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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 THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended October 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number - 333-31025
KSL RECREATION GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0747103
- --------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5-880 PGA BOULEVARD
LA QUINTA, CALIFORNIA 92253
- --------------------------------------- ----------------------------
(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
--- ---
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.
The number of shares of common stock ($.01 par value) outstanding at January 29,
2001 was 1,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None
1
INDEX
PAGE
Part I.
Item 1. Business.................................................................................................3
Item 2. Properties...............................................................................................8
Item 3. Legal Proceedings........................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders......................................................8
Part II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................9
Item 6. Selected Financial Data..................................................................................9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................10
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..............................................15
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 involved in two operating segments, Resort and
Real Estate, which represented 96% and 4%, respectively of revenues, in fiscal
2000. The Resort segment has engaged in service-based recreation through the
ownership and management of resorts, spas, golf courses, private clubs, and
activities related thereto. The Company's Resort 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 and 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. The Resort segment'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 and athletic focused special events. The Real
Estate segment develops and sells real estate in and around the Company's Resort
operations. The Real Estate operations exist to support and enhance growth of
the Company's Resort operations.
The Company is wholly owned by KSL Recreation Corporation (the "Parent"), a
Delaware corporation incorporated on May 19, 1993, of which approximately 97.8%
of the common stock as of October 31, 2000, (89.0% on a fully diluted basis) is
owned by partnerships formed at the direction of Kohlberg Kravis Roberts & Co.,
L.P. ("KKR"). Shortly after the Company's formation in March 1997, the
subsidiaries of the Parent which owned Desert Resorts and Doral, and managed
Lake Lanier, became wholly owned subsidiaries of the Company. Additional wholly
owned subsidiaries of the Company have been formed in connection with subsequent
acquisitions.
In December 2000, the Company, through a subsidiary, purchased substantially all
of the assets and certain liabilities of the Arizona Biltmore Resort & Spa, a
730-room resort, for approximately $335 million, including the assumption of an
approximate $59.4 million mortgage and excluding a working capital adjustment of
$8.3 million and estimated transaction costs of $5.3 million.
DESERT RESORTS
Desert Resorts is located in La Quinta, California, a golf and recreation
destination near Palm Springs, California. Since the acquisition of Desert
Resorts in December 1993, the Company has invested approximately $78 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 622 "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, several 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 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 an $85,000 deposit, which is fully refundable in
thirty years (or sooner under certain circumstances), and annual golf dues of
$6,300. A full golf membership at PGA WEST currently requires a $90,000 deposit,
which is fully refundable in thirty years (or sooner under certain
circumstances), and annual golf dues of $6,960.
In 1999 and 2000, Desert Resorts sold 68 homes for approximately $41 million in
the first three phases of its development of ninety-eight single-family
"casitas" homes adjacent to La Quinta (the "La Quinta Resort Homes"). The fourth
phase of this development of luxury homes is currently under construction. This
development is expected to represent a total investment by Desert Resorts of
approximately $48.6 million, of which $34.7 million was incurred through October
31, 2000. Approximately 61 of the La Quinta Resort Homes are currently in Desert
Resorts' rental program.
3
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 $79 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 Course by
Greg Norman which reopened as "The Great White Course" in February, 2000; the
"Blue Monster" golf course, 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 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 water feature and pool facility, and a
private club members' facility that opened in March, 2000.
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 $23,500
deposit which is fully refundable in thirty years (or sooner under certain
circumstances), and annual dues of approximately $4,428.
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, Georgia. 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. Lake Lanier renovated all of its hotel rooms during 2000.
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 over 1,000 acres and features a 426-room hotel,
approximately 55,000 square feet of conference space, three championship 18-hole
golf courses, a 22,000 square foot clubhouse, an 11,000 square foot spa, nine
tennis 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. Another
championship 18-hole golf course, "The Wolverine", was designed by professional
golfer and golf course designer Gary Player. 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
$13,500 deposit which is fully refundable in thirty years (or sooner under
certain circumstances), and annual dues of approximately $2,280.
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, two pools, ten tennis courts, and fitness facilities. In
addition, The Claremont recently completed a new 15,000 square foot European
style spa with 43 treatment rooms. During 2000, The Claremont completed
extensive room and common area renovations. The Claremont's private club
membership currently requires a $9,500 deposit, which is fully refundable in
thirty years (or sooner under certain circumstances), and annual dues ranging
from $2,940 to $3,900.
4
GRAND WAILEA
In December 1998, the Company acquired Grand Wailea Resort Hotel & Spa, located
in Maui, Hawaii. It comprises forty acres situated close to the base of south
Maui's Mount Haleakala, and includes elaborate pools, grottos and waterslides
reflecting 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, blackout periods, special activities and programming. These
memberships currently require a deposit of up to $10,000 depending on the type
of membership and annual dues ranging from $100 to $2,400. The deposits are
fully refundable in thirty years (or sooner under certain circumstances).
MARKETING AND SALES 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 distribution 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, conducts public relations and engages advertising agencies,
coordinates communications with media sources, and develops video materials,
interactive CDs, and Internet Web sites.
While the Company's customer base varies by resort (as discussed in the
"Customers" section below), a significant portion of resort revenues are derived
from corporate and other group business. The Company uses a national sales force
to develop corporate and other group business for the resort facilities by
focusing on identifying, obtaining and maintaining corporate and other group
business through direct relationships with these accounts and through third
party 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; Atlanta, Georgia; Los Angeles, San Francisco and Corona,
California; Detroit, Michigan; and Reston, Virginia.
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 typically 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 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 affluent corporate guests visiting
the San Francisco Bay area and surrounding communities, including Silicon
Valley. The Claremont's private club appeals to and attracts local spa and
fitness enthusiasts.
CERTAIN FACTORS AFFECTING RESORTS
5
The Company currently operates 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.
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 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
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.
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 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 at the Company's resorts 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 from the Company's
membership programs, 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.
RELIANCE ON KEY PERSONNEL
The operations of the Company are dependent on the continued efforts of senior
management, in particular Michael S. Shannon, the Company's President and Chief
Executive Officer. There are no employment agreements between the Company and
the members of its senior management, except E.D. Bryant, the Company's Vice
President of Direct Marketing and Sales. There can be no assurance that members
of the Company's senior management will continue in their present roles, and
should any of the Company's senior managers be unable or choose not to do so,
the Company's prospects could be adversely affected.
LICENSES AND TRADEMARKS
6
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
affect 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 with the United States Patent
and Trademark Office.
EMPLOYEES
For the year ended October 31, 2000, the Company employed approximately 7,000
persons during its peak seasons and approximately 6,000 persons during its
off-peak seasons. In addition, the Parent employs approximately 45 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. At Grand Wailea, one union represents
approximately 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.
7
ITEM 2. PROPERTIES
PROPERTIES CITY/STATE OWNED/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.
In December 2000, the Corporation acquired, through a subsidiary, the
Arizona Biltmore Resort & Spa, located in Phoenix, Arizona. With the exception
of a very small portion of this property that is under a long-term ground lease,
the Arizona Biltmore is owned by the acquiring subsidiary of the Company.
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 affect 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 2000.
8
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 RATIOS, SHARE AND PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
2000 1999(1) 1998(2) 1997(3) 1996
---- ------- ------- ------- ----
Revenue:
Resort......................................... $ 447,659 $ 419,304 $ 296,978 $ 226,633 $ 183,122
Real estate.................................... 17,312 34,416 887 - -
----------- ----------- ----------- ----------- -----------
Total revenue.............................. $ 464,971 $ 453,720 $ 297,865 $ 226,633 $ 183,122
Operating expenses:
Resort......................................... 320,557 305,559 219,000 165,567 143,258
Real estate.................................... 13,654 23,117 803 - -
Depreciation and amortization.................. 50,687 55,569 36,354 27,665 23,799
----------- ----------- ----------- ----------- -----------
Total operating expenses................... $ 384,898 $ 384,245 $ 256,157 $ 193,232 $ 167,057
Income from operations............................. 80,073 69,475 41,708 33,401 16,065
Gain on sale of subsidiary......................... - 22,393 - - -
Net interest expense............................... 49,165 48,665 33,125 30,037 27,711
Net income (loss).................................. $ 16,140 $ 23,332 $ 14,114 $ (363) $ 19,741
========== ========== ========== ============ ==========
Net income (loss) per share:
Before extraordinary item...................... $ 16,140 $ 23,332 $ 14,114 $ 2,801 $ (12,379)
Extraordinary gain (loss)...................... - - - (3,164) 32,120
----------- ----------- ----------- ----------- -----------
Net income (loss) per share......................... $ 16,140 $ 23,332 $ 14,114 $ (363) $ 19,741
========== ========== ========== ============ ==========
Weighted-average number of common shares and common
share equivalents................................ 1,000 1,000 1,000 1,000 1,000
============ ============ ============ ============ ============
Balance Sheet Data:
Cash and cash equivalents........................... 16,567 9,369 5,248 24,056 9,329
Total assets........................................ 1,034,457 1,026,068 737,593 636,041 578,852
Debt and capital leases (including current portion). 564,632 584,109 442,212 366,020 271,436
Other data:
EBITDA (4).......................................... $ 126,981 $ 145,184 $ 76,596 $ 60,646 $ 39,049
Net membership deposits (5) ........................ 28,964 27,174 17,544 8,311 4,391
Adjusted net membership deposits (6) ............... 28,964 19,054 17,544 8,311 4,391
Other non cash and non recurring items (7).......... 3,779 (20,022) 1,820 563 873
Adjusted EBITDA (8)................................. 159,724 144,216 95,960 69,520 44,313
Ratio of earnings to fixed charges (9).............. 1.5x 1.7x 1.2x 1.1x -
1) 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. The Fairways Group was sold in
September 1999. Accordingly, the Company's operating results for fiscal
1999 included approximately eleven months of operations for the
Fairways Group. Additionally, the Company realized a pre-tax gain of
$22.4 million from the sale of this subsidiary.
