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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, 1998
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)
56-140 PGA Boulevard
La Quinta, California 92253
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(Address of principal executive office) (Zip Code)
Registrant's telephone number including area code: 760-564-1088
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.
Common Stock, $.01 par value, 1,000 shares (January 15, 1999)
DOCUMENTS INCORPORATED BY REFERENCE: None
INDEX
Page
Part I. ----
Item 1. Business.............................................................3
Item 2. Properties...........................................................9
Item 3. Legal Proceedings....................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................9
Part II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................................10
Item 6. Selected Financial Data.............................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................11
Item 8. Financial Statements and Supplementary Data.........................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................36
Part III.
Item 10. Directors and Executive Officers....................................37
Item 11. Executive Compensation..............................................40
Item 12. Security Ownership of Certain Beneficial Owners and Management......44
Item 13. Certain Relationships and Related Transactions......................46
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....48
2
PORTIONS OF THIS ANNUAL REPORT ON FORM 10-K INCLUDE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER
FACTORS, WHICH COULD CAUSE ACTUAL RESULTS TO MATERIALLY DIFFER FROM THOSE
PROJECTED OR IMPLIED. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND
OTHER FACTORS ARE DESCRIBED IN THIS ANNUAL REPORT.
PART I.
ITEM 1. BUSINESS
GENERAL
KSL Recreation Group, Inc. was incorporated on March 14, 1997, under the
laws of the State of Delaware. KSL Recreation Group, Inc., together with its
subsidiaries (the "Company"), is engaged in service-based recreation through the
ownership and management of resorts, spas, golf courses, private clubs, and
activities related thereto. The Company's operations currently include: (i) La
Quinta Resort & Club ("La Quinta") and PGA WEST ("PGA WEST"), located in the
Palm Springs, California area, which together, constitute the Company's "Desert
Resorts" operations; (ii) Doral Golf Resort and Spa ("Doral"), located near
Miami, Florida; (iii) a hotel and recreational complex known as Lake Lanier
Islands ("Lake Lanier") located on Lake Lanier near Atlanta, Georgia; (iv) Grand
Traverse Resort ("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) KSL Fairways ("Fairways"), which
operates 24 golf facilities located in six states. The Company is wholly owned
by KSL Recreation Corporation, ("Parent"), a Delaware corporation incorporated
on May 19, 1993, of which approximately 99.6% of the common stock as of October
31, 1998, (85.4% on a fully diluted basis) is owned by partnerships formed at
the direction of Kohlberg Kravis Roberts & Co., L.P., an affiliate of Kohlberg
Kravis Roberts & Co. Shortly after the Company's formation in March 1997, the
subsidiaries of the Parent which owned Desert Resorts, Doral and Fairways, and
managed Lake Lanier, became wholly owned subsidiaries of the Company.
On April 6, 1998, KSL Claremont Resort, Inc. became a wholly owned
subsidiary of the Company. KSL Claremont Resort, Inc. owns and operates The
Claremont, which was acquired in April 1998. (SEE THE CLAREMONT). On May 16,
1998, KSL Resorts Group, Inc. was founded and became a wholly owned
subsidiary of the Company. KSL Resorts Group, Inc. is engaged in the sales
and marketing of group business nationwide for the Company's resorts.
In December 1998, the Company, through a subsidiary, purchased
substantially all of the assets and certain liabilities of the Grand Wailea
Resort Hotel & Spa, a 781-room resort in Maui, Hawaii for approximately $375
million, including the assumption of approximately $275 million in mortgage
financing.
The Company's operations comprise numerous interrelated services,
including lodging, conference services, corporate and individual guest
hospitality programs and facilities, food and beverage, private and resort golf
operations, spas, club membership programs, and entertainment and athletic
focused special events.
DESERT RESORTS
Desert Resorts is located in La Quinta, California, a golf and recreation
destination located near Palm Springs, California. Since the acquisition of
Desert Resorts in December 1993, the Company has invested approximately $52
million in facilities-related improvements, initiated measures designed to
enhance and expand the revenue base, and introduced numerous operating
efficiencies.
Desert Resorts includes La Quinta, formerly known as the La Quinta Hotel,
which opened in 1926. La Quinta currently offers 640 "casita"-style hotel rooms
(Spanish-style cottages) spread over approximately 45 acres of grounds,
featuring indigenous architecture and a campus-like setting, and caters to
corporate groups, individual guests and recreation enthusiasts. Desert Resorts
also includes PGA WEST, which together with La Quinta encompass approximately
1,490 acres, eight championship 18-hole golf courses, six clubhouses, eight
restaurants, 19,500 square feet of retail space, 42 hard, clay and grass tennis
courts, 66,000 square feet of conference facilities, 25 swimming pools and 38
spas/hot tubs. In October 1998, the 23,000 square foot Spa La Quinta was opened,
offering the use of 48 treatment rooms to members and resort guests.
Both La Quinta's and PGA WEST's private club operations provide golf and
tennis facilities, golf and tennis instruction, fitness facilities, special
events, and dining and social activities to their members. A full golf
membership at La Quinta currently requires a $55,000 deposit, which is fully
refundable in thirty years (or sooner under certain circumstances), and annual
golf dues of $5,160. A full golf membership at PGA WEST currently requires a
$70,000 deposit, which is fully refundable in thirty years (or sooner under
certain circumstances), and annual golf dues of $5,940.
3
In 1998, Desert Resorts, commenced the development and construction of the
first phases of 97 homes on approximately eleven acres adjoining La Quinta.
Designed with comparable architectural features of La Quinta, the homes are to
be sold as luxury resort homes and are expected to represent a total investment
by Desert Resorts of approximately $37.9 million, of which $7.2 million was
incurred through October 31, 1998. The project is expected to have an
eighteen-month build out ending in fiscal 2000.
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 $49.6 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 14,500 square feet of retail space; five
championship 18-hole golf courses including the recently restored "Blue Monster"
golf course, the home of the Doral Ryder Open; the Silver Course, which reopened
in the fall of 1998 after extensive renovation by golf professional and designer
Jerry Pate; and the Gold Course, which was also recently rebuilt under the
direction of golf professional and designer Raymond Floyd; the Doral Golf
Learning Center, operated by noted instructor Jim McLean; three restaurants; the
Arthur Ashe Tennis Center, featuring ten courts; a $6.5 million water feature
and pool facility currently under construction; and a private club members'
facility also under construction.
Facilities at Doral also include the Spa at Doral, which includes 48 guest
suites, approximately 85,000 square feet of fitness and spa facilities, 52
treatment rooms, three swimming pools, two saunas and two restaurants. 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 $17,500 deposit which is fully refundable in thirty years (or sooner under
certain circumstances), and annual dues of approximately $4,200.
LAKE LANIER
Lake Lanier is a regional destination resort and recreational complex
comprised of 1,041 acres located approximately 45 miles northeast of downtown
Atlanta. It is situated on Lake Lanier, an approximately 38,000-acre lake with
approximately 520 miles of shoreline and extensive lakeside primary and
secondary homes. It is subleased from a government agency of the State of
Georgia (which leases it from the U.S. Army Corps of Engineers) under a
fifty-year sublease commencing August 1997.
Lake Lanier features a 216-room hotel, 12,500 square feet of conference
space which is currently being expanded by an additional 10,000 square feet,
three retail outlets, three restaurants, a swimming pool, a golf course, three
tennis courts, beach and water park facilities, a boat rental operation, a 2,000
seat outdoor amphitheater, riding stables, campgrounds and pavilions. In 1998,
Lake Lanier constructed and began renting 30 two-bedroom lake houses.
GRAND TRAVERSE
In August 1997, the Company acquired Grand Traverse and related golf and
recreational facilities. Grand Traverse is a regional destination resort located
in the northwest portion of the lower peninsula of Michigan, approximately six
miles from Traverse City, Michigan. The Resort covers approximately 1,370 acres,
and features a 426-room hotel, approximately 55,000 square feet of conference
space, two championship 18-hole golf courses, nine tennis courts, four
racquetball courts, three swimming pools, three restaurants, approximately
73,000 square feet of fitness facilities, approximately 23,000 square feet of
retail space and a private club operation. One of Grand Traverse's two courses,
"The Bear," was designed by golf professional and designer Jack Nicklaus. A
third championship 18-hole golf course, designed by professional golfer and golf
course designer Gary Player, will open in the spring of 1999, and a 22,000
square foot golf clubhouse is currently under construction. Grand Traverse also
operates a condominium leasing program comprised of approximately 234 rental
units.
Grand Traverse's private club operation provides golf, tennis and fitness
facilities, sports instruction, special events, dining and social activities to
its members. A full golf membership at Grand Traverse currently requires a
$12,500 deposit which is fully refundable in thirty years (or sooner under
certain circumstances), and annual dues of approximately $1,800.
4
THE CLAREMONT
In April 1998, the Company acquired The Claremont, a historic 279-room
hotel located near Berkeley, California. The Claremont incorporates a number of
the physical and economic characteristics which the Company seeks in its
portfolio, including a unique, irreplaceable asset with high recognition and
strong positioning in the markets it serves, multiple and diverse sources of
revenues, with room revenues representing less than 50% of total revenues,
attractive growth characteristics in its hospitality operations, and an
established and successful membership program. Located on approximately
twenty-two acres, its amenities include four restaurants, approximately 32,000
square feet of meeting space, a complete European style spa with 14 treatment
rooms, two pools, ten tennis courts, and fitness facilities. The Claremont's
private club membership currently requires a $7,500 deposit, which is fully
refundable in thirty years (or sooner under certain circumstances), and annual
dues ranging from $2,760 to $3,780.
FAIRWAYS
Fairways is based in Manassas, Virginia and operates 24 golf course
properties (22 of which are owned and two of which are leased) located in
numerous markets in the Eastern and Midwestern United States. These properties
include seventeen 18-hole golf courses, three 27-hole golf courses and four
36-hole golf courses, comprising private, semi-private, and daily fee golf
operations.
At the time it was acquired by the Company in July 1993, Fairways owned and
operated eleven golf course properties, one of which was subsequently sold.
Since July 1993, Fairways has acquired fourteen additional golf course
properties. Of Fairway's 24 properties, five are private clubs, eleven are
semi-private clubs and eight are public (or daily fee) facilities. The Company's
operating strategy for Fairways has been to form "clusters" of courses within
geographic areas in order to create economies of scale in management and
purchasing and to promote reciprocity among clubs for the members within these
clusters.
Approximately 980,000 rounds were played at all Fairways courses in fiscal
1998, of which members played approximately 398,000 rounds and non-members
played approximately 582,000 rounds. Individual golf dues range from $900 to
$5,700 annually.
MARKETING PROGRAMS
The Company attempts to position Desert Resorts, Doral, Grand Traverse and
The Claremont 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. Fairways
positions itself as "America's Leader in Quality, Affordable Golf."
To effectively position its operations, the Company's operating
subsidiaries use a number of marketing strategies and marketing channels. The
marketing function is largely decentralized to allow managers who are most
familiar with the guest or member population and with the specific property
to play an active role in developing the appropriate marketing strategy. The
Company uses a combination of print media, direct mail, internet,
telemarketing, local and national public relations and, in the case of
professional golf tournaments, television, to develop market awareness and
brand positioning, and to market golf, lodging, memberships, food and
beverage and special events to targeted consumers. Although specific
marketing activities are largely decentralized, the Company's corporate
office develops and implements national marketing and promotional programs,
controls trademarks and trademark licensing agreements, engages public
relations firms and advertising agencies, coordinates communications with
media sources, develops video materials and interactive CDs and internet web
sites, and develops and manages televised golf tournaments. To promote the
Company's properties to corporations, associations and meeting managers,
regional sales offices were opened in 1998 in the following markets: the
greater New York City, New Jersey and Connecticut markets; Washington, D.C.;
Chicago, Illinois; and Atlanta, Georgia.
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 and Doral, the customers are drawn from an international,
national and regional customer base and often exhibit the higher spending
patterns of affluent corporate and leisure travelers. Desert Resorts' private
clubs attract members and non-member guests on a national scale, with higher
concentrations of customers from southern California. The private club at Doral
typically attracts local corporate and individual golf and fitness enthusiasts.
5
Lake Lanier draws customers from Georgia and the southeastern United
States. The hotel operations at Lake Lanier draw significant numbers of both
corporate and other group participants and FIT guests. Lake Lanier's other
facilities attract a mix of customers with a wide array of interests, including
active golfers and daily attraction users, such as boaters and water park
attendees.
Grand Traverse draws customers largely from Michigan and the Midwest. Its
customers include affluent FIT and corporate guests. Grand Traverse's private
club typically attracts local fitness and golf enthusiasts.
The Claremont draws customers largely from the San Francisco Bay area and
surrounding communities, including Silicon Valley. Its customers include large
group and associations and affluent FIT guests. The Claremont's private club
appeals to and attracts local spa and fitness enthusiasts.
Fairways' golf facilities attract members and daily fee golf participants
from the community in which the applicable facility is located. Its golf club
customers include families and individual golf enthusiasts from a broad range of
socioeconomic backgrounds.
CERTAIN FACTORS AFFECTING RESORTS AND GOLF COURSES
Turf grass conditions must be satisfactory to attract play on the Company's
golf courses. Severe weather or other factors, including grass diseases or
pestilence, could cause unexpected problems with turf grass conditions at any
golf course or at courses located within the same geographic area. Turf grass
conditions at each of the Company's golf courses also depend to a large extent
on the quality and quantity of available water. The availability of sufficient
water is affected by various factors, many of which are not within the Company's
control. While the Company believes that it currently has sufficient access to
water to operate its golf courses in the manner in which they are currently
operated, there can be no assurance that certain conditions, including weather,
governmental regulation or environmental concerns, will not materially adversely
affect the supply of water to a particular golf course or courses in the future.
The Company currently operates golf courses and/or resorts in nine states
which 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 one or more golf courses for play
and on the number of customers a golf course can attract.
CERTAIN UNINSURED RISKS
The Company currently carries comprehensive liability, fire, flood (for
certain courses) and extended coverage insurance with respect to its resorts and
all of the golf courses owned or leased by it, with policy specifications and
insured limits and deductibles customarily carried for similar properties. There
are, however, certain types of losses (such as those losses incurred as a result
of earthquakes, which are of particular concern with respect to Desert Resorts
and The Claremont, or hurricanes, which are of particular concern with respect
to the Company's Florida properties) 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 golf courses.
FACTORS AFFECTING RESORT VISITORS AND GOLF PARTICIPATION
The success of efforts to attract visitors to resorts is dependent upon
discretionary spending by consumers, which may be adversely affected by general
and regional economic conditions. In the case of the Company's resorts, the
regional economies of southern and northern California, South Florida, and the
states of Michigan and Georgia are significant to its operations, although
Desert Resorts and Doral attract customers from throughout the United States and
abroad. A decrease in tourism or in consumer spending on travel and/or
recreation could have an adverse effect on the Company's business, financial
condition and results of operations.
The success of efforts to attract and retain members at a private or
semi-private club and the number of rounds played at a public golf course are
also dependent upon discretionary spending by consumers, which may be adversely
affected by general and regional economic conditions. In the case of Fairways'
golf operations, the regional economies of Florida, Wisconsin and the
Mid-Atlantic United States are particularly important. A decrease in the number
of golfers or their rates of participation or in consumer spending on golf could
have an adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The recreation industry is highly competitive. The Company's resorts
compete with other golf and recreation-based resorts. These include premier
independent resorts as well as national hotel chains. In addition, the Company's
resorts compete with other recreational businesses, such as cruise ships and
gaming casinos. The Company believes that it competes based on brand name
recognition, location, room rates and the quality of its services and amenities.
6
Golf courses compete for players and members with other golf courses
located in the same geographic areas. The Company's golf courses compete based
on the overall quality of their facilities (including the quality of its
customer service), the maintenance of their facilities, available amenities,
location and overall value. The number and quality of golf courses in a
particular area could have a material effect on the revenue of any of the
Company's golf courses, which could in turn affect the Company's financial
performance and results of operations. There can be no assurance that continued
construction of competing facilities, or renewed or strong and sustained
interest in existing competing facilities, will not adversely affect the
Company's future financial performance.
The Company competes for the purchase and lease of golf courses with
several national and regional golf course companies. Certain of the Company's
national competitors have larger staffs and more golf courses currently leased,
owned or under management than the Company. In addition, certain national
competitors have greater capital resources than the Company and some of such
competitors may have access to capital at a lower cost than is currently
available to the Company. There can be no assurance that such competition will
not adversely affect the Company's results of operations or ability to maintain
or increase sales and market share.
SEASONALITY
The operations of the Company are seasonal. Primarily due to the popularity
of Desert Resorts and Doral during the winter and early spring months,
approximately 67% of these properties' revenues are recognized in the first two
quarters of the fiscal year, while Lake Lanier, Grand Traverse and Fairways
generate approximately 67% of their revenue during the summer and fall months,
thereby being recorded in the last two quarters of the fiscal year. The
Claremont is generally not affected by seasonal trends.
