Item 1. Business
General
KSL Recreation Group, Inc. was incorporated on March 14, 1997, under the laws of the State of Delaware. KSL Recreation Group, Inc., together with its subsidiaries (the "Company"), is involved in two operating segments, Resort and Real Estate, which represented 95% and 5%, respectively of revenues, in fiscal 2002. The Resort segment has engaged in service-based recreation through the ownership and management of resorts, spas, golf courses, private clubs, and activities related thereto. The Company's Resort operations currently include: (i) La Quinta Resort & Club ("La Quinta") and PGA WEST ("PGA WEST"), located in the Palm Springs, California area, which together, constitute the Company's "Desert Resorts" operations; (ii) the Grand Wailea Resort Hotel & Spa ("Grand Wailea"), located in Maui, Hawaii; (iii) the Arizona Biltmore Resort and Spa, located in Phoenix, Arizona; (iv) Doral Golf Resort and Spa ("Doral"), located near Miami, Florida; (v) La Costa Resort and Spa ("La Costa") located near San Diego, California; (vi) The Claremont Resort & Spa ("The Claremont"), located near Berkeley, California; (vii) Grand Traverse Resort and Spa ("Grand Traverse"), located in the northwest portion of the lower peninsula of Michigan; and (viii) a hotel and recreational complex known as Lake Lanier Islands ("Lake Lanier") located on Lake Lanier near Atlanta, Georgia. The Resort segment's operations comprise numerous interrelated services, including lodging, conference services, corporate and individual guest hospitality programs and facilities, food and beverage, private and resort golf operations, spas, club membership programs, entertainment and athletic focused special events. The Real Estate segment develops and sells real estate in and around the Company's Resort operations. The Real Estate operations exist to support and enhance growth of the Company's Resort operations.
The Company is wholly owned by KSL Recreation Corporation (the "Parent"), a Delaware corporation incorporated on May 19, 1993, of which approximately 96.7% of the common stock as of October 31, 2002, (88.0% on a fully diluted basis) is owned by partnerships formed at the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"). Shortly after the Company's formation in March 1997, the subsidiaries of the Parent which owned Desert Resorts and Doral, and managed Lake Lanier, became wholly owned subsidiaries of the Company. Additional wholly owned subsidiaries of the Company have been formed in connection with subsequent acquisitions.
The Company's strategy has been to acquire unique, irreplaceable resorts and invest significantly in facilities-related improvements to enhance and expand the revenue base, introduce numerous operating efficiencies and develop an expanded membership base. These measures are also designed to diversify the Company's revenue streams and cash flows and have reduced the Company's reliance on rooms revenue.
Desert Resorts
Desert Resorts is located in La Quinta, California, a golf and recreation destination near Palm Springs, California. Desert Resorts includes La Quinta, formerly known as the La Quinta Hotel, which opened in 1926. La Quinta currently offers 796 "casita"-style hotel rooms (Spanish-style cottages) spread over approximately 45 acres of grounds, featuring indigenous architecture and a campus-like setting, and caters to corporate groups, individual guests and recreation enthusiasts. Desert Resorts also
includes PGA WEST, which together with La Quinta encompass approximately 1,490 acres, nine championship 18-hole golf courses, six clubhouses, several restaurants (including Azur by Le Bernardin, a fine dining restaurant co-branded with the top-rated Le Bernardin restaurant in New York City), 19,500 square feet of retail space, 42 hard, clay and grass tennis courts, 66,000 square feet of conference facilities, 25 swimming pools, 38 spas/hot tubs and the 23,000 square foot Spa La Quinta, which includes 48 treatment rooms, a salon, retail store, and extensive spa programming.
Both La Quinta's and PGA WEST's private club operations provide golf and tennis facilities, golf and tennis instruction, fitness facilities, special events, and dining and social activities for their members. A full golf membership at La Quinta currently requires a $90,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual golf dues of $6,960. A full golf membership at PGA WEST currently requires a $105,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual golf dues of $7,740.
Grand Wailea
In December 1998, the Company acquired Grand Wailea Resort Hotel & Spa, located in Maui, Hawaii. It comprises forty acres situated close to the base of south Maui's Mount Haleakala, and includes sophisticated water features including elaborate pools, grottos and waterslides reflecting Grand Wailea's location on the Maui coast. The resort features 779 luxury hotel rooms and guest suites, six restaurants, twenty-two banquet and meeting rooms totaling 81,000 square feet, expansive water features and pool facilities, a wedding chapel, and a 50,000 square foot European-style spa and fitness center with 38 treatment rooms, the largest of its kind in Hawaii. In addition, guests at the Grand Wailea have access to preferred tee times on golf courses near the resort.
Grand Wailea currently offers memberships, which offer access to special programming, room upgrade offers, and preferred room rates. Members are encouraged to plan their visits during the resort's low demand periods based on reservation eligibility, blackout periods, special activities and programming. Grand Wailea has recently introduced an additional membership program catering to local residents. Members of this program are provided use of the resort's facilities. The Grand Wailea memberships currently require a deposit of $2,500 to $20,000 depending on the type of membership and annual dues ranging from $110 to $2,400. The deposits generally are fully refundable in thirty years (or sooner under certain circumstances).
The Arizona Biltmore
In December 2000, the Company acquired The Arizona Biltmore ("The Biltmore"), which includes 730 rooms, suites and villas located on 39 acres in Phoenix, Arizona. The Biltmore was first opened in 1929 and features architecture inspired by Frank Lloyd Wright throughout the resort. The resort has numerous water features including its Paradise Pool Complex with a 92-foot water slide and seven other on-site pools. Facilities at the Biltmore also include approximately 64,000 square feet of conference space, approximately 20,000 square feet of spa space with 21 treatment rooms, seven lighted tennis courts, four food and beverage outlets, and six high-end retailers. In addition, guests at the Biltmore have access to preferred tee times on two golf courses adjacent to the resort. In fiscal 2002, the Company began work on a conference center addition, which will increase the Biltmore's meeting space to over 100,000 square feet.
Doral
Doral is a golf destination resort located approximately fifteen miles from downtown Miami, Florida and approximately ten miles from Miami International Airport. Doral includes 645 hotel rooms, approximately 75,000 square feet of conference space, approximately 15,100 square feet of retail space; five championship 18-hole golf courses; four restaurants; the Arthur Ashe Tennis Center, featuring ten
courts; the Blue Lagoon, a water feature and pool facility, and a private club members' facility that opened in March 2000. Facilities at Doral also include the Spa at Doral, which includes 48 guest suites, approximately 85,000 square feet of fitness and spa facilities, 52 treatment rooms, three swimming pools, two saunas and one restaurant.
The Company is nearing completion of the renovation and repositioning of Doral. This project includes the renovation of all 645 rooms including guest bathrooms, the renovation of the lobby and other common areas and the replacement of the heating, ventilation and air conditioning infrastructure. As of October 31, 2002, 538 of the planned 645 rooms and the lobby and common area renovations are complete with the balance of the project to be completed in fiscal 2003.
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 $26,500 deposit which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues of approximately $4,860.
La Costa
In November 2001, the Company acquired La Costa, situated on 400 rolling acres in the greater San Diego area approximately two miles from the Pacific Ocean. The resort features 479 rooms and guest suites, several restaurants, fifteen meeting and banquet rooms totaling 50,000 square feet, two 18-hole championship golf courses, twenty-one hard, clay and grass tennis courts (seven of which are lighted), five pool facilities, and a 75,000 square foot spa and fitness center.
The Company began the renovation of La Costa immediately after its acquisition. The renovation and repositioning plan for La Costa includes the renovation of all 479 rooms and suites, the redesign and renovation of all common areas, the redesign of the main access road to the resort, the upgrade of resort restaurants, the addition of a ballroom and the replacement of the spa. This project is currently estimated to cost $55 million and will be completed over three years.
The Company has developed a new membership program for La Costa. Members of La Costa's private club are provided use of the resort's golf and tennis and facilities, golf and tennis instruction, fitness facilities, special events, dining and social activities. A full golf membership at La Costa currently requires a $95,000 deposit which is refundable in thirty years (or sooner under certain circumstances), and annual dues of approximately $4,000. Individuals who were members of La Costa's existing membership programs when the Company acquired the resort are being offered new memberships at discounted rates.
The Claremont
The Claremont is a historic 279-room hotel located near Berkeley, California. Located in the Berkeley Hills, the resort's Bay Area location enjoys views of the San Francisco Bay, the Oakland Bay Bridge and at night the lights of San Francisco and the surrounding Bay Area. The resort encompasses approximately twenty-two acres and its amenities include four restaurants, approximately 30,000 square feet of meeting space, two pools, ten tennis courts, and fitness facilities. In January 2001, The Claremont completed a new 20,000 square foot European style spa with 31 treatment rooms. In September 2001, The Claremont opened Paragon, a co-branded fine dining restaurant at the resort. Since the Company acquired The Claremont, significant improvements have been made throughout the resort, including the aforementioned spa as well as extensive room and common area renovations.
The Claremont's private club membership currently requires a $11,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues up to $4,200. Members of Claremont's private club are permitted to use the resort fitness, spa and other facilities.
Grand Traverse
Grand Traverse is a regional destination resort located in the northwest portion of the lower peninsula of Michigan, approximately six miles from Traverse City, Michigan. The resort covers over 1,000 acres and features a 426-room hotel, approximately 49,000 square feet of conference space, three championship 18-hole golf courses, a 22,000 square foot clubhouse, an 11,000 square foot spa, 15 treatment rooms, nine tennis courts, three swimming pools, three restaurants, approximately 73,000 square feet of fitness facilities, approximately 20,000 square feet of retail space and a private club operation. Grand Traverse also operates a condominium-leasing program comprised of approximately 235 rental units.
Grand Traverse's private club operation provides golf, tennis and fitness facilities, sports instruction, special events, dining and social activities to its members. A full golf membership at Grand Traverse currently requires a $13,500 deposit which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues of approximately $2,340.
Lake Lanier
Lake Lanier is a regional destination resort and recreational complex comprised of 1,041 acres located approximately 45 miles northeast of downtown Atlanta, Georgia. It is situated on Lake Lanier, an approximately 38,000-acre lake with approximately 520 miles of shoreline and extensive lakeside primary and secondary homes. It is subleased from a government agency of the State of Georgia (which leases it from the U.S. Army Corps of Engineers) under a fifty-year sublease commencing August 1997. During fiscal 2001, the Company re-branded the Lake Lanier hotel as Emerald Pointe, ending its prior affiliation with Hilton.
Lake Lanier features a 216-room hotel, 22,500 square feet of conference space, three retail outlets, three restaurants, a swimming pool, a golf course, three tennis courts, beach and water park facilities, a boat rental operation including group boats, houseboats, and ski boats, a 2,000 seat outdoor amphitheater, riding stables, campgrounds and pavilions and 30 two-bedroom lake house rental units.