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.
9
3) 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.
4) EBITDA is defined as net income before (i) income tax expense; (ii)
depreciation and amortization; and (iii) net interest expense. EBITDA
is not defined under generally accepted accounting principles ("GAAP"),
and it may not be comparable to similarly titled measures reported by
other companies.
5) 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. These membership deposits are fully refundable in thirty
years (or sooner under certain circumstances). In accordance with
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.
6) Adjusted Net Membership Deposits is defined as Net Membership Deposits,
excluding $8.1 million in fiscal 1999, because this amount, which
relates to membership deposits assumed in connection with the
acquisition of the Grand Wailea Resort, was considered non-recurring in
nature.
7) Other non-cash and non recurring items consist of loss on sale of
facility, gain on sale of subsidiary, extraordinary items, non
recurring charges and non-cash membership related items.
8) Adjusted EBITDA is defined as EBITDA adjusted for (i) net membership
deposits and (ii) other non-cash and/or non-recurring items. Adjusted
EBITDA should not be construed as an indicator of the Company's
operating performance or as an alternative to profitability measures 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.
9) 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 were insufficient to cover fixed charges by $13.0 million.
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.
CONSOLIDATED RESULTS OF OPERATIONS
Net income totaled $16.1 million, $23.3 million and $14.1 million for the years
ended October 31, 2000, 1999 and 1998, respectively. Net income in fiscal 1999
included a pre-tax gain of $22.4 million from the sale of a subsidiary. Income
from operations totaled $80.1 million, $69.5 million and $41.7 million in fiscal
2000, 1999 and 1998, respectively. The improvement in operating results from the
year ended October 31, 1999 to the year ended October 31, 2000 relates primarily
to increases in operating income by the resort segment and the full year impact
of the acquisition of the Grand Wailea Resort offset partially by decreases in
operating income by the real estate segment and the disposition of the Fairways
subsidiary. The improvement in operating results from the year ended October 31,
1998 to the year ended October 31, 1999 relates primarily to the full year
impact of the acquisition of The Claremont in April 1998 and the acquisition of
the Grand Wailea Resort in December 1998. Additional information relating to the
operating results for each business segment is set forth below.
10
RESORT SEGMENT
Select operating data for the Company's resort segment for the years indicated
is as follows:
(IN THOUSANDS, EXCEPT OPERATING STATISTICS)
YEAR ENDED OCTOBER 31,
2000 1999 1998
---- ---- ----
Resort revenue:
Rooms............................................ $ 172,338 $ 145,557 $ 83,892
Food and beverage................................ 112,897 103,884 74,706
Golf fees........................................ 32,809 48,592 48,529
Dues and fees.................................... 21,596 30,602 28,716
Merchandise...................................... 21,800 20,495 16,300
Spa ............................................. 23,458 17,255 6,639
Other............................................ 62,761 52,919 38,196
------------ ----------- -----------
Total resort revenue......................... 447,659 419,304 296,978
Resort operating income.............................. 76,415 58,176 41,624
Operating statistics:
Available room nights............................ 1,245,457 1,164,764 864,543
Occupancy........................................ 67.3% 63.9% 60.0%
ADR (average daily room rate).................... $ 205.64 $ 192.62 $ 159.43
RevPAR (revenue per available room night)........ $ 138.35 $ 123.10 $ 95.71
FISCAL YEAR ENDED OCTOBER 31, 2000 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1999
RESORT REVENUES. Resort revenues increased by $28.4 million or 6.8%, from $419.3
million in fiscal 1999 to $447.7 million in fiscal 2000. The increase can be
attributed to: (i) internal growth as the Company achieved significant increases
in occupancy and ADR at its resorts, especially at Grand Wailea; (ii) revenue
growth related to recently completed capital improvements; and (iii) a full year
of operations at Grand Wailea in fiscal 2000 compared to ten months of
operations in fiscal 1999. These increases totaled $73.6 million and were offset
by the disposition of Fairways in September 1999, which had revenues of $45.2
million in fiscal 1999. Rooms revenue increased by $26.8 million or 18.4%; food
and beverage sales increased by $9.0 million or 8.7%; merchandise sales
increased by $1.3 million or 6.4%; spa revenue increased by $6.2 million or
35.9%; and other revenue increased by $9.8 million or 18.6%. As impacted by the
sale of Fairways, golf fees decreased by $15.8 million or 32.5% and dues and
fees decreased by $9.0 million.
During fiscal 2000, 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 $59.9 million in fiscal 2000.
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.
RESORT OPERATING EXPENSES. With the exception of the cost of real estate sold,
substantially all of the Company's operating expenses, including depreciation
and amortization and the corporate fee, relate to the Resort segment. Operating
expenses (excluding depreciation and amortization and the corporate fee)
increased by $14.1 million, or 4.8%, from $295.8 million in fiscal 1999 to
$309.9 million in fiscal 2000. Excluding Fairways, operating expenses (other
than depreciation and amortization and the corporate fee) increased $48.7
million from fiscal 1999. The increase can be attributed to increased expenses
related to revenue growth discussed above. Depreciation and amortization
decreased $4.9 million or 8.8%. The decrease can be attributed primarily to the
disposition of Fairways, which had depreciation and amortization of $8.0 million
in fiscal 1999. This decrease was partially offset by increased depreciation due
to the ongoing capital improvements at each of the resorts and the full year
impact of the acquisition of Grand Wailea.
RESORT OPERATING INCOME. Operating income increased $18.2 million, or 31.4%,
from $58.2 million in fiscal 1999 to $76.4 million in fiscal 2000 due to the
factors detailed above. The operating income for the resort segment margin was
17.1% in fiscal 2000 as compared to 13.9% in fiscal 1999.
REAL ESTATE OPERATIONS. Real estate revenue totaled $17.3 million in fiscal 2000
as compared to $34.4 million in fiscal 1999, a year over year decrease of $17.1
million or 49.7%. Operating income earned by the real estate segment decreased
$7.6 million or 67.3% from $11.3 million in 1999 to $3.7 million in 2000. The
decreases in real estate revenue and operating income can be attributed to: (i)
the sale of a parcel of land adjacent to Doral and (ii) fewer sales of guest
casitas on site adjacent to La Quinta Resort and Spa in fiscal 2000 as
11
compared to fiscal 1999. The Company sold the land adjacent to Doral for $9.5
million, which resulted in operating income of $8.0 million for the real estate
segment in fiscal 1999. In addition, the real estate segment sold 42 guest
casitas for approximately $24.4 million on a site adjacent to La Quinta Resort
and Spa in fiscal 1999. In fiscal 2000, the real estate segment sold 26 of these
casitas for approximately $16.6 million. The year over year difference in unit
sales had minimal impact on operating income for the real estate segment as
operating income related to these sales was comparable in fiscal 1999 and fiscal
2000.
NET INTEREST EXPENSE. Net interest expense increased by $0.5 million or 1.0%
from $48.7 million in fiscal 1999 to $49.2 in fiscal 2000. Interest expense for
the year ended October 31, 2000 consisted primarily of interest on the Company's
(i) $125.0 million 10 1/4% Senior Subordinated Notes due 2007; (ii) a $275.0
million Mortgage secured by the Grand Wailea Resort; (iii) Term A and Term B
Notes drawn against the Company's Amended and Restated Credit Facility; and (iv)
revolving borrowings under the Company's Amended and Restated Credit Facility.
Slightly lower average debt balances in fiscal 2000 were offset by a slightly
higher effective interest rate in fiscal 2000.
INCOME TAX EXPENSE. Income tax expense decreased to $11.0 million in fiscal 2000
from $17.6 million in fiscal 1999. The Company's effective tax rate for fiscal
2000 was 40.5% as compared to 43.0% in fiscal 1999.
NET INCOME. Net income decreased by $7.2 or 30.8% from $23.3 million in fiscal
1999 to $16.1 million in fiscal 2000. Included in fiscal 1999 net income is a
$22.4 million pre-tax gain from the sale of a subsidiary.
ADJUSTED EBITDA. Adjusted EBITDA increased by $15.5 million or 10.7% from $144.2
million in fiscal 1999 to $159.7 million in fiscal 2000 primarily due to the
factors described above and an increase in Adjusted Net Membership Deposits of
$9.9 million or 52.0%, from $19.1 million in fiscal 1999 to $29.0 million in
fiscal 2000.
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
RESORT REVENUES. Resort revenues increased by $122.3 million, or 41.2%, from
$297.0 million in fiscal 1998 to $419.3 million in fiscal 1999. The increase can
be attributed primarily to the acquisition of Grand Wailea and the full year
impact of the acquisition of the Claremont. In fiscal 1999, Grand Wailea had
$89.3 million of revenues. In addition, the Claremont, which was acquired in
April 1998 had $36.5 million of revenue in fiscal 1999 compared to $18.9 million
of revenue in fiscal 1998. These increases were partially offset by the
disposition of Fairways, which was sold in September 1999. In fiscal 1999,
Fairways had revenue of $45.2 million compared to revenues of $48.6 million in
fiscal 1998. The remaining increase in revenue can be attributed to revenue
growth at operations owned for all of 1998 and 1999 as the Company achieved
improved operations at these properties.