LICENSES AND TRADEMARKS
The Company is a party to the Professional Golfers' Association License
Agreement ("PGA License Agreement") pursuant to which it is permitted and
licensed to use the PGA WEST name and logos in sales, promotion, advertising,
development and/or operations of certain property located in the city of La
Quinta, California, known as "PGA WEST" (the "PGA WEST Property"). The PGA
License Agreement provides the Company with (i) the exclusive rights in the
United States to the name "PGA WEST" in connection with the PGA WEST Property
and (ii) the exclusive rights in the states of California and Arizona to the
names "PGA" and "PGA of America" in connection with the PGA WEST Property. The
term of the PGA License Agreement extends through the later of (i) the date on
which all of the residential units located on the PGA WEST Property have been
sold and (ii) the date on which the Company ceases to use the name "PGA WEST" in
the name of golf clubs, golf courses, hotels and/or any other commercial, office
or residential developments then located on the PGA WEST Property. The Company
believes that the PGA WEST logo is an important aspect of the Company's business
because of the prestige associated with the Professional Golfers' Association.
The PGA License Agreement provides for royalty payments on an annual basis
through 2005, although the exact amount of any royalty payments with respect to
the PGA mark will be determined by reference to the number and sales of
residential units by KSL Land Corporation and its subsidiaries, an affiliate of
the Company engaged in the real estate development business ("KSL Land").
KSL Land has in the past made all royalty payments attributable to its land
sales and is expected to continue to do so 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 land sales by
KSL Land, could result in the payment of monetary damages by the Company. Such
occurrence could have a material adverse effect on the Company.
The Company is also a licensee under a license agreement with the PGA TOUR.
The PGA TOUR license agreement provides the Company with the exclusive rights to
use the names "PGA TOUR" and "TPC" in connection with the sales, promotion,
marketing and operation of PGA WEST. The PGA TOUR agreement is expected to
terminate no earlier than January 1, 2006.
The Company owns the "Blue Monster" name and has an irrevocable, perpetual
license for the "Doral" name in connection with the Company's operation,
marketing and promotion of the facilities located at Doral. The licensor of the
Doral mark is prohibited from licensing the Doral mark for any purpose
anywhere in southern Florida, but retains the right to license the Doral mark
elsewhere. Although failure by the Company to comply with the terms of the Doral
license agreement could result in monetary damages, the licensor does not have
the right to terminate the Doral license agreement in the event of a breach by
the Company.
EMPLOYEES
For the year ended October 31, 1998, the Company employed approximately
6,400 persons during its peak seasons and approximately 4,300 persons during its
off-peak seasons. In addition, Parent employs approximately 35 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, none of the Company's employees is represented by a labor
union. At The Claremont, three unions represent approximately 54% of employees.
The Company believes its relationship with these unions is good.
7
GOVERNMENTAL REGULATION
ENVIRONMENTAL MATTERS. Operations at the Company's resort and community
golf courses 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.
8
ITEM 2. PROPERTIES
PROPERTIES CITY/STATE OWNED OR LEASED
Desert Resorts
La Quinta Resort & Club La Quinta, California Owned
PGA WEST La Quinta, California Owned
Doral Golf Resort and Spa Miami, Florida Owned
Lake Lanier Lake Lanier Islands, Georgia Leased
Grand Traverse Resort Acme, Michigan Owned
The Claremont Resort & Spa Berkeley, California Owned
KSL Fairways:
MID-ATLANTIC COURSES
Birkdale Golf and C.C. Richmond, Virginia Owned
Broad Bay C.C. Virginia Beach, Virginia Owned
Countryside Golf Club Roanoke, Virginia Owned
The Gauntlet Fredericksburg, Virginia Leased
Kiln Creek Golf and C.C. Newport News, Virginia Owned
Marlborough C.C. Upper Marlboro, Maryland Owned
Monroe Valley Golf Club Jonestown, Pennsylvania Owned
Montclair C.C. Dumfries, Virginia Owned
Patuxent Greens C.C. Laurel, Maryland Owned
Prince William Golf Club Dulles, Virginia Leased
Tantallon C.C. Ft. Washington, Maryland Owned
SOUTHEASTERN COURSES
The Club at Hidden Creek Navarre, Florida Owned
Indigo Lakes Golf and C.C. Daytona Beach, Florida Owned
Pebble Creek Tampa, Florida Owned
Scenic Hills C.C. Pensacola, Florida Owned
Shalimar Pointe Golf and C.C. Shalimar, Florida Owned
Tiger Point Golf & C.C. Gulf Breeze, Florida Owned
Walden Lake Golf and C.C. Plant City, Florida Owned
Wellington C.C. Wellington, Florida Owned
MIDWESTERN COURSES
Lake Windsor G. C. Windsor, Wisconsin Owned
Memphis Oaks C.C. Memphis, Tennessee Owned
Mequon C.C. Mequon, Wisconsin Owned
Silver Spring C.C. Menomonee, Wisconsin Owned
Willow Run G.C. Pewaukee, Wisconsin Owned
Descriptions of the Company's significant properties are provided in the
"Business" section. All properties are owned or leased by subsidiaries of the
Company. The corporate office is located in La Quinta, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings generally incidental
to its normal business activities. Management of the Company does not believe
that the outcome of any of these proceedings will have a material adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 20, 1998, the Company's only shareholder, KSL Recreation
Corporation, acting without a meeting, elected the Directors of the Company for
fiscal year 1999 as follows: Henry R. Kravis, George R. Roberts, Michael T.
Tokarz, Paul E. Raether, Scott M. Stuart, Alexander Navab, Jr., Michael S.
Shannon and Larry E. Lichliter.
9
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Currently, there is no market for the common stock of the Company or its
Parent.
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
1998(3) 1997(2) 1996 1995 1994(1)
------- ------- ---- ---- -------
Revenues.................................... $ 296,270 $ 226,070 $ 182,249 $ 159,266 $ 124,210
Net income (loss) .......................... 14,114 (363) 19,741 (16,172) (7,729)
Cash and cash equivalents................... 5,248 24,056 9,329 10,112 39,396
Total assets................................ 737,593 636,041 578,852 578,955 565,583
Long-term debt (including current portion).. 442,212 366,020 271,436 324,604 324,343
Earnings (Loss) Per Share:
Before extraordinary item.............. $ 14,114 $ 2,801 $ (12,379) $ (16,172) $ (5,527)
Extraordinary gain (loss) ............. -- (3,164) 32,120 -- (2,202)
------------ ------------ ------------ ------------ ------------
Total Earnings (Loss) Per Share............. $ 14,114 $ (363) $ 19,741 $ (16,172) $ (7,729)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average number of common shares
and common share equivalents............. 1,000 1,000 1,000 1,000 1,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Other Data:
Net Membership Deposits (4) ................ $ 17,544 $ 8,311 $ 4,391 $ 6,347 $ 24,218
Adjusted Net Membership Deposits (5) ....... 17,544 8,311 4,391 234 351
Other non-cash and non-recurring items...... 1,820 563 873 885 228
Ratio of earnings to fixed charges (6)...... 1.4x 1.1x -- -- --
1) Desert Resorts and Doral were acquired in December 1993. Accordingly, the
Company's operating results for fiscal 1994 include only ten months of
operations for Desert Resorts and Doral.
2) 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.
3) 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.
4) Net Membership Deposits is defined as the amount of refundable membership
deposits paid by new and upgraded resort club members and by existing
members who have converted to new membership plans, in cash, plus principal
payments in cash received on notes in respect thereof, minus the amount of
any refunds paid in cash with respect to such deposits.
5) Adjusted Net Membership Deposits is defined as Net Membership Deposits,
excluding in fiscal 1995 and fiscal 1994, $6.1 million and $23.9 million,
respectively, of Net Membership Deposits which, because these amounts were
paid by existing resort club members in connection with the initial
conversion of such members to new membership plans at Desert Resorts, were
considered non-recurring in nature.
6) For purposes of these ratios, (i) earnings have been calculated by adding
interest expense, the estimated interest portion of rental expense, and
minority interests in losses of subsidiaries to earnings before income
taxes and extraordinary items and (ii) fixed charges are comprised of
interest expense, capitalized interest and the estimated interest portion
of rental expense. Earnings for fiscal 1996, 1995 and 1994 were
insufficient to cover fixed charges by $12,980, $17,014 and $5,148,
respectively.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS DOCUMENT. DOLLAR AMOUNTS INCLUDED IN THIS SECTION ARE IN
THOUSANDS.
The Company generates revenues at Desert Resorts, Doral, Grand Traverse and
The Claremont from room revenues, greens fees (except The Claremont), food and
beverage sales and, to a lesser extent, membership dues, merchandise (pro shop
and retail) sales, and other sources. At Fairways, revenues are substantially
generated through initiation fees, membership dues, greens fees, golf cart
rentals, merchandise (pro shop) sales, and food and beverage sales. Rooms
revenue, water park and other daily recreation revenues, food and beverage sales
and to a lesser extent, golf fees, merchandise sales, and admission fees drive
revenues at Lake Lanier.
Revenues at Desert Resorts, Doral, Grand Traverse and The Claremont do not
include Net Membership Deposits, which are defined as the amount of refundable
membership deposits paid by new and upgraded resort club members and by existing
members who have converted to new membership plans, in each case in cash, plus
principal payments in cash received on notes in respect thereof, minus the
amount of any refunds paid in cash with respect to such deposits. These
membership deposits are fully refundable in thirty years (or sooner under
certain circumstances). In accordance with generally accepted accounting
principles (GAAP), the Company accounts for membership deposits as "cash
provided from financing activities" in its statements of cash flows and reports
a liability in its balance sheets equal to the amount of such membership
deposits.
In addition to statements of operations data in accordance with GAAP, this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" includes a discussion of the Company's Adjusted EBITDA, which is
defined as net income before income tax expense (benefit), net interest expense,
depreciation and amortization, loss on sale of golf facility, extraordinary
items, non-recurring charges and non-cash items, plus Adjusted Net Membership
Deposits. Adjusted Net Membership Deposits is defined as Net Membership
Deposits, excluding in fiscal 1994 and fiscal 1995, $23,900 and $6,100,
respectively, of Net Membership Deposits which, because these amounts were paid
by existing resort club members in connection with the initial conversion of
such members to new membership plans at Desert Resorts, were non-recurring in
nature. In fiscal 1994 and 1995, Desert Resorts introduced new membership
programs at the PGA WEST and La Quinta private clubs, respectively. These new
programs, which provide for the payment of a fully refundable (in thirty years
or sooner under certain circumstances) membership deposit to join one or both of
the clubs were offered, on an optional basis, to then existing members of each
of the two private clubs. Accordingly, existing members who chose to convert to
the new membership program paid a new membership deposit. Information regarding
Adjusted EBITDA has been provided because the Company believes that it assists
in understanding the Company's operating results. The Company views cash flow
from membership sales as an important component of its operating cash flow
measure as membership sales are recurring in nature as the club builds its
membership and replaces the natural turnover. Also, the significant payroll and
operating expenses necessary to create, sell and maintain a private club
operation are treated as ongoing expenses in the Company's Statements of
Operations and therefore recognizing the cash flow from sales is an appropriate
match in determining the overall performance of the club operation. It is
important to note that the membership cash flow included in Adjusted EBITDA is
only the cash amount collected net of financed sales and refunds. From the
Company's perspective, EBITDA and net membership cash flow together as Adjusted
EBITDA, provide the most accurate measure of the recurring cash flow performance
of the operations. As structured, these private club membership sales are not
treated as revenue for GAAP purposes and therefore do not appear in the
Company's Statements of Operations, but are reflected in the Company's
Statements of Cash Flows.
11
RECONCILIATIONS OF CONSOLIDATED NET INCOME (LOSS) TO ADJUSTED EBITDA
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
1998 (3) 1997 (2) 1996 1995 1994(1)
-------- -------- ---- ---- -------
NET INCOME (LOSS) ............................ $ 14,114 $ (363) $ 19,741 $ (16,172) $ (7,729)
Adjustments to net income (loss):
Income tax expense (benefit) ............... (6,997) 143 (82) -- --
Net interest expense ...................... 33,125 30,037 27,711 18,492 14,011
Loss on sale of golf facility............... -- -- -- 2,684 --
Depreciation and amortization............... 36,354 27,665 23,799 20,340 13,971
Extraordinary (gain) loss................... -- 3,164 (32,120) -- 2,202
------------- ------------ ------------ ------------ ------------
EBITDA: ...................................... 76,596 60,646 39,049 25,344 22,455
Adjustments to EBITDA:
Net Membership Deposits (4)................. 17,544 8,311 4,391 6,347 24,218
Excluded Conversion Membership Deposits .... -- -- -- (6,113) (23,867)
------------- ------------ ------------ ------------ ------------
Adjusted Net Membership Deposits (5)........ 17,544 8,311 4,391 234 351
Non-cash and non-recurring items ........... 1,820 563 873 885 228
------------- ------------ ------------ ------------ ------------
Total Adjustments to EBITDA: ................. 19,364 8,874 5,264 1,119 579
------------- ------------ ------------ ------------ ------------
ADJUSTED EBITDA: ............................. $ 95,960 $ 69,520 $ 44,313 $ 26,463 $ 23,034
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
1) Desert Resorts and Doral were acquired in December 1993. Accordingly, the
Company's operating results for fiscal 1994 include only ten months of
operations for Desert Resorts and Doral.
2) Full operations of Lake Lanier and Grand Traverse commenced in August 1997.
Accordingly, the Company's operating results for fiscal 1997 included
management fees for Lake Lanier through July, and approximately three
months of operations for both Lake Lanier and Grand Traverse.
3) 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.
4) Net Membership Deposits is defined as the amount of refundable membership
deposits paid by new and upgraded resort club members and by existing
members who have converted to new membership plans, in cash, plus principal
payments in cash received on notes in respect thereof, minus the amount of
any refunds paid in cash with respect to such deposits.
5) Adjusted Net Membership Deposits is defined as Net Membership Deposits,
excluding in fiscal 1995 and fiscal 1994, $6.1 million and $23.9 million,
respectively, of Net Membership Deposits which, because these amounts were
paid by existing resort club members in connection with the initial
conversion of such members to new membership plans at Desert Resorts, were
considered non-recurring in nature.
Adjusted EBITDA should not be construed as an indicator of the Company's
operating performance or as an alternative to operating income as determined in
accordance with GAAP. Additionally, Adjusted EBITDA should not be construed by
investors as a measure of the Company's liquidity or ability to meet all cash
needs or as an alternative to cash flows from operating, investing and financing
activities as determined in accordance with GAAP, nor should Adjusted EBITDA be
construed by investors as an alternative to any other determination under GAAP.
The Company's Adjusted EBITDA may not be comparable to similarly titled measures
reported by other companies.
12
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
REVENUES. Revenues increased by $70,200, or 31%, from $226,070 in fiscal
1997 to $296,270 in fiscal 1998. Rooms revenue increased by $24,499, or 41%;
food and beverage sales increased by $20,108, or 37%; golf fees increased by
$5,888, or 14%; dues and fees increased by $3,890, or 16%; merchandise sales
increased by $1,863, or 13%; spa revenue increased by $2,595, or 64%; and other
revenue increased by $11,357, or 43%. Revenue increases at Desert Resorts and
Doral equaled $9,367; adjusted for a non-cash loss on the disposal of fixed
assets associated with the renovation of Doral's Silver Course, their revenue
increases equaled $10,864. Revenues at Fairways (excluding 1998 course
acquisitions) were substantially unchanged, largely reflecting adverse weather
conditions experienced in 1998 at Fairways' clubs, most notably in central and
northern Florida and the Florida Panhandle. The Company's 1998 acquisitions
added $23,333 in revenues, while revenue increases at Grand Traverse and Lake
Lanier equaled $37,821.
OPERATING EXPENSES. Operating expenses increased by $62,925, or 33%, from
$193,232 in fiscal 1997 to $256,157 in fiscal 1998. Operating expenses,
excluding depreciation and amortization, increased by $54,236, or 33%, from
$165,567 in fiscal 1997 to $219,803 in fiscal 1998, primarily from the full
fiscal year effect of Grand Traverse and Lake Lanier, as well as the
partial-year addition of The Claremont. Of those properties owned throughout
fiscal 1997, Desert Resorts' operating expenses increased 3%, Doral's operating
expenses increased less than 1%, and Fairways' operating expenses (excluding the
two golf course acquisitions) increased 4%. For the Company as a whole, the
primary components of the increase were (i) an increase in payroll and benefits
of $28,404, or 39%, from $71,935 in fiscal 1997 to $100,339 in fiscal 1998, of
which $22,655, or 80% of the total increase, reflected 1998 acquisitions and
year to year increases in those properties not owned for all of fiscal 1997,
(ii) an increase in other expenses of $22,188, or 25%, from $88,526 in fiscal
1997 to $110,714 in fiscal 1998, of which $22,824, or 103% of the increase
reflected 1998 acquisitions and the partial year effect of 1997 acquisitions,
and (iii) an increase in corporate fees of $3,644, or 71%, from $5,106 in fiscal
1997 to $8,750 in fiscal 1998, largely reflecting the partial year effect of the
Company's formation in 1997. As a percentage of revenues, operating expenses,
excluding depreciation and amortization, increased from 73% of revenues in
fiscal 1997 to 74% of revenues in fiscal 1998. Depreciation and amortization
increased by $8,689, or 31%, from $27,665 in fiscal 1997 to $36,354 in fiscal
1998. This increase was primarily attributable to the full-year addition of
Grand Traverse and Lake Lanier, and the partial-year addition of The Claremont.