Marketing and Sales Programs
The Company's strategy is to position Desert Resorts, Grand Wailea, The Biltmore, Doral, La Costa 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. Grand Traverse is positioned as a regional resort for corporate groups and individuals from the Midwest.
To effectively position its operations, the Company's operating subsidiaries use a number of marketing strategies and distribution channels. The marketing function is directed by three senior executives in the Company's corporate office, however day to day operations are largely decentralized to allow managers who are most familiar with the guest or member population and with the specific property to play an active role in developing the appropriate marketing strategy. The Company uses a combination of print media, direct mail, internet, telemarketing, local and national public relations, to develop market awareness and brand positioning, and to market golf, lodging, memberships, food and beverage and special events to targeted consumers. Although specific marketing activities are largely decentralized, the Company's corporate office develops and implements national marketing and promotional programs, controls trademarks and trademark licensing agreements, conducts public relations and engages advertising agencies, coordinates communications with media sources, and develops video materials, interactive CDs, and Internet Web sites.
Due to the complex and unique nature of each of the Company's resorts, reservations are taken locally rather than on a centralized basis. However, the Company maintains centralized customer database of all of its resorts' customers to facilitate cross-promotion of its resorts via traditional direct mail and internet based marketing campaigns.
While the Company's customer base varies by resort (as discussed in the "Customers" section below), a significant portion of resort revenues are derived from corporate and other group business. The Company uses a national sales force to develop corporate and other group business for the resort facilities by focusing on identifying, obtaining and maintaining corporate and other group business through direct relationships with these accounts and through third party meeting managers. The Company has regional sales offices in the following markets: greater New York City, New Jersey and Connecticut; Washington D.C.; Chicago, Illinois (also serving the Detroit, Michigan market); Atlanta, Georgia; as well as Los Angeles and San Francisco, California.
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 activities. For the Company as a whole, approximately 55% of our guests are corporate or other group participants and approximately 45% are FIT guests. At Desert Resorts, Grand Wailea, The Biltmore, Doral and La Costa, the customers are drawn from an international, national and regional customer base and typically exhibit the higher spending patterns of affluent corporate and leisure travelers. Desert Resorts' private clubs attract members and non-member guests on a national scale, with higher concentrations of customers from southern California. The private club at Doral typically attracts local corporate and individual golf and fitness enthusiasts.
Lake Lanier draws customers from Georgia and the southeastern United States. The hotel operations at Lake Lanier draw significant numbers of both corporate and other group participants and FIT guests. Lake Lanier's other facilities attract a mix of customers with a wide array of interests, including active golfers and daily attraction users, such as boaters and water park attendees.
Grand Traverse draws customers largely from Michigan and the Midwest. Its customers include affluent FIT and corporate guests. Grand Traverse's private club typically attracts local fitness and golf enthusiasts.
The Claremont draws customers largely from affluent corporate guests visiting the San Francisco Bay area and surrounding communities, including Silicon Valley. The Claremont's private club appeals to and attracts local spa and fitness enthusiasts.
Certain Factors Affecting Resorts
The Company currently operates resorts in six states, and may experience natural conditions which are beyond its control (such as periods of extraordinarily dry, wet, hot and cold weather, or unforeseen natural events such as hurricanes, fires, floods, severe storms, tornadoes or earthquakes). These conditions may occur at any time and may have a significant impact on the condition and availability of its resort amenities and room base.
In addition, the Company is highly dependent on the perceived and actual safety of domestic air travel in the United States. The recent, tragic events of September 11, 2001 highlight this factor. After the terrorist attacks on September 11th, air travel within the United States came to a virtual halt and the Company experienced numerous cancellations across all segments of its customer base. Several of the Company's resorts are highly dependent on airlift (notably Grand Wailea, The Biltmore and Doral) and these resorts were hit particularly hard in the aftermath of September 11th. The safety of air travel and the impact of terrorist attacks and other factors are beyond the Company's control. Further
terrorist attacks or other "man-made" disasters could have a significant adverse impact on travel and thereby the Company's business, financial condition and results of operations.
Certain Uninsured Risks
The Company currently carries comprehensive liability, fire, flood (for certain resorts), terrorism (for certain resorts) and extended coverage insurance with respect to its resorts and all of the golf courses owned with policy specifications and insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as those losses incurred as a result of earthquakes, which are of particular concern with respect to Desert Resorts, La Costa and The Claremont, or hurricanes, which are of particular concern with respect to Doral and Grand Wailea) which may be either uninsurable, only partially insurable or not economically insurable. As a result, in the event of such a loss, the Company could lose all or a significant portion of both its capital invested in, and anticipated profits from, one or more of the Company's resorts and/or certain resort amenities.
Factors Affecting Resort Visitors
The success of efforts to attract visitors to resorts is dependent upon discretionary spending by consumers, which may be adversely affected by general and regional economic conditions. In the case of the Company's resorts, the regional economies of southern and northern California, south Florida, and the states of Arizona, Michigan, Georgia and Hawaii are significant to its operations, although Desert Resorts, Doral, Biltmore and Grand Wailea attract customers from throughout the United States and abroad.
The ability to attract visitors to the Company's resorts is also dependent upon the safety of travel within or to the United States as discussed in "Certain Factors Affecting Resorts" above. A decrease in tourism or in consumer spending on travel and/or recreation could have a significant 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, spa and recreation-based resorts some of which have significantly more resources than the Company. These include premier independent resorts as well as national hotel chains. In addition, the Company's resorts compete with other recreational businesses, such as cruise ships and gaming casinos. The Company believes that it competes based on brand name recognition, location, room rates and the quality of its services and amenities. The number and quality of competing resorts and/or hotels in a particular area could have material effect on the Company's revenues.
Golf courses at the Company's resorts compete for players and members with other golf courses located in the same geographic areas. The Company's golf courses compete based on the overall quality of their facilities (including the quality of its customer service), the maintenance of their facilities, available amenities, location and overall value. The number and quality of golf courses in a particular area could have a material effect on the revenue from the Company's membership programs, which could in turn affect the Company's financial performance and results of operations.
Seasonality
The operations of some of the Company's properties are seasonal. Primarily due to the popularity of Desert Resorts, The Biltmore, and Doral during the winter and early spring months, approximately 60% of these properties' revenues are recognized in the first two quarters of the fiscal year, while Lake Lanier and Grand Traverse generate approximately 70% of their revenue during the summer and fall months, thereby being recorded in the last two quarters of the fiscal year. Grand Wailea, La Costa and The Claremont generally reflect less seasonality in their operations.
Reliance on Key Personnel
The operations of the Company are dependent on the continued efforts of senior management, in particular Michael S. Shannon, the Company's President and Chief Executive Officer. There are no employment agreements between the Company and the members of its senior management. There can be no assurance that members of the Company's senior management will continue in their present roles, and should any of the Company's senior managers be unable or choose not to do so, the Company's prospects could be adversely affected.
Licenses and Trademarks
The Company is a party to the Professional Golfers' Association License Agreement ("PGA License Agreement") pursuant to which it is permitted and licensed to use the PGA WEST name and logos in sales, promotion, advertising, development and/or operations of certain property located in the city of La Quinta, California, known as "PGA WEST" (the "PGA WEST Property"). The PGA License Agreement provides the Company with (i) the exclusive rights in the United States to the name "PGA WEST" in connection with the PGA WEST Property and (ii) the exclusive rights in the states of California and Arizona to the names "PGA" and "PGA of America" in connection with the PGA WEST Property. The term of the PGA License Agreement extends through the later of (i) the date on which all of the residential units located on the PGA WEST Property have been sold and (ii) the date on which the Company ceases to use the name "PGA WEST" in the name of golf clubs, golf courses, hotels and/or any other commercial, office or residential developments then located on the PGA WEST Property. The Company believes that the PGA WEST logo is an important aspect of the Company's business because of the prestige associated with the Professional Golfers' Association. The PGA License Agreement provides for royalty payments on an annual basis through 2005, although the exact amount of any royalty payments with respect to the PGA mark will be determined by reference to the number and sales of residential units in the PGA WEST community.
KSL Land Corporation and its subsidiaries ("KSL Land"), an affiliate of the Company, has in the past made royalty payments attributable to sales of residential units. Third party acquirors of land at PGA WEST have agreed to make PGA royalty payments (through KSL Land) upon the closing of each residential unit. KSL Land is expected to continue to pay the royalty payments in the future; however, KSL Land has not agreed in writing to do so, is not controlled by the Company and no assurance can be given that KSL Land will pay any future royalty owing under the PGA License Agreement. Failure to comply with the terms of the PGA License Agreement, including any failure to pay royalties arising out of sales of residential units by KSL Land, could result in the payment of monetary damages by the Company. Such occurrence could have a material adverse affect on the Company.
The Company is also a licensee under a license agreement with the PGA TOUR. The PGA TOUR license agreement provides the Company with the exclusive rights to use the names "PGA TOUR" and "TPC" in connection with the sales, promotion, marketing and operation of PGA WEST. The PGA TOUR agreement is expected to terminate no earlier than January 1, 2006.
The Company owns the "Blue Monster" name and has an irrevocable, perpetual license for the "Doral" name in connection with the Company's operation, marketing and promotion of the facilities located at Doral. The licensor of the Doral mark is prohibited from licensing the Doral mark for any purpose anywhere in southern Florida, but retains the right to license the Doral mark elsewhere. Although failure by the Company to comply with the terms of the Doral license agreement could result in monetary damages, the licensor does not have the right to terminate the Doral license agreement in the event of a breach by the Company.
KSL Grand Wailea Resort, Inc. owns certain trademarks which are integral to its business and operations. The most significant of these include Grand Wailea Resort Hotel & Spa (words and design)
and Spa Grande. Such trademarks are currently registered in the State of Hawaii and with the United States Patent and Trademark Office.
KSL Biltmore Resort, Inc. owns certain trademarks which are integral to its business and operations. The most significant of these include Arizona Biltmore Resort & Spa (words and design) and the Biltmore Block (design only). Such trademarks are currently registered in the State of Arizona. The Biltmore Block (design only) is currently registered in the United States Patent and Trademark Office and applications for registrations of the other above referenced items have been filed in the United States Patent and Trademark Office.
KSL La Costa Resort Corporation owns certain trademarks, which are integral to its business and operations. The most significant of these include La Costa Resort & Spa (words and design) and the LC (logo and design). Such trademarks are currently registered with the United States Patent and Trademark Office.
Employees
For the year ended October 31, 2002, the Company employed approximately 8,000 persons during its peak seasons and approximately 7,000 persons during its off-peak seasons. In addition, the Parent employs approximately 45 persons who render services in connection with the Company's operations at its corporate headquarters. The Company believes that its employee relations are generally good. Unions represent none of the employees at Desert Resorts, Doral, Grand Traverse or Lake Lanier. At Grand Wailea, one union represents approximately 76% of employees. At the Biltmore, one union represents less than 1% of its employees. At La Costa, one union represents approximately 50% of employees. At The Claremont, three unions represent approximately 51% of employees. The Company is currently engaged in collective bargaining with unions at Biltmore, La Costa and The Claremont.