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 $63.7 million in fiscal 1999
and include: at Desert Resorts, the construction of a new golf facility by Greg
Norman, the recapture and renovations of approximately four thousand square feet
of retail space, and the construction of fifty Casita style resort homes
adjacent to the La Quinta Resort; at Doral, construction of a pool/water
feature, the ongoing construction of a member clubhouse, the commencement of a
complete rebuild of the White golf course by Greg Norman, and renovation of
several new retail stores; at The Claremont, extensive room and common area
renovations; at Grand Traverse, the construction of a golf clubhouse and an
eleven thousand square foot spa, and the refurbishment and branding of six
retail stores; and at Lake Lanier, the completion of approximately ten thousand
square feet of additional meeting space, the renovations 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
disruption in normal business levels and hence, dampened revenue growth at these
properties.
RESORT OPERATING EXPENSES. With the exception of the cost of real estate sold,
substantially all of the Company's operating expenses, including depreciation
and amortization and the corporate fee, relates to the resort segment. Operating
expenses (excluding depreciation and amortization and corporate fee) increased
by $85.5 million, or 40.7%, from $210.3 million in fiscal 1998 to $295.8 million
in fiscal 1999. Depreciation and amortization increased $19.2 million or 52.9%
from 36.4 million in fiscal 1998 to $55.6 million in fiscal 1999. These
increases can be attributed primarily to the acquisitions of the Grand Wailea
Resort and the Claremont Resort as discussed above. Fairways, which was sold in
September 1999, had total operating expenses (excluding the corporate fee) of
$42.6 million in fiscal 1999 compared to $45.1 million in fiscal 1998.
RESORT OPERATING INCOME. Resort operating income increased $16.6 million, or
39.9%, from $41.6 million in fiscal 1998 to $58.2 million in fiscal 1999 as a
result of the factors discussed above. Operating income for the resort segment
margin was 13.9% in fiscal 1999 and 14.0% in fiscal 1998.
12
REAL ESTATE OPERATIONS. Real estate revenue totaled $34.4 million in fiscal 1999
as compared to $0.9 million in fiscal 1998, a year over year increase of $33.5
million. Operating income earned by the real estate segment increased $11.2
million to $11.3 million in fiscal 1999. The increase in real estate revenue and
operating income can be attributed to: (i) the sale of a parcel of land adjacent
to Doral for $9.5 million in fiscal 1999; (ii) the sale of 42 guest casitas for
$24.4 million on a site adjacent to La Quinta Resort and Spa in fiscal 1999. The
sale of land adjacent to Doral resulted in operating income of $8.0 million for
the real estate segment in fiscal 1999; whereas the sale of the guest casitas
resulted in operating income of $2.4 million in fiscal 1999 for the real estate
segment. In fiscal 1998, the Company had only minor real estate operations.
NET INTEREST EXPENSE. Net interest expense increased by $15.5 million, or 46.9%
from $33.1 million in fiscal 1998 to $48.7 million in fiscal 1999. The increase
can be attributed to the assumption of a $275 million mortgage to partially
finance the acquisition of the Grand Wailea. The increase can also be attributed
to the full year impact of the $88.0 million of debt incurred to finance the
acquisition of the Claremont.
INCOME TAX EXPENSE. Income tax expense was $17.6 million in fiscal 1999 as
compared to an income tax benefit of $7.0 million in fiscal 1998. The Company's
effective tax rate for 1999 was 43.0%. The income tax benefit in fiscal 1998 can
be attributed primarily to the reversal of valuation allowance of $11.1 million
against the Company's deferred tax assets.
NET INCOME. Net income increased by $9.2 million or 65.3% from $14.1 million in
fiscal 1998 to $23.3 million in fiscal 1999. Included in fiscal 1999 net income
is a $22.4 million pre-tax gain from the sale of a subsidiary.
ADJUSTED EBITDA. Adjusted EBITDA increased by $48.2 million or 50.3% from $96.0
million in fiscal 1998 to $144.2 million in fiscal 1999 primarily due to the
factors described above and an increase in Adjusted Net Membership Deposits of
$1.6 million or 8.6%, from $17.5 million in fiscal 1998 to $19.1 in fiscal 1999.
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 2000, cash flow provided by operating activities was $73.7
million compared to $83.2 million in fiscal 1999. Fiscal 2000 included cash
paid for taxes of $20.1 million compared to cash paid for taxes of 0.9
million in fiscal 1999. Excluding the impact of cash paid for taxes,
operating cash flow in fiscal 2000 increased $9.7 million or 11.5% from
fiscal 1999. As of October 31, 2000, the Company had cash and cash
equivalents of $16.6 million (excluding restricted cash of $13.5 million).
The Company's long-term debt at October 31, 2000 included (i) $125.0 million
10 1/4% Senior Subordinated Notes due 2007; (ii) a $275.0 million mortgage
secured by the Grand Wailea Resort; (iii) Term A and Term B Notes totaling
$97.0 million drawn against the Company's Amended and Restated Credit
Facility; and (iv) $34.0 million of revolving borrowings under the Company's
Amended and Restated Credit Facility. Capital expenditures totaled $59.9
million, $63.7 million and $32.3 million for the fiscal years ended October
31, 2000, 1999 and 1998, respectively. Although the Company has no material
firm commitments for capital expenditures, the Company expects to invest
significant capital in its Resort properties in the future to drive revenue
growth.
As of October 31, 2000, the Company had a revolving credit facility, which
allowed for maximum borrowings of $257.3 million. Maximum borrowings under the
revolving credit line decrease to $239.6 million in May 2001, $216.1 million in
May 2002 and $186.6 million in May 2003. Borrowings under the credit facility
bear interest at variable rates up to 2.50 % above LIBOR or 1.25% above the
Syndication Agent's base rate. As of October 31, 2000 borrowings under the
revolving credit facility were $34.0 million and bore interest at LIBOR plus
0.625% and mature on April 30, 2004. Concurrent with the acquisition of the
Arizona Biltmore on December 22, 2000, the Company amended its credit facility.
The Amended and Restated Credit Facility allows for maximum borrowings of $529.3
million including Term A and Term B loans of $48.5 million each, a Term C loan
of $175.0 million and maximum borrowings under a revolving credit facility of
$257.3 million, decreasing to $239.7 million, $216.1 million and $186.6 million
in May 2001, 2002 and 2003, respectively. Borrowings under the Amended and
Restated Credit Facility as of December 22, 2000 bear interest at variable rates
up to 2.875% above LIBOR or 1.875% above the Syndication Agent's Base Rate.
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 the Parent or partnerships formed at the
direction of KKR, or other external debt or equity financings. There
13
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
at least the next twelve months. 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 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
existing indebtedness may be adversely impacted.
INFLATION
Inflation and changing prices have not had a material impact on the Company's
revenue and results of operations. Based on the current economic climate, the
Company does not expect that inflation and changing prices will have a material
impact on the Company's revenue or earnings during fiscal 2001. However, there
can be no assurance that increases in labor and other operating costs due to
inflation will not have a material impact on the Company's future profitability.
ECONOMIC DOWNTURN
Resort revenues are derived from discretionary recreational spending that can be
impacted by a significant economic downturn, which, in turn could adversely
impact the Company's operating results. There can be no assurance that a
decrease in the level of discretionary spending by consumers in the future would
not have an adverse effect on the Company.
ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended by SFAS 137, which
modified the effective date of SFAS 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, SFAS 133 was further amended
by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". SFAS 133, as amended, requires that every derivative instrument,
including certain derivative instruments embedded in other contracts, and
hedging activities be recorded on the balance sheet at its fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. SFAS
133 also requires that the Company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company adopted
SFAS 133 as of November 1, 2000. On that date the Company recorded an asset of
$4.6 million in "Other Long-Term Assets" and a net of tax adjustment of $2.7
million recorded as "Other Comprehensive Income".
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company adopted SAB 101 effective upon issuance. The adoption of SAB 101 did
not have a material effect on the Company's consolidated financial statements.
YEAR 2000 COMPLIANCE
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
15, 2001, the Company has experienced no significant year-2000 related operating
difficulties.
RECENT EVENTS
On December 22, 2000, the Company, through a wholly-owned subsidiary, acquired
certain assets and assumed certain liabilities comprising the Arizona Biltmore
Resort & Spa (the "Property"), located in Phoenix, Arizona, pursuant to an
agreement of purchase and sale between Biltmore Hotel Partners, LLLP, an Arizona
limited liability limited partnership ("Seller"), and the Company dated December
22, 2000 ("Agreement"). The Company, by unanimous consent of the Board of
Directors, approved and assigned the Agreement and all rights, title, interest
and obligations thereunder to a newly formed, wholly-owned subsidiary of the
Company, KSL Biltmore Resort, Inc., a Delaware corporation.
14
The purchase price of the Property was $335.0 million (excluding transaction
costs of approximately $5.3 million and a working capital purchase adjustment of
$8.3 million). The Company financed the acquisition with cash and debt issued
under its Amended and Restated Credit Agreement (as amended December 22, 2000)
with various financial institutions, Credit Suisse First Boston, The Bank of
Nova Scotia and Salomon Smith Barney. In addition, the Company assumed a
mortgage of $59.4 million, secured by the Property. The acquisition was
accounted for using the purchase method of accounting.
The Company intends to continue to operate the Property as a resort hotel and
spa.
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, 2000, the Company's debt consisted of approximately $125.0 million
of fixed rate debt at a weighted average interest rate of 10.25% and $406.0
million of variable rate debt at a weighted average interest rate of 8.31%. The
Company entered into interest swap agreements to reduce its exposure to interest
rate fluctuations on its variable rate debt. As of October 31, 2000, the Company
had swap agreements in effect with notional amounts totaling $270.0 million.