OPERATING INCOME. Operating income increased $7,275, or 22%, from $32,838
in fiscal 1997 to $40,113 in fiscal 1998 as a result of the factors discussed
above.
NET INTEREST EXPENSE. Net interest expense increased by $3,088, or 10%,
from $30,037 in fiscal 1997 to $33,125 in fiscal 1998. This increase was
primarily attributable to increased indebtedness of the Company due to
acquisitions, partially offset by interest income received on a note
receivable from an affiliate.
EXTRAORDINARY ITEMS. The Company incurred an extraordinary loss, net of
income tax benefits, on the early extinguishment of indebtedness of $3,164 in
fiscal 1997.
NET INCOME. Net income increased by $14,477, from a net loss of $363 in
fiscal 1997 to net income of $14,114 in fiscal 1998 as a result of the factors
described above. Excluding extraordinary items in 1997, net income would have
increased by $11,313, or 404%, from net income of $2,801 in fiscal 1997 to net
income of $14,114 in fiscal 1998.
ADJUSTED EBITDA. Adjusted EBITDA increased by $26,440, or 38%, from $69,520
in fiscal 1997 to $95,960 in fiscal 1998. This increase was primarily
attributable to the factors described above and an increase in Adjusted Net
Membership Deposits of $9,233, or 111%, from $8,311 in fiscal 1997 to $17,544 in
fiscal 1998.
13
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996
REVENUES. Revenues increased by $43,821, or 24%, from $182,249 in fiscal
1996 to $226,070 in fiscal 1997. Rooms revenue increased $13,845, or 30%; food
and beverage sales increased $10,260, or 23%; golf fees increased $7,270, or
21%; dues and fees increased $1,277, or 5%; merchandise sales increased $369, or
3%; spa revenue increased $932, or 30%, and other revenue increased $9,868, or
61%. Revenue increases at Desert Resorts, Doral and Fairways were $26,893 for
fiscal 1997. The Company's fiscal 1997 acquisitions, Grand Traverse and Lake
Lanier, added $16,118 in revenues.
OPERATING EXPENSES. Operating expenses increased by $26,175, or 16%, from
$167,057 in fiscal 1996 to $193,232 in fiscal 1997. Operating expenses,
excluding depreciation and amortization, increased by $22,309, or 16%, from
$143,258 in fiscal 1996 to $165,567 in fiscal 1997, primarily as a result of
increased activity resulting from the opening of new facilities, the addition of
Grand Traverse and Lake Lanier, and higher occupancy rates at the Company's
resorts. The primary components of the increase were (i) an increase in payroll
and benefits of $8,896, or 14%, from $63,039 in fiscal 1996 to $71,935 in fiscal
1997, reflecting increases in staff and changes in incentive programs, (ii) an
increase in other expenses of $11,506, or 15%, from $77,020 in fiscal 1996 to
$88,526 in fiscal 1997, and (iii) an increase in corporate fees of $1,907, or
60%, from $3,199 in fiscal 1996 to $5,106 in fiscal 1997. As a percentage of
revenues, operating expenses, excluding depreciation and amortization, declined
from 79% of revenues in fiscal 1996 to 73% of revenues in fiscal 1997.
Depreciation and amortization increased by $3,866, or 16%, from $23,799 in
fiscal 1996 to $27,665 in fiscal 1997. This increase was primarily attributable
to the completion of capital improvements at Desert Resorts and Doral in fiscal
1996 and the addition of Grand Traverse and Lake Lanier.
OPERATING INCOME. Operating income increased by $17,646, or 116%, from
$15,192 in fiscal 1996 to $32,838 in fiscal 1997 as a result of the factors
discussed above.
NET INTEREST EXPENSE. Net interest expense increased by $2,326, or 8%,
from $27,711 in fiscal 1996 to $30,037 in fiscal 1997. This increase was
primarily attributable to (i) increased indebtedness of the Company and (ii)
increased amortization of capitalized finance costs, partially offset by
interest income received on a note receivable from an affiliate.
EXTRAORDINARY ITEMS. The Company incurred an extraordinary loss, net of
income tax benefits, on the early extinguishment of indebtedness of $3,164, in
fiscal 1997. In fiscal 1996, the Company incurred an extraordinary gain, net of
income tax, on the early extinguishment of indebtedness of $32,120.
NET INCOME. Net income decreased by $20,104 from $19,741 in fiscal 1996 to
a net loss of $363 in fiscal 1997 as a result of the factors described above.
Excluding extraordinary items, net loss would have decreased by $15,180, or
123%, from a net loss of $12,379 in fiscal 1996 to a net income of $2,801 in
fiscal 1997.
ADJUSTED EBITDA. Adjusted EBITDA increased by $25,207, or 57%, from
$44,313 in fiscal 1996 to $69,520 in fiscal 1997. This increase was primarily
attributable to the factors described above and an increase in Adjusted Net
Membership Deposits of $3,920 from $4,391 in fiscal 1996 to $8,311 in fiscal
1997.
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 1998, cash flow provided by operating activities was $33,820
compared to $100,104 for fiscal 1997. This decrease was primarily due to (i) the
settlement of receivables due from Parent and its affiliates of $46,446 in
fiscal 1997, (ii) the release of restricted cash to operating cash of $11,910
during fiscal 1997, as discussed below, and (iii) the payment of accrued
interest offset by the increase in net income adjusted for depreciation and
amortization. During fiscal 1998, cash flow used in investing activities was
$135,198, compared to $87,276 for fiscal 1997. This increase was primarily
attributable to (i) the investment in The Claremont being greater than the prior
year's investments in Lake Lanier and Grand Traverse by $29,690, (ii) increased
purchases of property and equipment of $20,147, (iii) $7,184 for real estate
under development, and (iv) the purchase of two golf facilities for $11,448 in
1998, all of which was offset by the issuance of a $21,653 note by the Company
to an affiliate in fiscal 1997. Cash flows provided by financing activities
during
14
fiscal 1998 were $82,570 compared to $1,899 for fiscal 1997. This was due to
increased usage of the revolving line of credit of $47,750 and increased net
cash member deposits of $7,158. In April 1998, the Company's maximum borrowings
under its revolving credit facility were increased to $275,000.
During fiscal 1997, cash flow provided by operating activities was
$100,104, compared to $15,218 for fiscal 1996. This increase was primarily due
to (i) the settlement of receivables due from Parent and its affiliates of
$46,446, (ii) the release of restricted cash to operating cash of $9,499 due to
the credit facility, (iii) the release of $2,411 in restricted cash due to the
execution of the Lake Lanier sublease, (iv) an increase in accrued interest
payable of $5,997, and (v) a decrease in trade receivables of $4,738. The
positive impact on cash from the settlement of these receivables was offset by
the cash used in financing activities to provide a dividend and a net return of
capital to Parent of $51,655. During fiscal 1997, cash flow used in investing
activities was $87,276, compared to $12,755 for fiscal 1996. This change was
primarily attributable to the investment in Lake Lanier, Grand Traverse and the
Silver Course at Doral of $58,575, the repayment to the Company of a $23,065
note by an affiliate in fiscal 1996, as compared to the issuance of a new
$21,653 note by the Company to an affiliate in fiscal 1997, all of which was
offset by a decline in capital expenditures of $8,945, and a decline in
acquisition of golf course facilities of $15,274 in fiscal 1997 compared to
fiscal 1996.
In April 1997, the Company sold $125,000 of senior subordinated redeemable
notes ("the Notes") and entered into a new credit facility providing for term
loans of up to $100,000 and a revolving credit line of up to $175,000. The Notes
are redeemable beginning May 2002 at the Company's option at various rates
ranging from 105.125% at May 2002, decreasing to 100% at May 2005 and
thereafter. The Company is required to offer to buy the Notes at 101% upon a
change of control, as defined in the Notes agreement.
The proceeds from the Notes, together with $100,000 of term loans under the
new credit facility and a $75,000 drawing under the revolving credit portion of
the new credit facility (collectively, the Refinancings) were used on April 30,
1997, (i) to repay approximately $265,000 of outstanding indebtedness of the
Company, (ii) to make a loan of approximately $20,800 to KSL Land, which was
used to repay indebtedness of KSL Land with respect to which a subsidiary of the
Company was a co-obligor, (iii) to pay prepayment penalties and fees and
expenses incurred in connection with the Refinancings and (iv) for general
corporate purposes.
In December 1998, the Company, through a subsidiary, purchased
substantially all of the assets and certain liabilities of the Grand Wailea
Resort Hotel & Spa, a 781-room resort in Maui, Hawaii for approximately
$375,000, including the assumption of approximately $275,000 in mortgage
financing. The acquisition is to be accounted for using the purchase method of
accounting. The excess of the purchase price over the debt assumed, acquisition
related costs, and working capital were funded with an $110,000 equity
investment by the Parent in the Company.
The Company is continually engaged in evaluating potential acquisition
candidates to add to its portfolio of properties in both its resort and
community golf businesses. The Company expects that funding for future
acquisitions may come from a variety of sources, depending on the size and
nature of any such acquisitions. Potential sources of capital include cash
generated from operations, borrowings under the credit facility, additional
equity investments from Parent or partnerships formed at the direction of KKR,
or other external debt or equity financings. There can be no assurance that such
additional capital sources will be available to the Company on terms which the
Company finds acceptable, or be available at all.
The Company believes that its liquidity, capital resources and cash flows
from existing operations will be sufficient to fund capital expenditures,
working capital requirements and interest and principal payments on its
indebtedness for the foreseeable future. However, a variety of factors could
impact the Company's ability to fund capital expenditures, working capital
requirements and interest and principal payments, including a prolonged or
severe economic recession in the United States, departures from currently
expected demographic trends (for example, if the total number of golf rounds
played and golf spending are not as great as currently anticipated) or the
Company's inability to achieve operating improvements at existing and acquired
operations at currently expected levels. Moreover, the Company currently expects
that it will acquire additional resorts, golf facilities or other recreational
facilities, and in connection therewith, expects to incur additional
indebtedness. In the event that the Company incurs such additional indebtedness,
its ability to make principal and interest payments on its indebtedness,
including the Notes, may be adversely impacted.
SEASONALITY AND INFLATION
The operations of the Company are seasonal. Primarily due to the popularity
of Desert Resorts and Doral during the winter and early spring months,
approximately 67% of these properties' revenues are recognized in the first two
quarters of the fiscal year while Lake Lanier, Grand Traverse and Fairways
generate approximately 67% of their revenue during the summer and fall months,
thereby being recorded in the last two quarters of the fiscal year. The
Claremont is generally not affected by seasonal trends.
The Company believes that inflation does not materially impact its business
operations.
15
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. It differs from net income in that certain items currently
recorded to equity would be a part of comprehensive income. Comprehensive income
must be reported in a financial statement with the cumulative total presented as
a component of equity. This statement will be adopted by the Company beginning
November 1, 1998.
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
will be adopted by the Company beginning November 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company believes the segment information required to be disclosed
under SFAS No. 131 will be more comprehensive than previously provided,
including expanded disclosure of income statement and balance sheet items. The
Company will present the required segment information in its annual financial
statements as of October 31, 1999, as required by SFAS No. 131.
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," was issued in April 1998 and will be effective for the Company
beginning November 1, 1999. SOP 98-5 broadly defines and provides guidance on
the financial reporting of start-up costs and organization costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Any amounts capitalized as of the date of adoption will be expensed
and reported as the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value. The Company believes that adoption of SFAS No.
133, which is required in fiscal 2000, will not have a material impact on the
Company's consolidated financial statements.
OTHER MATTERS
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software or hardware may recognize a date using "00" as the year
1900 rather than the year 2000. Use of non-Year 2000-compliant programs could
result in system failures, miscalculations or errors causing disruptions of
operations or other business problems, including, among others, a temporary
inability to process transactions and invoices or engage in similar normal
business transactions.
ASSESSMENT AND IMPLEMENTATION PHASE. In 1998 the Company undertook an
examination of its systems for Year 2000 compliance with a view to replacing
non-compliant systems. The Company has identified substantially all of its major
computer hardware platforms and related software in use as well as the relevant
non-system areas. These non-computer systems include: (i) network switching;
(ii) the Company's non-information technology systems (such as buildings, plant,
equipment and other infrastructure systems that may contain embedded
microcontroller technology); and (iii) the status of major vendors and service
providers. The Company is approximately 45% complete in its assessment of
non-computer systems and is not expected to have material exposure in the area.
The Company employs distributed network technology that allows its
properties to operate independently and with little reliance on other parts of
the system. These stand-alone networks use personal computer workstations and
file servers to store and process information. As the underlying technology for
these systems is relatively new, the Company does not have material exposure in
this area. In addition, in the ordinary course of business, the Company
periodically replaces computer equipment and software, and in so doing, seeks to
acquire only Year 2000-compliant software and hardware. The Company presently
believes that its planned modifications or replacements of certain existing
computer equipment and software will be completed on a timely basis so as to
avoid potential Year 2000-related disruptions or malfunctions that it has
identified.
COSTS RELATED TO THE YEAR 2000 ISSUE. To date, the Company has incurred
relatively insignificant costs to upgrade its systems to Year 2000
specifications. It is estimated that total costs for systems and service
providers will be approximately $600. The Company plans to have all major
systems Year 2000-compliant by October 1999.
16
CONTINGENCY PLANS. The Company has begun to analyze contingency plans to
handle worst case Year 2000 scenarios that the Company believes could
reasonably occur and, if necessary, will develop a timetable for completing
such contingency plans.
RISKS RELATED TO YEAR 2000 ISSUE. Although the Company's efforts to be
Year 2000-compliant are intended to minimize the adverse effects of the Year
2000 issue on the Company's business and operations, the actual effects of
the issue will not be known until 2000. Difficulties in implementing computer
and non-computer systems by the Company or the failure of its major vendors,
service providers, and customers to adequately address their respective Year
2000 issues in a timely manner could have an adverse effect on the Company's
business, results of operations, and financial condition, although the amount
is not expected to be material. The Company's capital requirements may differ
materially from the foregoing estimate as a result of regulatory,
technological and competitive developments (including market developments and
new acquisitions) in the Company's industry. In addition, Year 2000-related
issues may lead to possible third party claims, the impact of which cannot
yet be estimated. No assurance can be given that the aggregate cost of
defending and resolving such claims, if any, would not have a material
adverse effect on the Company.