Governmental Regulation
Environmental Matters. Operations at the Company's facilities involve the use and storage of various hazardous materials such as herbicides, pesticides, fertilizers, batteries, solvents, motor oil and gasoline. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removing hazardous substances that are released on or in its property and for remediation of its property. Such laws often impose liability regardless of whether a property owner or operator knew of, or was responsible for, the release of hazardous materials. In addition, the failure to remediate contamination at a property may adversely affect the ability of a property owner to sell such real estate or to pledge such property as collateral for a loan. The Company believes that it is in compliance in all material respects with applicable federal, state and local environmental laws and regulations.
General. The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. Some of the Company's resort and golf course employees receive the federal minimum wage and any increase in the federal minimum wage would increase the Company's labor costs. In addition, the Company is subject to certain state "dram-shop" laws, which provide a person injured by an intoxicated individual the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. The Company is also subject to the Americans with Disabilities Act of 1990, the Equal Employment Opportunity Act and the Age Discrimination in Employment Act and similar state laws. The Company believes it is operating in substantial compliance with applicable laws and regulations governing its operations.
Item 2.
Item 2. Properties
Descriptions of the Company's significant properties are provided in the "Business" section. All properties are owned or leased by subsidiaries of the Company. The corporate office is located in La Quinta, California in a facility owned by and shared with an affiliated Company.
Item 3.
Item 3. Legal Proceedings
The Company is involved in certain legal proceedings generally incidental to its normal business activities. Management of the Company does not believe that the outcome of any of these proceedings will have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
By Unanimous Written Consent of Shareholders in Lieu of Annual Meeting dated as of October 31, 2002, the following individuals were elected directors of the Company:
Henry R. Kravis
George R. Roberts
Paul E. Raether
Paul M. Hazen
John K. Saer, Jr.
Michael S. Shannon
Larry E. Lichliter
Part II.
Item 5.
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.
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.
1)The La Costa Resort & Spa was acquired in November 2001. Accordingly, the Company's operating results for fiscal 2002 include approximately eleven months of operations for La Costa Resort & Spa. Additionally, the Company adopted SFAS 142 Goodwill and Other Intangible Assets during fiscal 2002, resulting in non-amortization of goodwill. (see Note 1)
2)The Arizona Biltmore was acquired in December 2000. Accordingly, the Company's operating results for fiscal 2001 include approximately ten months of operations for The Arizona Biltmore.
3)Grand Wailea was acquired on December 28, 1998. Accordingly, the Company's operating results for fiscal 1999 include approximately ten months of operations for Grand Wailea. The Fairways Group was sold in September 1999. Accordingly, the Company's operating results for fiscal 1999 included approximately eleven months of operations for the Fairways Group. Additionally, the Company realized a pre-tax gain of $22.4 million from the sale of this subsidiary.
4)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.
5)EBITDA is defined as net income before (i) income tax expense; (ii) depreciation and amortization; and (iii) net interest expense. EBITDA is not defined under generally accepted accounting principles ("GAAP"), and it may not be comparable to similarly titled measures reported by other companies. EBITDA should not be construed as an indicator of the Company's operating performance or as an alternative to profitability measures as determined in accordance with GAAP. Additionally, 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 EBITDA be construed by investors as an alternative to any other determination under GAAP.
6)Net Membership Deposits is defined as the amount of refundable membership deposits paid by new and upgraded resort club members and by existing members who have converted to new membership plans, in cash, plus principal payments in cash received on notes in respect thereof, minus the amount of any refunds paid in cash with respect to such deposits. These membership deposits are fully refundable in thirty years (or sooner under certain circumstances). The Company accounts for membership deposits as "cash provided by financing activities" in its statements of cash flows and reports a liability in its balance sheets equal to the amount of such membership deposits.
7)Adjusted Net Membership Deposits is defined as Net Membership Deposits, excluding $8.1 million in fiscal 1999 and $7.1 million in fiscal 2002, because these amounts relate to membership deposits assumed in connection with the acquisitions of the Grand Wailea Resort and La Costa Resort, respectively.
8)Other non-cash charges (income) and non-recurring items consist of losses on asset disposals, gain on sale of subsidiary, non-recurring charges such as restructuring charges and non-cash membership related items.
9)Adjusted EBITDA is defined as EBITDA adjusted for (i) net membership deposits and (ii) other non-cash and non-recurring items. Adjusted EBITDA should not be construed as an indicator of the Company's operating performance or as an alternative to profitability measures as determined in accordance with GAAP. Additionally, Adjusted EBITDA should not be construed by investors as a measure of the Company's liquidity or ability to meet all cash needs or as an alternative to cash flows from operating, investing and financing activities as determined in accordance with GAAP, nor should Adjusted EBITDA be construed by investors as an alternative to any other determination under GAAP. The Company's Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. EBITDA and Adjusted EBITDA are calculated in accordance with the Company's Amended and Restated Credit Facility. From the Company's perspective, EBITDA, net membership cash flow and other non-cash items, together as Adjusted EBITDA, provide the most meaningful measure of the recurring cash flow from the operations. In addition, the ratio of Adjusted EBITDA to Net Interest Expense reflects the Company's ability to meet its debt service requirements. A reconciliation of net income to Adjusted EBITDA follows:
10)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 subsidiary to earnings before income taxes and extraordinary items and (ii) fixed charges are comprised of interest expense and capitalized interest.
Item 7.
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.
Critical Accounting Policies
The following summarize the more significant accounting and reporting policies and practices of the Company:
Revenue Recognition-Revenues related to dues and fees are recognized as income in the period in which the service is provided. Rooms, food and beverage, golf, merchandise, spa and other revenues are recognized at the time of delivery of products or rendering of service.
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.
The determination of estimated useful lives for property and equipment for purpose of recording depreciation and amortization expense is inherently subjective and dependent on the Company's plans for renovations and replacement of such assets. In estimating useful lives for its property and equipment, the Company uses its forecasted capital expenditures for the individual resorts and planned timing of renovations of the various owned properties.
Long-Lived Assets-Management regularly reviews real estate, property and equipment and other long-lived assets, including certain identifiable intangibles and goodwill, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment of real estate, property and equipment or amortizable intangible assets, then 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 the future cash flows discounted at a rate commensurate with management's estimates of the business risks. Annually, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Annually, or earlier, if there is indication of impairment of goodwill, management compares the fair value of the business unit to its carrying value. If the estimated fair value of the related business unit is less than the carrying amount, an impairment loss is recognized to write down the goodwill to its implied fair value. Real estate assets, if any, for which management has committed to a plan to dispose of the assets, whether by sale or abandonment, are reported at the lower of carrying amount or fair value less cost to sell. Preparation of estimated expected future cash flows is inherently subjective and is based on management's best estimate of assumptions concerning expected future conditions. No impairments were identified as of October 31, 2002.
Management believes that the accounting estimate related to asset impairment is a "critical accounting estimate" because: (1) it is highly susceptible to change from period to period because it
requires company management to make assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on the Company's consolidated balance sheet, as well as net income, could be material. Management's assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so. In estimating future revenues, the Company uses its internal budgets. Internal budgets are developed based on recent revenues data for existing properties and planned timing of capital expenditures at the various properties and its related impact on ADR and RevPAR.
Recent Accounting Pronouncements
See Note 2 to Consolidated Financial Statements regarding recently issued accounting pronouncements.
Consolidated Results of Operations
For the years ended October 31, 2002, 2001 and 2000, net income totaled $20.5 million, $12.4 million and $16.1 million, respectively. Income from operations totaled $108.9 million, $100.7 million and $80.1 million in fiscal 2002, 2001 and 2000, respectively. The improvement in operating results from the year ended October 31, 2001 to the year ended October 31, 2002 relates primarily to the sale of a land parcel near La Quinta Resort and Spa. This sale generated $13.1 million in operating income for the Real Estate segment. This increase was offset by decreases in the Resort segment, which was impacted by the aftermath of the tragic events of September 11, 2001 and their impact on the hospitality industry, as well as the persistent economic weakness in the U.S. economy throughout 2002. The improvement in operating results from the year ended October 31, 2000 to the year ended October 31, 2001 relates primarily to the impact of the acquisition of The Arizona Biltmore on December 22, 2000. Additional information relating to the operating results for each business segment is set forth below.
During 2002, the Company adopted SFAS 142 Goodwill and Other Intangible Assets and ceased amortization of goodwill. Had the non-amortization provision of SFAS 142 been adopted as of November 1, 1999, net income and net income per share for the years ended October 31, 2002, 2001 and 2000 would have been adjusted as follows:
There was no goodwill acquired or goodwill impairment losses recognized during the year ended October 31, 2002.
Resort Segment
Select operating data for the Company's resort segment for the years indicated is as follows:
Fiscal Year Ended October 31, 2002 Compared to Fiscal Year Ended October 31, 2001
Resort Revenues. Resort revenues increased by $23.5 million or 4.6%, from $508.6 million in fiscal 2001 to $532.1 million in fiscal 2002. The increase can be attributed to the acquisition of The La Costa Resort & Spa in fiscal 2002. The acquisition of La Costa was accounted for as a purchase and from the date of its acquisition, November 16, 2001, through the end of the fiscal 2002 this resort generated $37.7 million in revenue. For the full year, rooms revenue for the Company increased by $5.3 million or 2.6%; food and beverage sales increased by $7.9 million or 6.2%; dues and fees increased $4.4 million or 17.4%; merchandise sales increased by $0.3 million or 1.2%; spa revenue increased by $3.9 million or 13.8%; and other revenue increased by $2.0 million or 2.9%. Golf fees decreased by $0.2 million or 0.8%, due to the decrease in occupancy as well as an increase in high-end competition at the Company's golf resorts.
The increase in revenue due to the acquisition of La Costa was offset by a reduction in revenues at the resorts owned for over one year. These reductions were due to the aftermath of the tragic events of September 11th and the persistent economic weakness throughout 2002, as discussed above. Occupancy for fiscal 2002 decreased 6 points compared to the same period in fiscal 2001. The lower occupancy had a negative impact on rooms revenue as well as the ancillary revenues that our guests typically spend at our resorts.
During fiscal 2002, the Company was engaged in ongoing capital improvements at all of its resorts, which the Company believes will add to future revenues. These capital improvements totaled approximately $54.0 million in fiscal 2002. While management believes these capital improvements will enhance the guest experience and provide future revenue growth, their short-term impact caused some disruption to normal business levels and hence dampened revenue growth.
Resort operating expenses. With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to
the Resort segment. Operating expenses (excluding depreciation and amortization, the corporate fee, and restructuring expense) increased by $21.9 million, or 6.4%, from $341.6 million in fiscal 2001 to $363.5 million in fiscal 2002. The increase can be attributed to the acquisition of La Costa, which had $33.6 million of operating expenses in fiscal 2002. This increase was partly offset by strong expense controls across all resorts. Prior to September 11th, the Company was aggressively reducing costs in an effort to match its cost structure with the economic slowdown which began in January 2001.