The amount of variable rate debt fluctuates during the year based on the
Company's cash requirements. If average interest rates were to increase one
eighth of one percent for the year ended October 31, 2000, the net impact on the
Company's pre-tax earnings would have been approximately $0.2 million.
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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, 2001
16
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 1999 1998
---- ---- ----
Revenues:
Resort ........................................................... $ 447,659 $ 419,304 $ 296,978
Real estate....................................................... 17,312 34,416 887
----------- ----------- -----------
Total revenues................................................ 464,971 453,720 297,865
Expenses:
Cost of real estate............................................... 13,654 23,117 803
Payroll and benefits.............................................. 152,977 143,507 100,339
Other expenses.................................................... 156,876 152,252 109,911
Depreciation and amortization..................................... 50,687 55,569 36,354
Corporate fee..................................................... 10,704 9,800 8,750
----------- ----------- -----------
Total operating expenses...................................... 384,898 384,245 256,157
----------- ----------- -----------
Income from operations............................................ 80,073 69,475 41,708
Other income (expense):
Gain on sale of subsidiary........................................ - 22,393 -
Interest income................................................... 1,299 3,114 2,527
Interest expense.................................................. (50,464) (51,779) (35,652)
Other income (expense)............................................ (3,779) (2,371) (1,595)
----------- ----------- -----------
Other expense, net............................................ (52,944) (28,643) (34,720)
----------- ----------- -----------
Income before minority interests and income taxes................. 27,129 40,832 6,988
Minority interests in losses of subsidiary........................ - 118 129
----------- ----------- -----------
Income before income taxes........................................ 27,129 40,950 7,117
Income tax expense (benefit)...................................... 10,989 17,618 (6,997)
----------- ----------- -----------
Net income $ 16,140 $ 23,332 $ 14,114
=========== =========== ===========
Basic and diluted earnings per share.............................. $ 16,140 $ 23,332 $ 14,114
=========== =========== ===========
Weighted average number of 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, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 16,567 $ 9,369
Restricted cash ..................................................................... 5,768 10,421
Trade receivables, net of allowance for doubtful receivables of $882 and $712,
respectively..................................................................... 23,219 21,855
Inventories.......................................................................... 13,436 12,467
Current portion of notes receivable.................................................. 6,623 4,015
Other receivables.................................................................... 3,618 6,048
Prepaid expenses and other current assets............................................ 2,771 4,593
Deferred income taxes................................................................ 2,697 1,523
----------- -----------
Total current assets............................................................ 74,699 70,291
Real estate under development............................................................. 6,886 8,947
Property and equipment, net............................................................... 750,056 736,254
Notes receivable, less current portion.................................................... 6,646 3,754
Restricted cash, less current portion..................................................... 7,683 8,150
Excess of cost over net assets of acquired entities, net of accumulated amortization
of $27,812 and $22,863, respectively................................................. 100,832 105,775
Other assets, net......................................................................... 87,655 92,897
=========== ===========
$ 1,034,457 $ 1,026,068
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................................... $ 13,026 $ 13,411
Income taxes payable................................................................. - 10,441
Accrued liabilities.................................................................. 31,539 28,572
Accrued interest payable............................................................. 1,571 1,642
Current portion of long-term debt.................................................... 1,000 1,000
Current portion of obligations under capital leases.................................. 926 1,303
Customer and other deposits.......................................................... 18,165 18,173
Payable to parent.................................................................... 1,840 -
Deferred income and other............................................................ 3,249 2,732
----------- -----------
Total current liabilities....................................................... 71,316 77,274
Long-term debt, less current portion...................................................... 530,000 549,000
Obligations under capital leases, less current portion.................................... 32,706 32,806
Other liabilities......................................................................... 1,847 1,705
Member deposits........................................................................... 125,986 92,187
Deferred income taxes..................................................................... 19,604 16,286
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value, 25,000 shares authorized, 1,000 outstanding............ - -
Additional paid-in capital........................................................... 252,998 256,810
Retained earnings.................................................................... - -
----------- -----------
Total stockholder's equity...................................................... 252,998 256,810
----------- -----------
$ 1,034,457 $ 1,026,068
=========== ===========
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, 2000, 1999 AND 1998
(IN THOUSANDS)
(ACCUMULATED
ADDITIONAL DEFICIT)/
PAID-IN RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
-------------- -------------- ----------- ------------
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 ........................................ - 119,178 - 119,178
Dividends .................................................... - - (8,102) (8,102)
Capital distributions ........................................ - (59,903) - (59,903)
Net income.................................................... - - 23,332 23,332
-------------- -------------- ----------- ------------
BALANCE, October 31, 1999..................................... - 256,810 - 256,810
Dividends .................................................... - - (16,140) (16,140)
Capital distributions ........................................ - (3,812) - (3,812)
Net income.................................................... - - 16,140 16,140
-------------- -------------- ----------- ------------
BALANCE, October 31, 2000..................................... - $ 252,998 $ - $ 252,998
============== ============== =========== ============
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, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 16,140 $ 23,332 $ 14,114
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 50,687 55,569 36,354
Amortization of debt issuance costs................................ 1,015 1,010 969
Deferred income taxes.............................................. 2,144 7,177 (7,616)
Provision for losses on trade and notes receivables................ 698 615 495
Minority interests in losses of subsidiary......................... - (118) (129)
Gain on sales of land.............................................. - (8,070) -
Gain on sale of subsidiary......................................... - (22,393) -
Loss on sales and disposals of property, net....................... 3,495 2,095 1,483
Changes in operating assets and liabilities, net of effects
from investment in subsidiaries:
Restricted cash............................................... 5,120 1,102 162
Trade receivables............................................. (1,871) 1,552 (7,337)
Inventories................................................... (969) (1,017) (1,447)
Prepaid expenses and other receivables........................ 4,252 (6,361) (407)
Notes receivable.............................................. 244 (1,605) 68
Other assets.................................................. 46 5,676 (760)
Accounts payable.............................................. (385) 2,428 2,667
Accrued liabilities and income taxes payable.................. (7,474) 17,130 2,317
Accrued interest payable...................................... (71) (450) (9,204)
Deferred income, customer deposits and other.................. 509 5,189 1,845
Other liabilities............................................. 142 291 246
----------- ----------- -----------
Net cash provided by operating activities 73,722 83,152 33,820
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired.................... - (105,150) (88,265)
Purchases of property and equipment................................ (59,925) (63,712) (32,282)
Notes receivable from affiliate, net............................... - 23,450 (1,797)
Investment in real estate under development........................ 2,061 (307) (7,184)
Acquisition of golf course facilities.............................. - - (11,448)
Proceeds from sales of property and equipment...................... 935 126 -
Collections on member notes receivable............................. 12,032 8,640 5,778
Net proceeds from sale of subsidiary............................... - 126,639 -
Net proceeds from sale of land..................................... - 8,793 -
----------- ----------- -----------
Net cash used in investing activities...................... $ (44,897) $ (1,521) $ (135,198)
See accompanying notes to consolidated financial statements.
20
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit, net...................................... $ (18,000) $ (125,750) $ 75,250
Principal payments on long-term debt and obligations under
capital leases................................................ (2,447) (3,895) (4,092)
Member deposits.................................................... 25,448 14,165 14,347
Membership refunds................................................. (8,516) (3,944) (2,581)
Due to parent, net................................................. 1,840 - -
Capital contributions from Parent.................................. - 110,000 -
Capital distributions and dividends to Parent...................... (19,952) (68,005) -
Debt financing costs............................................... - (81) (354)
------------ ----------- -----------
Net cash (used in) provided by financing activities................ (21,627) (77,510) 82,570
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 7,198 4,121 (18,808)
CASH AND CASH EQUIVALENTS, beginning of period..................... 9,369 5,248 24,056
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period........................... $ 16,567 $ 9,369 $ 5,248
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of amounts capitalized).................... $ 49,521 $ 54,501 $ 43,887
=========== =========== ===========
Income taxes paid............................................. $ 20,127 $ 925 $ 1,123
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases................................... $ 1,191 $ 3,997 $ 2,927
Notes receivable issued for member deposits........................ 16,867 10,610 6,499
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.......................... 221 517 1,154
Notes receivable issued from sale of land and golf course facility. 4,400 625 -
Development of golf course from undeveloped land................... - 3,717 -
See accompanying notes to consolidated financial statements.
21
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(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.
As of October 31, 2000, 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 14). Grand Wailea owns and operates the
Grand Wailea Resort Hotel & Spa in Maui, Hawaii (Note 14).
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 14).
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 15).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION- The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America.
BASIS OF CONSOLIDATION- The consolidated financial statements include
the accounts of Group and its wholly-owned subsidiaries. All 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 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.
22
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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.
No impairments were identified as of October 31, 2000.
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 $4,949, $5,253 and $4,558 for fiscal years
2000, 1999 and 1998, 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. No impairments
were identified as of October 31, 2000.
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 increased its ownership to approximately 95.8% in January
1999. A minority interest partner (the Partner) in TFG L.P. had a partner
deficit balance of approximately $3,555 as of October 31, 1998. The Company
reduced the minority interest allocation of TFG L.P.'s net loss by the Partner's
share of $118 in Fiscal 1999. The Company sold its investment in TFG L.P. in
September 1999 (Note 15).
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.
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.
23
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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 PER SHARE- Basic earnings per share is computed by dividing
net income 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. The
Company had no potentially dilutive securities outstanding in 2000, 1999 or
1998.
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 and comprehensive
income, therefore a statement of Comprehensive Income has not been presented.