17
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) as of October 31, 1998 and
1997, 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, 1998. Our audits also included the financial statement schedule
listed in the index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of KSL
Recreation Group, Inc. and subsidiaries as of October 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Costa Mesa, California
January 29, 1999
18
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(In thousands, except share and per share data)
1998 1997 1996
---- ---- ----
REVENUES:
Rooms revenue...................................................... $ 83,892 $ 59,393 $ 45,548
Food and beverage sales............................................ 74,706 54,598 44,338
Golf fees.......................................................... 48,529 42,641 35,371
Dues and fees...................................................... 28,716 24,826 23,549
Merchandise sales ................................................. 16,300 14,437 14,068
Spa revenue........................................................ 6,639 4,044 3,112
Other ........................................................... 37,488 26,131 16,263
------------ ------------ ------------
Total revenues................................................. 296,270 226,070 182,249
EXPENSES:
Payroll and benefits............................................... 100,339 71,935 63,039
Other expenses..................................................... 110,714 88,526 77,020
Depreciation and amortization...................................... 36,354 27,665 23,799
Corporate fee (Note 12) ........................................... 8,750 5,106 3,199
------------ ------------ ------------
Total operating expenses....................................... 256,157 193,232 167,057
------------ ------------ ------------
INCOME FROM OPERATIONS............................................. 40,113 32,838 15,192
OTHER INCOME (EXPENSE):
Interest income (Notes 3 and 12)................................... 2,527 1,672 1,058
Interest expense................................................... (35,652) (31,709) (28,769)
------------ ------------ ------------
Other expense, net............................................. (33,125) (30,037) (27,711)
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS, INCOME TAXES AND
EXTRAORDINARY ITEM.............................................. 6,988 2,801 (12,519)
MINORITY INTERESTS IN LOSSES OF SUBSIDIARY......................... 129 143 58
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 7,117 2,944 (12,461)
INCOME TAX EXPENSE (BENEFIT) (Note 9).............................. (6,997) 143 (82)
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................ 14,114 2,801 (12,379)
EXTRAORDINARY GAIN (LOSS) ON EARLY EXTINGUISHMENT OF DEBT (net of
income tax expense (benefit) of $0, ($2,007) and $16,757,
respectively) (Note 13)......................................... -- (3,164) 32,120
------------ ------------ ------------
NET INCOME (LOSS).................................................. $ 14,114 $ (363) $ 19,741
------------ ------------ ------------
------------ ------------ ------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Before extraordinary item.......................................... $ 14,114 $ 2,801 $ (12,379)
Extraordinary gain (loss).......................................... -- (3,164) 32,120
------------ ------------ ------------
TOTAL BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 10)........ $ 14,114 $ (363) $ 19,741
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES........................... 1,000 1,000 1,000
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
19
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1998 AND 1997
(In thousands, except share data)
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 5,248 $ 24,056
Restricted cash............................................................ 1,743 1,790
Trade receivables, net of allowance for doubtful receivables of
$718 and $722, respectively.......................................... 21,276 14,185
Inventories (Note 4) ...................................................... 10,085 7,383
Current portion of notes receivable (Note 3)............................... 2,387 1,946
Prepaid expenses and other current assets.................................. 4,243 3,631
Deferred income taxes (Note 9) ............................................ 992 --
-------------- -------------
Total current assets.................................................. 45,974 52,991
REAL ESTATE UNDER DEVELOPMENT (Note 12)......................................... 7,184 --
PROPERTY AND EQUIPMENT, net (Notes 5, 7 and 8).................................. 508,812 431,436
NOTES RECEIVABLE FROM AFFILIATES (Note 12)...................................... 23,450 21,653
NOTES RECEIVABLE, less current portion (Notes 3 and 12)......................... 5,389 5,177
RESTRICTED CASH, less current portion........................................... 91 101
EXCESS OF COST OVER NET ASSETS OF ACQUIRED ENTITIES, net of
accumulated amortization of $18,314 and $13,756, respectively.............. 112,521 90,343
OTHER ASSETS, net (Note 6)...................................................... 34,172 34,340
------------- -------------
$ 737,593 $ 636,041
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 9,615 $ 6,948
Accrued liabilities........................................................ 20,504 16,899
Accrued interest payable................................................... 945 10,149
Current portion of long-term debt (Note 7)................................. 1,044 1,000
Current portion of obligations under capital leases (Note 8)............... 2,802 3,044
Deferred income, customer deposits and other............................... 8,878 6,458
------------- -------------
Total current liabilities............................................. 43,788 44,498
LONG-TERM DEBT, less current portion (Note 7)................................... 403,950 326,500
OBLIGATIONS UNDER CAPITAL LEASES, less current portion (Note 8)................. 34,416 35,476
OTHER LIABILITIES............................................................... 1,414 1,168
MEMBER DEPOSITS................................................................. 63,024 44,759
DEFERRED INCOME TAXES (Note 9).................................................. 8,578 15,202
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY (Note 2)............................. 118 247
COMMITMENTS AND CONTINGENCIES (Notes 3, 11 and 12)
STOCKHOLDER'S EQUITY (Note 10):
Common stock, $.01 par value, 1,000 shares authorized and outstanding...... -- --
Additional paid-in capital................................................. 197,535 197,535
Accumulated deficit........................................................ (15,230) (29,344)
------------- -------------
Total stockholder's equity................................................. 182,305 168,191
------------- -------------
$ 737,593 $ 636,041
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
20
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(In thousands)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----- ------- ------- -----
BALANCE October 31, 1995 ................................. $ -- $ 222,389 $ (24,801) $ 197,588
Capital contributions (Note 10) .......................... -- 5,035 -- 5,035
Net income ............................................... -- -- 19,741 19,741
-------------- -------------- ------------- ------------
BALANCE October 31, 1996 ................................. -- 227,424 (5,060) 222,364
Capital contributions (Note 10) .......................... -- 9,144 -- 9,144
Dividends (Note 10) ...................................... -- -- (23,921) (23,921)
Capital distributions (Note 10) .......................... -- (39,033) -- (39,033)
Net loss ................................................. -- -- (363) (363)
-------------- -------------- ------------- ------------
BALANCE October 31, 1997.................................. -- 197,535 (29,344) 168,191
Net income ............................................... -- -- 14,114 14,114
-------------- -------------- ------------- ------------
BALANCE, October 31, 1998 ................................ $ -- $ 197,535 $ (15,230) $ 182,305
-------------- -------------- ------------- ------------
-------------- -------------- ------------- ------------
See accompanying notes to consolidated financial statements.
21
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(In thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 14,114 $ (363) $ 19,741
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................. 36,354 27,665 23,799
Amortization of debt issuance costs........................... 969 1,720 2,112
Extraordinary loss (gain) on debt extinguishment.............. -- 5,171 (48,256)
Deferred income taxes......................................... (7,616) (1,558) 16,760
Provision for losses on trade receivables..................... 495 1,193 1,433
Provision for losses on notes receivable...................... -- -- 228
Minority interests in losses of subsidiary.................... (129) (143) (58)
(Gain) loss on sales and disposals of property, net........... 1,483 (141) 88
Changes in operating assets and liabilities, net of effects
from investment in subsidiaries:
Restricted cash.......................................... 162 11,910 (9,464)
Trade receivables........................................ (7,337) 1,901 (2,837)
Inventories.............................................. (1,447) 386 (518)
Prepaid expenses and other current assets................ (407) 1,813 1,537
Notes receivable......................................... 68 347 (292)
Receivable from Parent................................... -- 43,442 10,069
Receivables from affiliates.............................. -- 3,004 (2,975)
Other assets............................................. (760) (542) (596)
Accounts payable......................................... 2,667 (532) (2,894)
Accrued liabilities...................................... 2,317 (2,433) 6,356
Accrued interest payable................................. (9,204) 7,435 1,438
Deferred income, customer deposits and other............. 1,845 (453) (781)
Other liabilities........................................ 246 282 328
--------- --------- ---------
Net cash provided by operating activities............. 33,820 100,104 15,218
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries, net of cash acquired.............. (88,265) (58,575) (50)
Purchases of property and equipment........................... (32,282) (12,135) (21,080)
Notes receivable from affiliate, net.......................... (1,797) (21,653) 23,065
Investment in real estate under development .................. (7,184) -- --
Acquisition of golf course facilities......................... (11,448) -- (15,274)
Proceeds from sales of property and equipment................. -- 277 583
Collections on member notes receivable........................ 5,778 3,704 1,908
Investment in partnerships.................................... -- (515) (1,907)
Proceeds from sale of investment in partnership............... -- 1,621 --
--------- --------- ---------
Net cash used in investing activities................. (135,198) (87,276) (12,755)
See accompanying notes to consolidated financial statements.
22
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 (CONTINUED)
(In thousands)
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance..................................... $ -- $ 300,362 $ 147,395
Revolving line of credit, net................................... 75,250 27,500 --
Principal payments on long-term debt and obligations under
capital leases............................................. (4,092) (268,081) (154,945)
Member deposits................................................. 14,347 6,371 3,505
Membership refunds.............................................. (2,581) (1,763) (1,022)
Capital contributions from Parent............................... -- 9,144 5,035
Capital distributions and dividends to Parent................... -- (60,799) --
Debt financing costs............................................ (354) (10,835) (3,214)
---------- ------------ ------------
Net cash provided by (used in) financing activities............. 82,570 1,899 (3,246)
---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (18,808) 14,727 (783)
CASH AND CASH EQUIVALENTS, beginning of period.................. 24,056 9,329 10,112
---------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period........................ $ 5,248 $ 24,056 $ 9,329
---------- ------------ ------------
---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of amounts capitalized)................. $ 43,887 $ 22,555 $ 25,774
---------- ------------ ------------
---------- ------------ ------------
Income taxes paid.......................................... $ 1,123 $ 424 $ 9
---------- ------------ ------------
---------- ------------ ------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases................................ $ 2,927 $ 35,154 $ 4,615
Notes receivable issued for member deposits..................... 6,499 5,210 1,892
Assumption of debt on acquisition of golf facility.............. 3,261 -- --
Note receivable issued from sale of assets...................... -- 412 494
Dividend to Parent of investments in partnerships............... -- 2,155 --
Trade-in of equipment under capital lease....................... 1,154 -- 397
Development of golf course from undeveloped land................ -- -- 2,720
Issuance of long-term debt for acquisition of land.............. -- -- 1,711
See accompanying notes to consolidated financial statements.
23
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. GENERAL
KSL Recreation Group, Inc. (Group), is a wholly-owned subsidiary of KSL
Recreation Corporation (the Parent). Group and its subsidiaries (collectively,
the Company) are engaged in the ownership and management of resorts, golf
courses, private clubs, spas and activities related thereto. At the completion
of certain financing transactions (as described in Note 7) on April 30, 1997,
KSL Desert Resorts, Inc. (previously KSL Landmark Corporation), KSL Florida
Holdings, Inc., KSL Georgia Holdings, Inc. and KSL Golf Holdings, Inc. became
wholly-owned subsidiaries of Group in a transaction accounted for in a manner
similar to a pooling of interests. Prior to April 30, 1997, these subsidiaries
were wholly-owned by the Parent.
On October 31, 1997, certain wholly-owned subsidiaries of the Parent, KSL
Travel, Inc. (KTI), KSL Vacation Resorts, Inc. (VRI) and Wild West Desert
Properties, Inc. (Wild West), became wholly-owned subsidiaries of Group in a
transaction accounted for in a manner similar to a pooling of interests. The
accompanying consolidated financial statements have been restated to reflect
this transaction. The effects on income (loss) before extraordinary items, net
income (loss) and related per share amounts were not material.
As of October 31, 1998, the Company has six principal investments: (1)
through KSL Golf Holdings, Inc. (Fairways), a Delaware corporation, the
Company, through an intermediate subsidiary owns an 88.1% majority
partnership interest in The Fairways Group, L.P. (TFG, L.P.), a Delaware
limited partnership; (2) a 100% interest in KSL Florida Holdings, Inc.
(Doral), a Delaware corporation; (3) a 100% interest in KSL Desert Resorts,
Inc. (Desert Resorts), a Delaware corporation, (4) a 100% interest in KSL
Georgia Holdings, Inc. (Lake Lanier), a Delaware corporation; (5) a 100%
interest in KSL Grand Traverse Holdings, Inc. (Grand Traverse), a Delaware
Corporation; and (6) a 100% interest in KSL Claremont Resort, Inc. (The
Claremont), a Delaware corporation. TFG L.P. and an affiliate operate 24 golf
facilities, 22 of which are owned, principally in the mid-Atlantic, southeast
and midwestern United States. Fairways, through a subsidiary, is the managing
general partner in TFG L.P. 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 of
approximately 1,041 acres known as Lake Lanier, outside of Atlanta, Georgia.
Grand Traverse owns and operates the Grand Traverse Resort and related
activities outside of Traverse City, Michigan (Note 14). The Claremont owns
and operates The Claremont Resort and Spa and related activities in the
Berkeley Hills area near San Francisco, California (Note 14).
On May 15, 1996, the Company, through a subsidiary, entered into a
management agreement with Lake Lanier Islands Development Authority (LLIDA), a
State of Georgia agency, to manage the facilities at Lake Lanier (a golf, hotel
and recreation complex) which LLIDA leases from the United States Army Corps of
Engineers (the Corps). LLIDA's intent was to privatize the management and
operation of Lake Lanier through a sublease arrangement. Due to the need for
third party consents and approvals, LLIDA and the Company entered into this
management agreement as an interim step prior to execution of a sublease. At the
closing of the sublease, which occurred in August 1997, the management agreement
provided that LLIDA and the Company would be placed in the same economic
position as if the sublease transaction had closed on May 15, 1996. Accordingly,
the Company was credited with the net earnings (as defined) of the operations
from May 15, 1996 to the closing date less amounts earned by the Company
pursuant to the management agreement. Such net amount paid by the Company was
recognized as an adjustment to the recorded values of the assets leased pursuant
to the sublease. The sublease is accounted for as a capital lease. Accordingly,
in August 1997, the Company recorded the net assets acquired pursuant to the
sublease and recognized the net present value of the related minimum lease
payments.
24
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION- The consolidated financial statements include the
accounts of Group and its wholly owned subsidiaries. Investments in 50%-or-less
owned affiliates in which Company management has significant influence are
accounted for using the equity method of accounting. Under the equity method of
accounting, the investment is carried at cost, adjusted each year for the
appropriate share of investee income or loss and any cash contributions or
distributions. All significant intercompany transactions and balances have been
eliminated in the accompanying consolidated financial statements.
CASH EQUIVALENTS- The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
RESTRICTED CASH- Certain cash balances are restricted primarily to uses for
debt service, capital expenditures, real estate taxes, insurance payments and
letters of credit required for construction in progress.
INVENTORIES- Inventories are stated primarily at the lower of cost,
determined on the first-in, first-out 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. Real estate assets for which management has committed to
a plan of immediate disposition are reported at the lower of carrying amount or
fair value less cost to sell.
PROPERTY AND EQUIPMENT- Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Generally, the estimated useful lives are 15
to 40 years for buildings and improvements and 3 to 10 years for furniture,
fixtures and equipment. Improvements are capitalized while maintenance and
repairs are charged to expense as incurred. Assets under capital leases are
amortized using the straight-line method over the shorter of the lease term or
estimated useful lives of the assets. Depreciation of assets under capital
leases is included in depreciation and amortization expense in the accompanying
consolidated statements of operations.
LONG-LIVED ASSETS- Management reviews real estate and other long-lived
assets, including certain identifiable intangibles and goodwill, for possible
impairment whenever events or circumstances indicate the carrying amount of an
asset may not be recoverable. If there is an indication of impairment,
management prepares an estimate of future cash flows (undiscounted and without
interest charges) expected to result from the use of the asset and its eventual
disposition. If these cash flows are less than the carrying amount of the asset,
an impairment loss is recognized to write down the asset to its estimated fair
value. The fair value is estimated at the present value of future cash flows
discounted at a rate commensurate with management's estimate of the business
risks. Real estate assets, if any, for which management has committed to a plan
to dispose of the assets, whether by sale or abandonment, are reported at the
lower of carrying amount or fair value less cost to sell. Preparation of
estimated expected future cash flows is inherently subjective and is based on
management's best estimate of assumptions concerning expected future conditions.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED ENTITIES- The excess of the cost
over the fair value of acquired entities (goodwill) is capitalized and amortized
on a straight-line basis over 15 to 30 years. Amortization expense related to
goodwill was approximately $4,558, $3,749 and $3,616 for fiscal years 1998, 1997
and 1996, 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.
25
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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.
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.
MINORITY INTERESTS IN EQUITY OF SUBSIDIARY- Minority interests in equity of
subsidiary represents minority shareholders' proportionate share of the equity
in TFG L.P. The Company owned approximately 88.1% of TFG L.P. at October 31,
1998 and 1997.
A minority interest partner (the Partner) in TFG L.P. had a partner deficit
balance of approximately $3,555 and $3,322 as of October 31, 1998 and 1997,
respectively. The Company has reduced the minority interest allocation of TFG
L.P.'s net loss by the Partner's share of $233, $257, and $104 in fiscal years
1998, 1997 and 1996, respectively.
INCOME TAXES- The Company accounts for income taxes under the provisions of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which requires an asset and liability
approach in accounting for income taxes. 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, SFAS No. 109 requires
an evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The Company is included in the
consolidated federal and combined state income tax returns filed by the Parent.
Pursuant to the terms of an agreement between the Company and the Parent,
current and deferred income tax expenses and benefits are provided to the
members of the tax sharing group, including the Company, based on their
allocable share of the consolidated taxable income or loss. To the extent that
the Federal tax losses of the Company are utilized by the Parent or other of the
Parent's subsidiaries, the Company is compensated. The combined state tax
liabilities will be allocated based on each member's apportioned share of the
combined state tax liabilities. Had the Company's accounting for income taxes
been performed utilizing the separate return basis, the provision (benefit) for
income taxes would have been $(7,161), $149 and $260 for the years ended
October 31, 1998, 1997 and 1996, respectively.
REVENUE RECOGNITION- Revenues related to dues and fees are recognized as
income in the period in which the service is provided. Non-refundable membership
initiation fees are recognized as revenue over the expected membership life.
Other revenues are recognized at the time of sale or rendering of service.
FAIR VALUE OF FINANCIAL INSTRUMENTS- The carrying amounts of cash and cash
equivalents, trade receivables, other receivables, accounts payable and accrued
liabilities approximate their fair values because of the short maturity of these
financial instruments. Notes receivable approximate fair value as the interest
rates charged approximate currently available market rates. Based on the
borrowing rates currently available to the Company for debt with similar terms
and maturities, the fair value of notes payable and obligations under capital
leases approximate the carrying value of these liabilities.
