tax liabilities
will be allocated based on each member's apportioned share of the combined
state tax liabilities. Had the Company's accounting
23
for income taxes been performed utilizing the separate return basis, the
provision (benefit) for income taxes would have been $17,618, ($7,161) and $149
for the years ended October 31, 1999, 1998 and 1997, respectively.
REVENUE RECOGNITION- Revenues related to dues and fees are recognized as
income in the period in which the service is provided. Non-refundable membership
initiation fees are recognized as revenue over the expected membership life.
Other revenues are recognized at the time of sale or rendering of service.
FAIR VALUE OF FINANCIAL INSTRUMENTS- The carrying amounts of cash and
cash equivalents, trade receivables, other receivables, accounts payable and
accrued liabilities approximate their fair values because of the short maturity
of these financial instruments. Notes receivable approximate fair value as the
interest rates charged approximate currently available market rates. Based on
the borrowing rates currently available to the Company for debt with similar
terms and maturities, the fair value of notes payable and obligations under
capital leases approximate the carrying value of these liabilities.
Member deposits represent liabilities with no defined maturities and are
payable on demand, subject to certain conditions, and, accordingly, approximate
fair value.
USE OF ESTIMATES- 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.
EARNINGS (LOSS) PER SHARE- Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of
common shares outstanding. Diluted earnings per share is computed by dividing
net income by the weighted average number of common shares and common share
equivalents, if any, during the respective periods. Common share equivalents
include the effect of dilutive stock options calculated using the treasury
stock method.
ACCOUNTING PRONOUNCEMENTS- During 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which
established standards for the reporting and displaying of comprehensive
income. Comprehensive income is defined as all changes in a Company's net
assets except changes resulting from transactions with shareholders. This
statement was adopted by the Company on November 1, 1998 and had no material
impact on the accompanying consolidated financial statements. The Company has
not reported material differences between net income (loss) and comprehensive
income (loss), therefore a statement of Comprehensive Income has not been
presented.
During 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which was adopted by the Company November 1, 1998. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. The Company
has presented the required segment information in the accompanying consolidated
financial statements (Note 18).
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," was issued in April 1998 and will be effective for the
Company beginning November 1, 1999. SOP 98-5 broadly defines and provides
guidance on the financial reporting of start-up costs and organization costs.
SOP 98-5 requires costs of start-up activities and organization costs to be
expensed as incurred. Any amounts capitalized as of the date of adoption will be
expensed and reported as the cumulative effect of a change in accounting
principle. The Company believes that adoption of SOP 98-5, which is required in
fiscal 2000, will not have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognizes all derivatives as
either assets or liabilities in the statements of financial position and
measures those instruments at fair value. 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.
RECLASSIFICATION- Certain reclassifications have been made to the 1998
and 1997 consolidated financial statements to conform to the 1999 presentation.
24
3. NOTES RECEIVABLE
Notes receivable of $6,589 and $4,866 at October 31, 1999 and 1998,
respectively, primarily represent notes from members related to member deposits
and bear interest primarily at 10%. The majority of these notes are due within
three years.
Notes receivable of $472 and $2,234 as of October 31, 1999 and 1998,
respectively, primarily represent purchase money mortgage notes received in
connection with the sale of various land parcels and a golf facility. Such notes
are due at various dates primarily through 2002.
The Company has a note receivable from a former general partner in TFG
L.P. of $708 and $676 as of October 31, 1999 and 1998 respectively. The note
bears interest at 8% and is due in April 2000 (Note 16).
4. INVENTORIES
Inventories consist of the following:
OCTOBER 31,
-----------
1999 1998
---- ----
Merchandise .......................................... $ 5,656 $ 5,253
Food and beverage .................................... 2,028 1,724
Base stock (china, silver, glassware, linen) ......... 3,394 2,131
Supplies and other ................................... 1,389 977
------- -------
$12,467 $10,085
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
OCTOBER 31,
-----------
1999 1998
---- ----
Land and land improvements ....................... $ 252,167 $ 276,516
Buildings and improvements ....................... 459,423 219,094
Furniture, fixtures and equipment ................ 98,674 96,639
Construction in progress ......................... 28,368 10,422
--------- ---------
838,632 602,671
Less accumulated depreciation .................... (102,378) (95,219)
--------- ---------
Property and equipment, net .................. $ 736,254 $ 507,452
========= =========
25
6. OTHER ASSETS
Other assets consist of the following:
OCTOBER 31,
-----------
1999 1998
---- ----
Trade name ....................................... $ 31,730 -
Management contract .............................. 26,872 -
Membership contract .............................. 12,589 -
Debt issue costs ................................. 9,998 9,890
Lease agreements ................................. 3,955 3,955
Favorable leases ................................. - 5,398
Other intangibles ................................ - 2,957
-------- --------
85,144 22,200
Accumulated amortization ......................... (8,074) (5,794)
-------- --------
77,070 16,406
Undeveloped land ................................. 12,659 16,376
Art .............................................. 2,611 -
Deposits and other assets ........................ 557 860
-------- --------
$ 92,897 $ 33,642
======== ========
The membership contract, the management contract and the trade name
represent the estimated fair value of a membership program, a management
contract and the trade name associated with the Grand Wailea acquisition,
which are being amortized up to 25 years using the straight-line method (Note
15). Other intangibles primarily represent costs related to certain
membership programs. Lease agreements represent the estimated fair value of
lease contracts with third parties related to a condominium leasing program
associated with the acquisition of Grand Traverse and is amortized generally
over three years. Amortization expense for these other assets, excluding debt
issue costs, approximated $6,882, $2,029 and $960 for 1999, 1998 and 1997,
respectively. The favorable lease asset represented the difference between
the stated lease term and the estimated fair value of two golf course leases
acquired. (Note 16).
7. LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31,
-----------
1999 1998
---- ----
Senior subordinated redeemable notes payable, with interest payable semi-annually
at 10.25%, principal due at maturity on May 1, 2007 .................................. $ 125,000 $ 125,000
Term notes, payable in annual installments of $1,000 with interest payable either
at Prime plus .75% or LIBOR plus 2.0% (7.89% at October 31, 1999), $46,500 maturing
April 30, 2005 and $46,000 maturing April 30, 2006 ................................... 98,000 99,000
Revolving note, total available of $275,000, with interest payable at either Prime
plus .125% or LIBOR plus 1.125% (6.41% to 6.53% at October 31, 1999), principal due at
maturity on April 30, 2004 ........................................................... 52,000 177,750
Mortgage notes payable, with interest only payments at LIBOR plus 2.75% (8.2% at
October 31, 1999) principal due at maturity in November 2002 ........................ 275,000
Other mortgage notes payable ............................................................ - 3,244
--------- ---------
550,000 404,994
Less current portion .................................................................... (1,000) (1,044)
--------- ---------
Long-term portion ....................................................................... $ 549,000 $ 403,950
========= =========
In April 1997, the Company sold $125,000 of senior subordinated
redeemable notes (the Notes) and entered into a new credit facility providing
for term loans of up to $100,000 and a revolving credit line of up to $175,000.
The Notes are redeemable beginning
26
May 2002 at the Company's option at various rates ranging from 105.125% at May
2002, decreasing to 100% at May 2005 and thereafter. The Company is required to
offer to buy the Notes at 101% upon a change of control, as defined in the Notes
agreement.
The proceeds from the Notes, together with $100,000 of term loans under
the new credit facility and a $75,000 drawing under the revolving credit portion
of the new credit facility (collectively, the Refinancings) were used on April
30, 1997, (i) to repay approximately $265,000 of outstanding indebtedness of the
Company, (ii) to make a loan of approximately $20,800 to an affiliate, KSL Land
Corporation (KSL Land), which was used to repay indebtedness of KSL Land with
respect to which a subsidiary of the Company was a co-obligor, (iii) to pay
prepayment penalties and fees and expenses incurred in connection with the
Refinancings and (iv) for general corporate purposes. The stock of certain
subsidiaries has been pledged to collateralize the new credit facility.
In April 1998, the Company's maximum borrowings under its revolving
credit facility were increased to $275,000. Maximum borrowings under the
revolving credit line decrease from a maximum of $275,000 to $257,320 in May
2000, $239,640 in May 2001, $216,070 in May 2002 and $186,610 in May 2003.
The terms of the credit facility contain certain financial covenants
including interest coverage, fixed charges, leverage ratios and restrictions on
dividends. Certain of the long-term debt agreements provide that any
distributions of profits must satisfy certain terms and must be approved by the
lenders, require the Company to maintain specified financial ratios and, in some
instances, govern investments, capital expenditures, asset dispositions and
borrowings. In addition, mandatory prepayments are required under certain
circumstances, including the sale of assets. The Company pays a commitment fee
at a rate that currently is equal to .3% per annum on the undrawn portion of the
commitments with respect to the credit facility. Total non-use fees of
approximately $429, $352 and $437 were paid in 1999, 1998, and 1997
respectively, on the daily average of the unused amount of certain revolving and
term loan commitments. The credit facility contains provisions under which
commitment fees and interest rates for the revolving credit facility will be
adjusted in increments based on the achievement of certain performance goals.
The Company was in compliance with the financial covenants at October 31, 1999.
In connection with the Grand Wailea acquisition (Note 1 and 15), the
Company assumed approximately $275,000 in mortgage financing (Mortgage
Financing). The terms of this financing include interest only payments at 30 day
LIBOR plus 2.75% 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. However, the terms of the
Mortgage Financing contain certain financial covenants including liability
limitations, operational performance, and restrictions on dividends. In
addition, mandatory prepayments are required under certain circumstances,
including the sale of assets. Grand Wailea was in compliance with the financial
covenants at October 31, 1999.