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," was issued in April 1998 and was 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
adoption of SOP 98-5 did not have a material impact on the Company's
consolidated financial statements.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 was amended by SFAS
137, which modified the effective date of SFAS 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. In June 2000, SFAS 133 was further
amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS 133, as amended, requires that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded on the balance sheet at its fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 also
requires that the Company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company adopted
SFAS 133 as of November 1, 2000, and on that date, recorded an asset of $4,585
in "Other Long-Term Assets" and a net of tax adjustment of $2,728 recorded as
"Other Comprehensive Income".
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company adopted SAB 101 effective upon issuance. The adoption of SAB 101 did
not have a material effect on the Company's consolidated financial statements.
RECLASSIFICATION- Certain reclassifications have been made to
the 1999 and 1998 consolidated financial statements to conform to the 2000
presentation.
24
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
3. NOTES RECEIVABLE
Notes receivable of $11,005 and $6,589 at October 31, 2000 and 1999,
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 $2,264 and $472 as of October 31, 2000 and 1999,
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 2003.
The Company had a note receivable from a former general partner in TFG
L.P. of $708 as of October 31, 1999. The note bore interest at 8% and was paid
in full during 2000 (Note 15).
4. INVENTORIES
Inventories consist of the following:
OCTOBER 31,
-----------
2000 1999
---- ----
Merchandise......................................................................... $ 6,125 $ 5,656
Food and beverage................................................................... 2,471 2,028
Base stock (china, silver, glassware, and linen).................................... 3,451 3,394
Supplies and other................................................................ 1,389 1,389
--------- ---------
$ 13,436 $ 12,467
========= =========
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
OCTOBER 31,
-----------
2000 1999
------------ ------------
Land and land improvements.......................................................... $ 278,571 $ 252,167
Buildings and improvements.......................................................... 468,177 459,423
Furniture, fixtures and equipment................................................... 117,380 98,674
Construction in progress............................................................ 24,055 28,368
------------ ------------
888,183 838,632
Less accumulated depreciation....................................................... (138,127) (102,378)
------------ ------------
Property and equipment, net.................................................... $ 750,056 $ 736,254
============ ============
6. OTHER ASSETS
Other assets consist of the following:
OCTOBER 31,
-----------
2000 1999
------------ ------------
Trade name.......................................................................... $ 31,703 $ 31,703
Management contract................................................................. 26,872 26,872
Membership contract................................................................. 12,589 12,589
Debt issue costs.................................................................... 9,998 9,998
Lease agreements.................................................................... 3,955 3,955
------------ ------------
85,117 85,117
Accumulated amortization (13,264) (8,074)
------------ -------------
71,853 77,043
Undeveloped land.................................................................... 12,659 12,659
Art ............................................................................... 2,611 2,611
25
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Deposits and other assets........................................................... 532 584
------------ ------------
$ 87,655 $ 92,897
============ ============
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 14).
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 $4,175, $6,882 and $2,029 for 2000, 1999 and 1998, respectively.
26
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31,
--------------------------
2000 1999
------------ ----------
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 .50% or LIBOR plus 1.75% (8.45% at October 31, 2000), $46,500
maturing April 30, 2005 and $46,000 maturing April 30, 2006...................... 97,000 98,000
Revolving note, total available of $257,320, with interest payable at either Prime
or LIBOR plus 0.625% (7.25% at October 31, 2000), principal due at maturity on
April 30, 2004................................................................... 34,000 52,000
Mortgage notes payable, with interest only payments at LIBOR plus 2.75% (9.45% at
October 31, 2000) principal due at maturity in November 2002. 275,000 275,000
------------ ------------
531,000 550,000
Less current portion................................................................ (1,000) (1,000)
------------ ------------
Long-term portion................................................................... $ 530,000 $ 549,000
============ ============
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 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. In May 2000, the maximum borrowings
decreased to $257,320. Maximum borrowings under the revolving credit line
decrease to $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 $511, $429 and $352 were paid in 2000, 1999 and 1998 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, 2000.
In connection with the Grand Wailea acquisition (Notes 1 and 14),
the Company assumed approximately $275,000 in mortgage financing (the
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, 2000.
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 8.50%. In
the event the LIBOR rate exceeds 8.50%, the third party would pay the interest
in excess of 8.50%. This agreement expired in November 2000 and was replaced
27
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
with a new interest rate cap agreement, which provides for a LIBOR rate cap of
8.25%. The fair market value of the agreement, which expires in November 2001,
is insignificant.
Pursuant to a cash management agreement underlying the 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, 2000 and 1999,
the aggregate balance of these accounts was approximately $4,506 and $8,917,
respectively, and is included in restricted cash in the accompanying
consolidated balance sheets.
Scheduled principal payments on long-term debt as of October 31, 2000
are as follows:
Year ending October 31:
2001..................................................................... $ 1,000
2002..................................................................... 1,000
2003..................................................................... 276,000
2004..................................................................... 35,000
2005..................................................................... 47,000
Thereafter............................................................... 171,000
-----------
Total.................................................................... $ 531,000
===========
In March 1999, the Company entered into an interest rate swap agreement
to hedge the effects of changes in interest rates on such indebtedness. The
Company does not use derivative financial instruments for trading purposes. The
swap involves the exchange of the variable interest rate of 30 day LIBOR with a
fixed LIBOR interest rate (5.57%). This interest rate swap agreement is
denominated in dollars, has a notional principal amount of $270,000 and matures
in November 2002. The fair value of the interest rate swap agreement was $4,585
at October 31, 2000 and represented the spread between the interest rate the
Company pays and the interest rate the Company will receive over the remaining
life of the agreement. The counter-parties to the interest swap agreement are
two major financial institutions. The amounts to be received or paid pursuant to
this agreement are accrued and recognized through an adjustment to interest
expense in the accompanying consolidated statements of operations over the life
of the agreement.
During 2000, 1999 and 1998, the Company capitalized interest of
approximately $1,691, $1,619 and $754, respectively, related to construction in
progress activities.
8. OBLIGATIONS UNDER CAPITAL LEASES
During 1997, the Company entered into a fifty-year capital sublease of
a resort recreation area known as Lake Lanier. 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,
--------------------------
2000 1999
------------ ------------
Buildings and land improvements..................................................... $ 24,715 $ 24,715
Equipment........................................................................... 9,839 11,158
Less accumulated depreciation....................................................... (8,354) (7,769)
------------ ------------
$ 16,200 $ 28,104
============ ============
28
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Total minimum payments due under capital leases at October 31, 2000 are
summarized as follows:
LAKE OTHER
LANIER CAPITAL
SUBLEASE LEASES TOTAL
----------- --------- ----------
Year ending October 31:
2001............................................................... $ 3,100 $ 1,105 $ 4,205
2002............................................................... 3,125 951 4,076
2003............................................................... 3,200 481 3,681
2004............................................................... 3,200 131 3,331
2005............................................................... 3,200 - 3,200
Thereafter...................................................... 133,600 - 133,600
----------- --------- ----------
Total minimum lease payments............................................ 149,425 2,668 152,093
Less amounts representing interest...................................... (118,165) (296) (118,461)
----------- --------- ----------
Present value of minimum lease payments................................. 31,260 2,372 33,632
Less current portion.................................................... (30) (896) (926)
----------- --------- ----------
Long-term portion....................................................... $ 31,230 $ 1,476 $ 32,706
=========== ========= ==========
9. INCOME TAXES
The components of the Federal and state income tax expense (benefit)
are as follows:
YEAR ENDED OCTOBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
Current:
Federal........................................................... $ 6,072 $ 8,231 $ 391
State............................................................. 2,774 2,211 228
--------- --------- ---------
8,846 10,442 619
Deferred:
Federal........................................................... 1,875 6,279 (6,664)
--------- --------- ---------
State............................................................. 268 897 (952)
--------- --------- ---------
2,143 7,176 (7,616)
--------- --------- ---------
Total.................................................................. $ 10,989 $ 17,618 $ (6,997)
========= ========= =========
Taxes on income vary from the statutory Federal income tax rate applied
to earnings before taxes on income as follows:
YEAR ENDED OCTOBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
Statutory Federal income tax rate applied to earnings before income
taxes $ 9,284 $ 14,333 $ 2,491
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefits............................ 1,440 2,125 358
Change in valuation allowance.......................................... - - (11,071)
Benefits of lower federal income tax rate.............................. - - 152
Sale of subsidiary..................................................... - 435 -
Reduction in state tax carryforwards................................... - 67 698
Other.................................................................. 265 658 375
----------- ----------- -----------
$ 10,989 $ 17,618 $ (6,997)
=========== =========== ===========
29
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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,
-----------------
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards and AMT credit................................ $ 3,533 $ 6,261
Capitalized lease.............................................................. 1,408 1,452
Deferred income................................................................ 907 823
Self-insured employee benefit programs......................................... 2,145 1,530
Capitalized assets............................................................. 635 595
Compensation related accruals.................................................. 1,027 833
Other.......................................................................... 3,681 2,705
---------- ---------
Total deferred tax assets........................................................... 13,336 14,199
Less valuation reserve.............................................................. - -
---------- ---------
Deferred tax assets, net.................................................... 13,336 14,199
Deferred tax liabilities:
Purchase price adjustment ..................................................... 15,386 15,861
Fixed assets................................................................... 5,789 5,079
Prepaid real property taxes.................................................... 1,576 834
Amortization of intangibles.................................................... 5,581 4,916
Prepaid supplies............................................................... 577 462
Other.......................................................................... 1,334 1,810
---------- ---------
Total deferred tax liabilities.............................................. 30,243 28,962
---------- ---------
Net deferred tax liability............................................. $ (16,907) $ (14,763)
========== =========
At October 31, 2000, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $27,051, which will
begin to expire in the year ending October 31, 2007.