Depreciation and amortization increased $4.2 million or 6.7%. This increase was due to the impact of the acquisition of La Costa and ongoing capital improvements at each of the resorts. These increases were offset by the Company's adoption of SFAS 142, as the Company ceased amortizing its goodwill effective November 1, 2001. Had the Company not adopted this statement, it would have recorded additional amortization of approximately $6.0 million in fiscal 2002.
Resort operating income. Operating income decreased $2.5 million, or 2.7%, from $93.6 million in fiscal 2001 to $91.1 million in fiscal 2002 due to the factors detailed above. The operating margin for the resort segment was 17.1% in fiscal 2002 as compared to 18.4% in fiscal 2001.
Real Estate Operations. Real estate revenue totaled $29.7 million in fiscal 2002 as compared to $28.1 million in fiscal 2001, a year over year increase of $1.6 million or 5.5%. Operating income earned by the real estate segment increased $10.7 million or 150.1% from $7.1 million in 2001 to $17.8 million in 2002. The increases in real estate revenue and operating income can be attributed to the sale of a parcel of land near La Quinta in fiscal 2002, which generated $13.1 million in operating income for the real estate segment. Also, in fiscal 2002, a contingency was satisfied related to the sale of a land parcel in fiscal 2001 and $1.4 million in revenue and operating income was recognized in fiscal 2002. Additionally in fiscal 2002, the Company received the final installment in connection with the sale of the Cherry Key parcel near Grand Traverse for $2.8 million. In fiscal 2001, the Company completed the sale of "The Grove" parcel of land for $8.2 million (net of $1.4 million, which was deferred pending satisfaction of certain contingencies) which generated operating income of $3.8 million.
Beginning in 1999, the real estate segment developed 98 single-family "casitas-style" homes adjacent to La Quinta (the "La Quinta Resort Homes") in four phases. Construction of the final phase of the La Quinta Resort Homes was completed in fiscal 2001. The real estate segment sold the last 5 guest casitas for approximately $3.3 million in fiscal 2002, compared to fiscal 2001 when the real estate segment sold 25 of these casitas for approximately $18.0 million.
Net interest expense. Net interest expense decreased by $3.7 million or 5.0% from $73.7 million in fiscal 2001 to $70.0 million in fiscal 2002. Interest expense for the year ended October 31, 2002 consisted primarily of interest on the Company's (i) $125.0 million 10.25% Senior Subordinated Notes due 2007; (ii) $275.0 million mortgage secured by the Grand Wailea Resort; (iii) Term A, Term B and Term C Notes drawn against the Company's Amended and Restated Credit Facility totaling $268.3 million; (iv) $56.3 million mortgage secured by the Arizona Biltmore Resort and Spa; (v) $51.0 million mortgage secured by the La Costa Resort and Spa; and (vi) revolving borrowings under the Company's Amended and Restated Credit Facility. The decrease in interest expense can be attributed to lower average interest rates in fiscal 2002, partially offset by the Company's increased debt level due to the acquisition of La Costa.
Income Tax Expense. Income tax expense increased to $14.5 million in fiscal 2002 from $9.8 million in fiscal 2001. The Company's effective tax rate for fiscal 2002 was 41.4% as compared to 44.2% in fiscal 2001. The higher effective tax rate in fiscal 2001 can be primarily attributed to the change in the Company's federal tax rate. The Company's net deferred tax liabilities generated prior to fiscal 2001 were created based on a 34% federal income tax rate as the Company had taxable income less than $10.0 million during that period. In fiscal 2001, the Company's taxable income increased to over $10.0 million and thus the Company's federal tax rate increased from 34% to 35%. The change in
the carrying value of these deferred tax liabilities resulted in an approximate 4.0 percentage point increase in the Company's effective tax rate in fiscal 2001.
Net income. Net income increased by $8.1 million or 65.4% from $12.4 million in fiscal 2001 to $20.5 million in fiscal 2002.
Adjusted EBITDA. Adjusted EBITDA increased by $11.0 million or 5.8% from $189.3 million in fiscal 2001 to $200.3 million in fiscal 2002 primarily due to the factors described above, as well as a $1.1 million or 4.9% increase in net membership deposits.
Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended October 31, 2000
Resort Revenues. Resort revenues increased by $62.4 million or 14.0%, from $446.2 million in fiscal 2000 to $508.6 million in fiscal 2001. The increase can be attributed to the acquisition of The Biltmore in fiscal 2001. The acquisition of The Biltmore was accounted for as a purchase and from the date of its acquisition through the end of the fiscal 2001 this resort generated $76.4 million in revenue. For the full year, rooms revenue for the Company increased by $32.1 million or 18.7%; food and beverage sales increased by $14.7 million or 13.0%; dues and fees increased $3.7 million or 17.3%; merchandise sales increased by $1.5 million or 6.8%; spa revenue increased by $4.9 million or 21.0%; and other revenue increased by $7.9 million or 12.9%. Golf fees decreased by $2.4 million or 7.3%, due to the decrease in occupancy as well as an increase in high-end competition at the Company's golf resorts.
The increase in revenue was offset by a reduction in revenues at the resorts owned for over one year. These reductions can be attributed to the tragic events of September 11th as discussed above. In the 48 days from September 11th through our fiscal year end, management estimates that the Company lost between $25 to $35 million in revenues. This lost revenue can be attributed to significant group and FIT cancellations at our resorts. Subsequent to September 11th through the end of our fiscal year, we received cancellations totaling approximately 70,000 room nights or over 5% of our annual rooms demand. In addition the Company experienced a considerable reduction in bookings and arrivals by potential customers through the end of the fiscal year. The result of these two factors was occupancy approximately 25 points below the same period in fiscal 2000. The lower occupancy had a negative impact on rooms revenue as well as the ancillary revenues that our guests typically spend at our resorts.
Resort operating expenses. With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to the Resort segment. Operating expenses (excluding depreciation and amortization, the corporate fee, and restructuring expense) increased by $32.7 million, or 10.6%, from $308.9 million in fiscal 2000 to $341.6 million in fiscal 2001. The increase can be attributed to the acquisition of the Arizona Biltmore, which represented $45.1 million of operating expenses in fiscal 2001. This increase was offset by strong expense controls across all resorts. Prior to September 11th, the Company was aggressively reducing costs in an effort to match its cost structure with the economic slowdown which began in January 2001. Subsequent to September 11th, the Company strengthened its focus on expense reduction by eliminating non-essential spending as discussed in the "Restructuring Expense" section below.
Depreciation and amortization increased $12.5 million or 24.6%. This increase was due to the impact of the acquisition of the Arizona Biltmore and ongoing capital improvements at each of the resorts.
Restructuring expense: Responding to the reduced business levels following the tragic events of September 11th, the Company implemented a stringent cost mitigation plan across its resort portfolio. The plan included the reduction of approximately 15% of the Company's salaried management workforce accomplished by the elimination of 113 management positions. In addition, the Company reduced its hourly labor costs by eliminating 333 hourly positions and by reducing the number of hours
of many of our hourly employees. The cost of severance payments related to the elimination of positions totaled $0.5 million and was recorded as restructuring expense and paid in fiscal 2001. In addition, the Company eliminated non-essential spending such as travel and entertainment, supplies and similar expenses. The Company expects operating expenses to decrease 10% to 15% as a result of the cost mitigation plan.
Resort operating income. Operating income increased $17.2 million, or 22.5%, from $76.4 million in fiscal 2000 to $93.6 million in fiscal 2001 due to the factors detailed above. The operating income margin for the resort segment was 18.4% in fiscal 2001 as compared to 17.1% in fiscal 2000.
Real Estate Operations. Real estate revenue totaled $28.1 million in fiscal 2001 as compared to $18.8 million in fiscal 2000, a year over year increase of $9.3 million or 50.0%. Operating income earned by the real estate segment increased $2.9 million or 69.9% from $4.2 million in 2000 to $7.1 million in 2001. The increases in real estate revenue and operating income can be attributed to: (i) the sale of "The Grove" parcel of land in July 2001 for $8.2 million, (net of $1.4 million deferred pending satisfaction of certain contingencies) which generated operating income of $3.8 million; and (ii) an increase in the sales price of guest casitas adjacent to La Quinta Resort and Spa in fiscal 2001 as compared to fiscal 2000.
Beginning in 1999, the real estate segment developed 98 single-family "casitas-style" homes adjacent to La Quinta (the "La Quinta Resort Homes") in four phases. The final phase of the La Quinta Resort Homes was completed in Fiscal 2001. The real estate segment sold 25 guest casitas for approximately $18.0 million in fiscal 2001, compared to fiscal 2000 when the real estate segment sold 26 of these casitas for approximately $16.6 million. The year over year difference in unit sales had an immaterial impact on operating income for the real estate segment as operating income related to these sales was comparable in fiscal 2000 to fiscal 2001. At the end of fiscal 2001, five of these homes remained available for purchase and the Company expects to complete their sale in fiscal 2002.
Net interest expense. Net interest expense increased by $24.5 million or 49.9% from $49.2 million in fiscal 2000 to $73.7 million in fiscal 2001. Interest expense for the year ended October 31, 2001 consisted primarily of interest on the Company's (i) $125.0 million 101/4% Senior Subordinated Notes due 2007; (ii) a $275.0 million Mortgage secured by the Grand Wailea Resort; (iii) Term A, Term B and Term C Notes drawn against the Company's Amended and Restated Credit Facility; (iv) revolving borrowings under the Company's Amended and Restated Credit Facility; and (v) a $58.0 million mortgage secured by the Arizona Biltmore Resort and Spa. The acquisition of the Arizona Biltmore during fiscal 2001 was fully financed with debt and resulted in higher debt balances in fiscal 2001 as compared to fiscal 2000. The higher interest expense associated with this higher debt load was partially offset by lower average interest rates in fiscal 2001 as compared to fiscal 2000.
Income Tax Expense. Income tax expense decreased to $9.8 million in fiscal 2001 from $11.0 million in fiscal 2000. The Company's effective tax rate for fiscal 2001 was 44.2% as compared to 40.5% in fiscal 2000. The higher effective tax rate in fiscal 2001 can be primarily attributed to the change in the Company's federal tax rate during the current year. The Company's net deferred tax liabilities generated prior to fiscal 2000 were created based on a 34% federal income tax rate as the Company had taxable income less than $10 million during that period. In fiscal 2001, the Company's taxable income increased to over $10.0 million and thus the Company federal tax rate has increased from 34% to 35%. As the Company expects to continue to be subject to the 35% tax rate in the foreseeable future, the net deferred tax liabilities will likely become current deferred tax liabilities at a 35% rate. The change in the carrying value of these deferred tax liabilities resulted in an approximate 4.0 percentage point increase in the Company's effective tax rate in fiscal 2001.
Net income. Net income decreased by $3.7 million or 23.1% from $16.1 million in fiscal 2000 to $12.4 million in fiscal 2001.