In connection with the Grand Wailea financing, Grand Wailea entered
into an interest rate cap agreement with a third party whereby the LIBOR rate
incurred by Grand Wailea on its Mortgage Financing 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 fair market value of the agreement, which expires in
November 2000, is insignificant.
Pursuant to a cash management agreement underlying the $275,000 of
mortgage financing, 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 October 31, 1999, the
aggregate balance of these accounts was approximately $8,917 and is included in
restricted cash in the accompanying consolidated balance sheet.
27
Scheduled principal payments on long-term debt as of October 31, 1999
are as follows:
Year ending October 31:
2000 .......................................................... $ 1,000
2001 .......................................................... 1,000
2002 .......................................................... 1,000
2003 .......................................................... 276,000
2004 .......................................................... 1,000
Thereafter........................................................ 270,000
---------
Total ....................................................... $ 550,000
=========
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 agreement 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
swap agreement as of October 31, 1999 is $5,412.
During 1999, 1998 and 1997, the Company capitalized interest of
approximately $1,619, $754 and $0, respectively, related to construction in
progress activities.
8. OBLIGATIONS UNDER CAPITAL LEASES
During 1997, the Company entered into a fifty-year sublease of a
resort recreation area known as Lake Lanier. At the closing of the sublease,
which occurred in August 1997, the management agreement provided that Lake
Lanier Islands Development Authority and the Company would be placed in the
same economic position as if the sublease transaction had closed on May 15,
1996. Accordingly, the Company was credited with the net earnings (as
defined) of the operations from May 15, 1996 to the closing date less amounts
earned by the Company pursuant to the management agreement. Such net amount
paid by the Company was recognized as an adjustment to the recorded valued of
the assets leased pursuant to the sublease. Under the terms of the sublease,
the Company is required to make monthly base lease payments of $250. An
additional annual payment equal to 3.5% of gross revenues in excess of
$20,000 is payable pursuant to the sublease, with a minimum of $100 in years
one through five and $200 in years six through fifty. Pursuant to the
sublease, the Company is required to spend 5% of annual gross revenues on
capital replacement and improvements, with carryover provisions allowing all
or some portion of these amounts to be deferred to subsequent years. This
sublease expires in 2046 and is guaranteed by the Parent. Additionally, the
Company has entered into certain leases for equipment and golf carts that are
classified as capital leases.
Property under the sublease and the other capital leases is summarized
as follows:
OCTOBER 31,
-----------
1999 1998
---- ----
Buildings and land improvements........................... $ 24,715 $ 24,715
Equipment................................................. 11,158 15,901
Less accumulated depreciation............................. (7,769) (8,741)
--------- -------
$ 28,104 $ 31,875
========= ========
28
Total minimum payments due under capital leases at October 31, 1999 are
summarized as follows:
LAKE OTHER
LANIER CAPITAL
SUBLEASE LEASES TOTAL
-------- ------ -----
Year ending October 31:
2000................................................... $ 3,100 $ 1,458 $ 4,558
2001 .................................................. 3,100 857 3,957
2002 .................................................. 3,125 693 3,818
2003 .................................................. 3,200 161 3,361
2004 .................................................. 3,200 11 3,211
Thereafter ........................................... 136,800 - 136,800
--------- ---------
Total minimum lease payments .............................. 152,525 3,180 155,705
Less amounts representing interest......................... (121,235) (361) (121,596)
--------- --------- ---------
Present value of minimum lease payments ................... 31,290 2,819 34,109
Less current portion ...................................... (30) (1,273) (1,303)
--------- --------- ---------
Long-term portion ......................................... $ 31,260 $ 1,546 $ 32,806
========= ========= =========
29
9. INCOME TAXES
The components of the Federal and state income tax expense (benefit) are
as follows:
YEAR ENDED OCTOBER 31,
----------------------
1999 1998 1997
---- ---- ----
Current:
Federal ................... $ 8,231 $ 391 $ -
State ..................... 2,211 228 263
-------- -------- --------
10,442 619 263
Deferred:
Federal ................... 6,279 (6,664) (105)
State ..................... 897 (952) (15)
-------- -------- --------
7,176 (7,616) (120)
-------- -------- --------
Total .......................... $ 17,618 $ (6,997) $ 143
======== ======== ========
Taxes on income vary from the statutory Federal income tax rate applied
to earnings before taxes on income and extraordinary items as follows:
YEAR ENDED OCTOBER 31,
----------------------
1999 1998 1997
---- ---- ----
Statutory Federal income tax rate (35%) applied to
earnings before income taxes and extraordinary items ......... $ 14,333 $ 2,491 $ 1,030
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefits ..................... 2,125 358 147
Change in valuation allowance ................................... - (11,071) (1,128)
Benefits of lower federal income tax rate ....................... - 152 29
Sale of subsidiary .............................................. 435 - -
Reduction in state tax carryforwards ............................ 67 698 (96)
Other ........................................................... 658 375 161
-------- -------- --------
$ 17,618 $ (6,997) $ 143
======== ======== ========
30
Deferred income tax assets and liabilities arising from differences
between accounting for financial statement purposes and tax purposes, at
October 31, are as follows:
OCTOBER 31,
-----------
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards and AMT credit ....... $ 6,261 $ 12,188
Capitalized lease ..................................... 1,452 1,457
Deferred income ....................................... 823 975
Investment in partnership interest .................... - 2,178
Self-insured employee benefit programs ................ 1,530 856
Capitalized assets .................................... 595 512
Other ................................................. 3,538 1,188
-------- --------
Total deferred tax assets .................................. 14,199 19,354
Less valuation reserve...................................... - -
-------- --------
Deferred tax assets, net ............................ 14,199 19,354
Deferred tax liabilities:
Purchase price adjustment ............................. 15,861 16,098
Fixed assets .......................................... 5,079 4,549
Prepaid real property taxes ........................... 834 1,018
Basis difference in partnerships ...................... 459 -
Amortization of intangibles ........................... 4,916 4,604
Prepaid supplies ...................................... 462 -
Other ................................................. 1,351 671
-------- --------
Total deferred tax liabilities ...................... 28,962 26,940
-------- --------
Net deferred tax liability ...................... $(14,763) $ (7,586)
======== ========
At October 31, 1999, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $13,760 which will
begin to expire in the year ending October 31, 2011.
10. STOCKHOLDER'S EQUITY
During 1999 the Company received capital contributions of approximately
$110,000 from the Parent. The contribution was used for the Grand Wailea
acquisition (Notes 1 and 15).
In January 1999, the Company's Parent exercised a put/call agreement it
had with the 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.
On September 14, 1999, the Company paid a dividend to Parent of
$8,000. At October 31, 1999, the Company distributed 100% of the common stock
of a subsidiary effectively paying a cash dividend to Parent of $102 and
returning capital of $59,903. These dividends/return of capital are provided
for under the terms of the Refinancings relating to the sale of specified
real property (as defined) and corporate sale transaction (as defined),
respectively.
In December 1998, the number of authorized shares of the Company was
increased to twenty-five thousand shares.
Concurrent with the Refinancings (Note 7), the Company provided
dividends to the Parent of $23,321 and a return of capital of $39,033 including
a transfer of the Company's $2,155 investment in certain limited partnerships at
historical cost. Immediately prior to the contribution from the Parent of
certain subsidiaries (Note 1), Wild West provided a dividend to the Parent of
$600.
31
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to various litigation matters which are
incidental to its business. Although the results of the litigation cannot be
predicted with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the Company's consolidated
financial statements.
Contractual obligations primarily associated with construction in
progress approximated $9,074 at October 31, 1999, consisting primarily of the
Greg Norman golf courses at Desert Resorts and Doral, and common area and room
renovations at the Claremont.
Contractual obligations to KSL Land (Note 14) approximate $989 at
October 31, 1999 related to the development of 97 single family homes.
12. REAL ESTATE TRANSACTIONS
In July 1999, Doral sold for cash approximately ten acres of real
property previously utilized as a nine hole, Par 3 golf course for $9,500.
The Company recorded a gain, net of selling and closing costs of
approximately $8,000.
During fiscal 1999, Desert Resorts sold 42 homes for approximately
$24,429 (Note 14). As of October 31, 1999, the Company had other receivables of
approximately $4,145 related to the sale of these homes. Grand Traverse and
Fairways Golf had combined real estate sales of $487and $887 for various land
parcels in fiscal 1999 and 1998, respectively.
13. EXTRAORDINARY ITEM
On April 30, 1997, the Company expensed the net deferred financing
costs, prepayment fees and other costs, which aggregated approximately $5,171,
related to the debt that was extinguished as a result of the Refinancings (Note
7). Such amount is reflected as an extraordinary loss on early extinguishment of
debt, net of income tax benefit of $2,007, in the accompanying consolidated
statements of operations.
14. RELATED PARTY TRANSACTIONS
Effective April 1, 1998, Desert Resorts entered into a management
agreement with an unconsolidated affiliate, KSL Land II Corporation (Land
II), whereby Land II will provide development services for the entitlement,
subdivision, construction, marketing, and sale of approximately 97 single
family detached units on approximately eleven acres of real estate currently
owned by Desert Resorts. The development site is adjacent to the Desert
Resorts' La Quinta Resort & Club. The contractor and project management fees
for these services are calculated as 6.0% of the Project Sales Revenues, as
defined. Also, Land II is to be paid by Desert Resorts a marketing fee in an
amount equal to 2.75% of the Project Sales Revenues. Such marketing fee will
be used by Land II primarily to pay marketing, sales and promotional expenses
to third parties. The project is expected to have a twenty-four month build
out ending in fiscal 2001. In fiscal 1999, 1998 and 1997, Desert Resorts paid
$1,554, $330 and $0, respectively for project management fees and $720, $0
and $0, respectively for marketing fees.