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 14).
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 the 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 the Parent of $102 and
returning capital of $59,903. During 2000, the Company paid a dividend to the
Parent of $16,140 and returned capital of $3,812. 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 transactions (as
defined), respectively.
In December 1998, the number of authorized shares of the Company was
increased to twenty-five thousand shares.
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 affect on the Company's consolidated
financial statements.
30
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Contractual obligations associated with construction in progress were
not material to the Company's consolidated financial position as of October 31,
2000.
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 2000 and 1999, Desert Resorts sold 26 and 42 homes for
approximately $16,639 and $24,429, respectively (Note 13). The Company had other
receivables of approximately $4,145 related to the sale of these homes as of
October 31, 1999. Grand Traverse and Fairways Golf had combined real estate
sales of $673, $487 and $887 for various land parcels in fiscal 2000, 1999 and
1998, respectively.
13. 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 98 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 thirty-six month build out ending in fiscal 2001.
In fiscal 2000, 1999 and 1998, Desert Resorts paid $1,070, $1,554 and $330,
respectively for project management fees and $493, $720 and $0, respectively for
marketing fees.
The Company provided financing to KSL Land of approximately $20,800 at
April 30, 1997. This unsecured note receivable bore interest at 8% and was paid
in full in October 1999. The Company recorded interest income of $1,946 and
$1,797 in 1999 and 1998, respectively, related to this note receivable.
During 2000, 1999 and 1998, the Company incurred $10,704, $9,800 and
$8,750, 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.
In connection with the Grand Wailea acquisition in Fiscal 1999, the
Company paid $4,000 to a stockholder of the Parent for financial advisory
services.
14. 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.
31
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
The following is 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 (loss) before income taxes................................................... 37,648 (895)
Net income.......................................................................... 20,030 6,102
Basic and diluted earnings per share................................................ 20,030 6,102
The unaudited pro forma results do not necessarily represent results
that 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 15).
15. 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 $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 $9,178.
The Company had a note receivable from a former general partner in TFG
L.P. of $708 as of October 31, 1999. The note accrued interest at 8% and was
paid in full during 2000. 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.
32
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
16. 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, 2000:
Revenues.................................................. $ 103,878 $ 143,974 $ 113,210 $ 103,909 $ 464,971
Income from operations.................................... 14,409 39,434 14,233 11,997 80,073
Net income (loss) ........................................ 1,397 17,011 395 (2,663)(A) 16,140
Basic and diluted earnings (loss) per share............... 1,397 17,011 395 (2,663) 16,140
For the year ended October 31, 1999:
Revenues.................................................. $ 87,114 $ 126,726 $ 125,193 $ 114,687 (B) $ 453,720
Income from operations.................................... 9,247 32,919 24,980 2,329 (C) 69,475
Net income (loss) ........................................ (1,024) 11,743 6,920 5,693 (D) 23,332
Basic and diluted earnings (loss) per share............... (1,024) 11,743 6,920 5,693 23,332
(a) Fourth quarter includes a loss on disposal of fixed assets of $3,248.
(b) Fourth quarter includes revenues from the sale of single-family homes
of $19,803.
(c) Fourth quarter includes an increase in workers' compensation expense of
$1,330 due to a change in industry-wide experience rating.
(d) Fourth quarter includes a pre-tax gain of $22,393 from the sale of a
subsidiary (Note 15).
17. 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. For financial reporting purposes, individual properties
included in the Resort segment have been aggregated because of their common
economic and operating characteristics. The Real Estate segment develops and
sells real estate in and around the Company's Resort operations. The Company's
Real Estate segment exists to support and enhance growth of the Company's Resort
segment (Note 12). 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.
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.
33
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Reportable segment data for the year ended October 31, are as follows:
RESORT REAL ESTATE CONSOLIDATED
----------- ------------ ------------
Year ended October 31, 2000
Revenues............................................................. $ 447,659 $ 17,312 $ 464,971
Income from operations............................................... 76,415 3,658 80,073
Year ended October 31, 1999
Revenues............................................................ 419,304 $ 34,416 453,720
Income from operations............................................... 58,176 11,299 69,475
Year ended October 31, 1998
Revenues............................................................. 296,978 887 297,865
Income from operations............................................... 41,624 84 41,708
The Real Estate segment's identifiable assets were $8,496 and $13,918 at October
31, 2000 and 1999, respectively. All of the remaining assets of the Company are
related to the Resort segment, other than the deferred income taxes which is
considered a corporate asset and is not identifiable to either segment.
Substantially all of the Company's capital expenditures and depreciation and
amortization expense relates to the Resort segment.
Revenues for the resort segment for the years indicated are as follows:
YEAR ENDED OCTOBER 31,
2000 1999 1998
---- ---- ----
Resort revenue:
Rooms............................................ $ 172,338 $ 145,557 $ 83,892
Food and beverage................................ 112,897 103,884 74,706
Golf fees........................................ 32,809 48,592 48,529
Dues and fees.................................... 21,596 30,602 28,716
Merchandise...................................... 21,800 20,495 16,300
Spa ............................................. 23,458 17,255 6,639
Other............................................ 62,761 52,919 38,196
------------ ----------- -----------
Total resort revenue......................... 447,659 419,304 296,978
18. INSURANCE LOSS
During 2000 and 1999, Doral's buildings and golf courses were flooded
and damaged due to heavy rains from an unnamed tropical depression and Hurricane
Irene, respectively. The Company is insured for these losses and expects to
recover $759 in connection with the tropical depression, which has been recorded
as other receivables in the accompanying consolidated financial statements. The
Company recorded $1,032 in other receivables as of October 31,1999 in connection
with Hurricane Irene, which was fully recovered during 2000. In fiscal 2000 and
1999, the Company recorded losses of $100 and $438, respectively, which are net
of the insurance receivables.
34
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
19. SUBSEQUENT EVENTS
On December 22, 2000, the Company, through a wholly-owned subsidiary,
acquired certain assets and assumed certain liabilities comprising the Arizona
Biltmore Resort & Spa (the "Property"), located in Phoenix, Arizona, pursuant to
an agreement of purchase and sale between Biltmore Hotel Partners, LLLP, an
Arizona limited liability limited partnership ("Seller"), and the Company dated
December 22, 2000 ("Agreement"). The Company, by unanimous consent of the Board
of Directors, approved and assigned the Agreement and all rights, title,
interest and obligations thereunder to a newly formed, wholly-owned subsidiary
of the Company, KSL Biltmore Resort, Inc., a Delaware corporation.
The purchase price of the Property was $335.0 million (excluding
transaction costs of approximately $5.3 million and a working capital purchase
adjustment of $8.3 million). The Company financed the acquisition with cash and
debt issued under its Amended and Restated Credit Agreement (as amended December
22, 2000) with various financial institutions, Credit Suisse First Boston, The
Bank of Nova Scotia and Salomon Smith Barney. In addition, the Company assumed a
mortgage of $59.4 million, secured by the Property. The acquisition was
accounted for using the purchase method of accounting.
Concurrent with the acquisition of the Arizona Biltmore on December 22,
2000, the Company amended its credit facility. The Amended and Restated Credit
Facility allows for maximum borrowings of $529.3 million including Term A and
Term B loans of $48.5 million each, a Term C loan of $175.0 million and maximum
borrowings under a revolving credit facility of $257.3 million, decreasing to
$239.7 million, $216.1 million and $186.6 million in May 2001, 2002 and 2003,
respectively. Borrowings under the Amended and Restated Credit Facility as of
December 22, 2000 bear interest at variable rates up to 2.875% above LIBOR or
1.875% above the Syndication Agent's Base Rate.
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 the 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 42 President, Chief Executive Officer and Director
Larry E. Lichliter 57 Executive Vice President and Director; (effective until February
1, 2001) Chief Financial Officer and Treasurer
Eric C. Resnick 28 Vice President, Chief Financial Officer and Treasurer (effective
February 1, 2001)
Nola S. Dyal 51 Vice President, General Counsel and Secretary
Scott M. Dalecio 38 Vice President of Resort Operations
E. D. "Murray" Bryant 54 Vice President of Direct Marketing and Sales
Doris Allen-Kirchner 48 Vice President of Human Resources
James E. Wanless 47 Vice President of Club and Membership Development
Thomas F. McGrath 50 Vice President of Merchandising and Events
Gary M. Beasley 35 Vice President of Business Development
Peter L. Faraone 47 Vice President of Sales
Michael R. Donahue 47 Vice President of Marketing
Samuel J. Barton 34 Corporate Controller
Henry R. Kravis 56 Director
George R. Roberts 57 Director
Paul E. Raether 54 Director
Michael T. Tokarz 51 Director
Scott M. Stuart 41 Director
Alexander Navab, Jr. 35 Director
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 the Parent and has served as a Director and President
and Chief Executive Officer of the 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 the
Parent, Mr. Shannon was President and Chief Executive Officer of Vail Associates
in Vail, Colorado. Mr. Shannon is a director of ING Insurance Holdings and ING
Direct.
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 the Parent and has served as a Director and its Executive Vice
President since its inception. He served as Chief Operating Officer of the
Parent from its inception through December 1996. He was elected Chief Financial
Officer and Treasurer of the Company on December 29, 2000 to serve in that
capacity until February 1, 2001. 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 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.