Adjusted EBITDA. Adjusted EBITDA increased by $29.6 million or 18.5% from $159.7 million in fiscal 2000 to $189.3 million in fiscal 2001 primarily due to the factors described above as well as an increase in other non-cash items of $3.6 million or 94.2%, from $3.8 million in fiscal 2000 to $7.3 million in fiscal 2001. This increase was offset by a decrease in Adjusted Net Membership Deposits of $6.1 million or 20.9%, from $29.0 million in fiscal 2000 to $22.9 million in fiscal 2001. In addition, management estimates that the Company lost between $15 to $20 million of Adjusted EBITDA in the forty-eight days subsequent to the terrorist attacks discussed above through the end of the fiscal year.
Supplemental Pro Forma Consolidated Results of Operations
On December 22, 2000, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the Arizona Biltmore Resort & Spa, located in Phoenix, Arizona. On November 16, 2001, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising La Costa Resort & Spa, located in Carlsbad, California. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the operating results of the Biltmore and La Costa have been included in the Company's consolidated financial statements since acquisition. The Company financed the acquisitions with existing cash and debt issued under its Amended and Restated Credit Agreement.
The following is the Company's unaudited pro forma comparative financial information and pro forma operating statistics, assuming the Biltmore and La Costa transactions occurred as of November 1, 2000:
The unaudited pro forma results above are presented for informational purposes only and do not necessarily represent results that would have occurred if the acquisitions had taken place as of the beginning of the fiscal periods presented, nor do they purport to be indicative of the results that will be obtained in the future.
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 2002, cash flow provided by operating activities was $113.4 million compared to $123.1 million in fiscal 2001. Fiscal 2002 included cash paid for taxes of $4.3 million compared to cash
paid for taxes of $7.2 million in fiscal 2001. As of October 31, 2002, the Company had cash and cash equivalents of $17.7 million (excluding restricted cash of $19.7 million). The Company's long-term debt at October 31, 2002 included (i) $125.0 million 10.25% Senior Subordinated Notes due 2007; (ii) a $275.0 million mortgage secured by the Grand Wailea Resort; (iii) Term A, Term B and Term C Notes totaling $268.3 million drawn against the Company's Amended and Restated Credit Facility; (iv) $56.3 million mortgage secured by the Arizona Biltmore Resort and Spa; (v) $51.0 million mortgage secured by the La Costa Resort and Spa; and (vi) $45.0 million revolving borrowings under the Company's Amended and Restated Credit Facility
During fiscal 2002, cash flow used in investing activities was $170.2 million compared to $325.2 million in fiscal 2001. Investing activities in fiscal 2002 included the purchase of La Costa as discussed above; whereas fiscal 2001 included the purchase of the Biltmore also discussed above. In addition, capital expenditures totaled $54.0 million and $43.4 million for the fiscal years ended October 31, 2002 and 2001, respectively. Although the Company has no material firm commitments for capital expenditures, the Company expects to invest significant capital in its Resort properties in the future to drive revenue growth. For fiscal 2003, the Company expects to invest approximately $100.0 million in capital improvements at its resorts.
During fiscal 2002, cash flow provided by financing activities was $37.0 million compared to $223.1 million during fiscal 2001. The financing activities in both years consisted primarily of net borrowings to finance the investing activities discussed above, which were not financed by cash flow from operations.
The following represents a summary of the Company's contractual obligations and related scheduled maturities as of October 31, 2002 (in thousands):
The Company also has standby letters of credit under its credit facility for approximately $7.0 million in connection with the Company's self insurance programs.
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 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 its financial covenants at October 31, 2002.
If any event of default shall occur for any reason, whether voluntary or involuntary, the lenders can declare all or any portion of the outstanding principal amount of the loans and other obligations to
be due and payable and/or the commitments to be terminated, whereupon the full unpaid amount of such loans and other obligations become immediately due and payable, without further notice, and the Company shall automatically and immediately be obligated to deposit with the lenders cash collateral in an amount equal to all letters of credit outstanding.
As of October 31, 2002, the Company had a revolving credit facility, which allowed for maximum borrowings of $216.1 million. Maximum borrowings under the revolving credit line decrease to $186.6 million in May 2003. Borrowings under the credit facility bear interest at variable rates up to 2.875% above LIBOR or 1.875% above the Syndication Agent's base rate. As of October 31, 2002 borrowings under the revolving credit facility were $45.0 million, bore interest at LIBOR plus 1.25% and mature on April 30, 2004.
The Company is continually engaged in evaluating potential acquisition candidates to add to its portfolio of properties. The Company expects that funding for future acquisitions may come from a variety of sources, depending on the size and nature of any such acquisitions. Potential sources of capital include cash generated from operations, borrowings under the credit facility, additional equity investments from the Parent or partnerships formed at the direction of KKR, or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to the Company on terms which the Company finds acceptable, or be available at all.
The Company believes that its liquidity, capital resources and cash flows from existing operations will be sufficient to fund capital expenditures, working capital requirements and interest and principal payments on its indebtedness for at least the next twelve months. However, a variety of factors could impact the Company's ability to fund capital expenditures, working capital requirements and interest and principal payments, including a prolonged or severe economic recession in the United States, departures from currently expected demographic trends or the Company's inability to achieve operating improvements at existing and acquired operations at currently expected levels.
The Company is highly dependent on operating cash flow to fund its liquidity requirements. As discussed above, the events of September 11thmaterially impacted the Company's cash flow from operations. Natural and/or man-made disasters can have a significant adverse impact on the Company's operating cash flow. There can be no assurance that an unforeseen disaster will not have a material adverse affect on the Company's liquidity. However, if certain events (including unforeseen disasters) were to occur, the Company expects that it would have several options to meet its liquidity requirements including (i) securing additional borrowings under its existing credit facility; (ii) suspending all non-essential spending, including spending on capital projects; (iii) securing additional equity investments from the Parent or partnerships formed at the direction of KKR; (iv) obtaining other debt or equity financing; and (v) monetizing certain of the Company's assets.
Consistent with the Company's operating strategy, it may continue to acquire additional resorts, golf facilities or other recreational facilities, and in connection therewith, and if it did so, the Company would likely incur additional indebtedness. In the event that the Company incurs such additional indebtedness, its ability to make principal and interest payments on its existing indebtedness may be adversely impacted.
Inflation
Inflation and changing prices have not had a material impact on the Company's revenue and results of operations. Based on the current economic climate, the Company does not expect that inflation and changing prices will have a material impact on the Company's revenue or earnings during fiscal 2003. However, there can be no assurance that increases in labor and other operating costs due to inflation will not have a material impact on the Company's future profitability.
Economic Downturn
Resort revenues are derived from discretionary recreational spending that can be impacted by a significant economic downturn, which, in turn could adversely impact the Company's operating results. There can be no assurance that a decrease in the level of discretionary spending by consumers in the future would not have an adverse effect on the Company.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company's most significant "market risk" exposure is the effect of changing interest rates. The Company manages its interest expense risk by using a combination of fixed and variable rate debt and interest rate cap and swap agreements. At October 31, 2002, the Company's debt consisted of approximately $125.0 million and $56.2 million of fixed rate debt at a weighted average interest rate of 10.25% and 8.25%, respectively, and $639.3 million of variable rate debt at a weighted average interest rate of 6.42% for the fiscal year. The Company entered into interest swap agreements to reduce its exposure to interest rate fluctuations on its variable rate debt. As of October 31, 2002, the Company had swap agreements in effect with notional amounts totaling $275.0 million.
The amount of variable rate debt fluctuates during the year based on the Company's cash requirements. If average interest rates were to increase one percent for the year ended October 31, 2002, the net impact on the Company's pre-tax earnings would have been approximately $3.4 million.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
KSL Recreation Group, Inc.:
We have audited the accompanying consolidated balance sheets of KSL Recreation Group, Inc. and subsidiaries (the "Company") (a wholly owned subsidiary of KSL Recreation Corporation) as of October 31, 2002 and 2001, and the related consolidated statements of income and comprehensive income, stockholder's equity and cash flows for each of the three years in the period ended October 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and this financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and this financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KSL Recreation Group, Inc. and subsidiaries as of October 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets effective November 1, 2001, and its method of accounting for derivative instruments and hedging activities effective November 1, 2000.
Deloitte & Touche LLP
Costa Mesa, California
January 21, 2003
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2002 and 2001
See accompanying notes to consolidated financial statements.
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
1. GENERAL
KSL Recreation Group, Inc. (Group), is a wholly-owned subsidiary of KSL Recreation Corporation (the Parent). Group and its subsidiaries (collectively, the Company) are engaged in the ownership and management of resorts, golf courses, private clubs, spas and activities related thereto.
As of October 31, 2002, the Company has eight principal wholly-owned investments: (1) KSL Desert Resorts, Inc. (Desert Resorts), a Delaware corporation; (2) KSL Grand Wailea Resort, Inc. (Grand Wailea), a Delaware corporation; (3) KSL Arizona Biltmore, Inc. (The Biltmore), a Delaware corporation; (4) KSL Florida Holdings, Inc. (Doral), a Delaware corporation; (5) KSL La Costa Corporation (La Costa), a Delaware Corporation; (6) KSL Claremont Resort, Inc. (The Claremont), a Delaware corporation; (7) KSL Grand Traverse Holdings, Inc. (Grand Traverse), a Delaware corporation; and (8) KSL Georgia Holdings, Inc. (Lake Lanier), a Delaware corporation. Desert Resorts owns and operates the PGA WEST golf courses, the La Quinta Resort & Club and related activities in La Quinta, California. Grand Wailea owns and operates the Grand Wailea Resort Hotel & Spa in Maui, Hawaii. The Biltmore owns and operates the Arizona Biltmore Resort and Spa and related activities in Phoenix, Arizona. Doral owns and operates the Doral Golf Resort and Spa in Miami, Florida. La Costa owns and operates the La Costa Resort and Spa and related activities in Carlsbad, California. The Claremont owns and operates The Claremont Resort & Spa and related activities in the Berkeley Hills area near San Francisco, California. Grand Traverse owns and operates the Grand Traverse Resort & Spa and related activities outside of Traverse City, Michigan. Lake Lanier leases and manages a resort recreation area known as Lake Lanier, outside of Atlanta, Georgia.
On December 22, 2000, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the Arizona Biltmore Resort & Spa, located in Phoenix, Arizona. The purchase price of the Property was $335.0 million (excluding transaction costs of $1.5 million and a working capital purchase price adjustment of $8.3 million). As part of the purchase consideration, the Company assumed a mortgage of $59.4 million (Note 15).
On November 16, 2001, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the La Costa Resort & Spa, located in Carlsbad, California. The purchase price of the Property was $120.0 million (excluding transaction costs of approximately $4.6 million, membership liabilities of $7.1 million and a positive working capital purchase price adjustment of $8.5 million). The Company financed the acquisition with existing cash and debt issued under its Amended and Restated Credit Agreement. The acquisition was accounted for using the purchase method of accounting (Note 15).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles").