As a result of the Refinancings (Note 7), the Company provided financing
to KSL Land of approximately $20,800 at April 30, 1997. The Company recorded
interest income of $1,946, $1,797 and $798 in 1999, 1998 and 1997, respectively,
related to this note receivable. This unsecured note receivable bore interest at
8% and was paid in full in October, 1999.
During 1999, 1998 and 1997, the Company incurred $9,800, $8,750 and
$5,106, respectively, of expenses to be reimbursed to the Parent. Such
management fees and reimbursed expenses are included in corporate fee expense in
the accompanying consolidated statements of operations.
On April 30, 1997, the Company sold its investment in a land partnership
at historical cost of $1,621 (which approximated fair value) to an affiliate.
In connection with the Grand Wailea acquisition, the Company paid
$4,000 to a stockholder of the Parent for financial advisory services.
32
15. 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, 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 was funded with $110,000 equity investment by the parent to the
Company. The Company paid $4,000 to an affiliate of the Parent for financial
advisory services in connection with the Grand Wailea acquisition.
On April 21, 1998, the Company, through a wholly-owned subsidiary,
acquired substantially all the assets and certain liabilities of The Claremont
Resort & Spa, 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
(Note 7) 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 excess of the
aggregate purchase price over the fair value of the net assets acquired of
approximately $26,700, including acquisition costs, is being amortized over 30
years.
The following are the Company's unaudited pro forma consolidated results
of operations for the years ended October 31, which assume the Claremont and the
Grand Wailea transactions occurred as of November 1, 1997:
(In thousands, except per share data)
1999 1998
---- ----
Revenues........................................... $ 463,324 $ 403,068
Income before income taxes......................... 37,648 (895)
Net income (loss).................................. 20,030 6,102
Basic and diluted earnings (loss) per share........ 20,030 6,102
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.
Also, in the quarter ended April 30, 1998, the Company acquired, in
separate transactions, two golf course facilities for an aggregate purchase
price of approximately $14,800, including the assumption of certain
liabilities of approximately $3,300. The acquisitions were financed under the
revolving credit portion of the Company's credit facility. The operating
results of the two facilities have been included in the Company's
consolidated financial statements since acquisition. The pro forma results of
operations of these two facilities were not material to the Company. These
facilities were disposed of in fiscal 1999 as part of the sale of a
subsidiary (Note 16).
16. SALE OF A SUBSIDIARY
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. The Company owned
100% of Fairways Golf, which owned an approximate 95.8% majority interest in TFG
L.P.. TFG L.P. and Fairways Golf operated 24 golf facilities, 22 of which were
owned, principally in the mid-Atlantic, southeast and mid-western United States.
The sales price for the common stock of Fairways Golf was approximately $132,500
paid in cash (exclusive of closing costs). The Company recorded a net gain of
approximately $22,393 from the sale.
In January 1999, the Parent exercised a put/call agreement it had with
the Partner in TFG L.P. As a result the Company's Parent acquired an additional
7.61% ownership interest in TFG L.P., which the Parent contributed to the
Company. The Company recorded goodwill of approximately $9,178.
33
The Company has a note receivable from the partner of TFG L.P of $708
and $676 as of October 31, 1999 and 1998. The note accrues interest at 8% and
is due in April 2000. No principal or interest payments are due on the note
until it matures (Note 3). In January 1999, the Partner became a stockholder
of the Parent and pledged shares of the Parent's stock to the Parent as
security for repayment of this note.
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share data)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
For the year ended October 31, 1999:
Revenues............................ $ 86,522 $126,133 $ 124,600 $ 114,094 (A) $451,349
Income from operations.............. 8,655 32,326 24,387 1,736 (B) 67,104
Net income (loss) .................. (1,024) 11,743 6,920 5,693 (C) 23,332
Basic and diluted earnings (loss)
per share........................... (1,024) 11,743 6,920 5,693 23,332
For the year ended October 31, 1998:
Revenues............................ $ 65,602 $ 84,629 $ 74,424 $ 71,615 $296,270
Income (loss) from operations....... 7,730 21,710 7,282 3,391 40,113
Net income (loss) .................. 9 13,970 (1,840) 1,975 (D) 14,114
Basic and diluted earnings (loss)
per share........................... 9 13,970 (1,840) 1,975 14,114
(A) Fourth quarter includes $19,803 revenues from the sale of single family
homes.
(B) Fourth quarter includes an increase in workers compensation expense
of approximately $1,330 due to a change in industry-wide experience
rating.
(C) Fourth quarter includes a pre-tax gain of $22,393 from the sale of a
subsidiary (Note 16).
(D) Fourth quarter includes tax benefit of $6,997 primarily resulting from
the reversal of deferred tax asset valuation allowance established
in prior years.
18. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the Company's chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision-maker is its Chief Executive Officer. The operating
segments of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
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 (Note 12). The
Company's Real Estate segment exists to support and enhance growth of the
Company's Resort segment. The Company utilizes the expertise of an affiliate
Company in determining real estate projects to undertake. Both of the
Company's operating segments are within the United States.
34
The accounting policies of the Company's operating segments are the
same as those described in Note 2, Summary of Significant Accounting
Policies. The Company evaluates performance based on stand alone segment
income reduced by direct expenses. Because the Company does not evaluate
performance, based on segment net income at the operating segment level, the
Company's non-operating expenses are not tracked internally by segment.
Therefore, such information is not presented.
Operating segment data for the year ended October 31, are as follows:
RESORT REAL ESTATE CONSOLIDATED
Year ended October 31, 1999
Revenues $416,933 $ 34,416 $451,349
Income from operations 55,805 11,299 67,104
Year ended October 31, 1998
Revenues 295,383 887 296,270
Income from operations 40,029 84 40,113
Year ended October 31, 1997
Revenues 225,577 493 226,070
Income from operations 32,412 426 32,838
The Real Estate segments' identifiable assets were $13,918 and
$10,054 at October 31, 1999 and 1998, 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 depreciation and
amortization expense relates to the Resort segment.
19. INSURANCE LOSS
In October 1999 Doral's buildings and golf courses were flooded and
damaged due to heavy rains from hurricane Irene. The Company is insured for
this loss and expects to recover $1,032, which has been recorded as an other
receivable in the accompanying consolidated financial statements. In fiscal
1999, the Company recorded a loss of $438, net of the insurance receivable.
35
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company (unless otherwise specified), together with
other key executive officers of the Company's subsidiaries and Parent. The terms
of each of the directors will expire annually upon the election and
qualification at the annual meeting of shareholders.
NAME AGE POSITION
---- --- --------
DIRECTORS AND EXECUTIVE OFFICERS:
Michael S. Shannon 41 President, Chief Executive Officer and Director
Larry E. Lichliter 56 Executive Vice President and Director
John K. Saer, Jr. 43 Vice President, Chief Financial Officer and Treasurer
Nola S. Dyal 50 Vice President, General Counsel and Secretary
Scott M. Dalecio 37 Vice President of Resort Operations
E. D. "Murray" Bryant 53 Vice President of Direct Marketing and Sales
Doris Allen-Kirchner 47 Vice President of Human Resources
James E. Wanless 46 Vice President of Club and Membership Development
Thomas F. McGrath 49 Vice President of Merchandising and Events
Gary M. Beasley 34 Vice President of Business Development
Peter L. Faraone 46 Vice President of Sales
Emily-May Richards 51 Corporate Controller
Henry R. Kravis 55 Director
George R. Roberts 56 Director
Paul E. Raether 53 Director
Michael T. Tokarz 50 Director
Scott M. Stuart 40 Director
Alexander Navab, Jr. 34 Director
OTHER KEY EXECUTIVE OFFICERS:
Eric L. Affeldt 42 President, KSL La Quinta Corporation, Vice
President, KSL Desert Resorts, Inc.
Joel B. Paige 40 President, KSL Florida Holdings, Inc. and KSL Grand
Traverse Holdings, Inc., KSL Hotel Corp. and KSL
Silver Properties
Raymond C. Williams 53 President, KSL Lake Lanier, Inc.
MICHAEL S. SHANNON. Mr. Shannon has been a Director and the President and
Chief Executive Officer of the Company since its formation. Mr. Shannon was a
founding stockholder of Parent and has served as a Director and President and
Chief Executive Officer of Parent since its inception. Mr. Shannon is also a
Director of each of the Company's subsidiaries and serves as either President or
Executive Vice President of each subsidiary. Prior to forming Parent, Mr.
Shannon was President and Chief Executive Officer of Vail Associates in Vail,
Colorado. Mr. Shannon is a director of ING America Life Insurance Company.
LARRY E. LICHLITER. Mr. Lichliter has been a Director and Executive Vice
President of the Company since its formation. Mr. Lichliter was a founding
stockholder of Parent and has served as a Director and its Executive Vice
President since its inception. He served as Chief Operating Officer of Parent
from its inception through December 1996. Mr. Lichliter is also a Director and
serves as either President or Executive Vice President of each of the Company's
subsidiaries. Mr. Lichliter began his career as the Controller for Vail
Associates in 1977 before becoming Director of Finance for Beaver Creek Resort,
and later serving as Senior Vice President of Operations for Vail Associates.
JOHN K. SAER, JR. Mr. Saer has been Vice President, Chief Financial Officer
and Treasurer of the Company since its formation. Mr. Saer joined Parent in July
1993 as Director of Finance and Acquisitions. He was later elected to the office
of Vice President of Business Development and Acquisitions in 1994 and now
serves as Vice President, Chief Financial Officer and Treasurer of Parent. Mr.
Saer is also Vice President, Chief Financial Officer and/or Treasurer for each
of the Company's subsidiaries. From 1990 until joining Parent, Mr. Saer served
as a principal of Windermere Management, Inc. and its affiliate, Jonison
Partners, Ltd.