ERIC C. RESNICK. Mr. Resnick has been elected, effective February 1,
2001, Vice President, Chief Financial Officer and Treasurer of the Company and
the Parent. Mr. Resnick will also serve as Vice President, Chief Financial
Officer and/or Treasurer for each of the Company's subsidiaries. Prior to
joining the Company, Mr. Resnick was employed by Vail Resorts, Inc. where he
served most recently as Vice President, Strategic Planning and Investor
Relations and previously as Corporate Treasurer and in other capacities. Prior
to Vail Resorts, Mr. Resnick was a consultant with McKinsey and Company.
36
NOLA S. DYAL. Ms. Dyal has been Vice President, General Counsel and
Secretary of the Company since its formation. Ms. Dyal joined the 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 the 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 or Vice President of all of the Company's
subsidiaries. Mr. Dalecio has been President of KSL Desert Resorts, Inc. 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.
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 the 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
the 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 the 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 the Parent in
June 1996 as Vice President of Merchandising and Events. From 1988 until joining
the 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 the 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 the 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. Faraone served in several
positions with Ritz Carlton Hotels, the last of which was General Manager of the
Ritz Carlton Tysons Corner.
MICHAEL DONAHUE. Mr. Donahue became Vice President of Marketing of the
Company and the Parent in September 2000. Mr. Donahue was Senior Vice President
of Marketing of Pegasus Solutions from May 1997 through June 1999. From
September 1988 through April 1997, Mr. Donahue was Vice President of Marketing
of Lane Hospitality.
SAMUEL J. BARTON. Mr. Barton has been Corporate Controller of the
Company and the Parent since August 2000. Mr. Barton is also the Corporate
Controller of all of the Company's subsidiaries. From July 1997 through August
2000, Mr. Barton was Director of Financial Reporting at United States Filter
Corporation. From 1994 through June of 1997, Mr. Barton worked as a certified
public accountant for KPMG Peat Marwick LLP.
HENRY R. KRAVIS. Mr. Kravis, Founding Partner of KKR, is a Director of
the 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, Amphenol Corporation, Borden,
Inc., The Boyds Collection, Ltd., Evenflo Company, Inc., The Gillette Company,
IDEX Corporation, KinderCare Learning Centers, Inc., KSL Golf Holdings, Inc.,
KSL Land Corporation, Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas,
Sotheby's Holdings, Inc. and Spalding Holdings Corporation.
GEORGE R. ROBERTS. Mr. Roberts, Founding Partner of KKR, is a Director
of the 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
37
Corporation, Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd.,
Dayton Power & Light, Evenflo Company, Inc., IDEX Corporation, KinderCare
Learning Centers, Inc., KSL Land Corporation, Owens-Illinois, Inc., PRIMEDIA
Inc., Safeway, Inc. and Spalding Holdings Corporation.
PAUL E. RAETHER. Mr. Raether is a Director of the 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 IDEX Corporation, KSL Land
Corporation and Regal Cinemas. Mr. Raether joined KKR in 1980.
MICHAEL T. TOKARZ. Mr. Tokarz is a Director of the 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, PRIMEDIA, Inc., Spalding Holdings Corporation and
Walter Industries, Inc. Mr. Tokarz joined KKR in 1985.
SCOTT M. STUART. Mr. Stuart is a Director of the 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., The Boyds
Collection, Ltd., DPL Inc. (The Dayton Power & Light Co.), KSL Golf Holdings,
Inc. and KSL Land Corporation. Mr. Stuart joined KKR in 1986.
ALEXANDER NAVAB, JR. Mr. Navab is a Director of the Parent and the
Company and is a member of the limited liability company which serves as the
general partner of KKR. Prior to 2001, Mr. Navab was an Executive at KKR.. Prior
to joining KKR in 1993, Mr. Navab was employed by James D. Wolfensohn
Incorporated. He is also a Director of Borden, Inc., CAIS Internet, Inc.,
Intermedia Communications, Inc., KSL Land Corporation and Regal Cinemas.
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 2001: Messrs. Kravis, Raether, Tokarz and
Shannon. The following directors have been appointed to serve on the Company's
Audit Committee during fiscal 2001: Messrs. Stuart, Navab and Lichliter.
38
ITEM 11. EXECUTIVE COMPENSATION
The following table presents certain summary information concerning
compensation paid or accrued by the Parent for services rendered in all
capacities for the fiscal years ended October 31, 2000, 1999 and 1998 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, 2000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE (1) (2)
- -------------------------------------------------------------------------------------------------------------------------------
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------------------------------------------------
AWARDS
-------------------
NAME AND SECURITIES ALL OTHER
PRINCIPAL POSITION UNDERLYING COMPENSATION
YEAR SALARY BONUS OPTION/SARS
- -------------------------------------------------------------------------------------------------------------------------------
Michael S. Shannon - 2000 600,000 800,000 8,945 103,300 (3)
President and Chief Executive Officer 1999 500,000 700,000 1,947 73,775
1998 500,000 600,000 - 27,864
Larry E. Lichliter - 2000 300,000 250,000 5,361 29,962 (4)
Executive Vice President 1999 275,000 300,000 1,800 30,035
1998 275,000 225,000 - 29,962
John K. Saer, Jr. - 2000 325,000 300,000 5,275 5,097 (5)
Vice President, Chief Financial Officer 1999 275,000 300,000 5,100 6,473
and Treasurer 1998 275,000 200,000 707 -
Nola S. Dyal - 2000 300,000 125,000 2,551 - (6)
Vice President, General Counsel and 1999 260,000 100,000 1,500 -
Secretary 1998 250,000 90,000 477 -
Scott M. Dalecio - 2000 275,000 150,000 2,363 2,806 (7)
Vice President of Resort Operations 1999 250,000 125,000 1,300 -
1998 200,000 100,000 - -
- ------------------------------------------- -------- ------------------ ----------------- ------------------- -----------------
(1) The Parent has and will continue to pay all compensation for the Named
Executive Officers; however, the Company will reimburse the 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. Mr.
Lichliter spends between 90% to 95% of his time on work related to KSL
Land, an affiliate of the Company.
(3) Represents cost of premiums for long-term disability insurance,
Directors' compensation, and compensation for personal use of the
Parent's corporate aircraft.
(4) Represents cost of premiums for long-term disability insurance and for
Directors' compensation. In Fiscal 2000, the Parent purchased 3,297
options to purchase the Parent's common stock from Mr. Lichliter for
$1,800 per share, less the exercise price of $500 per share. See
"Transactions with Management" included elsewhere herein.
(5) Represents compensation for personal use of the Parent's corporate
aircraft. In Fiscal 2000, the Parent purchased 2,182 options to
purchase the Parent's common stock from Mr. Saer for $1,800 per share,
less the exercise price of $500 per share. See "Transactions with
Management" included elsewhere herein. Mr. Saer served as the Company's
Vice President, Chief Financial Officer and Treasurer through December
31, 2000.
(6) In Fiscal 2000, the Parent purchased 1,051 options to purchase the
Parent's common stock from Ms. Dyal for $1,800 per share, less the
exercise price of $500 per share. The Parent purchased 700 Common Stock
Options from Ms. Dyal during fiscal 1998 at $2,000 per share, less the
exercise price of $500 per share. See "Transactions with Management"
included elsewhere herein.
(7) Represents compensation for personal use of the Parent's corporate
aircraft. In Fiscal 2000, the Parent purchased 363 options to purchase
the Parent's common stock from Mr. Dalecio for $1,800 per share, less
the exercise price of $500 per share. See "Transactions with
Management" included elsewhere herein.
39
STOCK OPTIONS OF THE PARENT
STOCK OPTION PLAN
The 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 the
Parent ("Stock"). The number of shares of common stock of the Parent for this
Plan was increased to 125,908 during 2000. Unless sooner terminated by the
Parent's Board of Directors, the Plan will expire on June 30, 2005.
The Compensation Committee of the 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 the
Parent into another corporation or the exchange or acquisition by another
corporation of all or substantially all of the Parent's assets or 80% of the
Parent's then outstanding voting stock, or the reorganization, recapitalization,
liquidation or dissolution of the 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 the 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 the 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 the Parent at or after
age 65 after having been employed by the Parent for at least three years after
the Purchase Trigger Date or (c) with the prior consent of the Parent's Board of
Directors (which consent will not be withheld unless the Board reasonably
determines that the Parent would be financially impaired if it made such a
purchase), or (d) the Management Stockholder retires from the Parent on or after
age 65 after having been employed by the 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 the 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 the 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 the Parent, the transfer restrictions,
right of first refusal, and certain other rights with respect to sale
40
and 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
the 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 the 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 THE PARENT FOR FISCAL YEAR 2000 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 2000: (i) the
number of shares of common stock underlying options granted; (ii) the percent of
total options granted to employees in fiscal year 2000; (iii) the exercise price
of such options; (iv) the expiration date of such options and (v) the potential
realizable values at assumed rates of such options.