Member deposits represent liabilities with no defined maturities and are
payable on demand, subject to certain conditions, and, accordingly, approximate
fair value.
USE OF ESTIMATES- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
EARNINGS (LOSS) PER SHARE- Basic earnings per share is computed by dividing
net income by the weighted average number of common shares outstanding. Diluted
earnings per share are 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.
26
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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. It differs from net
income in that certain items currently recorded to equity would be a part of
comprehensive income. Comprehensive income must be reported in a financial
statement with the cumulative total presented as a component of equity. This
statement will be adopted by the Company beginning November 1, 1998.
During 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
will be adopted by the Company beginning November 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company believes the segment information required to be disclosed
under SFAS No. 131 will be more comprehensive than previously provided,
including expanded disclosure of income statement and balance sheet items. The
Company will present the required segment information in its annual financial
statements as of October 31, 1999, as required by SFAS No. 131.
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities," was issued in April 1998 and will be effective for the Company
beginning November 1, 1999. SOP 98-5 broadly defines and provides guidance on
the financial reporting of start-up costs and organization costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Any amounts capitalized as of the date of adoption will be expensed
and reported as the cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position and measure
those instruments at fair value. The Company believes that adoption of SFAS No.
133, which is required in fiscal 2000, will not have a material impact on the
Company's consolidated financial statements.
RECLASSIFICATION- Certain reclassifications have been made to the 1997
and 1996 consolidated financial statements to conform to the 1998
presentation.
3. NOTES RECEIVABLE
Notes receivable of $4,866 and $4,061 at October 31, 1998 and 1997,
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 $2,234 and $2,386 as of October 31, 1998 and 1997,
respectively, primarily represent purchase money mortgage notes received in
connection with the sale of a golf facility and various land parcels. Such notes
are due at various dates primarily through 2002.
During fiscal 1995, the Company sold one of the golf facilities included
in the Company's original acquisition of TFG L.P. In connection with the
sale, the Company received a note of approximately $1,900, collateralized by
the facility sold. The note receivable bears interest at prime plus 2%
(10.25% at October 31, 1998), with an interest rate floor of 9% and a cap of
11%. For certain periods, interest was deferred and added to principal.
Monthly principal and interest payments of $20 commenced in July 1997 and
were to continue through the maturity date of the note in July 2002. However,
as of October 31, 1998, the note with a balance of $2,115 is in monetary
default. Management had previously recorded a $317 reserve on the note.
Management believes the fair market value of the facility to be in excess of
the note's net book value of $1,798 and expects to regain ownership of the
golf course facility through foreclosure or through conveyance of the deed in
lieu of foreclosure.
The Company, through TFG L.P., has a note receivable from a general partner
of $676 as of October 31, 1998 and 1997. The note accrues interest at 8% and is
due upon the earlier of April 2000 or the partner selling his partnership
interest for cash proceeds. No principal or interest payments are due on the
note until it matures (Note 12). In July 1996, this general partner pledged TFG
L.P. partnership units as security for repayment of this note.
27
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
4. INVENTORIES
Inventories consist of the following: OCTOBER 31,
-----------
1998 1997
---- ----
Merchandise..................................................................... $ 5,253 $ 3,791
Food and beverage............................................................... 1,724 1,629
Base stock (china, silver, glassware, linen).................................... 2,131 1,182
Supplies and other.............................................................. 977 781
------------ ------------
$ 10,085 $ 7,383
------------ ------------
------------ ------------
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
OCTOBER 31,
-----------
1998 1997
---- ----
Land and land improvements...................................................... $ 278,406 $ 242,815
Buildings....................................................................... 219,094 171,364
Furniture, fixtures and equipment............................................... 96,109 79,033
Construction in progress........................................................ 10,422 5,071
------------ ------------
604,031 498,283
Less accumulated depreciation................................................... (95,219) (66,847)
------------ ------------
Property and equipment, net.................................................. $ 508,812 $ 431,436
------------ ------------
------------ ------------
6. OTHER ASSETS
Other assets consist of the following:
OCTOBER 31,
-----------
1998 1997
---- ----
Undeveloped land.................................................................... $ 16,376 $ 16,376
Debt issue costs, less accumulated amortization of $1,442 and $473, respectively.... 8,448 9,064
Favorable leases, less accumulated amortization of $2,120 and $1,694, respectively.. 3,278 2,019
Other intangibles, less accumulated amortization of $845 and $609, respectively..... 2,903 2,666
Lease agreements, less accumulated amortization of $1,648 and $324, respectively.... 2,307 3,555
Deposits and other assets........................................................... 860 660
-------------- -------------
$ 34,172 $ 34,340
-------------- -------------
-------------- -------------
The favorable lease assets represent the difference between the stated
lease terms and the estimated fair value of two golf course leases acquired and
are amortized over the lease terms. Other intangibles primarily represent costs
related to certain membership programs which are being amortized over 5 to 30
years using the straight-line method. 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 $2,029, $960, and $573 for
1998, 1997 and 1996, respectively.
28
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
7. LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31,
1998 1997
---- ----
Senior subordinated redeemable notes payable, with interest payable semi-annually at 10.25%,
principal due at maturity on May 1, 2007................................................ $ 125,000 $ 125,000
Term notes, payable in annual installments of $1,000 with interest payable
either at Prime plus .75% or LIBOR plus 2.0% (6.97% at October 31, 1998),
$46,500 maturing April 30, 2005 and $46,000 maturing April 30, 2006..................... 99,000 100,000
Revolving note, total available of $275,000, with interest payable at either Prime plus
.625% or LIBOR plus 1.625% (6.56% to 8.625% at October 31, 1998), principal due at
maturity on April 30, 2004.............................................................. 177,750 102,500
Mortgage notes payable....................................................................... 3,244 --
----------- -----------
404,994 327,500
Less current portion......................................................................... (1,044) (1,000)
----------- -----------
Long-term portion............................................................................ $ 403,950 $ 326,500
----------- -----------
----------- -----------
In April 1997, the Company sold $125,000 of senior subordinated redeemable
notes (the Notes) and entered into a new credit facility providing for term
loans of up to $100,000 and a revolving credit line of up to $175,000. The Notes
are redeemable beginning May 2002 at the Company's option at various rates
ranging from 105.125% at May 2002, decreasing to 100% at May 2005 and
thereafter. The Company is required to offer to buy the Notes at 101% upon a
change of control, as defined in the Notes agreement.
The proceeds from the Notes, together with $100,000 of term loans under the
new credit facility and a $75,000 drawing under the revolving credit portion of
the new credit facility (collectively, the Refinancings) were used on April 30,
1997, (i) to repay approximately $265,000 of outstanding indebtedness of the
Company, (ii) to make a loan of approximately $20,800 to an affiliate, KSL Land
Corporation (KSL Land), which was used to repay indebtedness of KSL Land with
respect to which a subsidiary of the Company was a co-obligor, (iii) to pay
prepayment penalties and fees and expenses incurred in connection with the
Refinancings and (iv) for general corporate purposes. The stock of certain
subsidiaries has been pledged to collateralize the new credit facility.
In April 1998, the Company's maximum borrowings under its revolving credit
facility were increased to $275,000. Maximum borrowings under the revolving
credit line decrease from a maximum of $275,000 to $257,320 in May 2000,
$239,640 in May 2001, $216,070 in May 2002 and $186,610 in May 2003.
The terms of the credit facility contain certain financial covenants
including interest coverage, fixed charges, leverage ratios and restrictions on
dividends. Certain of the long-term debt agreements provide that any
distributions of profits must satisfy certain terms and must be approved by the
lenders, require the Company to maintain specified financial ratios and, in some
instances, govern investments, capital expenditures, asset dispositions and
borrowings. In addition, mandatory prepayments are required under certain
circumstances, including the sale of assets. The Company pays a commitment fee
at a rate that currently is equal to .375% per annum on the undrawn portion of
the commitments with respect to the credit facility. Total non-use fees of
approximately $352, $437, and $262 were paid in 1998, 1997, and 1996
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, 1998.
29
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
In December 1995, the Company completed a negotiated compromise debt
settlement (Note 13), and the Company and certain of its affiliates obtained
debt financing of $153,000. As a result of this transaction, the Company was,
through a subsidiary, co-obligor on KSL Land's portion of the debt financing
which had a principal amount outstanding of $20,794, at October 31, 1996. The
Company was released from its co-obligation as a result of the repayment of KSL
Land's indebtedness in April 1997, as described above.
Scheduled principal payments on long-term debt as of October 31, 1998 are
as follows:
Year ending October 31:
1999 .......................................... $ 1,044
2000 .......................................... 1,047
2001 .......................................... 1,052
2002 .......................................... 1,056
2003 .......................................... 1,061
Thereafter......................................... 399,734
----------
Total $ 404,994
----------
----------
During 1998, 1997 and 1996, the Company capitalized interest of
approximately $754, $0, and $577, respectively, related to construction in
progress activities.
8. OBLIGATIONS UNDER CAPITAL LEASES
During 1997, the Company entered into a fifty year sublease of a resort
recreation area of approximately 1,041 acres known as Lake Lanier (Note 1).
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. In addition, the Company is committed to expend $5,000 over the first
five years of the sublease for the development and construction of new capital
projects. 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,
-----------
1998 1997
---- ----
Buildings and land improvements........... $ 24,715 $ 24,715
Equipment................................. 15,901 15,617
Less accumulated depreciation............. (8,741) (5,606)
------------ ------------
$ 31,875 $ 34,726
------------ ------------
------------ ------------
30
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Total minimum payments due under capital leases at October 31,1998 are
summarized as follows:
LAKE LANIER OTHER CAPITAL
SUBLEASE LEASES TOTAL
-------- ------ -----
Year ending October 31:
1999................................................. $ 3,100 $ 3,203 $ 6,303
2000................................................. 3,100 2,127 5,227
2001................................................. 3,100 942 4,042
2002................................................. 3,125 373 3,498
2003................................................. 3,200 -- 3,200
Thereafter........................................... 140,000 -- 140,000
------------- ------------- -------------
Total minimum lease payments.............................. 155,625 6,645 162,270
Less amounts representing interest........................ (124,308) (744) (125,052)
------------- ------------- -------------
Present value of minimum lease payments................... 31,317 5,901 37,218
Less current portion...................................... (25) (2,777) (2,802)
------------- ------------- -------------
Long-term portion......................................... $ 31,292 $ 3,124 $ 34,416
------------- ------------- -------------
------------- ------------- -------------
9. INCOME TAXES
The components of the Federal and state income tax expense (benefit) are as
follows:
YEAR ENDED OCTOBER 31,
----------------------
1998 1997 1996
---- ---- ----
Current:
Federal........................................... $ 391 $ -- $ (150)
State............................................. 228 263 65
------------- ----------- --------------
619 263 (85)
Deferred:
Federal (6,664) (105) 3
State............................................. (952) (15) --
------------- ----------- --------------
(7,616) (120) 3
------------- ----------- --------------
Total .............................................. $ (6,997) $ 143 $ (82)
------------- ----------- --------------
------------- ----------- --------------
Taxes on income vary from the statutory Federal income tax rate applied to
earnings before taxes on income and extraordinary items as follows:
YEAR ENDED OCTOBER 31,
----------------------
1998 1997 1996
---- ---- ----
Statutory Federal income tax rate (35%) applied to
earnings before income taxes and
extraordinary items............................... $ 2,491 $ 1,030 $ (4,361)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefits...... 358 147 (623)
Change in valuation allowance.................... (11,071) (1,128) 4,040
Benefits of lower federal income tax rate............. 152 29 125
Reduction in state tax carryforwards.................. 698 (96) 348
Other ............................................. 375 161 389
---------- ------------ -------------
$ (6,997) $ 143 $ (82)
---------- ------------ -------------
---------- ------------ -------------
31
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Deferred income tax assets and liabilities arising from differences
between accounting for financial statement purposes and tax purposes, less
valuation reserves at October 31, are as follows:
OCTOBER 31,
-----------
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards ............................ $ 12,188 $ 15,968
Capitalized lease ........................................... 1,457 1,574
Deferred income ............................................. 975 365
Investment in partnership interest .......................... 2,178 2,049
Self-insured employee benefit programs ...................... 856 433
Capitalized assets .......................................... 512 --
Other ....................................................... 1,188 946
-------- --------
Total deferred tax assets .............................. 19,354 21,335
Less valuation reserve -- (11,071)
-------- --------
Deferred tax assets, net ................................. 19,354 10,264
Deferred tax liabilities:
Purchase price adjustment (Note 13) ......................... 16,098 15,978
Fixed assets ................................................ 4,549 4,494
Prepaid real property taxes ................................. 1,018 1,080
Basis difference in partnerships ............................ -- 316
Amortization of intangibles ................................. 4,604 3,192
Capitalized assets .......................................... -- 78
Other ....................................................... 671 328
-------- --------
Total deferred tax liabilities ........................... 26,940 25,466
-------- --------
Net deferred tax liability ............................... $ (7,586) $(15,202)
-------- --------
-------- --------
In fiscal 1997 and 1996, the Company reserved for net deferred tax assets
whose realization depended on future taxable income. In fiscal 1998, the Company
has concluded that realization of such net deferred tax assets is more likely
than not and has accordingly, reversed the valuation allowance. The valuation
reserve was decreased by $11,071 and $1,128 during 1998 and 1997, respectively
and was increased by $4,040 during 1996.
At October 31, 1998, the Company has net operating loss carryforwards
available of approximately $31,599, which will begin to expire in the year
ending October 31, 2009, to offset future federal taxable income. State net
operating loss carryforwards total approximately $31,903, and will begin to
expire in the year ending October 31, 1999.
10. STOCKHOLDER'S EQUITY
During 1997 and 1996, the Company received capital contributions of
approximately $9,005 and $5,035, respectively, from the Parent. The 1997
contributions were used primarily for equipment and other fixed asset
purchases at Lake Lanier and the 1996 contributions were used primarily for
property renovations at Doral.
Concurrent with the Refinancings (Note 7), the Company provided
dividends to the Parent of $23,321 and a return of capital of $39,033
including a transfer of the Company's $2,155 investment in certain limited
partnerships at historical cost. Immediately prior to the contribution from
the Parent of certain subsidiaries (Note 1), Wild West provided a dividend to
the Parent of $600 and the Parent contributed additional capital of $139 to
VRI.
32
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, EARNINGS PER SHARE (EPS), which requires the Company to disclose
basic EPS and diluted EPS for all periods for which an income statement is
presented. The Company has adopted this standard effective November 1, 1997.
The EPS data for the current reporting and comparable periods in the prior
year have been computed in accordance with SFAS No. 128. There was no
difference between reported EPS computed in accordance with SFAS No. 128 and
amounts that were or would have been reported using the Company's previous
method of accounting for EPS.
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 effect on the Company's consolidated
financial statements.
Contractual obligations primarily associated with construction in
progress approximated $12,655 at October 31, 1998, consisting primarily of
real estate under development at Desert Resorts, a pool and water feature at
Doral, ballroom renovation at Lake Lanier and a new clubhouse at Grand
Traverse.
In May 1998, Doral entered into a non-binding letter of intent for the
sale, development, construction and marketing of interval ownership units on
approximately ten acres of real property currently being utilized by Doral as
a golf course. If a definitive agreement is reached, the sales price for the
real estate would be $9,500, and the transaction would be expected to close
no earlier than June 1999, subject to due diligence review and obtaining
certain land use approvals.
12. RELATED PARTY TRANSACTIONS
Effective April 1, 1998, Desert Resorts entered into a management
agreement with an unconsolidated affiliate, KSL Land II Corporation ("Land
II"), whereby Land II will provide development services for the entitlement,
subdivision, construction, marketing, and sale of approximately 97 single
family detached units on approximately eleven acres of real estate currently
owned by Desert Resorts. The development site is adjacent to the Desert
Resorts' La Quinta Resort & Club. The contractor and project management fees
for these services are calculated as 6.0% of the Project Sales Revenues, as
defined, and are expected to total approximately $3,400. 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 an eighteen-month build out ending in fiscal
2000. In fiscal 1998, Desert Resorts paid $330 to Land II for project
management fees. The total investment by Desert Resorts is expected to
approximate $37,900, of which approximately $7,200 was incurred through
October 31, 1998.
The Company provided financing to an affiliate, KSL Land, of
approximately $26,000 at October 31, 1995. The notes receivable bear interest
at rates ranging from 4% to 8.5%. On December 20, 1995, the Company forgave
$2,930 of the notes receivable (Note 13). The Company recorded interest
income of $87 in 1996 related to these notes receivable. KSL Land retired the
remaining notes payable to the Company in December 1995, when KSL Land and
the Company obtained debt financing of $153,000 (Note 7). As a result of the
Refinancings (Note 7), the Company provided financing to KSL Land of
approximately $20,800 at April 30, 1997. The Company recorded interest income
of $1,797 and $798 in 1998 and 1997, respectively, related to this note
receivable. This unsecured note receivable bears interest at 8% and is
payable at maturity in June 2001.