36
NOLA S. DYAL. Ms. Dyal has been Vice President, General Counsel and Secretary
of the Company since its formation. Ms. Dyal joined Parent in November 1993 as
Vice President, General Counsel and Secretary. Ms. Dyal also serves as Vice
President, General Counsel and Secretary for each of the Company's subsidiaries.
From 1986 to 1993, Ms. Dyal was Vice President, General Counsel and Secretary of
Vail Associates.
SCOTT M. DALECIO. Mr. Dalecio was elected Vice President of Resort Operations
of the Company and Parent on January 11, 2000. He currently serves in that
capacity and as President of the Company's Resort Operations Division, as well
as President of KSL Grand Wailea Resort, Inc., and KSL Claremont Resort, Inc.
Mr. Dalecio has been President of KSL Desert Resorts, Inc., the operating
subsidiary which operates both the La Quinta Resort & Club and PGA WEST in La
Quinta, California since March 1996. Prior thereto, Mr. Dalecio held several
management positions with the La Quinta Resort & Club since joining La Quinta
Resort & Club in 1986, including President and General Manager. Mr. Dalecio is
also the President or Vice President of each of the four operating subsidiaries
of KSL Desert Resorts, Inc.
E. D. "MURRAY" BRYANT. Mr. Bryant became Vice President of Direct Sales and
Marketing of the Company and the Parent in September 1997. At that time, Mr.
Bryant was also elected Vice President of Direct Marketing and Sales for certain
of the Company's subsidiaries. From January 1991 to September 1997, Mr. Bryant
was Vice President, Western Region Sales and Marketing for Marriott Vacation
Club International.
DORIS ALLEN-KIRCHNER. Ms. Allen-Kirchner has been Vice President of Human
Resources of the Company and Parent since October 1997. From November 1994 to
September 1997, Ms. Allen-Kirchner served as a Management Consultant to Quorum
Health Resources, Inc. Prior to that, Ms. Allen-Kirchner was Chief Operations
Officer for Vail Valley Medical Center in Vail, Colorado since 1985.
JAMES E. WANLESS. Mr. Wanless has been Vice President of Club and Membership
Development of the Company since its formation. Mr. Wanless joined Parent in
September 1996 as Vice President of Club and Membership Development. From 1995
to 1996, Mr. Wanless was a Director and Senior Vice President of Membership
Marketing International. For more than five years prior to joining Parent, Mr.
Wanless was a senior partner of the law firm Hillier and Wanless.
THOMAS MCGRATH. Mr. McGrath has been Vice President of Merchandising and
Events of the Company since its formation. Mr. McGrath joined Parent in June
1996 as Vice President of Merchandising and Events. From 1988 until joining
Parent, Mr. McGrath was Vice President of Merchandising with Silver Dollar City,
Inc. in Branson, Missouri.
GARY M. BEASLEY. Mr. Beasley became Vice President of Business Development
for the Parent in November 1999 and served as and Vice President of Acquisitions
for the Company from October 1998 to November 1999. He joined the Parent in June
1995 as an Associate in Business Development and became Director of Acquisitions
in December 1996. Prior to joining Parent, Mr. Beasley was an Associate at
Security Capital Group, Inc. from September 1993 to June 1995.
PETER L. FARAONE. Mr. Faraone became Vice President of Sales of the Company and
Parent in November 1999. Mr. Faraone was Director of Sales of the Company from
June 1998 through November 1999. From 1995 through June of 1998, Mr. Faraone was
Vice President of Sales Marketing of Sierra Tucson Lifestyles, located in
Arizona. From 1984 to June of 1995 Mr. Farone served in several positions with
Ritz Carlton Hotels, the last of which was General Manager of the Ritz Carlton
Tysons Corner.
EMILY-MAY RICHARDS. Ms. Richards has been Corporate Controller of the Company
since its formation. Ms. Richards joined Parent in October 1994 as Corporate
Controller after serving as a private consultant for Parent and its subsidiaries
with Richards Group, P.C., a certified public accounting firm founded by Ms.
Richards in 1986. Ms. Richards is also the Corporate Controller of all of the
Company's subsidiaries. Ms. Richards owned and operated the Richards Group, P.C.
from 1986 to 1994.
HENRY R. KRAVIS. Mr. Kravis, Founding Partner of KKR, is a Director of Parent
and the Company and a managing member of the Executive Committee of the limited
liability company which serves as the general partner of KKR. Mr. Kravis is also
a Director of Accuride Corporation, Alliance Imaging, Amphenol Corporation,
Birch Telecom, Inc., Borden, Inc., The Boyds Collection, Ltd., BRW Acquisition,
Inc., Evenflo Company, Inc., The Gillette Company, IDEX Corporation, KinderCare
Learning Centers, Inc., KSL Golf Holdings, Inc., KSL Land Corporation, MedCath
Incorporated, Owens-Illinois Group, Inc., Owens-Illinois, Inc., PRIMEDIA, Inc.,
Regal Cinemas, Inc., Safeway, Inc., Sotheby's Holdings, Inc., Spalding Holdings
Corporation, TI Group, Willis Corroon Group Limited, U.S. Natural Resources,
Inc. and United Fixtures Company.
37
GEORGE R. ROBERTS. Mr. Roberts, Founding Partner of KKR, is a Director of
Parent and the Company and a managing member of the Executive Committee of the
limited liability company which serves as the general partner of KKR. He is also
a Director of Accuride Corporation; Alliance Imaging, Inc.; Amphenol
Corporation; Birch Telecom, Inc.; Borden, Inc.; The Boyds Collection, Ltd.; BRW
Acquisition, Inc. (Bristol West Insurance Group); Evenflo Company, Inc.; IDEX
Corporation; KinderCare Learning Centers, Inc.; KSL Land Corporation; MedCath
Incorporated; Owens-Illinois Group, Inc.; Owens-Illinois, Inc.; PRIMEDIA, Inc.;
Regal Cinemas, Inc.; Safeway, Inc.; Spalding Holdings Corporation; Trinity
Acquisition plc (Willis Carroon);United Fixtures Company; and U.S. Natural
Resources, Inc.;
PAUL E. RAETHER. Mr. Raether is a Director of Parent and the Company and is a
member of the limited liability company which serves as the general partner of
KKR. He is also a Director of Bruno's, Inc., IDEX Corporation, KSL Golf
Holdings, Inc., and KSL Land Corporation. Mr. Raether joined KKR in 1980.
MICHAEL T. TOKARZ. Mr. Tokarz is a Director of Parent and the Company and is
a member of the limited liability company which serves as the general partner of
KKR. Prior to 1993, Mr. Tokarz was an Executive at KKR. He is also a Director of
Evenflo Company, Inc., IDEX Corporation, KSL Golf Holdings, Inc., KSL Land
Corporation, Nextstar Financial Corporation, PRIMEDIA, Inc., Spalding Holdings
Corporation, United Fixtures Company, and Walter Industries, Inc. Mr. Tokarz
joined KKR in 1985.
SCOTT M. STUART. Mr. Stuart is a Director of Parent and the Company and is a
member of the limited liability company which serves as the general partner of
KKR. Prior to 1995, Mr. Stuart was an Executive at KKR. In addition, Mr. Stuart
is a Director of AEP Industries, Inc., Borden, Inc., Borden Chemicals, The Boyds
Collection, Ltd., Corning Consumer Products, KSL Golf Holdings, Inc., KSL Land
Corporation. Mr. Stuart joined KKR in 1986.
ALEXANDER NAVAB, JR. Mr. Navab is a Director of Parent and the Company and
has been an Executive at KKR since 1993. Prior to joining KKR, Mr. Navab was
employed by James D. Wolfensohn Incorporated. He is also a Director of Birch
Telecom, Inc., Borden Chemical, Borden Foods, Borden, Inc., Corning Consumer
Products, Elmers Consumer Products, KSL Land Corporation, Regal Cinemas, Wise
Food Products and Zhone Technologies, Inc.
ERIC L. AFFELDT. In January 1999, Mr. Affeldt became Vice President of KSL
Desert Resorts. Prior to that, Mr. Affeldt was President of KSL Hotel Corp., the
operating subsidiary which owns Doral. Prior to that, Mr. Affeldt was President
of KSL Fairways Golf Corporation, a subsidiary of the Company and the managing
general partner of The Fairways Group, L.P., a limited partnership through which
Fairways operations are conducted. Mr. Affeldt joined Parent in July 1992 as
Director of Finance. After serving as Vice President of Acquisitions of The
Fairways Group, he became its President in July 1995. Prior to joining the
Company, Mr. Affeldt owned and operated Vail Financial Planning, a financial
advisory firm in Vail, Colorado.
JOEL B. PAIGE. Mr. Paige has been the President of KSL Florida Holdings,
Inc., a subsidiary of the Company which owns KSL Hotel Corp. and KSL Silver
Properties, Inc., since December 1996. Mr. Paige is also the President of KSL
Grand Traverse Holdings, Inc., and its four wholly owned operating subsidiaries,
which own and operate the Grand Traverse Resort and its related assets, acquired
in August 1997. From April 1995 through December 1997 and from January 1999 to
present, Mr. Paige has also been the President of KSL Hotel Corp. From November
1994 through April 1995, Mr. Paige was General Manager at the Scottsdale Hilton
in Scottsdale, Arizona. From September 1990 until joining the Scottsdale Hilton,
Mr. Paige was employed as General Manager of Doral.
RAYMOND C. WILLIAMS. Mr. Williams has been President of KSL Lake Lanier,
Inc., the operating subsidiary which leases and operates Lake Lanier since July
1996. Prior to July 1996, Mr. Williams was Vice President and Chief Operating
Officer of Arrow Dynamics in Salt Lake City, Utah. From 1973 to 1995, Mr.