Basis of Consolidation-The consolidated financial statements include the accounts of Group and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.
Change in Accounting for Derivative Instruments and Hedging Activities-Effective November 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not,
are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. SFAS 133 also requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
The adoption of SFAS 133 on November 1, 2000, resulted in recognition of a derivative asset of $4.6 million. The cumulative effect of the change in accounting for derivatives and hedging activities, net of tax, of $2.7 million was recognized in "Other Comprehensive Income" ("OCI"). This change in accounting also resulted in recognition of derivative gains/(losses), net of income taxes, of $6.3 million and ($13.6) million during the years ended October 31, 2002 and 2001, respectively, which were included in OCI. In addition, net payments made related to these interest rate swaps of $8.8 million and $3.5 million were charged to earnings during the years ended October 31, 2002 and 2001, respectively.
The Company uses derivatives instruments, such as interest rate swaps and caps, to manage exposures to interest rate risks in accordance with its risk management policy. The Company's objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. The Company does not use derivative financial instruments for trading purposes. When applicable and in accordance with its risk management policy, the Company uses the short cut or matched terms methods assuming no ineffectiveness to account for its hedging instruments in accordance with SFAS No. 133.
Change in Accounting for Goodwill and Other Intangible Assets-Effective November 1, 2001, the Company adopted SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separate from goodwill. SFAS 142 requires that goodwill and certain intangibles with indefinite lives no longer be amortized, but instead tested for impairment at least annually. There was no impairment of goodwill upon adoption of SFAS 142 (Note 6).
Had the non-amortization provision of SFAS 142 been adopted as of November 1, 1999, net income and net income per share for the years ended October 31, 2002, 2001 and 2000 would have been adjusted as follows:
There was no goodwill acquired or goodwill impairment recognized during the year ended October 31, 2002.
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 for debt service, capital expenditures, real estate taxes, insurance payments, membership deposits and letters of credit required for construction in progress (Note 8).
Inventories-Inventories are stated primarily at the lower of cost, determined on the weighted average method, or market.
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 real estate under development is recognized upon closing using the full accrual method of accounting, provided that all the requirements prescribed by SFAS No. 66, Accounting for Sales of Real Estate, have been met.
Property and Equipment-Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Generally, the estimated useful lives are 15 to 40 years for buildings and improvements and 3 to 10 years for furniture, fixtures and equipment. Improvements are capitalized while maintenance and repairs are charged to expense as incurred. Assets under capital leases are amortized using the straight-line method over the shorter of the lease term or estimated useful lives of the assets. Depreciation of assets under capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Operating equipment consisting of china, silver, glassware and linens is recorded using the base stock inventory method. Under this method, the operating equipment is recorded at an unchanging amount (as determined by either the cost to establish the new stock inventory or the estimated fair value of the stock inventory when acquired in a business purchase). Subsequent purchases are charged to expense when incurred.
Long-Lived Assets-Management regularly reviews real estate, property and equipment and other long-lived assets, including certain identifiable intangibles and goodwill, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment of real estate, property and equipment or amortizable intangible assets, then 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 the future cash flows discounted at a rate commensurate with management's estimates of the business risks. Annually, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Annually, or earlier, if there is indication of impairment of goodwill, management compares the fair value of the business unit to its carrying value. If the estimated fair value of the related business unit is less than the carrying amount,
an impairment loss is recognized to write down the goodwill to its implied fair value. Real estate assets, if any, for which management has committed to a plan to dispose of the assets, whether by sale or abandonment, are reported at the lower of carrying amount or fair value less cost to sell. Preparation of estimated expected future cash flows is inherently subjective and is based on management's best estimate of assumptions concerning expected future conditions. No impairments were identified as of October 31, 2002.
Debt Issuance Costs-Debt issuance 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 various golf, tennis and social facilities and services. Under the Company's membership programs, deposits become refundable upon: 1) demand by the member after thirty years in the program, 2) the sale of the member's home in the resort community when the home buyer purchases a new membership, 3) the member's withdrawal from the program and a request for a refund under the "Four-for-One" program, and 4) in case of a member's death, a request for refund by the surviving spouse.
Under the "Four-for-One" program, a member is eligible, upon notification to the Company, to cause the Company to repurchase its membership and refund the related deposit. However, the Company's obligation to repurchase a membership and refund the deposit occurs only after the Company has sold four new memberships for each member who has notified the Company under this program.
Income Taxes-The Company accounts for income taxes using an asset and liability approach. Under this method, a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences in the recognition of accounting transactions for tax and reporting purposes and from carryforwards. Measurement of the deferred items is based on enacted tax laws. In the event the future consequence of differences result in a deferred tax asset, management determines the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company is included in the consolidated federal and combined state income tax returns filed by the Parent. Pursuant to the terms of an agreement between the Company and the Parent, current and deferred income tax expenses and benefits are provided to the members of the tax sharing group, including the Company, based on their allocable share of the consolidated taxable income or loss. Under the tax sharing agreement, the Company and its subsidiaries are generally responsible for federal taxes based upon the amount that would be due if the Company and its subsidiaries filed federal tax returns as a separate affiliated group of corporations rather than as part of the Parent's consolidated Federal tax returns. To the extent that any 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 are allocated based on each member's apportioned share of the combined state tax liabilities.
Revenue Recognition-Revenues related to dues and fees are recognized as income in the period in which the service is provided. Other revenues are recognized at the time of delivery of products 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 and the traded value of the senior subordinated redeemable notes, the fair value of notes payable and obligations under capital leases approximate the carrying value of these liabilities in all material respects. Member deposits are refundable without interest in thirty years or sooner under certain criteria and circumstances, and, accordingly, fair value has not been determined due to the uncertain timing of related cash flow.
Use of Estimates-The preparation of consolidated 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. Significant estimates in these consolidated financial statements include allowances for doubtful accounts receivable, estimates of future cash flows associated with assets, fair value of long lived assets, useful lives for depreciation and amortization, estimated workers' compensation and general liability reserves, and the fair values of financial instruments. Actual results could differ from these estimates.
Risks and Uncertainties-During fiscal 2002, the Company employed approximately 8,000 persons during its peak seasons and approximately 7,000 persons during its off-peak seasons. Unions represent none of the employees at Desert Resorts, Doral, Grand Traverse or Lake Lanier. At Grand Wailea, one union represents approximately 76% of employees. At the Biltmore, one union represents less than 1% of its employees. At La Costa, one union represents approximately 50% of employees. At The Claremont, three unions represent approximately 51% of employees. The Company is continually engaged in collective bargaining with unions at Biltmore, La Costa and The Claremont.
Earnings per Share-Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common share equivalents, if any, during the respective periods. Common share equivalents include the effect of dilutive stock options calculated using the treasury stock method. The Company had no potentially dilutive securities outstanding in 2002, 2001 or 2000.
Comprehensive Income-The Company reports comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income. This standard defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholders transactions. Accordingly, comprehensive income includes certain changes in equity that are excluded from net income. The Company's only comprehensive income items were net income and the change in fair value of derivative instruments.
Recently Issued Accounting Pronouncements-In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position and will adopt such standards on November 1, 2002, as required.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. Adoption of SFAS 144 is required no later than the beginning of fiscal 2003. Management does not expect the adoption of SFAS 144 to have a significant impact on the Company's financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes the adoption of such interpretation will not have a material impact on its results of operations or financial position and will adopt such interpretation on November 1, 2002, as required.
Reclassification-Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements to conform with the 2002 presentation.
3. NOTES RECEIVABLE
Notes receivable of $10,603 and $12,324 at October 31, 2002 and 2001, respectively, primarily represent notes from members related to member deposits that bear interest at 10%. The majority of these notes are due within three years.
Notes receivable of $1,388 and $2,181 as of October 31, 2002 and 2001, respectively, primarily represent purchase money mortgage notes received in connection with the sale of various land parcels and a golf facility and are due at various dates primarily through 2003.
4. INVENTORIES
Inventories consist of the following:
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
6. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS 141, Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations be accounted for using the purchase method and provides new criteria for recording intangible assets separately from goodwill. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and other intangible assets that have indefinite useful lives will not be amortized into results of operations, but instead, will be tested at least annually for impairment and written down when impaired. The Company elected to early adopt the provisions of each statement, which apply to goodwill and intangible assets acquired prior to June 30, 2001, effective November 1, 2001. However, SFAS 142 was immediately applicable to any goodwill and other intangible assets the Company acquired after June 30, 2001. Upon adoption, the Company ceased amortizing goodwill against its results of operations. In addition, the Company reassessed the useful lives of its other intangible assets and determined that such other intangible assets are deemed to have a definite useful life because their related future cash flows are closely associated with the operations, level of future maintenance expenditures, and the useful lives of the individual resort to which they relate. Under SFAS 142, the Company completed a goodwill transition impairment test, and no impairment was identified.
The gross carrying amount and accumulated amortization of the Company's other intangible assets as of October 31, 2002 and 2001 are as follows:
Amortization expense recorded on the intangible assets, excluding debt issuance costs, for fiscal years 2002, 2001 and 2000 was $9.5 million, $6.6 million and $4.2 million, respectively. As a result of adoption of SFAS 142, there were no changes to amortizable lives or amortization methods. The estimated amortization expense for the Company's other intangible assets for each of the five succeeding fiscal years is as follows:
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
8. LONG-TERM DEBT
Long-term debt consists of the following:
In April 1997, the Company sold $125,000 of senior subordinated redeemable notes payable (the Notes) and entered into a new credit facility providing for term loans of up to $100,000 and a revolving credit line of up to $175,000. The Notes are redeemable beginning May 2002 at the Company's option at various rates ranging from 105.125% at May 2002, decreasing to 100% at May 2005 and thereafter. The Company is required to offer to buy the Notes at 101% upon a change of control, as defined in the Notes agreement.
The stock of certain subsidiaries has been pledged to collateralize the new credit facility.
In April 1998, the Company's maximum borrowings under its revolving credit facility were increased to $275,000. In May 2002, the maximum borrowings decreased to $216,070. Maximum borrowings under the revolving credit line will decrease to $186,610 in May 2003. In addition to the $45.0 million outstanding on the revolving credit line, the Company also has standby letters of credit under the credit facility for approximately $7.0 million primarily in connection with the Company's self insurance programs.
The terms of the credit facility contain certain financial covenants including interest coverage, fixed charges, leverage ratios and restrictions on dividends. Certain of the long-term debt agreements provide that any distributions of profits must satisfy certain terms and must be approved by the lenders, require the Company to maintain specified financial ratios and, in some instances, govern investments, capital expenditures, asset dispositions and borrowings. In addition, mandatory prepayments are required under certain circumstances, including the sale of assets. The Company pays a commitment fee at a rate that currently is equal to .3% per annum on the undrawn portion of the commitments with respect to the credit facility. Total non-use fees of approximately $335, $496 and $511 were paid in 2002, 2001 and 2000 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, 2002.