OPTION GRANTS IN FISCAL 2000
--------------------------------------------------------------------
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
PERCENT OF TOTAL ASSUMED ANNUAL RATES OF
OPTIONS GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM
NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE 5%($) 10%($)
- ------------------------------------------------------------------------------------------------------------------------------------
Michael S. Shannon 2,945 8.0% $ 1,800 September 1, 2010 $ 3,333,770 $ 8,448,429
6,000 16.3% $ 1,800 September 1, 2010 6,792,062 17,212,419
Larry E. Lichliter 3,861 10.5% $ 1,800 September 1, 2010 4,370,692 11,076,191
1,500 4.1% $ 1,800 September 1, 2010 1,698,015 4,303,105
John K. Saer, Jr. 2,275 6.2% $ 1,800 September 1, 2010 2,575,323 6,526,375
3,000 8.2% $ 1,800 September 1, 2010 3,396,031 8,606,209
Nola S. Dyal 1,051 2.9% $ 1,800 September 1, 2010 1,189,743 3,015,042
1,500 4.1% $ 1,800 September 1, 2010 1,698,015 4,303,105
Scott M. Dalecio 363 1.0% $ 1,800 September 1, 2010 410,920 1,041,351
2,000 5.4% $ 1,800 September 1, 2010 2,264,021 5,737,473
The following table sets forth, as to each of the Named Executive
Officers, information with respect to option exercises during fiscal year 2000
and the status of their options on October 31, 2000: (i) the number of shares of
common stock underlying options exercised during fiscal year 2000, (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,
2000 and (iv) the aggregate dollar value of in-the-money exercisable and
unexercisable options on October 31, 2000.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END
OPTION VALUES AT OCTOBER 31, 2000
---------------------------------
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT OCTOBER 31, 2000 OCTOBER 31, 2000
NAME EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) (1)
---- -------- -------- --------------------------- -------------------------------
Michael S. Shannon - - 22,744 / 10,892 $29,567,200 / $1,070,850
Larry E. Lichliter - - 9,349 / 7,161 12,153,700 / 440,000
John K. Saer, Jr. - - 2,274 / 10,375 2,956,200 / 880,000
Nola S. Dyal - - 1,051 / 4,051 1,366,300 / 440,000
Scott M. Dalecio - - 362 / 3,663 470,600 / 440,000
(1) The Common Stock is not publicly traded and the value of the options
represents management's best judgment of value at October 31, 2000 as
calculated using the "Black-Scholes" model of option valuation.
41
MANAGEMENT INCENTIVE BONUSES
Certain members of management of the 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 the Parent, the Company and its
subsidiaries.
OPTIONS AND PARTNERSHIP INTERESTS IN AFFILIATES
Certain executive officers received options or partnership interests in
KSL Foster Land, L.P. ("Foster") during fiscal year 2000. Foster was dissolved
during fiscal 2000, and its net assets were distributed to its partners
including certain executive officers. Prior to and during fiscal 1997, certain
executive officers received options and partnership interest in KSL Land and
other partnerships affiliated therewith, but no allocation has been made for
distribution of partnership interests related to these partnerships.
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 the Parent's and the Company's
Boards of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors participated in deliberations of the Parent's
board of directors concerning executive officer compensation during fiscal year
2000 and have been appointed to serve on the Parent's Compensation Committee
during fiscal year 2000: Messrs. Kravis and Tokarz. During fiscal year 2000, no
executive officer of the 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 the
Parent.
42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 15, 2001 certain
information concerning the ownership of shares of Common Stock of the 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. The Parent owns 100% of the common stock of
the Company. As of January 15, 2001, there are 551,168 shares of Common Stock of
the Parent outstanding.
AMOUNT AND NATURE OF PERCENT
BENEFICIAL OF
NAME OF BENEFICIAL OWNER OWNERSHIP (9) CLASS
---------------------------------------------------------------------------------------------------------------
KKR Associates, L.P. .................................................. 458,689 (1) 83.22
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
KKR 1996 GP, LLC....................................................... 81,320 (2) 14.75
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Michael S. Shannon..................................................... 28,161 (3) 4.87
Larry E. Lichliter..................................................... 12,256 (4) 2.18
John K. Saer, Jr. ..................................................... 6,972 (5) 1.25
Nola S. Dyal........................................................... 2,701 (6) *
Scott M. Dalecio....................................................... 1,880 (7) *
All Executive Officers and Directors as a Group (18 persons) .......... 57,882 (8) 9.54
* 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, Edward A. Gilhuly and Alexander Navab, Jr.
Messrs. Kravis, Roberts, Raether, Tokarz, Stuart and Navab are also
directors 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, Gilhuly, Navab,
Todd Fisher, Johannes Huth and Neil Richardson. Messrs. Kravis,
Roberts, Raether, Tokarz, Stuart and Navab 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 26,504 shares exercisable within 60 days.
(4) Includes options to purchase 11,856 shares exercisable within 60 days.
(5) Includes options to purchase 6,072 shares exercisable within 60 days.
(6) Includes options to purchase 2,501 shares exercisable within 60 days.
(7) Includes options to purchase 1,670 shares exercisable within 60 days.
(8) Includes options to purchase 55,420 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
83.22% and 14.75% (75.62% and 13.41%, on a fully diluted basis), respectively,
of the Parent's outstanding shares of Common Stock as of January 15, 2001. 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, Edward A. Gilhuly, Todd Fisher, Alexander Navab, Jr.,
Neil Richardson and Johannes Huth. Messrs. Kravis, Roberts, Raether, Tokarz,
Stuart and Navab are also directors of the Company. 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"). KKR
receives an annual fee of $500,000 in connection with providing financial
advisory services to the Parent and may receive customary investment banking
fees for services rendered to the 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 the 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 the 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
the Parent as a primary offering.
In connection with the Grand Wailea acquisition, during fiscal 1999,
the Company paid $4,000,000 to KKR for financial advisory services.
TRANSACTIONS WITH THE PARENT AND AFFILIATES OF THE PARENT
The Company and the Parent are parties to an Expense Allocation
Agreement pursuant to which the Parent performs management services requested by
the Company and the Company reimburses the Parent for all expenses incurred by
the 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 $10.7 million to the
Parent in fiscal year 2000.
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 the 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 the
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 bore 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. Desert Resorts paid
$1,563,000 and $2,274,000, in Fiscal 2000 and 1999, respectively, to Land II for
project management and marketing fees.
44
TRANSACTIONS WITH MANAGEMENT
COMMON STOCK AND COMMON STOCK OPTION PURCHASES
In July 2000, the Parent purchased 3,602 shares of its common stock from the
Named Executive Officers. The common stock was purchased at $1,800 per share.
The Parent purchased 2,945, 564 and 93 shares of the Parent's common stock from
Messrs. Shannon, Lichliter and Saer, respectively.
In July 2000, the Parent purchased 13,962 of the options to purchase the
Parent's common stock from 24 optionees of which 7,523 were purchased from the
Named Executive Officers. These options were purchased at $1,800 per share, less
the exercise price of $500 per share. The Parent purchased 3,297, 2,812 and 363
options from Messrs. Lichliter, Saer and Dalecio, respectively, and 1,051
options from Ms. Dyal.
LOANS TO MANAGEMENT
The 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 the Parent. During
Fiscal 2000, these loans were paid in full.
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 2000, Mr. Shannon received
$49,501 and Mr. Lichliter received $56,652 of 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, 2000, 1999 and 1998
Consolidated Balance Sheets as of October 31, 2000 and 1999
Consolidated Statements of Stockholder's Equity for the years
ended October 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
October 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Schedules
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(in thousands)
BALANCE AT
BEGINNING CHARGED TO COST DEDUCTIONS -NET BALANCE AT
OF PERIOD AND EXPENSES CREDIT LOSS END OF PERIOD
---------- --------------- --------------- -------------
Allowance for doubtful accounts:
Trade Receivable.......................
Fiscal year ended October 31, 2000.......... $ 712 $ 507 $ (337) $ 882
Fiscal year ended October 31, 1999.......... $ 718 $ 615 $ (621) $ 712
Fiscal year ended October 31, 1998.......... $ 722 $ 495 $ (499) $ 718
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.)
10.1 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.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 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.
10.9 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, 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.
10.10 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.
47
10.11 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.
10.12 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 Form 8-K, File No.
333-31025, is hereby incorporated by reference.
10.13 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.
10.14 Management Agreement by and between KSL Desert Resorts, Inc.
and KSL Land II Corporation, dated April 1, 1998, is hereby
incorporated by reference.
10.15 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.
10.16 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.,
48
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.
10.17 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.
10.18 Agreement of Purchase and Sale between Biltmore Hotel
Partners, LLLP and KSL Biltmore Resort, Inc., filed as Exhibit
10-2, Form 8-K, File No. 333-31025, is hereby incorporated by
reference.
10.19 Amended and Restated Credit Agreement dated Decemebr, 22, 2000
among KSL Recreation Group, Inc. and various Financial
Institutions, as the lenders, Credit Suisse First Boston, as
lead arranger, The Bank of Nova Scotia, as administrative
agent, and Salomon Smith Barney, as the Syndication agent,
filed as Exhibit 10.2, Form 8-K, File No. 333-31025, is hereby
incorporated by reference.
*11 Computation of Earnings (Loss) Per Share
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries of the Company
------------------------
* Filed herewith.
(4) Report on Form 8-K:
Form 8-K dated January 8, 2001 is hereby incorporated by reference.
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, 2001.
KSL RECREATION GROUP, INC.
By: /S/ Larry E. Lichliter
-------------------------------
Larry E. Lichliter
Executive 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, 2001.
Signatures Title
- ------------------------------------------------------- -----------------------------------------------------
/s/ Michael S. Shannon President, Chief Executive Officer and Director
- -------------------------------------------------------
(Michael S. Shannon) (Principal Executive Officer)
/s/ Larry E. Lichliter Executive Vice President, Chief Financial Officer
- -------------------------------------------------------
(Larry E. Lichliter) and Treasurer
/s/ Henry R. Kravis Director
- -------------------------------------------------------
(Henry R. Kravis)
/s/ George R, Roberts 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)
/s/ Alexander Navab, Jr. Director
- -------------------------------------------------------
(Alexander Navab, Jr.)
/s/ Samuel J. Barton Controller (Principal Accounting Officer)
- -------------------------------------------------------
(Samuel J. Barton)
50