Williams was an executive for Six Flags Theme Parks, Inc., holding several
positions, including Senior Vice President, Operational Planning & Strategy.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Raether, Tokarz, Stuart and
Navab is 9 West 57th Street, Suite 200, New York, New York 10019 and the
business address of Mr. Roberts is 2800 Sand Hill Road, Suite 200, Menlo Park,
California 94025.
The following directors have been appointed to serve on the Company's
Executive Committee during fiscal 2000: Messrs. Kravis, Raether, Tokarz and
Shannon. The following directors have been appointed to serve on the Company's
Audit Committee during fiscal 2000: Messrs. Stuart, Navab and Lichliter.
38
ITEM 11. EXECUTIVE COMPENSATION
Prior to the formation of the Company in March 1997, Parent employed
executive officers of the Company and all compensation for such officers was
paid by Parent. The following table presents certain summary information
concerning compensation paid or accrued by Parent for services rendered in all
capacities for the fiscal years ended October 31, 1999, 1998 and 1997 for (i)
the chief executive officer of the Company and (ii) each of the four other most
highly compensated executive officers of the Company, determined as of October
31, 1999 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE (1) (2)
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
------------------------------ ---------------------- -------- --------------
OTHER SECURITIES
NAME AND ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL COMPEN STOCK OPTION/ LTIP COMPEN-
POSITION YEAR SALARY BONUS -SATION AWARD(S) SARS PAYOUTS SATION
- -------- ---- ------ ----- ------- -------- ---- ------- ------
Michael S. Shannon 1999 $500,000 $700,000 - - 1,947 $ 73,775(5)
President and Chief 1998 500,000 600,000 - - - - 27,864
Executive Officer 1997 475,000 650,000 - - - - 27,864
Larry E. Lichliter
Executive Vice 1999 $275,000 $300,000 - - 1,800 - 30,035(6)
President 1998 275,000 225,000 - - - - 29,962
1997 275,000 175,000 - - - - 29,962
John K. Saer, Jr
Vice President, Chief
Financial Officer and 1999 $275,000 $300,000 - - 5,100 - 6,473(7)
Treasurer 1998 275,000 200,000 - - 707 - -
1997 244,000 250,000 - - - - -
E.D. "Murray" Bryant
Vice President of 1999 $200,000 $178,087 - - - - -
Direct Sales and 1998 200,000 100,000 - - - - -
Marketing (3) 1997 19,230 - - - - - -
Nola S. Dyal
Vice President, 1999 $260,000 $100,000 - - 1,500 -
General Counsel and 1998 250,000 90,000 - - 477 - (4)
Secretary 1997 200,000 200,000 - - - - -
- ----------------
(1) After formation of the Company, the Parent has and will continue to pay
all compensation for the Named Executive Officers; however, the Company
will reimburse Parent for the amount of all such compensation that is
directly attributable to the operations of the Company.
See "Certain Relationships and Related Transactions."
(2) The Named Executive Officers spend between 90% to 98% of their time on
Company matters, with the exception of Mr. Lichliter who spends
approximately 5% to 10% of his time on work related to the Company and
Mr. Bryant who spends 50% of his time on work related to the Company.
Mr. Lichliter spends between 90% to 95% of his time on work related to
KSL Land, an affiliate of the Company. Mr. Bryant spends 50% of his time
on work related to KSL Destinations Corporation, a subsidiary of Parent.
(3) E.D. "Murray" Bryant began his employment with the Company in September
1997.
(4) Parent repurchased 700 Common Stock Options from Ms. Dyal during fiscal
1998 at $2,000 per share, less the exercise price of $500 per share.
(5) Represents cost of premiums for long-term disability insurance,
Directors' compensation, and compensation for personal use of the
Parent's corporate aircraft.
(6) Represents cost of premiums for long-term disability insurance and for
Directors' compensation.
(7) Represents compensation for personal use of the Parent's corporate
aircraft.
39
STOCK OPTIONS OF PARENT
STOCK OPTION PLAN
Parent adopted the KSL Recreation Corporation 1995 Stock Purchase and
Option Plan (the "Plan"), providing for the issuance to certain officers and key
employees (the "Optionees") of up to 77,225 shares of common stock of Parent
("Stock"). The number of shares of common stock of the Parent for this Plan was
increased to 95,908 during 1999. Unless sooner terminated by Parent's Board of
Directors, the Plan will expire on June 30, 2005.
The Compensation Committee of Parent's Board of Directors, consisting
of Messrs. Kravis and Tokarz (the "Committee"), administers the Plan. The
Committee has the authority to determine the forms and amounts of awards made
to Optionees (each, a "Grant"). Such Grants may take a variety of forms in
the Committee's sole discretion including "incentive stock options" under
Section 422 of the Code, other Stock options, stock appreciation rights,
restricted Stock, purchase Stock, dividend equivalent rights, performance
rights, performance shares or other stock-based grants.
NON-QUALIFIED STOCK OPTION AGREEMENTS
All options granted under the Plan to date have been non-qualified stock
options granted pursuant to Non-Qualified Stock Option Agreements (the "Stock
Option Agreements"). Under the terms of Stock Option Agreements, the exercise
price of the options granted ranges from $500 to $2,000 per share, and options
may be exercised based upon a schedule which refers to a date set forth in each
Optionee's Stock Option Agreement (the "Option Trigger Date"). Generally, an
Optionee's options will vest over periods ranging from one to five years from
such Optionee's Option Trigger Date. Each Stock Option Agreement provides for
acceleration of exercisability of some or all of an Optionee's options
immediately prior to a change of control and immediately upon termination of
employment because of death, permanent disability or retirement (at age 65 or
over after three years of employment) of the Optionee.
Options granted under the Plan pursuant to a Stock Option Agreement
expire upon the earliest of (i) ten years from the date of the grant, (ii) the
date the option is terminated under the circumstances set forth in the Common
Stock Purchase Agreement (as defined below), (iii) the termination of the
Optionee's employment because of criminal conduct (other than traffic
violations), (iv) if prior to the vesting 100% of Optionee's Options, the
termination of employment for any reason other than involuntary termination of
employment without cause, death, disability or retirement after the age of 65
and (v) if the Committee so determines, the merger or consolidation of Parent
into another corporation or the exchange or acquisition by another corporation
of all or substantially all of Parent's assets or 80% of Parent's then
outstanding voting stock, or the reorganization, recapitalization, liquidation
or dissolution of Parent.
MANAGEMENT COMMON STOCK PURCHASE AGREEMENTS
If an Optionee exercises options under his or her Stock Option
Agreement, he or she is required to enter into a Common Stock Purchase Agreement
with Parent. None of these employees (the "Management Stockholders") has
exercised any options to date. Pursuant to each Common Stock Purchase Agreement,
the Management Stockholder may not transfer any shares of Stock acquired thereby
or upon exercise of vested options granted under the Plan (collectively, the
"Plan Shares") within five years (although certain Management Stockholders may
transfer their Plan Shares after they have been fully vested) after the date set
forth in his or her Common Stock Purchase Agreement (the "Purchase Trigger
Date").
Each Common Stock Purchase Agreement provides the Management
Stockholder with the right to require Parent to repurchase all of Management
Stockholder's Plan Shares and pay Management Stockholder (or his or her
estate or Management Stockholder Trust) a stated price for cancellation of
options if (a) the Management Stockholder's employment is terminated as a
result of his or her death or permanent disability, (b) the Management
Stockholder dies or becomes permanently disabled after having retired from
Parent at or after age 65 after having been employed by Parent for at least
three years after the Purchase Trigger Date or (c) with the prior consent of
Parent's Board of Directors (which consent will not be withheld unless the
Board reasonably determines that Parent would be financially impaired if it
made such a purchase), or (d) the Management Stockholder retires from Parent
on or after age 65 after having been employed by Parent for at least three
years after the Purchase Trigger Date. The Management Stockholder also has
the right, until the later of five years after the Purchase Trigger Date or
the first public offering in which the Partnerships participate, to have
Parent register a stated percentage of his Plan Shares under the Securities
Act in connection with certain public offerings. (See Security Ownership of
Certain Beneficial Owners and Management).
Each Common Stock Purchase Agreement also provides Parent with (a) prior
to a public offering, the right of first refusal to buy Plan Shares owned by
each Management Stockholder on essentially the same terms and conditions as such
Management Stockholder proposes in a sale of his Plan Shares to another bona
fide third party purchaser and (b) the right to repurchase all of the Management
Stockholder's Plan Shares and pay him a stated price for cancellation of his
Options if (i) the Management Stockholder's employment is involuntarily
terminated with cause, (ii) the Management Stockholder terminates his or her
employment other than by reason of death, disability or retirement on or after
the age of 65 or (iii) the Management Stockholder effects an unpermitted
transfer of Plan Shares.
Upon a change of control of Parent, the transfer restrictions, right of
first refusal, and certain other rights with respect to sale and
40
repurchase of the Plan Shares and cancellation of Options as described above
will lapse.
The repurchase price of the Plan Shares under the Common Stock Purchase
Agreements depends upon the nature of the event that triggers the repurchase and
whether such repurchase occurs at the election of the Management Stockholder or
Parent. Generally, if the repurchase is at the Management Stockholder's
election, the repurchase price per share will be the book value per share (as
defined in the Common Stock Purchase Agreement) of Stock or, if the Stock is
publicly traded, the market value per share of Stock. Generally, if the
repurchase is at Parent's election, the repurchase price per share will be the
lesser of (a) the book value per share (as defined in the Common Stock Purchase
Agreement) of Stock (or if the Stock is publicly traded, the market value per
share) and (b) the exercise price.
OPTION GRANTS IN PARENT FOR FISCAL YEAR 1999 AND POTENTIAL REALIZABLE VALUES
The following sets forth as to each of the Named Executive Officers
information with respect to options granted during fiscal year 1999: (i) the
number of shares of common stock underlying options granted; (ii) the percent of
total options granted to employees in fiscal year 1999; (iii) the exercise price
of such options; (iv) the expiration date of such options and (v) the potential
realization values at assumed rates of such options.