In connection with the Grand Wailea acquisition, the Company assumed approximately $275.0 million in mortgage financing (the Mortgage Financing). The terms of this financing include interest only payments at 30 day LIBOR plus 2.75% with a maturity of November 2002. As the Company established its Grand Wailea subsidiary as an unrestricted subsidiary under the terms of the Company's credit facility, Grand Wailea is not considered in the Company's financial ratio tests under the credit facility. In May 2002, the Company refinanced its $275.0 million mortgage at Grand Wailea. The new mortgage matures in October 2006 with two 12-month extensions available at the Company's option. The mortgage bears interest at LIBOR plus 2.75% and increases to LIBOR plus 3.00% in February 2003, LIBOR plus 3.25% in May 2003, LIBOR plus 3.50% in August 2003 and LIBOR plus 3.75% in October 2003. This refinanced debt is secured by the assets of Grand Wailea. Grand Wailea was in compliance with the financial covenants at October 31, 2002.
In connection with the Grand Wailea mortgage financing, Grand Wailea entered into an interest rate cap agreement with a third party whereby the LIBOR rate incurred by Grand Wailea on its Mortgage Financing would not exceed 6.50%. This agreement expired in November 2002 and was extended for an additional year, which provides for a LIBOR rate cap of 8.50%. The fair market value of the agreement, which expires in November 2003, is insignificant.
Pursuant to a cash management agreement underlying the Mortgage Financing, the Company was required to establish certain cash accounts for taxes, insurance, debt service, capital assets, working capital and operating expenses. Accordingly, the cash generated from operations of Grand Wailea is deposited into these accounts, which are maintained by a third-party servicer, and used to fund and replenish the required balances. Disbursements by the third-party servicer from these accounts are made pursuant to the terms of the agreement, which include disbursements for management fees and excess cash (as defined), which would be paid to the Company. As of October 31, 2002 and 2001, the aggregate balance of these accounts was approximately $4,149 and $3,377, respectively, and is included in restricted cash in the accompanying consolidated balance sheets.
Scheduled principal payments on long-term debt as of October 31, 2002 are as follows:
In March 1999, the Company entered into an interest rate swap agreement to hedge the effects of changes in interest rates. The swap was designated as a cash flow hedge as defined by SFAS 133. The Company does not use derivative financial instruments for trading purposes. As required by SFAS 133, the swap was recorded at its fair value on the accompanying consolidated balance sheet, with the change in the swap's carrying value, net of tax, from November 1, 2000 to October 31, 2001 being reflected in OCI. The swap involved the exchange of the variable interest rate of 30 day LIBOR (receive) with a fixed LIBOR interest rate of 5.57% (pay). This interest rate swap agreement was denominated in dollars, had a notional principal amount of $270.0 million and matures in November 2002. The counter-parties to the interest swap agreement were two major financial institutions. The amounts to be received or paid pursuant to this agreement were accrued and recognized through an adjustment to interest expense in the accompanying consolidated statements of operations over the life of the agreement. Effective November 1, 2001, the Company, the Parent and the swap counter parties executed agreements to substitute the Parent for the Company as the contractual party to this interest rate swap agreement as part of the Company's overall risk management policy. As a result of this transaction, the fair value of the swap liability of $9.8 million was assumed by the Parent, and the reduction in the swap liability, net of a reduction of deferred tax asset of $3.9 million, was accounted for as a contribution of capital of $5.9 million by the Parent. The Company discontinued hedge accounting for this swap and an accumulated other comprehensive loss of $5.9 million was reclassified into earnings as interest expense during the year ended October 31, 2002-the remaining term of the hedged debt obligation.
In February 2001, the Company entered into additional interest rate swap agreements to hedge the effects of changes in interest rates on the Company's variable rate debt, which increased significantly concurrent with the Biltmore acquisition. One agreement has a notional principal amount of $175.0 million and matures in February 2004. However, the counter-party to this agreement can, at its discretion, terminate the agreement in February 2003. The swap involves the exchange of the variable interest rate of 3-month LIBOR (receive) with a fixed LIBOR interest rate of 4.95% (pay). This swap is designated as a cash flow hedge as defined by SFAS 133 and accordingly is recorded at its fair value (liability of $7.6 million and $8.4 million at October 31, 2002 and 2001, respectively) on the accompanying consolidated balance sheet. The fair value of the swap at inception was $0 and its change in fair value from inception to October 31, 2002 is reflected, net of tax, in accumulated other comprehensive loss.
An additional swap agreement has a notional principal amount of $100.0 million and matures in February 2003. The swap involves the exchange of the variable rate interest of 3-month LIBOR (receive) with a fixed LIBOR interest rate of 4.95% (pay). If the 3-month LIBOR is 6.25% or higher at any time during the agreement, the agreement is automatically terminated. The Company entered into such swap agreement to hedge the effects of increase in the LIBOR rate above 4.95%. However due to the knock-out provision in this swap agreement, it does not qualify for hedge accounting under SFAS 133. The fair value of the swap at October 31, 2002 and 2001 was a liability of $1.1 million and $3.5 million, respectively, and is included on the accompanying condensed consolidated balance sheet. The change in fair value is recorded in interest expense.
The counter-parties to all of the Company's interest swap agreements are major financial institutions. The purpose of these swaps is to manage the Company's interest rate exposure on its variable rate borrowings. The amounts to be received or paid pursuant to these agreements are accrued and recognized through an adjustment to interest expense in the accompanying condensed consolidated statements of operations over the life of the agreements. During 2002, the Company made net payments related to these swap agreements totaling $8.0 million. These amounts were recorded as increases to interest expense. Estimated net derivative losses of approximately $5.1 million included in accumulated other comprehensive loss as of October 31, 2002, are expected to be reclassified into
earnings, assuming no changes in relevant interest rates and as interest is paid, during the twelve months ending October 31, 2002.
During 2002, 2001 and 2000, the Company capitalized interest of approximately $1,118, $1,240 and $1,691, respectively, related to construction in progress activities.
9. OBLIGATIONS UNDER CAPITAL LEASES
During 1997, the Company entered into a fifty-year capital sublease of a resort recreation area known as Lake Lanier. Under the terms of the sublease, the Company is required to make monthly base lease payments of $250. An additional annual payment equal to 3.5% of gross revenues in excess of $20,000 is payable pursuant to the sublease, with a minimum of $100 in years one through five and $200 in years six through fifty. Pursuant to the sublease, the Company is required to spend 5% of annual gross revenues on capital replacement and improvements, with carryover provisions allowing all or some portion of these amounts to be deferred to subsequent years. There are no carryover obligations for capital replacements and improvements as of October 31, 2002. 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:
Total minimum payments due under capital leases at October 31, 2002 are summarized as follows:
10. INCOME TAXES
The components of the federal and state income tax expense are as follows:
Taxes on income vary from the statutory federal income tax rate applied to earnings before taxes on income as follows:
Deferred income tax assets and liabilities arising from differences between accounting for financial statement purposes and tax purposes at October 31, are as follows:
At October 31, 2002, the Company has net state operating loss carryforwards available to offset future taxable income of approximately $34,461, which will begin to expire in the year ending October 31, 2007.
11. STOCKHOLDER'S EQUITY
During 2000, the Company paid a dividend to the Parent of $16,140 and returned capital of $3,812. These dividends/return of capital are provided for under the terms of the Refinancings relating to the sale of specified real property (as defined) and corporate sale transactions (as defined), respectively.
During 2002, the Company received a non-cash capital contribution from the Parent of $5,845. Effective November 1, 2001, the Company, the Parent and the swap counter parties executed agreements to substitute the Parent for the Company as the contractual party to an interest rate swap agreement as part of the Company's overall risk management policy. As a result of this transaction, the fair value of the swap liability of $9,777 has been assumed by the Parent, and the reduction in the swap liability, net of tax of $3,932, has been accounted for as a contribution of capital of $5,845 by the Parent.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to various litigation matters which are incidental to its business. Although the results of the litigation cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse affect on the Company's consolidated financial statements.
Contractual obligations associated with construction in progress were not material to the Company's consolidated financial position as of October 31, 2002.
13. REAL ESTATE TRANSACTIONS
During fiscal 2002, 2001 and 2000, Desert Resorts sold 5, 25 and 26 homes for approximately $3,342, $18,049 and $16,639, respectively (Note 14). Additionally, Grand Traverse had real estate sales of $2,926, $1,219 and $673 for various land parcels in fiscal 2002, 2001 and 2000, respectively.
In June 2002, Desert Resorts sold a parcel of undeveloped land for $21,464, and generated operating income of $13,147. In July 2001, Desert Resorts sold for cash a parcel of undeveloped land for $8,172, (net of $1,400 which was deferred pending satisfaction of certain contingencies) and generated operating income of $3,787. The contingencies were satisfied during 2002 and the deferred revenue was recognized.
14. RELATED PARTY TRANSACTIONS
Effective April 1, 1998, Desert Resorts entered into a management agreement with an unconsolidated affiliate, KSL Land II Corporation (Land II), whereby Land II will provide development services for the entitlement, subdivision, construction, marketing, and sale of approximately 98 single family detached units on approximately eleven acres of real estate currently owned by Desert Resorts. The development site is adjacent to the Desert Resorts' La Quinta Resort & Club. The contractor and project management fees for these services are calculated as 6.0% of the Project Sales Revenues, as defined. Also, Land II is to be paid a marketing fee by Desert Resorts 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. In fiscal 2002, 2001 and 2000, Desert Resorts paid $104, $1,161 and $1,070 respectively for project management fees and $99, $532 and $493, respectively for marketing fees.
During fiscal 2002 and 2001, the Company entered into construction management agreements with an unconsolidated affiliate, KSL Land Corp. (Land Corp.), whereby Land Corp. will provide construction management services for certain construction projects. Land Corp. is to be paid a management fee by the Company for these services in an amount equal to 5.0% to 6.5% of the total gross contracted amount of the project. In fiscal 2002 and 2001, the Company paid $1,884 and $645, respectively, for project management fees to Land Corp.
During 2002, 2001 and 2000, the Company incurred $10,154, $9,744 and $10,704, respectively, of management fees and reimbursable expenses reimbursed to the Parent. Such management fees and reimbursed expenses are included in corporate fee expense in the accompanying consolidated statements of income and comprehensive income. The Parent allocates costs based on the expense allocation agreement between the Parent and the Company (the "Expense Allocation Agreement"). This agreement specifies that the Parent may allocate to the Company reasonable expenses related to the management of the Company. Certain executives of the Parent who provide services to the Company and employees of the Company are eligible to participate in various compensation plans offered by the Parent. The allocation of the corporate fee includes consideration for compensation expense recorded by the Parent on behalf of such individuals. The allocation of compensation is based on the amount of time that each employee spends providing services to the Company and is based on compensation expense recorded by the Parent. Management believes that the allocation method used is reasonable and is in accordance with the Expense Allocation Agreement.