During 1998, 1997 and 1996, the Company incurred $8,750, $5,106 and
$3,199, 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.
33
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
TFG L.P. has a note receivable from a general partner of $676, which is
included in long-term notes receivable at October 31, 1998 and 1997. The note
accrues interest at 8% and is due upon the earlier of April 2000 or the
partner selling his partnership interest for cash proceeds. No principal or
interest payments are due on the note until it matures. TFG L.P. accrued
interest income of $54 related to the note during each of 1998, 1997 and
1996. In July 1996, the general partner pledged TFG L.P. partnership units as
security for repayment of this note. In July 1996, the Parent entered into a
put/call agreement with one of the minority interest partners in TFG L.P. to
purchase such minority interest at any time through May 1, 2030 (Note 16).
On April 30, 1997, the Company sold its investment in a land partnership
at historical cost of $1,621 (which approximated fair value) to an affiliate.
13. EXTRAORDINARY ITEMS
On April 30, 1997, the Company expensed the net deferred financing
costs, prepayment fees and other costs, which aggregated approximately
$5,171, related to the debt that was extinguished as a result of the
Refinancings (Note 7). Such amount is reflected as an extraordinary loss on
early extinguishment of debt, net of income tax benefit of $2,007, in the
accompanying consolidated statements of operations.
On December 20, 1995, the Company completed a negotiated compromise debt
settlement with the lender which provided financing for the various
properties acquired by Desert Resorts. As a result of this settlement, the
Company retired debt totaling $199,687 for a payment of $148,500 which
resulted in an extraordinary gain of $51,187, which was offset by $2,930 of
debt forgiveness to KSL Land (Note 12). For financial statement purposes,
after net interest forgiveness of $953, transaction costs of $333 and
deferred income taxes of $16,757, the net gain on extinguishment of debt was
$32,120. For federal income taxes, this gain is treated as an adjustment of
the original purchase price of the related assets and, therefore, results in
a deferred long-term income tax liability.
14. ACQUISITIONS
On April 21, 1998, the Company, through a wholly owned subsidiary,
acquired substantially all the assets and certain liabilities of The
Claremont Resort and Spa, a 279 room luxury hotel and spa located in the
Berkeley Hills, near San Francisco, California, for approximately $88,000.
The purchase was financed under the revolving credit portion of the Company's
credit facility (Note 7) and has been accounted for using the purchase method
of accounting. Accordingly, the operating results of The Claremont have been
included in the Company's consolidated financial statements since
acquisition. The excess of the aggregate purchase price over the fair value
of the net assets acquired of approximately $26,700, including acquisition
costs, is being amortized over 30 years.
The following are the Company's unaudited pro forma consolidated results
of operations for the year ended October 31, which assume the Claremont
transaction occurred as of November 1, 1996:
(In thousands, except per share data)
1998 1997
---- ----
Revenues ..................................................... $ 311,367 $ 256,885
Income before extraordinary item.............................. 11,485 2,304
Net income (loss)............................................. 11,485 (5,468)
Basic and diluted earnings (loss) per share................... 11,485 (5,468)
The unaudited pro forma results do not necessarily represent results
which would have occurred if the acquisition had taken place as of the
beginning of the fiscal periods presented, nor do they purport to be
indicative of the results that will be obtained in the future.
34
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
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. Accordingly, 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.
On August 11, 1997, the Company, through a subsidiary, acquired the
Grand Traverse Resort, a 426-room hotel and related golf and recreational
facilities, located outside Traverse City, Michigan for approximately
$45,000. The purchase of Grand Traverse was financed under the revolving
credit portion of the Company's credit facility (Note 7). The acquisition has
been accounted for as a purchase and accordingly, the operating results of
Grand Traverse 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 $6,000 is being
amortized over 15 years. Assuming the Grand Traverse acquisition had occurred
as of November 1, 1995, the Company's fiscal 1997 and 1996 pro forma revenues
would have been $247,142 and $212,249, respectively, pro forma income (loss)
before income taxes and extraordinary items would have been $2,824 and
($10,961), respectively, and both pro forma net income (loss) and net
earnings (loss) per share would have been ($483) in 1997 and $21,241 in 1996.
These unaudited pro forma results do not include any pro forma effects of the
Claremont acquisition described above and do not necessarily represent
results which would have occurred if the acquisition had taken place as of
the beginning of the fiscal periods presented, nor do they purport to be
indicative of the results that will be obtained in the future.
15. 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, 1998:
Revenues $ 65,602 $ 84,629 $ 74,424 $ 71,615 $ 296,270
Income from operations...................... 7,730 21,710 7,282 3,391 40,113
Net income (loss) .......................... 9 13,970 (1,840) 1,975 (a) 14,114
Basic and diluted earnings (loss) per share. 9 13,970 (1,840) 1,975 14,114
For the year ended October 31, 1997:
Revenues $ 54,549 $ 70,565 $ 43,531 $ 57,425 $ 226,070
Income (loss) from operations............... 10,046 21,278 (54) 1,568 32,838
Net income (loss) .......................... 1,812 8,756 (b) (6,803) (4,128) (363)
Basic and diluted earnings (loss) per share. 1,812 8,756 (6,803) (4,128) (363)
(a) Includes tax benefit of $6,997 primarily resulting from the reversal of
deferred tax asset valuation allowance established in prior years.
(b) Includes extraordinary loss on early extinguishment of debt of $3,164.
16. SUBSEQUENT EVENTS
On December 29, 1998, the Company, through a subsidiary, purchased
substantially all of the assets and certain liabilities of the Grand Wailea
Resort Hotel & Spa, a 781 room resort in Maui, Hawaii for approximately
$375,000, including the assumption of approximately $275,000 in mortgage
financing. The acquisition is to be accounted for using the purchase method
of accounting. The excess of the purchase price over the debt assumed,
acquisition related costs, and working capital were funded with an $110,000
equity investment by the Parent in the Company. The Company paid $4,000 to an
affiliate of the Parent for financial advisory services in connection with
the Grand Wailea acquisition.
35
In January 1999, the Parent exercised its put/call agreement (Note 12)
with one of the Minority Interest Partners in TFG L.P. As a result, the
Parent acquired an additional 7.61% ownership interest in TFG L.P., which the
Parent contributed to the Company. The Company will record goodwill of
approximately $9,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the directors and
executive officers of the Company (unless otherwise specified), together with
other key executive officers of the Company's subsidiaries and Parent. The terms
of each of the directors will expire annually upon the election and
qualification at the annual meeting of shareholders.
NAME AGE POSITION
---- --- --------
DIRECTORS AND EXECUTIVE OFFICERS:
Michael S. Shannon 40 President, Chief Executive Officer and Director
Larry E. Lichliter 55 Executive Vice President and Director
John K. Saer, Jr. 42 Vice President, Chief Financial Officer and Treasurer
Nola S. Dyal 49 Vice President, General Counsel and Secretary
Steven F. Elliott 35 Vice President of Corporate Finance
E. D. "Murray" Bryant 52 Vice President of Direct Marketing and Sales
Doris Allen-Kirchner 46 Vice President of Human Resources
James E. Wanless 45 Vice President of Club and Membership Development
Thomas F. McGrath 48 Vice President of Merchandising and Events
Gary M. Beasley 33 Vice President of Acquisitions
Emily-May Richards 50 Corporate Controller
Henry R. Kravis 54 Director
George R. Roberts 55 Director
Paul E. Raether 52 Director
Michael T. Tokarz 49 Director
Scott M. Stuart 39 Director
Alexander Navab, Jr. 33 Director
OTHER KEY EXECUTIVE OFFICERS:
Eric L. Affeldt 41 Vice President, KSL Desert Resorts, Inc.
Mark A. Burnett 34 President, KSL Fairways Golf Corporation
Scott M. Dalecio 36 President, KSL Desert Resorts, Inc.
Joel B. Paige 39 President, KSL Florida Holdings, Inc. and KSL Grand Traverse
Holdings, Inc., KSL Hotel Corp. and KSL Silver Properties
Raymond C. Williams 52 President, KSL Lake Lanier, Inc.
MICHAEL S. SHANNON. Mr. Shannon has been a Director and the President and
Chief Executive Officer of the Company since its formation. Mr. Shannon was a
founding stockholder of Parent and has served as a Director and President and
Chief Executive Officer of Parent since its inception. Mr. Shannon is also a
Director of each of the Company's subsidiaries and serves as either President or
Executive Vice President of each subsidiary. Prior to forming Parent, Mr.
Shannon was President and Chief Executive Officer of Vail Associates in Vail,
Colorado. Mr. Shannon is a director of ING America Life Insurance Company and
TCA Cable TV, Inc.
LARRY E. LICHLITER. Mr. Lichliter has been a Director and Executive Vice
President of the Company since its formation. Mr. Lichliter was a founding
stockholder of Parent and has served as a Director and its Executive Vice
President since its inception. He served as Chief Operating Officer of Parent
from its inception through December 1996. Mr. Lichliter is also a Director and
serves as either President or Executive Vice President of each of the Company's
subsidiaries. Mr. Lichliter began his career as the Controller for Vail
Associates in 1977 before becoming Director of Finance for Beaver Creek Resort,
and later serving as Senior Vice President of Operations for Vail Associates.
JOHN K. SAER, JR. Mr. Saer has been Vice President, Chief Financial Officer
and Treasurer of the Company since its formation. Mr. Saer joined Parent in July
1993 as Director of Finance and Acquisitions. He was later elected to the office
of Vice President of Business Development and Acquisitions in 1994 and now
serves as Vice President, Chief Financial Officer and Treasurer of Parent. Mr.
Saer is also Vice President, Chief Financial Officer and/or Treasurer for each
of the Company's subsidiaries. From 1990 until joining Parent, Mr. Saer served
as a principal of Windermere Management, Inc. and its affiliate, Jonison
Partners, Ltd.
NOLA S. DYAL. Ms. Dyal has been Vice President, General Counsel and
Secretary of the Company since its formation. Ms. Dyal joined Parent in
November 1993 as Vice President, General Counsel and Secretary. Ms. Dyal also
serves as Vice President, General Counsel and Secretary for each of the
Company's subsidiaries. From 1986 to 1993, Ms. Dyal was Vice President,
General Counsel and Secretary of Vail Associates.
37
STEVEN F. ELLIOTT. Mr. Elliott has been Vice President of Corporate Finance
of the Company since its formation. Mr. Elliott joined Parent in 1995 as
Director of Finance and Analysis. In 1996, he was elected Vice President of
Corporate Finance. In April 1997, Mr. Elliott was elected Vice President of each
of the Company's then existing subsidiaries. Prior to joining Parent, Mr.
Elliott was Vice President of Corporate Finance in the Capital Markets Group of
Security Capital Group from 1994 to 1995. Prior to that, Mr. Elliott was a Vice
President at Dillon, Read & Co. Inc.
E. D. "MURRAY" BRYANT. Mr. Bryant became Vice President of Direct Sales and
Marketing of the Company and the Parent in September 1997. At that time, Mr.
Bryant was also elected Vice President of Direct Marketing and Sales for certain
of the Company's subsidiaries. From January 1991 to September 1997, Mr. Bryant
was Vice President, Western Region Sales and Marketing for Marriott Vacation
Club International.
DORIS ALLEN-KIRCHNER. Ms. Allen-Kirchner joined the Company and Parent in
October 1997 as Vice President of Human Resources. From November 1994 to
September 1997, Ms. Allen-Kirchner served as a Management Consultant to Quorum
Health Resources, Inc. Prior to that, Ms. Allen-Kirchner was Chief Operations
Officer for Vail Valley Medical Center in Vail, Colorado since 1985.
JAMES E. WANLESS. Mr. Wanless has been Vice President of Club and Membership
Development of the Company since its formation. Mr. Wanless joined Parent in
September 1996 as Vice President of Club and Membership Development. From 1995
to 1996, Mr. Wanless was a Director and Senior Vice President of Membership
Marketing International. For more than five years prior to joining Parent, Mr.
Wanless was a senior partner of the law firm Hillier and Wanless.
THOMAS MCGRATH. Mr. McGrath has been Vice President of Merchandising and
Events of the Company since its formation. Mr. McGrath joined Parent in June
1996 as Vice President of Merchandising and Events. From 1988 until joining
Parent, Mr. McGrath was Vice President of Merchandising with Silver Dollar City,
Inc. in Branson, Missouri.
GARY M. BEASLEY. Mr. Beasley became Vice President of Acquisitions for the
Parent in November 1997 and Vice President of Acquisitions for the Company on
October 20, 1998. He joined the Parent in June 1995 as an Associate in Business
Development and became Director of Acquisitions in December 1996. Prior to
joining Parent, Mr. Beasley was an Associate at Security Capital Group, Inc.
from September 1993 to June 1995. From September 1991 to June 1993, Mr. Beasley
attended Stanford Business School where he received his Masters in Business
Administration.
EMILY-MAY RICHARDS. Ms. Richards has been Corporate Controller of the
Company since its formation. Ms. Richards joined Parent in October 1994 as
Corporate Controller after serving as a private consultant for Parent and its
subsidiaries with Richards Group, P.C., a certified public accounting firm
founded by Ms. Richards in 1986. Ms. Richards is also the Corporate Controller
or Assistant Controller of all of the Company's subsidiaries and KSL Land and
its subsidiaries. Ms. Richards owned and operated the Richards Group, P.C. from
1986 to 1994.
HENRY R. KRAVIS. Mr. Kravis, Founding Partner of KKR, is a Director of
Parent and the Company and a managing member of the Executive Committee of
the limited liability company which serves as the general partner of KKR. Mr.
Kravis is also a Director of Accuride Corporation, Amphenol Corporation, B&S
Holdings Corporation (Neway Ancholok International, Inc.), BRW Acquisition,
Inc. (Bristol West Insurance Group), Borden, Inc., The Boyds Collection,
Ltd., Bruno's, Inc., Evenflo Company, Inc., The Gillette Company, Glenisla
Group, Ltd., KSL Golf Holdings, Inc., KSL Land Corporation, MedCath
Incorporated, Newsquest plc, Owens-Illinois Group, Inc., Owens-Illinois,
Inc., PRIMEDIA, Inc., Randall's Food Markets, Inc., Regal Cinemas, Inc.,
RELTEC Corporation, Safeway, Inc., Sotheby's Holdings, Inc., Spalding
Holdings Corporation, Willis Corroon Group Limited, U.S. Natural Resources,
Inc. and United Fixtures Company.
GEORGE R. ROBERTS. Mr. Roberts, Founding Partner of KKR, is a Director of
Parent and the Company and a managing member of the Executive Committee of
the limited liability company which serves as the general partner of KKR. He
is also a Director of Accuride Corporation, Amphenol Corporation, AutoZone,
Inc., Borden, Inc., Boyds Collections, Ltd., Bristol West Insurance Group,
Bruno's, Inc., DIL Trust, E & S Holdings Corporation, IDEX Corporation,
KinderCare Learning Center, Inc., KSL Land Corporation, MedCath Incorporated,
Neway Anchorlok International, Owens-Illinois Group, Inc. Owens-Illinois,
Inc., PRIMEDIA, INC., Randall's Food Markets, Inc., Regal Cinemas, Inc.,
RELTEC Corporation, Rhine Reinsurance Company, Safeway, Inc., United Fixtures
Company, U.S. Natural Resources, Inc., Willis Corroon Group Limited, and
World Color Press, Inc.
PAUL E. RAETHER. Mr. Raether is a Director of Parent and the Company and
is a member of the limited liability company which serves as the general
partner of KKR. He is also a Director of Bruno's, Inc., IDEX Corporation, KSL
Land Corporation, and Randall's Food Markets, Inc. Mr. Raether joined KKR in
1980.
38
MICHAEL T. TOKARZ. Mr. Tokarz is a Director of Parent and the Company and
is a member of the limited liability company which serves as the general
partner of KKR. Prior to 1993, Mr. Tokarz was an Executive at KKR. He is also
a Director of B&S Holdings Corporation (Neway Anchorlok International, Inc.),
IDEX Corporation, KAMAZ, Inc., KSL Golf Holdings, Inc., KSL Land Corporation,
PRIMEDIA, Inc., Spalding Holdings Corporation, United Fixtures Company, and
Walter Industries, Inc. Mr. Tokarz joined KKR in 1985.
SCOTT M. STUART. Mr. Stuart is a Director of Parent and the Company and is
a member of the limited liability company which serves as the general partner
of KKR. Prior to 1995, Mr. Stuart was an Executive at KKR. In addition, Mr.
Stuart is a Director of AEP Industries, Inc., Borden, Inc., The Boyds
Collection, Ltd., Corning Consumer Products, Glenisla Group, Ltd. (U.K.), KSL
Golf Holdings, Inc., KSL Land Corporation, Newsquest plc, and World Color
Press, Inc. Mr. Stuart joined KKR in 1986.