OPTION GRANTS IN FISCAL 1999
Individual Grants
- -----------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Percent of total Assumed Annual Rates of Stock
Options Granted to Price Appreciation for Option
Options Employees in Exercise Term
Name Granted Fiscal Year Price Expiration Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Michael S. Shannon 1,947 16.4% $ 1,250 March 31, 2009 $ 1,530,600 $ 3,878,800
Larry E. Lichliter 800 6.8% $ 1,250 March 31, 2009 628,900 1,593,800
1,000 7.7% $ 2,000 March 31, 2009 1,257,800 3,187,500
John K. Saer, Jr 1,600 13.5% $ 1,250 March 31, 2009 1,257,800 3,187,500
3,500 26.9% $ 2,000 March 31, 2009 4,402,300 11,156,200
Nola S. Dyal 800 6.8% $ 1,250 March 31, 2009 628,900 1,593,800
700 5.4% $ 2,000 March 31, 2009 880,500 2,231,200
E.D. Murray Bryant 0 N/A N/A N/A N/A N/A
The following table sets forth, as to each of the Named Executive
Officers, information with respect to option exercises during fiscal year 1999
and the status of their options on October 31, 1999: (i) the number of shares of
common stock underlying options exercised during fiscal year 1999, (ii) the
aggregate dollar value realized upon the exercise of such options, (iii) the
total number of exercisable and unexercisable stock options held on October 31,
1999 and (iv) the aggregate dollar value of in-the-money exercisable and
unexercisable options on October 31, 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END
OPTION VALUES AT OCTOBER 31, 1999
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT OCTOBER 31, 1999 OCTOBER 31, 1999
NAME EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
- ---- -------- -------- -------------------------- ------------------------------
Michael S. Shannon - - 22,744/ 1,947 $29,426400/ $1,200,700
Larry E. Lichliter - - 12,646/ 1,800 16,361,500/ 535,900
John K. Saer, Jr - - 4,456/ 5,100 5,765,200/ 1,126,100
Nola S. Dyal - - 2101/ 1,500 2,718,300/ 523,700
E.D."Murray"Bryant - - 354/ 530 439,900/ 658,600
(1) The Common Stock is not publicly traded and the value of the options
represents management's best judgment of value at October 31, 1999 as
calculated using the "Black-Scholes" model of option valuation.
41
MANAGEMENT INCENTIVE BONUSES
Certain members of management of Parent and the Company and its
subsidiaries, including departmental managers and executive officers, including
Named Executive Officers, are eligible to receive cash bonuses in addition to
their annual salary compensation. Such awards are based on the performance of
such individuals as determined by their direct supervisors and other senior
management and the financial performance of Parent, the Company and its
subsidiaries.
OPTIONS AND PARTNERSHIP INTERESTS IN AFFILIATES
No executive officers or key employees received options or partnership
interests in KSL Land and partnerships affiliated therewith during fiscal year
1999. Certain executive officers and key employees did receive options and
partnership interest in KSL Land and partnerships affiliated therewith prior to
and during fiscal year 1997, but such options were "out-of-the-money" and no
allocation has been made for distribution of partnership profits with respect to
such partnership interests.
TERMINATION OF EMPLOYMENT ARRANGEMENT
Pursuant to a letter, dated October 8, 1999, from Parent to Mr. Bryant,
in the event that Parent terminates Mr. Bryant's employment with Parent and
Company without cause at any time before September 18, 2001, Parent is obligated
to continue to pay Mr. Bryant's then current base salary through September 17,
2001.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. Each director receives
an aggregate annual fee of $25,000 for serving on Parent's and the Company's
Boards of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors participated in deliberations of Parent's board
of directors concerning executive officer compensation during fiscal year 1999
and have been appointed to serve on Parent's Compensation Committee during
fiscal year 1999: Messrs. Kravis and Tokarz. During fiscal year 1999, no
executive officer of Parent served as a member of the compensation committee of
another entity or as a director of another entity, one of whose executive
officers served on the compensation committee or board of directors of Parent.
1999 STOCK PURCHASE PROGRAM
During 1999, certain executive officers of the Company and Parent
purchased shares of common stock of Parent at a purchase price of $1,250 per
share. Certain of these purchases were funded with cash and others were paid by
purchase money promissory notes ("Notes").
The following executive officers purchased shares of common stock with
cash: Michael S. Shannon, 1,187 shares; Larry E. Lichliter, 400 shares; John K.
Saer, Jr., 500 shares; Scott M. Dalecio, 10 shares; James E. Wanless, 100 shares
and Emily-May Richards, 20 shares.
The following executive officers purchased shares of common stock by
Note: John K. Saer, Jr., 400 shares; Nola S. Dyal, 200 shares; Scott M. Dalecio,
200 shares; Doris Allen-Kirchner, 50 shares; James E. Wanless, 100 shares;
Thomas F. McGrath, 50 shares; Peter L. Faraone, 25 shares; Gary M. Beasley, 100
shares; Emily-May Richards, 50 shares; Eric L. Affeldt, 200 shares; Joel B.
Paige, 200 shares; and Raymond C.
Williams, 200 shares.
The Notes bear interest at the annual rate of five per cent (5%),
payable annually in arrears, and are due and payable in full on the earliest to
occur of: (a) November 1, 2003; (b) within 75 days of termination of an
executive officer's employment for cause; (c) within 365 days of termination of
an executive officer's employment without cause or voluntary termination of
employment by such executive officer; (d) immediately upon default under the
Note; and (e) upon the occurrence of certain events such as death or permanent
disability of such executive office, as set forth in the Notes, the Notes are
secured by a pledge of the common stock purchased and by certain options granted
to the executive officers in connection with the purchase of common stock.
42
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 15, 2000 certain
information concerning the ownership of shares of Common Stock of Parent by (i)
persons who own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each person who is a director of the Company; (iii) each person who
is a Named Executive Officer; and (iv) all directors and executive officers of
the Company as a group. Parent owns 100% of the common stock of the Company. As
of January 15, 2000, there are 554,928 shares of Common Stock of Parent
outstanding.
AMOUNT AND NATURE PERCENT
NAME OF OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (9) CLASS
----------------------------------------------------------- ------------------- -----------
KKR Associates, L.P. .................................... 458,689 (1) 82.66
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
KKR 1996 GP, LLC......................................... 81,320 (2) 14.65
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Michael S. Shannon....................................... 27,345 (3) 4.73
Larry E. Lichliter....................................... 13,610 (4) 2.40
John K. Saer, Jr. ....................................... 5,449 (5) *
Nola S. Dyal............................................. 2,301 (6) *
E.D. "Murray" Bryant..................................... 354 (7) *
All Executive Officers and Directors as a Group
(20 persons) ........................................ 54,877 (8) 8.99
* Denotes less than one percent.
(1) Shares of Common Stock shown as beneficially owned by KKR Associates,
L.P. are held as follows: approximately 71.4% by Resort Associates,
L.P., approximately 10.2% by Golf Associates, L.P. and approximately
1.7% by KKR Partners II, L.P. (collectively, the "Initial
Partnerships"). KKR Associates, L.P., a limited partnership, is the sole
general partner of each of the Partnerships and possesses sole voting
and investment power with respect to such shares. The general partners
of KKR Associates, L.P. are Henry R. Kravis, George R. Roberts, Robert
I. MacDonnell, Paul E. Raether, Michael W. Michelson, James H. Greene,
Jr., Michael T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott M.
Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts, Raether, Tokarz
and Stuart are also directors of the Company. Alexander Navab, Jr. is a
limited partner of KKR Associates, L.P. and is also a director of the
Company. Each of such individuals may be deemed to share beneficial
ownership of the shares shown as beneficially owned by KKR Associates,
L.P. Each of such individuals disclaims beneficial ownership of such
shares.
(2) Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC
are owned of record by KKR 1996 Fund L.P. KKR 1996 GP LLC is the general
partner of KKR Associates 1996 L.P., which is the general partner of KKR
1996 Fund L.P. (the "New Partnership"). The members of KKR 1996 GP LLC
are Messrs. Kravis, Roberts, MacDonnell, Raether, Michelson, Greene,
Tokarz, Golkin, Robbins, Stuart and Gilhuly. Messrs. Kravis, Roberts,
Raether, Tokarz and Stuart are also directors of the Company. Messrs.
Kravis and Roberts constitute the management committee of KKR 1996 GP,
LLC. Each of such individuals may be deemed to share beneficial
ownership of the shares shown as beneficially owned by KKR 1996 GP LLC.
Each of such individuals disclaims beneficial ownership of such shares.
The Initial Partnerships and the New Partnership are collectively
referred to as the "Partnerships."
(3) Includes options to purchase 22,744 shares exercisable within 60 days.
(4) Includes options to purchase 12,646 shares exercisable within 60 days.
(5) Includes options to purchase 4,456 shares exercisable within 60 days.
(6) Includes options to purchase 2,101 shares exercisable within 60 days.
(7) Includes options to purchase 354 shares exercisable within 60 days.
(8) Includes options to purchase 46,968 shares exercisable within 60 days.
(9) The nature of beneficial ownership for all of the shares listed is sole
voting and investment power.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH KKR
KKR Associates, L.P. and KKR 1996 GP LLC beneficially own approximately
82.66% and 14.65% (71.42% and 12.66%, on a fully diluted basis), respectively,
of Parent's outstanding shares of Common Stock as of January 15, 2000. The
general partners of KKR and the members of KKR 1996 GP LLC are Messrs. Henry R.
Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W.
Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts,
Raether, Tokarz and Stuart are also directors of the Company, as is Alexander
Navab, Jr. who is a limited partner of KKR Associates, L.P. Each of the general
partners of KKR Associates, L.P. is also a member of the limited liability
company which serves as the general partner of Kohlberg Kravis Roberts & Co.
("KKR") and Mr. Navab is an executive of KKR. KKR receives an annual fee of
$500,000 in connection with providing financial advisory services to Parent and
may receive customary investment banking fees for services rendered to Parent
and/or the Company in connection with divestitures, acquisitions and certain
other transactions. See "Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners and Management."
The limited partners of KKR Associates are certain past and present
employees of KKR and partnerships and trusts for the benefit of the families of
the general partners and past and present employees and a former partner of KKR.
Each of the Partnerships has the right to require Parent to register
under the Securities Act shares of Common Stock held by it pursuant to several
registration rights agreements. Such registration rights will generally be
available to each of the Partnerships until registration under the Securities
Act is no longer required to enable it to resell the Common Stock owned by it.
Such registration rights agreements provide, among other things, that Parent
will pay all expenses in connection with the first six registrations requested
by each such Partnership and in connection with any registration commenced by
Parent as a primary offering.
In connection with the Grand Wailea acquisition, the Company paid
$4,000,000 to KKR for financial advisory services.
TRANSACTIONS WITH PARENT AND AFFILIATES OF PARENT
The Company and Parent are parties to an Expense Allocation Agreement
pursuant to which Parent performs management services requested by the Company
and the Company reimburses Parent for all expenses incurred by Parent and
directly attributable to the Company and its subsidiaries. The Company paid
management fees and fees pursuant to the Expense Allocation Agreement (reflected
collectively as the "Corporate Fee" in the accompanying consolidated statements
of operations) in the amount of $9.8 million to Parent in fiscal year 1999.
The Company's liability for taxes is determined based upon a Tax Sharing
Agreement entered into by the members of the affiliated group of corporations
(within the meaning of Section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code")) of which Parent is the common parent (the "Parent
Affiliated Group"). Under the Tax Sharing Agreement, the Company and its
subsidiaries are generally responsible for Federal taxes based upon the amount
that would be due if the Company and its subsidiaries filed Federal tax returns
as a separate affiliated group of corporations rather than as part of Parent's
consolidated federal tax returns. The allocation of tax liability pursuant to
the Tax Sharing Agreement may not reflect the Company's actual tax liability
that would be imposed on the Company had it not filed tax returns as part of the
Parent Affiliated Group. The combined state tax liabilities are allocated to the
Company and its subsidiaries based on similar principles.
The Company provided financing to KSL Land of approximately $20,800,000
at April 30, 1997. The Company recorded interest income of approximately
$1,946,000 and $1,797,000 in 1999 and 1998, respectively, related to this note
receivable. This unsecured note receivable bears interest at 8% and was paid in
full in October 1999.
Effective April 1, 1998, Desert Resorts entered into a management
agreement with an unconsolidated affiliate, KSL Land II Corporation ("Land II"),
whereby Land II provides development services for the entitlement, subdivision,
construction, marketing, and sale of approximately 97 single family detached
units on approximately eleven acres of real estate currently owned by Desert
Resorts. The development site is adjacent to the Desert Resorts' La Quinta
Resort & Club. The contractor and project management fees for these services are
calculated as 6.0% of the Project Sales Revenues, as defined. Also, Land II is
to be paid by Desert Resorts a marketing fee in an amount equal to 2.75% of the
Project Sales Revenues. Such marketing fee will be used by Land primarily to pay
marketing, sale and promotional expenses to third parties. In fiscal 1999,
Desert Resorts paid $2,274,000 to Land II for project management and marketing
fees.
44
TRANSACTIONS WITH MANAGEMENT
LOANS TO MANAGEMENT
Parent previously made loans to Messrs. Shannon and Saer to fund tax
liability incurred as a result of their receipt of common stock of KSL Land and
certain partnership interests in partnerships affiliated with Parent. As of
October 31, 1999, Messrs. Shannon and Saer have outstanding principal balances
under these notes in the aggregate amounts of $212,461and $32,952, respectively.
PURCHASES OF REAL ESTATE PRODUCTS
During fiscal year 1999, Messrs. Shannon and Lichliter each purchased a "La
Quinta Resort Home" which are homes developed and sold by a subsidiary of the
Company in a project located adjacent to the Company's La Quinta property. Mr.
Shannon paid $820,000 for his home and Mr. Lichliter paid $700,000 for his home.
These prices were the retail "list" prices offered to the public at the time of
their purchases and were not discounted. Each of Messrs. Shannon and Lichliter
subsequently entered into a rental management agreement with a real estate
leasing subsidiary of the Company on standard terms and conditions applicable to
other purchasers of La Quinta Resort Homes who entered into rental management
agreements with such subsidiary. For fiscal year 1999, Mr. Shannon received
$3,195 and Mr. Lichliter received no rental income under their respective rental
management agreements.
45
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
The following Consolidated Financial Statements of KSL Recreation Group,
Inc. and subsidiaries are included in Part II, Item 8:
Independent Auditors' Report
Consolidated Statements of Operations for the years ended October 31,
1999, 1998 and 1997 Consolidated Balance Sheets as of October 31,
1999 and 1998 Consolidated Statements of Stockholder's Equity for the
years ended October 31, 1999, 1998 and 1997 Consolidated Statements
of Cash Flows for the years ended October 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Schedules
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
(In thousands)
BALANCE AT CHARGED TO DEDUCTIONS- BALANCE AT
BEGINNING COST AND NET END OF
OF PERIOD EXPENSES CREDIT LOSS PERIOD
--------- -------- ----------- ------
Allowance for doubtful accounts:
Accounts Receivable....................
Fiscal year ended October 31, 1997 ......... 1,573 1,193 (2,044) 722
Fiscal year ended October 31, 1998 ......... 722 495 (499) 718
Fiscal year ended October 31, 1999 ......... 718 615 (621) 712
Financial statements and schedules not listed are omitted because of the
absence of the conditions under which they are required or because all
material information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits
3.1 Certificate of Incorporation of the Company, filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-4, File No. 333-31025, is hereby incorporated by reference.
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company (changing name to KSL Recreation Group, Inc.),
filed as Exhibit 3.2 to the Company's Form fiscal 1997 10-K,
File No. 333-31025, is hereby incorporated by reference.
3.3 By-laws of the Company, filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is
hereby incorporated by reference.
4.1 Senior Subordinated Notes Indenture, dated as of April 30,
1997, among KSL Recreation Group, Inc. and First Trust of New
York National Association, Trustee, filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
4.2 Form of 10 1/4% Senior Subordinated Note due 2007, filed as
Exhibit 4.2 to the Company's Registration Statement on Form
S-4, File No. 333-31025, is hereby incorporated by reference.
(Included as part of Senior Subordinated Notes Indenture filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-4, File No. 333-31025, and hereby incorporated by
reference.)
46
4.3 Form of 10 1/4% Series B Senior Subordinated Note due 2007,
filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-4, File No. 333-31025, is hereby incorporated by
reference. (Included as part of Senior Subordinated Notes
Indenture filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-4, File No. 333-31025, and hereby
incorporated by reference.)
4.4 Senior Subordinated Notes Registration Rights Agreement, dated
April 30, 1997, by and among KSL Recreation Group, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Brothers Inc, Credit Suisse First Boston Corporation,
BancAmerica Securities, Inc., Montgomery Securities and Scotia
Capital Markets, filed as Exhibit 4.4 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is
hereby incorporated by reference.
10.1 Credit Agreement, dated as of April 30, 1997, among KSL
Recreation Group, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as a co-syndication agent and
documentation agent, The Bank of Nova Scotia, as a
co-syndication agent and administrative agent, and BancAmerica
Securities, Inc., as syndication agent, filed as Exhibit 10.1
to the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.2 Sublease, executed between Lake Lanier Islands Development
Authority and KSL Lake Lanier, Inc., filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.3 Intentionally deleted.
10.4 License Agreement, dated March 5, 1994, between The
Professional Golfer's Association and LML Development Corp. of
California as assigned by the Assignment and Assumption
Agreement, dated December 24, 1993, by and between Landmark
Land Company of California, Inc. and KSL Landmark Corporation,
filed as Exhibit 10.4 to the Company's Registration Statement
on Form S-4, File No. 333-31025, is hereby incorporated by
reference.
10.5 Trademark Agreement, dated January 10, 1985, between PGA Tour,
Inc. and Landmark Land Company of California, Inc. as assigned
by the Assignment and Assumption Agreement, dated December 24,
1993, by and between Landmark Land Company of California, Inc.
and KSL Landmark Corporation, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.6 Intentionally deleted.
10.7 License Agreement, dated December 30, 1993, among Carol
Management Corporation, C.A.H. Spa of Florida Corp., KSL Hotel
Corp., and KSL Spa Corp. (subsequently merged into KSL Hotel
Corp.), filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-4, File No. 333-31025, is hereby
incorporated by reference.
10.8 KSL Recreation Corporation 1995 Stock Purchase and Option
Plan, filed as Exhibit 10.8 to the Company's Registration
Statement on Form S-4, File No. 333-31025, is hereby
incorporated by reference.
10.9 Form of KSL Recreation Corporation Common Stock Purchase
Agreement, filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is
hereby incorporated by reference.
10.10 Form of KSL Recreation Corporation Non-Qualified Stock Option
Agreement, filed as Exhibit 10.10 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is
hereby incorporated by reference.
10.11 Expense Allocation Agreement, dated April 30, 1997, between
KSL Recreation Corporation and KSL Recreation Group, Inc.,
filed as Exhibit 10.11 to the Company's Registration Statement
on Form S-4, File No. 333-31025, is hereby incorporated by
reference.
10.12 Tax Sharing Agreement and Amendment to Tax Sharing Agreement,
dated April 30, 1997, by and between KSL Recreation
Corporation, KSL Recreation Group, Inc., KSL Landmark
Corporation, KSL Desert Resorts, Inc., KSL Vacation Resorts,
Inc., Xochimilco Properties, Inc., Wild West Desert
Properties, Inc., KSL Travel,
47
Inc., KSL Golf Holdings, Inc., KSL Fairways Golf Corporation,
KSL Florida Holdings, Inc., KSL Hotel Corp., KSL Georgia
Holdings, Inc., KSL Lake Lanier, Inc., KSL Land Corporation
and KSL Land II Corporation, filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.13 Second Amendment to the Tax Sharing Agreement, dated November
1, 1997, by and among KSL Recreation Corporation, KSL
Recreation Corporation, KSL Recreation Group, Inc., KSL Land
Holdings, Inc., KSL Landmark Corporation, KSL Desert Resorts,
Inc., Las Casitas Corporation, KSL Real Estate Company, KSL
Travel, Inc., Casitas Plaza Corporation, KSL Golf Holdings,
Inc., KSL Fairways Golf Corporation, KSL Florida Holdings,
Inc., KSL Hotel Corp., KSL Silver Properties, Inc., KSL
Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL Grand
Traverse Holdings, Inc., KSL Grand Traverse Land, Inc., KSL
Grand Traverse Realty, Inc., KSL Grand Traverse Resort, Inc.,
KSL Water Works, Inc., KSL Land Corporation, KSL Citrus
Properties, Inc., KSL Development Corporation, KSL Land II
Corporation, KSL Land III Corporation, KSL Land IV Corporation
and Landaq, Inc., filed as Exhibit 10.13 to the Company's
fiscal 1997 10-K, File No. 333-31025, is hereby incorporated
by reference.
10.14 Contract for Purchase and Sale of Grand Traverse Resort, dated
August 1, 1997, by and between Grand Traverse Holding Company,
GRS Grand Hotel Corporation, General Realty Services, Inc.,
GTR Resort Development, Inc. and Grand Personalty, Inc., TICOR
Title Insurance Corporation and KSL Recreation Corporation as
assigned by the Assignment of Purchase Contract from KSL
Recreation Corporation to KSL Grand Traverse Holdings, Inc.,
KSL Grand Traverse Resort, Inc., KSL Grand Traverse Land,
Inc., KSL Grand Traverse Realty, Inc., and KSL Water Works,
Inc. dated August 1, 1997, filed as Exhibit 10.14 to the
Company's fiscal 1997 10-K, File No. 333-31025, is hereby
incorporated by reference.
10.15 Assignment of Purchase Contract from KSL Recreation
Corporation to KSL Grand Traverse Holdings, Inc., KSL Grand
Traverse Resort, Inc., KSL Grand Traverse Land, Inc., KSL
Grand Traverse Realty, Inc., and KSL Water Works, Inc. dated
August 1, 1997, filed as Exhibit 10.15 to the Company's fiscal
1997 10-K, File No. 333-31025, is hereby incorporated by
reference.
10.16 Agreement of Purchase and Sale between Claremont Hotel, LLC,
Harsch Investment Corp. and KSL Recreation Group, Inc. dated
March 5, 1998, filed as Exhibit 10.1 of the Company's Form
8-K, File No. 333-31025, is hereby incorporated by reference.
10.17 First Amendment Agreement of Purchase and Sale between
Claremont Hotel, LLC, Harsch Investment Corp. and KSL
Recreation Group, Inc. dated April 6, 1998, filed as Exhibit
10.2 of the Company's Form 8-K, File No. 333-31025, is hereby
incorporated by reference.
10.18 Second Amendment Agreement of Purchase and Sale between
Claremont Hotel, LLC, Harsch Investment Corp. and KSL
Recreation Group, Inc. dated April 20, 1998 filed as Exhibit
10.3 of the Company's Form 8-K, File No. 333-31025, is hereby
incorporated by reference.
10.19 Amended and Restated Credit Agreement dated as of April 20,
1998, among KSL Recreation Group, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation, as a co-syndication agent and
documentation agent, The Bank of Nova Scotia, as a
co-syndication agent and administrative agent, and BancAmerica
Securities, Inc., as syndication agent, filed as Exhibit 10.5
of the Company's Form 8-K, File No. 333-31025, is hereby
incorporated by reference.
10.20 Agreement of Purchase and Sale and Joint Escrow Instructions
between International Hotel Acquisitions, LLC, and KSL
Recreation Corporation, dated November 5, 1998, filed as
exhibit 10.1 of the Company's most recent Form 8-K, File
333-31025, is hereby incorporated by reference.
10.21 First Amendment to Agreement for Purchase and Sale and Joint
Escrow Instructions between International Hotel Acquisitions,
LLC and KSL Recreation Corporation dated November 12, 1998,
filed as Exhibit 10.2 of the Company's most recent Form 8-K,
File No. 333-31025, is hereby incorporated by reference.
48
10.22 Assignment of Agreement of Purchase and Sale between KSL
Recreation Corporation and KSL Grand Wailea Resort, Inc.,
dated December 10, 1998, filed as Exhibit 10.3 of the
Company's Form 8-K, File No. 333-31025, is hereby incorporated
by reference.
10.23 Second Amendment to Agreement for Purchase and Sale and Joint
Escrow Instructions between International Hotel Acquisitions,
LLC and KSL Grand Wailea Resort, Inc., dated December 23,
1998, filed as Exhibit 10.4 of the Company's Form 8-K, File
No.
333-31025, is hereby incorporated by reference.
10.24 Management Agreement by and between KSL Desert Resorts, Inc.
and KSL Land II Corporation, dated April 1, 1998, is hereby
incorporated by reference.
10.25 Stock Purchase Agreement among Apollo Real Estate Investment
Fund IV, L.P. and KSL Fairways Golf Corporation and KSL Golf
Holdings, Inc., dated August 9, 1999, Exhibit 10.1, Form 8-K,
File No. 333-31025, is hereby incorporated by reference.
10.26 Fourth Amendment to the Tax Sharing Agreement, dated, October
1, 1999 by and among KSL Recreation Corporation, KSL
Recreation Group, Inc., KSL Land Holdings, Inc., KSL Desert
Resorts, Inc., Las Casitas Corporation, KSL Real Estate
Company, Casitas Plaza Corporation (renamed KSL La Quinta
Corporation), KSL Golf Holdings, Inc., KSL Resorts Group,
Inc., KSL Florida Holdings, Inc., KSL Hotel Corp., KSL Silver
Properties, KSL Development Corp., KSL Georgia Holdings, Inc.,
KSL Lake Lanier, Inc., KSL Land Corporation, KSL Citrus
Properties, Inc., KSL Development Corporation, KSL Land II
Corporation, KSL Land III Corporation, KSL Land IV
Corporation, Landaq, Inc., KSL Grand Traverse Holdings, Inc.,
KSL Grand Traverse Realty, Inc., KSL Grand Traverse Resort,
Inc., KSL Water Works, Inc., KSL Hawaii Holdings I, Inc., KSL
Hawaii Holdings II, Inc., KSL Hawaii Holdings III, Inc., KSL
Hawaii Holdings IV, Inc., KSL Hawaii Holdings V, Inc., KSL
Grand Wailea Hospitality Corporation and KSL Grand Wailea
Resort, Inc. Form 8-K, File No. 333-31025, Exhibit 10.2, Form
8-K, File No. 333-31025, is hereby incorporated by reference.
*10.27 Agreement and Release, dated November 29, 1999, by and among
KSL Golf Holdings, Inc., Fairways Acquisition Company, Apollo
Real Estate Investment Fund IV, L.P. and Fairways Golf
Corporation.
*11 Computation of Earnings (Loss) Per Share
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries of the Company
*27 Financial Data Schedule for the period ended October 31, 1999.
- -------------------
* Filed herewith.
(4) Reports on Form 8-K, is hereby incorporated by reference.
On October 15, 1999 the Company filed Form 8-K. The purpose of
the filing was to disclose the sale of KSL Fairways Golf Corporation.
The following financial statements and pro forma financial information
were filed as part of this Form 8-K:
(a)(1) Unaudited historical and pro forma condensed consolidated
statements of operations for the fiscal year ended October 31, 1998 and
the nine months ended July 31, 1999.
(2) Unaudited historical and pro forma condensed consolidated balance
sheet as of July 31, 1999.
49
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, on January 29, 2000.
KSL RECREATION GROUP, INC.
By: /s/ John K. Saer, Jr.
----------------------------------
John K. Saer, Jr.
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
in the capacities indicated on January 29, 2000.
Signatures Title
- ---------------------------------------------- ------------------------------------------------
/s/ Michael S. Shannon President, Chief Executive Officer and Director
- ---------------------------------------------- (Principal Executive Officer)
(Michael S. Shannon)
/s/ Larry E. Lichliter
- ---------------------------------------------- Executive Vice President and Director
(Larry E. Lichliter)
/s/ Henry R. Kravis Director
- ----------------------------------------------
(Henry R. Kravis)
Director
- ----------------------------------------------
(George R. Roberts)
/s/ Paul E. Raether Director
- ----------------------------------------------
(Paul E. Raether)
/s/ Michael T. Tokarz Director
- ----------------------------------------------
(Michael T. Tokarz)
/s/ Scott M. Stuart Director
- ----------------------------------------------
(Scott M. Stuart)
Director
- ----------------------------------------------
(Alexander Navab, Jr.)
/s/ John K. Saer, Jr. Vice President, Chief Financial Officer
- ---------------------------------------------- and Treasurer (Principal Financial Officer)
(John K. Saer, Jr.)
/s/ Emily-May Richards Controller (Principal Accounting Officer)
- ----------------------------------------------
(Emily-May Richards)
50