ALEXANDER NAVAB, JR. Mr. Navab is a Director of Parent and the Company and
has been an Executive at KKR since 1993. Prior to joining KKR, Mr. Navab was
employed by James D. Wolfensohn Incorporated. He is also a Director of
Borden, Inc., B&S Holdings Corporation (Neway Anchorlok International, Inc.),
KAMAZ, Inc., KSL Land Corporation, Newsquest plc, Regal Cinemas, Inc., RELTEC
Corporation, World Color Press, Inc.
ERIC L. AFFELDT. In January 1999, Mr. Affeldt became Vice President of KSL
Desert Resorts. Prior to that, Mr. Affeldt was President of KSL Hotel Corp., the
operating subsidiary which owns Doral. Prior to that, Mr. Affeldt was President
of KSL Fairways Golf Corporation, a subsidiary of the Company and the managing
general partner of The Fairways Group, L.P., a limited partnership through which
Fairways operations are conducted. Mr. Affeldt joined Parent in July 1992 as
Director of Finance. After serving as Vice President of Acquisitions of The
Fairways Group, he became its President in July 1995. Prior to joining the
Company, Mr. Affeldt owned and operated Vail Financial Planning, a financial
advisory firm in Vail, Colorado.
MARK A. BURNETT. On December 29, 1997, Mr. Burnett became President of KSL
Fairways Golf Corporation, a subsidiary of the Company and the managing general
partner of The Fairways Group, L.P., a limited partnership through which
Fairways operations are conducted. He had served as its Vice President since May
1997. Prior to that, Mr. Burnett was the southern regional manager for KSL
Fairways since August 1996. From August 1991 to July 1996, Mr. Burnett was
employed by Golf Enterprises, Inc. in Dallas, Texas in various capacities,
including Vice President of Western Operations from March 1994 through July
1996.
SCOTT M. DALECIO. In December 1998, Mr. Dalecio became President of KSL Grand
Wailea Resorts, Inc. Mr. Dalecio has been President of KSL Desert Resorts, Inc.,
the operating subsidiary which operates both the La Quinta Resort & Club and PGA
WEST in La Quinta, California since March 1996. Prior thereto, Mr. Dalecio held
several management positions with the La Quinta Resort & Club since joining La
Quinta Resort & Club in 1986, including President and General Manager. Mr.
Dalecio is also the President or Vice President of each of the four operating
subsidiaries of KSL Desert Resorts, Inc.
JOEL B. PAIGE. Mr. Paige has been the President of KSL Florida Holdings,
Inc., a subsidiary of the Company which owns KSL Hotel Corp. and KSL Silver
Properties, Inc., since December 1996. Mr. Paige is also the President of KSL
Grand Traverse Holdings, Inc., and its four wholly owned operating subsidiaries,
which own and operate the Grand Traverse Resort and its related assets, acquired
in August 1997. From April 1995 through December 1997 and from January 1999 to
present, Mr. Paige has also been the President of KSL Hotel Corp. From November
1994 through April 1995, Mr. Paige was General Manager at the Scottsdale Hilton
in Scottsdale, Arizona. From September 1990 until joining the Scottsdale Hilton,
Mr. Paige was employed as General Manager of Doral.
RAYMOND C. WILLIAMS. Mr. Williams has been President of KSL Lake Lanier,
Inc., the operating subsidiary which leases and operates Lake Lanier since July
1996. Prior to July 1996, Mr. Williams was Vice President and Chief Operating
Officer of Arrow Dynamics in Salt Lake City, Utah. From 1973 to 1995, Mr.
Williams was an executive for Six Flags Theme Parks, Inc., holding several
positions, including Senior Vice President, Operational Planning & Strategy.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Raether, Tokarz, Stuart and
Navab is 9 West 57th Street, Suite 200, New York, New York 10019 and the
business address of Mr. Roberts is 2800 Sand Hill Road, Suite 200, Menlo
Park, California 94025.
The following directors have been appointed to serve on the Company's
Executive Committee during fiscal 1998: Messrs. Kravis, Raether, Tokarz and
Shannon. The following directors have been appointed to serve on the
Company's Audit Committee during fiscal 1998: Messrs. Stuart, Navab and
Lichliter.
39
ITEM 11. EXECUTIVE COMPENSATION
Prior to the formation of the Company in March 1997, Parent employed
executive officers of the Company and all compensation for such officers was
paid by Parent. The following table presents certain summary information
concerning compensation paid or accrued by Parent for services rendered in
all capacities for the fiscal years ended October 31, 1998, 1997 and 1996 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, 1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE (1) (2)
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ---------------------------- ---------- ----------------
OTHER SECURITIES
NAME AND ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL COMPEN- STOCK OPTION/ LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
- -------- ---- ------ ----- ------ -------- ---- ------- ------
Michael S. Shannon
President and Chief 1998 $ 500,000 $ 600,000 -- -- -- -- $ 27,864(5)
Executive Officer 1997 475,000 650,000 -- -- -- -- 27,864
1996 450,000 615,000 -- -- -- -- 27,864
Larry E. Lichliter
Executive Vice President 1998 275,000 225,000 -- -- -- -- 29,962(5)
1997 275,000 175,000 -- -- -- -- 29,962
1996 250,000 175,000 -- -- -- -- 29,962
John K. Saer, Jr.
Vice President, Chief
Financial Officer and 1998 275,000 200,000 -- -- -- -- --
Treasurer 1997 244,000 250,000 -- -- 707 -- --
1996 190,000 150,000 -- -- -- -- --
Nola S. Dyal
Vice President, General 1998 250,000 90,000 -- -- -- -- (4)
Counsel and Secretary 1997 200,000 200,000 -- -- 477 -- --
1996 195,000 105,000 -- -- -- -- --
E.D. "Murray" Bryant
Vice President of Direct
Sales and Marketing (3) 1998 200,000 100,000 -- -- -- -- --
1997 19,230 -- -- -- -- -- --
- -------
(1) After formation of the Company, the Parent has and will continue to
pay all compensation for the Named Executive Officers; however, the
Company will reimburse Parent for the amount of all such compensation
that is directly attributable to the operations of the Company. See
"Certain Relationships and Related Transactions."
(2) The Named Executive Officers spend between 90% to 98% of their time on
Company matters, with the exception of Mr. Lichliter who spends
approximately 5% 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) E.D. "Murray" Bryant began his employment with the Company in
September 1997.
(4) Parent repurchased 700 Common Stock Options from Ms. Dyal. (SEE
TRANSACTIONS WITH MANAGEMENT).
(5) Represents cost of premiums for long-term disability insurance and
Directors' Compensation.
STOCK OPTIONS OF PARENT
STOCK OPTION PLAN
Parent adopted the KSL Recreation Corporation 1995 Stock Purchase and
Option Plan (the "Plan"), providing for the issuance to certain officers and
key employees (the "Optionees") of up to 77,225 shares of common stock of
Parent ("Stock"). Unless sooner terminated by Parent's Board of Directors,
the Plan will expire on June 30, 2005.
40
The Compensation Committee of Parent's Board of Directors, consisting of
Messrs. Kravis and Tokarz (the "Committee"), administers the Plan. The
Committee has the authority to determine the forms and amounts of awards made
to Optionees (each, a "Grant"). Such Grants may take a variety of forms in
the Committee's sole discretion including "incentive stock options" under
Section 422 of the Code, other Stock options, stock appreciation rights,
restricted Stock, purchase Stock, dividend equivalent rights, performance
rights, performance shares or other stock-based grants.
NON-QUALIFIED STOCK OPTION AGREEMENTS
All options granted under the Plan to date have been non-qualified stock
options granted pursuant to Non-Qualified Stock Option Agreements (the "Stock
Option Agreements"). Under the terms of Stock Option Agreements, the exercise
price of the options granted is $500 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) June 30, 2005, (ii) the date the option is
terminated under the circumstances set forth in the Common Stock Purchase
Agreement (as defined below), (iii) the termination of the Optionee's
employment because of criminal conduct (other than traffic violations), (iv)
if prior to the vesting 100% of Optionee's Options, the termination of
employment for any reason other than involuntary termination of employment
without cause, death, disability or retirement after the age of 65 and (v) if
the Committee so determines, the merger or consolidation of Parent into
another corporation or the exchange or acquisition by another corporation of
all or substantially all of Parent's assets or 80% of Parent's then
outstanding voting stock, or the reorganization, recapitalization,
liquidation or dissolution of Parent.
MANAGEMENT COMMON STOCK PURCHASE AGREEMENTS
If an Optionee exercises options under his or her Stock Option
Agreement, he or she is required to enter into a Common Stock Purchase
Agreement with Parent. None of these employees (the "Management
Stockholders") has exercised any options to date. Pursuant to each Common
Stock Purchase Agreement, the Management Stockholder may not transfer any
shares of Stock acquired thereby or upon exercise of vested options granted
under the Plan (collectively, the "Plan Shares") within five years (although
certain Management Stockholders may transfer their Plan Shares after they
have been fully vested) after the date set forth in his or her Common Stock
Purchase Agreement (the "Purchase Trigger Date").
Each Common Stock Purchase Agreement provides the Management Stockholder
with the right to require Parent to repurchase all of Management
Stockholder's Plan Shares and pay Management Stockholder (or his or her
estate or Management Stockholder Trust) a stated price for cancellation of
options if (a) the Management Stockholder's employment is terminated as a
result of his or her death or permanent disability, (b) the Management
Stockholder dies or becomes permanently disabled after having retired from
Parent at or after age 65 after having been employed by Parent for at least
three years after the Purchase Trigger Date or (c) with the prior consent of
Parent's Board of Directors (which consent will not be withheld unless the
Board reasonably determines that Parent would be financially impaired if it
made such a purchase), the Management Stockholder retires from Parent on or
after age 65 after having been employed by Parent for at least three years
after the Purchase Trigger Date. The Management Stockholder also has the
right, until the later of five years after the Purchase Trigger Date or the
first public offering in which the Partnerships participate, to have Parent
register a stated percentage of his Plan Shares under the Securities Act in
connection with certain public offerings. (SEE SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, Footnote (1).)
Each Common Stock Purchase Agreement also provides Parent with (a) prior
to a public offering, the right of first refusal to buy Plan Shares owned by
each Management Stockholder on essentially the same terms and conditions as
such Management Stockholder proposes in a sale of his Plan Shares to another
bona fide third party purchaser and (b) the right to repurchase all of the
Management Stockholder's Plan Shares and pay him a stated price for
cancellation of his Options if (i) the Management Stockholder's employment is
involuntarily terminated with cause, (ii) the Management Stockholder
terminates his or her employment other than by reason of death, disability or
retirement on or after the age of 65 or (iii) the Management Stockholder
effects an unpermitted transfer of Plan Shares.
Upon a change of control of Parent, the transfer restrictions, right of
first refusal, and certain other rights with respect to sale and repurchase
of the Plan Shares and cancellation of Options as described above will lapse.
41
The repurchase price of the Plan Shares under the Common Stock Purchase
Agreements depends upon the nature of the event that triggers the repurchase
and whether such repurchase occurs at the election of the Management
Stockholder or Parent. Generally, if the repurchase is at the Management
Stockholder's election, the repurchase price per share will be the book value
per share (as defined in the Common Stock Purchase Agreement) of Stock or, if
the Stock is publicly traded, the market value per share of Stock. Generally,
if the repurchase is at Parent's election, the repurchase price per share
will be the lesser of (a) the book value per share (as defined in the Common
Stock Purchase Agreement) of Stock (or if the Stock is publicly traded, the
market value per share) and (b) $500.
OPTION GRANTS IN PARENT FOR FISCAL YEAR 1998 AND POTENTIAL REALIZABLE VALUES
There were no option grants during fiscal year 1998 to the Named
Executive Officers.
The following table sets forth as to each of the Named Executive
Officers information with respect to option exercises during fiscal year 1998
and the status of their options on October 31, 1998: (i) the number of shares
of common stock underlying options exercised during fiscal year 1998, (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, 1998 and (iv) the aggregate dollar value of in-the-money
exercisable and unexercisable options on October 31, 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND OPTION VALUES AT OCTOBER 31, 1998
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT OCTOBER 31, 1998 OCTOBER 31, 1998
NAME EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE) (1)
---- -------- -------- --------------------------- -------------------------------
Michael S. Shannon -- -- 22,744/ 0 $20,229,300/ 0
Larry E. Lichliter -- -- 12,646/ 0 11,247,800/ 0
John K. Saer, Jr. -- -- 4456/ 0 3,931,400/ 0
Nola S. Dyal -- (2) 2101/ 0 1,852,500/ 0
E.D. "Murray" Bryant -- -- 177/ 707 146,800/ 586,300
- -----------
(1) The Common Stock is not publicly traded and the value of the options
represents management's best judgment of value at October 31, 1998 as
calculated using the "Black-Scholes" model of option valuation.
(2) Parent repurchased 700 Common Stock Options from Ms. Dyal. (SEE
TRANSACTIONS WITH MANAGEMENT).
MANAGEMENT INCENTIVE BONUSES
Certain members of management of Parent and the Company and its
subsidiaries, including departmental managers and executive officers,
including Named Executive Officers, are eligible to receive cash bonuses in
addition to their annual salary compensation. Such awards are based on the
performance of such individuals as determined by their direct supervisors and
other senior management and the financial performance of Parent, the Company
and its subsidiaries.
OPTIONS AND PARTNERSHIP INTERESTS IN AFFILIATES
No executive officers or key employees received options or partnership
interests in KSL Land and partnerships affiliated therewith during fiscal
year 1998. Certain executive officers and key employees did receive options
and partnership interest in KSL Land and partnerships affiliated therewith
prior to and during fiscal year 1997, but such options were
"out-of-the-money" and no allocation has been made for distribution of
partnership profits with respect to such partnership interests.
BOARD COMPENSATION
All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. Each director
receives an aggregate annual fee of $25,000 for serving on Parent's and the
Company's Boards of Directors.
42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors participated in deliberations of Parent's board
of directors concerning executive officer compensation during fiscal year
1998 and have been appointed to serve on Parent's Compensation Committee
during fiscal year 1998: Messrs. Kravis and Tokarz. During fiscal year 1998,
no executive officer of Parent served as a member of the compensation
committee of another entity or as a director of another entity, one of whose
executive officers served on the compensation committee or board of directors
of Parent.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 15, 1999 certain
information concerning the ownership of shares of Common Stock of Parent by
(i) persons who own beneficially more than 5% of the outstanding shares of
Common Stock; (ii) each person who is a director of the Company; (iii) each
person who is a Named Executive Officer; and (iv) all directors and executive
officers of the Company as a group. Parent owns 100% of the common stock of
the Company. As of January 15, 1999, there are 550,392 shares of Common Stock
of Parent outstanding.
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP (9) CLASS
--------------------------------------------------------------------------------------------------
KKR Associates, L.P........................................... 458,689 (1) 83.33
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
KKR 1996 GP, LLC.............................................. 81,320 (2) 14.77
c/o Kohlberg Kravis Roberts & Co.
9 West 57th Street
New York, New York 10019
Michael S. Shannon............................................ 26,158 (3) 4.56
Larry E. Lichliter............................................ 13,210 (4) 2.35
John K. Saer, Jr.............................................. 4,549 (5) *
Nola S. Dyal.................................................. 2,101 (6) *
E.D. "Murray" Bryant.......................................... 177 (7) *
All Executive Officers and Directors as a Group (23 persons).. 50,883 (8) 8.52
* Denotes less than one percent.
(1) Shares of Common Stock shown as beneficially owned by KKR Associates,
L.P. are held as follows: approximately 71.4% by Resort Associates,
L.P., approximately 10.2% by Golf Associates, L.P. and approximately
1.7% by KKR Partners II, L.P. (collectively, the "Initial
Partnerships"). KKR Associates, L.P., a limited partnership, is the
sole general partner of each of the Partnerships and possesses sole
voting and investment power with respect to such shares. The general
partners of KKR Associates, L.P. are Henry R. Kravis, George R.
Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson,
James H. Greene, Jr., Michael T. Tokarz, Perry Golkin, Clifton S.
Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis,
Roberts, Raether, Tokarz and Stuart are also directors of the Company.
Alexander Navab, Jr. is a limited partner of KKR Associates, L.P. and
is also a director of the Company. Each of such individuals may be
deemed to share beneficial ownership of the shares shown as
beneficially owned by KKR Associates, L.P. Each of such individuals
disclaims beneficial ownership of such shares.
(2) Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC
are owned of record by KKR 1996 Fund L.P. KKR 1996 GP LLC is the
general partner of KKR Associates 1996 L.P., which is the general
partner of KKR 1996 Fund L.P. (the "New Partnership"). The members of
KKR 1996 GP LLC are Messrs. Kravis, Roberts, MacDonnell, Raether,
Michelson, Greene, Tokarz, Golkin, Robbins, Stuart and Gilhuly. Messrs.
Kravis, Roberts, Raether, Tokarz and Stuart are also directors of the
Company. Messrs. Kravis and Roberts constitute the management committee
of KKR 1996 GP, LLC. Each of such individuals may be deemed to share
beneficial ownership of the shares shown as beneficially owned by KKR
1996 GP LLC. Each of such individuals disclaims beneficial ownership of
such shares. The Initial Partnerships and the New Partnership are
collectively referred to as the "Partnerships."
(3) Includes options to purchase 22,744 shares exercisable within 60 days.
(4) Includes options to purchase 12,646 shares exercisable within 60 days.
(5) Includes options to purchase 4,456 shares exercisable within 60 days.
(6) Represents options to purchase 2,101 shares exercisable within 60 days.
44
(7) Represents options to purchase 177 shares exercisable within 60 days.
(8) Includes options to purchase 46,812 shares exercisable within 60 days.
(9) The nature of beneficial ownership for all of the shares listed is sole
voting and investment power.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH KKR
KKR Associates, L.P. and KKR 1996 GP LLC beneficially own approximately
83.3% and 14.8% (73.3% and 12.9%, on a fully diluted basis), respectively, of
Parent's outstanding shares of Common Stock as of January 15, 1999. The
general partners of KKR and the members of KKR 1996 GP LLC are Messrs. Henry
R. Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael
W. Michelson, Michael T. Tokarz, James H. Greene, Jr., Perry Golkin, Clifton
S. Robbins, Scott M. Stuart and Edward A. Gilhuly. Messrs. Kravis, Roberts,
Raether, Tokarz and Stuart are also directors of the Company, as is Alexander
Navab, Jr. who is a limited partner of KKR Associates, L.P. Each of the
general partners of KKR Associates, L.P. is also a member of the limited
liability company which serves as the general partner of Kohlberg Kravis
Roberts & Co. ("KKR") and Mr. Navab is an executive of KKR. KKR receives an
annual fee of $500,000 in connection with providing financial advisory
services to Parent and may receive customary investment banking fees for
services rendered to Parent and/or the Company in connection with
divestitures, acquisitions and certain other transactions. See "Directors and
Executive Officers" and "Security Ownership of Certain Beneficial Owners and
Management."
The limited partners of KKR Associates are certain past and present
employees of KKR and partnerships and trusts for the benefit of the families
of the general partners and past and present employees and a former partner
of KKR.
Each of the Partnerships has the right to require Parent to register
under the Securities Act shares of Common Stock held by it pursuant to
several registration rights agreements. Such registration rights will
generally be available to each of the Partnerships until registration under
the Securities Act is no longer required to enable it to resell the Common
Stock owned by it. Such registration rights agreements provide, among other
things, that Parent will pay all expenses in connection with the first six
registrations requested by each such Partnership and in connection with any
registration commenced by Parent as a primary offering.
In connection with the Grand Wailea acquisition, the Company paid
$4,000,000 to KKR for financial advisory services.
TRANSACTIONS WITH PARENT AND AFFILIATES OF PARENT
The Company and Parent are parties to an Expense Allocation Agreement
pursuant to which Parent performs management services requested by the
Company and the Company reimburses Parent for all expenses incurred by Parent
and directly attributable to the Company and its subsidiaries. The Company
paid management fees and fees pursuant to the Expense Allocation Agreement
(reflected collectively as the "Corporate Fee" in the accompanying
consolidated statements of operations) in the amount of $8.8 million to
Parent in fiscal year 1998.
The Company's liability for taxes is determined based upon a Tax Sharing
Agreement entered into by the members of the affiliated group of corporations
(within the meaning of Section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code")) of which Parent is the common parent (the "Parent
Affiliated Group"). Under the Tax Sharing Agreement, the Company and its
subsidiaries are generally responsible for Federal taxes based upon the
amount that would be due if the Company and its subsidiaries filed Federal
tax returns as a separate affiliated group of corporations rather than as
part of Parent's consolidated federal tax returns. The allocation of tax
liability pursuant to the Tax Sharing Agreement may not reflect the Company's
actual tax liability that would be imposed on the Company had it not filed
tax returns as part of the Parent Affiliated Group. The combined state tax
liabilities are allocated to the Company and its subsidiaries based on
similar principles.
The Company provided financing to KSL Land of approximately $20,800,000
at April 30, 1997. The Company recorded interest income of $1,797,000 and
$798,000 in 1998 and 1997, respectively, related to this note receivable.
This unsecured note receivable bears interest at 8% and is payable at
maturity in June 2001.
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, and are expected to total approximately $3,400,000. Also, Land II is
to be paid by Desert Resorts a marketing fee in an amount equal to 2.75% of
the Project Sales Revenues. Such marketing fee will be used by Land primarily
to pay marketing, sale and promotional expenses to third parties. In fiscal
1998, Desert Resorts paid $330,000 to Land II for project management fees.
TRANSACTIONS WITH MANAGEMENT
In August 1998, Parent repurchased 13,774 shares of its common stock from
Management Stockholders, of which 13,541 were repurchased from the Named
Executive Officers. The common stock was repurchased at $2,000 per share.
Parent repurchased 7,919 and 4,403 and 1,219 shares of Parent's Common Stock
from Messrs. Shannon, Lichliter and Saer, respectively.
46
In August 1998, Parent repurchased 2,544 common stock options from 18
Optionees. The common stock options were repurchased at $2,000 per share,
less the exercise price of $500.
In 1995, Parent made loans to Messrs. Shannon, Lichliter, Saer and
Affeldt (i) in connection with their purchase of common stock of Parent and
(ii) to fund the tax liability incurred as a result of their receipt of
common stock of Parent. The loans were repaid in full in 1998.
In addition, Parent previously made loans to Messrs. Shannon, Lichliter,
Saer and Affeldt to fund tax liability incurred as a result of their receipt
of common stock of KSL Land and certain partnership interests in partnerships
affiliated with Parent. In 1998, Messrs. Lichliter and Affeldt repaid their
loans in full. Messrs. Shannon and Saer have remaining promissory notes in
aggregate amounts of $212,461 and $32,952, respectively.
47
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, 1998, 1997 and 1996
Consolidated Balance Sheets as of October 31, 1998 and 1997
Consolidated Statements of Stockholder's Equity for the years
ended October 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Schedules
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
(In thousands)
BALANCE AT CHARGED TO DEDUCTIONS - BALANCE AT
BEGINNING OF COST AND NET CREDIT END OF
PERIOD EXPENSES LOSS PERIOD
------ -------- ---- ------
Allowance for doubtful accounts:
Accounts Receivable...................
Fiscal year ended October 31, 1996......... $ 569 $ 1,433 $ (429) $ 1,573
Fiscal year ended October 31, 1997......... 1,573 1,193 (2,044) 722
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 in 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 Suborinated 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 Suborinated 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.)
48
4.3 Form of 10 1/4% Series B Senior Subordinated Note due 2007, filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-4, File
No. 333-31025, is hereby incorporated by reference. (Included as part
of Senior Subordinated Notes Indenture filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-4, File No. 333-31025, and
hereby incorporated by reference.)
4.4 Senior Subordinated Notes Registration Rights Agreement, dated April
30, 1997, by and among KSL Recreation Group, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Brothers Inc, Credit
Suisse First Boston Corporation, BancAmerica Securities, Inc.,
Montgomery Securities and Scotia Capital Markets, filed as Exhibit 4.4
to the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.1 Credit Agreement, dated as of April 30, 1997, among KSL Recreation
Group, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation,
as a co-syndication agent and documentation agent, The Bank of Nova
Scotia, as a co-syndication agent and administrative agent, and
BancAmerica Securities, Inc., as syndication agent, filed as Exhibit
10.1 to the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.2 Sublease, executed between Lake Lanier Islands Development Authority
and KSL Lake Lanier, Inc., filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is hereby
incorporated by reference.
10.3 Management Agreement effective as of May 16, 1996, by and between Lake
Lanier Islands Development Authority and KSL Lake Lanier, Inc., filed
as Exhibit 10.3 to the Company's Registration Statement on Form S-4,
File No. 333-31025, is hereby incorporated by reference.
10.4 License Agreement, dated March 5, 1994, between The Professional
Golfer's Association and LML Development Corp. of California as
assigned by the Assignment and Assumption Agreement, dated December
24, 1993, by and between Landmark Land Company of California, Inc. and
KSL Landmark Corporation, filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-4, File No. 333-31025, is hereby
incorporated by reference.
10.5 Trademark Agreement, dated January 10, 1985, between PGA Tour, Inc.
and Landmark Land Company of California, Inc. as assigned by the
Assignment and Assumption Agreement, dated December 24, 1993, by and
between Landmark Land Company of California, Inc. and KSL Landmark
Corporation, filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-4, File No. 333-31025, is hereby incorporated by
reference.
10.6 Assignment and Assumption Agreement, dated December 24, 1993, by and
between Landmark Land Company of California, Inc. and KSL Landmark
Corporation, filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-4, File No. 333-31025, is hereby incorporated by
reference.
10.7 License Agreement, dated December 30, 1993, among Carol Management
Corporation, C.A.H. Spa of Florida Corp., KSL Hotel Corp., and KSL Spa
Corp. (subsequently merged into KSL Hotel Corp.), filed as Exhibit
10.7 to the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.8 KSL Recreation Corporation 1995 Stock Purchase and Option Plan, filed
as Exhibit 10.8 to the Company's Registration Statement on Form S-4,
File No. 333-31025, is hereby incorporated by reference.
10.9 Form of KSL Recreation Corporation Common Stock Purchase Agreement,
filed as Exhibit 10.9 to the Company's Registration Statement on Form
S-4, File No. 333-31025, is hereby incorporated by reference.
10.10 Form of KSL Recreation Corporation Non-Qualified Stock Option
Agreement, filed as Exhibit 10.10 to the Company's Registration
Statement on Form S-4, File No. 333-31025, is hereby incorporated by
reference.
10.11 Expense Allocation Agreement, dated April 30, 1997, between KSL
Recreation Corporation and KSL Recreation Group, Inc., filed as
Exhibit 10.11 to the Company's Registration Statement on Form S-4,
File No. 333-31025, is hereby incorporated by reference.
49
10.12 Tax Sharing Agreement and Amendment to Tax Sharing Agreement, dated
April 30, 1997, by and between KSL Recreation Corporation, KSL
Recreation Group, Inc., KSL Landmark Corporation, KSL Desert Resorts,
Inc., KSL Vacation Resorts, Inc., Xochimilco Properties, Inc., Wild
West Desert Properties, Inc., KSL Travel, Inc., KSL Golf Holdings,
Inc., KSL Fairways Golf Corporation, KSL Florida Holdings, Inc., KSL
Hotel Corp., KSL Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL
Land Corporation and KSL Land II Corporation, filed as Exhibit 10.12
to the Company's Registration Statement on Form S-4, File No.
333-31025, is hereby incorporated by reference.
10.13 Second Amendment to the Tax Sharing Agreement, dated November 1, 1997,
by and among KSL Recreation Corporation, KSL Recreation Corporation,
KSL Recreation Group, Inc., KSL Land Holdings, Inc., KSL Landmark
Corporation, KSL Desert Resorts, Inc., Las Casitas Corporation, KSL
Real Estate Company, KSL Travel, Inc., Casitas Plaza Corporation, KSL
Golf Holdings, Inc., KSL Fairways Golf Corporation, KSL Florida
Holdings, Inc., KSL Hotel Corp., KSL Silver Properties, Inc., KSL
Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL Grand Traverse
Holdings, Inc., KSL Grand Traverse Land, Inc., KSL Grand Traverse
Realty, Inc., KSL Grand Traverse Resort, Inc., KSL Water Works, Inc.,
KSL Land Corporation, KSL Citrus Properties, Inc., KSL Development
Corporation, KSL Land II Corporation, KSL Land III Corporation, KSL
Land IV Corporation and Landaq, Inc., filed as Exhibit 10.13 to the
Company's fiscal 1997 10-K, File No. 333-31025, is hereby incorporated
by reference.
10.14 Contract for Purchase and Sale of Grand Traverse Resort, dated August
1, 1997, by and between Grand Traverse Holding Company, GRS Grand
Hotel Corporation, General Realty Services, Inc., GTR Resort
Development, Inc. and Grand Personalty, Inc., TICOR Title Insurance
Corporation and KSL Recreation Corporation as assigned by the
Assignment of Purchase Contract from KSL Recreation Corporation to KSL
Grand Traverse Holdings, Inc., KSL Grand Traverse Resort, Inc., KSL
Grand Traverse Land, Inc., KSL Grand Traverse Realty, Inc., and KSL
Water Works, Inc. dated August 1, 1997, filed as Exhibit 10.14 to the
Company's fiscal 1997 10-K, File No. 333-31025, is hereby incorporated
by reference.
10.15 Assignment of Purchase Contract from KSL Recreation Corporation to KSL
Grand Traverse Holdings, Inc., KSL Grand Traverse Resort, Inc., KSL
Grand Traverse Land, Inc., KSL Grand Traverse Realty, Inc., and KSL
Water Works, Inc. dated August 1, 1997, filed as Exhibit 10.15 to the
Company's fiscal 1997 10-K, File No. 333-31025, is hereby incorporated
by reference.
10.16 Agreement of Purchase and Sale between Claremont Hotel, LLC, Harsch
Investment Corp. and KSL Recreation Group, Inc. dated March 5, 1998,
filed as Exhibit 10.1 of the Company's Form 8-K, File No. 333-31025,
is hereby incorporated by reference.
10.17 First Amendment Agreement of Purchase and Sale between Claremont
Hotel, LLC, Harsch Investment Corp. and KSL Recreation Group, Inc.
dated April 6, 1998, filed as Exhibit 10.2 of the Company's Form 8-K,
File No. 333-31025, is hereby incorporated by reference.
10.18 Second Amendment Agreement of Purchase and Sale between Claremont
Hotel, LLC, Harsch Investment Corp. and KSL Recreation Group, Inc.
dated April 20, 1998 filed as Exhibit 10.3 of the Company's Form 8-K,
File No. 333-31025, is hereby incorporated by reference.
10.19 Amended and Restated Credit Agreement dated as of April 20, 1998,
among KSL Recreation Group, Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as a co-syndication agent and documentation
agent, The Bank of Nova Scotia, as a co-syndication agent and
administrative agent, and BancAmerica Securities, Inc., as syndication
agent, filed as Exhibit 10.5 of the Company's Form 8-K, File No.
333-31025, is hereby incorporated by reference.
10.20 Agreement of Purchase and Sale and Joint Escrow Instructions between
International Hotel Acquistions, LLC, and KSL Recreation Corporation,
dated November 5, 1998, filed as exhibit 10.1 of the Company's most
recent Form 8-K, File 333-31025, is hereby incorporated by reference.
10.21 First Amendment to Agreement for Purchase and Sale and Joint Escrow
Instructions between International Hotel Acquisitions, LLC and KSL
Recreation Corporation dated November 12, 1998, filed as Exhibit 10.2
of the Company's most recent Form 8-K, File No. 333-31025, is hereby
incorporated by reference.
50
10.22 Assignment of Agreement of Purchase and Sale between KSL Recreation
Corporation and KSL Grand Wailea Resort, Inc., dated December 10,
1998, filed as Exhibit 10.3 of the Company's most recent Form 8-K,
File No. 333-31025, is hereby incorporated by reference.
10.23 Second Amendment to Agreement for Purchase and Sale and Joint Escrow
Instructions between International Hotel Acquisitions, LLC and KSL
Grand Wailea Resort, Inc., dated December 23, 1998, filed as Exhibit
10.4 of the Company's most recent Form 8-K, File No. 333-31025, is
hereby incorporated by reference.
*10.24 Management Agreement by and between KSL Desert Resorts, Inc. and
KSL Land II Corporation, dated April 1, 1998.
*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.
51
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 28,
1999.
KSL RECREATION GROUP, INC.
By: /s/ John K. Saer, Jr.
--------------------------------------------
John K. Saer, Jr.
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons in the capacities indicated on January 28, 1999.
Signatures Title
- --------------------------------- -----------------------------------------
/s/ Michael S. Shannon President, Chief Executive Officer and
- --------------------------------- Director (Principal Executive Officer)
(Michael S. Shannon)
/s/ Larry E. Lichliter Executive Vice President and Director
- ---------------------------------
(Larry E. Lichliter)
/s/ Henry R. Kravis Director
- ---------------------------------
(Henry R. Kravis)
Director
- ---------------------------------
(George R. Roberts)
Director
- ---------------------------------
(Paul E. Raether)
/s/ Michael T. Tokarz Director
- ---------------------------------
(Michael T. Tokarz)
Director
- ---------------------------------
(Scott M. Stuart)
/s/ Alexander Navab, Jr. Director
- ---------------------------------
(Alexander Navab, Jr.)
/s/ John K. Saer, Jr. Vice President, Chief Financial Officer and
- --------------------------------- Treasurer (Principal Financial Officer)
(John K. Saer, Jr.)
/s/ Emily-May Richards Controller (Principal Accounting Officer)
- ---------------------------------
(Emily-May Richards)
52