Compensation plans offered by the Parent consist of the Parent stock option plans, the Parent restricted stock awards plan and a deferred cash bonus plan. Compensation expense related to the restricted stock awards plan, which is subject to variable accounting, and the deferred cash bonus plan are recorded over the related vesting periods based on the fair value of the underlying awards. The
Parent accounts for stock-based compensation for its stock option plans using the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Had compensation cost for the Parent's stock option plans been determined consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the increase in corporate fee allocated to the Company related to compensation expense for the Company's employees would not be significant.
During 1999 and 2001, two officers of the Company purchased 5 homes developed by a subsidiary of the Company for an aggregate of $3.6 million. These prices were at the retail list prices offered to the public at the time of their purchases and were not discounted. These officers subsequently entered into rental management agreements with a real estate leasing subsidiary of the Company on standard terms and conditions applicable to other purchasers of such homes. For fiscal 2002, 2001 and 2000, these officers received $119, $359 and $106, respectively, in rental income under these rental management agreements.
15. ACQUISITIONS
On December 22, 2000, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the Arizona Biltmore Resort & Spa (the "Property"), located in Phoenix, Arizona. The purchase price of the Property was $335.0 million (excluding transaction costs of $1.5 million and a working capital purchase price adjustment of $8.3 million). The Company financed the acquisition with cash and debt issued under its Amended and Restated Credit Agreement (as amended December 22, 2000) with various financial institutions, Credit Suisse First Boston, The Bank of Nova Scotia and Salomon Smith Barney. As part of the purchase consideration, the Company assumed a mortgage of $59.4 million, secured by the Property. The acquisition was accounted for using the purchase method of accounting resulting in goodwill of $27.2 million. Accordingly, the operating results of the Biltmore have been included in the Company's consolidated financial statements since acquisition. The excess of the purchase price over the debt assumed, acquisition related costs, and working capital were funded with existing cash and debt issued under the Company's Amended and Restated Credit Agreement, as amended December 22, 2000.
On November 16, 2001, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the La Costa Resort & Spa ("La Costa"), located in Carlsbad, California. The purchase price of La Costa was $120.0 million (excluding transaction costs of approximately $4.6 million, membership liabilities of $7.1 million and a positive working capital purchase price adjustment of $8.5 million). The acquisition was completed to further the Company's strategy of acquiring unique and irreplaceable resorts that would benefit significantly from the Company's operating strategy, and was accounted for using the purchase method of accounting. Accordingly, the operating results of La Costa have been included in the Company's consolidated financial statements since acquisition. The Company financed the acquisition with existing cash and debt issued under its Amended and Restated Credit Agreement.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of La Costa.
The acquired intangible assets consisted of trade name of $17.2 million, management contract of $14.3 million and club membership programs of $1.4 million and are being amortized using the straight-line method over their useful life of 15 years.
The following is the Company's unaudited pro forma consolidated results of operations for the years ended October 31, which assume the Arizona Biltmore and the La Costa transactions occurred as of November 1, 2000:
The unaudited pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place as of the beginning of the fiscal periods presented, nor do they purport to be indicative of the results that will be obtained in the future.
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(a)Third quarter in 2002 includes a gain on sale of a parcel of land of $13.1 million; whereas the third quarter in fiscal 2001 includes a gain of $3.6 million on the sale of another parcel of land. 17. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is its Chief Executive Officer. The operating segments of the Company are managed separately because each segment represents a strategic business unit that offers different products or services.
The Company's reportable operating segments include the Resort segment and the Real Estate segment. The Resort segment provides service-based recreation through resorts, spas, golf courses, private clubs and activities related thereto. For financial reporting purposes, individual properties included in the Resort segment have been aggregated because of their common economic and operating characteristics. The Real Estate segment develops and sells real estate in and around the Company's Resort operations. The Company's Real Estate segment exists to support and enhance growth of the Company's Resort segment (Note 13). The Company utilizes the expertise of an affiliate Company in determining real estate projects to undertake. Both of the Company's operating segments are within the United States.
The accounting policies of the Company's operating segments are the same as those described in Note 2, Summary of Significant Accounting Policies. The Company evaluates performance based on stand alone segment income reduced by direct expenses. Because the Company does not evaluate performance based on segment net income at the operating segment level, the Company's non-operating expenses are not tracked internally by segment. Therefore, such information is not presented.
Reportable segment data for the year ended October 31, are as follows:
The Real Estate segment's identifiable assets were $2,070, $3,562 and $8,496 at October 31, 2002, 2001 and 2000, respectively. All of the remaining assets of the Company are related to the Resort segment, other than the deferred income taxes, which is considered a corporate asset and is not identifiable to either segment. Substantially all of the Company's capital expenditures, depreciation and amortization expense, and interest expense relates to the Resort segment.
Revenues for the Resort segment for the years indicated are as follows:
PART III
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 10.
Item 10. Directors and Executive Officers
Set forth below are the names, ages and positions of the directors and executive officers of the Company (unless otherwise specified), together with other key executive officers of the Company's subsidiaries and the Parent. The terms of each of the directors will expire annually upon the election and qualification at the annual meeting of shareholders.
Michael S. Shannon. Mr. Shannon has been a Director and the President and Chief Executive Officer of the Company since its formation. Mr. Shannon was a founding stockholder of the Parent and has served as a Director and President and Chief Executive Officer of the Parent since its inception. Mr. Shannon is also a Director of each of the Company's subsidiaries and serves as either President or Executive Vice President of each subsidiary. Prior to forming the Parent, Mr. Shannon was President and Chief Executive Officer of Vail Associates in Vail, Colorado. Mr. Shannon is a director of ING America Holdings and ING Direct.
Larry E. Lichliter. Mr. Lichliter has been a Director and Executive Vice President of the Company since its formation. Mr. Lichliter was a founding stockholder of the Parent and has served as a Director and its Executive Vice President since its inception. He served as Chief Operating Officer of the Parent from its inception through December 1996. He was elected Chief Financial Officer and Treasurer of the Company on December 29, 2000 to serve in that capacity until February 1, 2001. Mr. Lichliter is also a Director and serves as either President or Executive Vice President of each of the Company's subsidiaries. Mr. Lichliter began his career as Controller for Vail Associates in 1977
before becoming Director of Finance for Beaver Creek Resort, and later serving as Senior Vice President of Operations for Vail Associates.
Eric C. Resnick. Mr. Resnick has been Vice President, Chief Financial Officer and Treasurer of the Company and the Parent since February 1, 2001. Mr. Resnick also serves as Vice President, Chief Financial Officer and/or Treasurer for each of the Company's subsidiaries. From May 1996 to January 2001, Mr. Resnick was employed by Vail Resorts, Inc. where he served as Vice President, Strategic Planning and Investor Relations and previously as Corporate Treasurer and in other capacities. Prior to Vail Resorts, Mr. Resnick was a consultant with McKinsey and Company.
Nola S. Dyal. Ms. Dyal has been Vice President, General Counsel and Secretary of the Company since its formation. Ms. Dyal joined the Parent in November 1993 as Vice President, General Counsel and Secretary. Ms. Dyal also serves as Vice President, General Counsel and Secretary for each of the Company's subsidiaries. From 1986 to 1993, Ms. Dyal was Vice President, General Counsel and Secretary of Vail Associates.
Scott M. Dalecio. Mr. Dalecio was elected Vice President of Resort Operations of the Company and the Parent on January 11, 2000. He currently serves in that capacity and as President of the Company's Resort Operations Division, as well as President or Vice President of all of the Company's subsidiaries. Mr. Dalecio has been President of KSL Desert Resorts, Inc. since March 1996. Prior thereto, Mr. Dalecio held several management positions with the La Quinta Resort & Club since joining La Quinta Resort & Club in 1986, including President and General Manager.
Doris Allen-Kirchner. Ms. Allen-Kirchner has been Vice President of Human Resources of the Company and the Parent since October 1997. From November 1994 to September 1997, Ms. Allen-Kirchner served as a Management Consultant to Quorum Health Resources, Inc. Prior to that, Ms. Allen-Kirchner was Chief Operations Officer for Vail Valley Medical Center in Vail, Colorado since 1985.
Thomas F. McGrath. Mr. McGrath has been Vice President of Merchandising and Events of the Company since its formation. Mr. McGrath joined the Parent in June 1996 as Vice President of Merchandising and Events. From 1988 until joining the Parent, Mr. McGrath was Vice President of Merchandising with Silver Dollar City, Inc. in Branson, Missouri.
Michael R. Donahue. Mr. Donahue has been Vice President of Marketing of the Company and the Parent since September 2000. Mr. Donahue was Senior Vice President of Marketing of Pegasus Solutions from May 1997 through June 1999. From September 1988 through April 1997, Mr. Donahue was Vice President of Marketing of Lane Hospitality.
Michael E. Erickson. Mr. Erickson has been Vice President of Sales since May 2002. From June 1997 to May 2002, Mr. Erickson was employed by Four Seasons Hotels and Resorts where he served as Western Regional Director of Worldwide Sales.
Arthur Berg. Mr. Berg has been Vice President Travel Industry & Leisure Marketing since July 2002. Prior to joining the Company, Mr. Berg was employed by Rosewood Hotels and Resorts from 1994 through 2001 where he served most recently as Vice President of Sales and Marketing.
Samuel J. Barton. Mr. Barton has been Corporate Controller of the Company and the Parent since August 2000. Mr. Barton is also the Corporate Controller of all of the Company's subsidiaries. From July 1997 through August 2000, Mr. Barton was Director of Financial Reporting at United States Filter Corporation. From 1994 through June of 1997, Mr. Barton worked as a certified public accountant for KPMG Peat Marwick LLP.
Henry R. Kravis. Mr. Kravis, Founding Partner of KKR, is a Director of the Parent and the Company and a managing member of the Executive Committee of the limited liability company which serves as the general partner of KKR. Mr. Kravis is also a Director of Accuride Corporation, Alliance Imaging, Inc., Amphenol Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company, Inc., KinderCare Learning Centers, Inc., PRIMEDIA Inc., Sotheby's Holdings, Inc., and Willis Group Holdings Limited.
George R. Roberts. Mr. Roberts, Founding Partner of KKR, is a Director of the Parent and the Company and a managing member of the Executive Committee of the limited liability company which serves as the general partner of KKR. He is also a Director of Borden, Inc., The Boyds Collection, Ltd., DPL, Inc., KinderCare Learning Centers, Inc., Owens-Illinois, Inc., PRIMEDIA Inc., Safeway, Inc. and Willis Group Holdings Limited.
Paul E. Raether. Mr. Raether is a Director of the Parent and the Company and is a member of the limited liability company which serves as the general partner of KKR. He is also a Director of IDEX Corporation and Shoppers Drug Mart, Inc. Mr. Raether joined KKR in 1980.
Paul M. Hazen. Mr. Hazen has been a Director of the Parent and the Company since September 19, 2001. From November 1998 to May 2001 Mr. Hazen was the Chairman of Wells Fargo & Co. from which he retired in May 2001. From November 1995 to November 1998 he was the Chairman and Chief Executive Officer of Wells Fargo & Co. He is also a director of E.piphany, Inc., Phelps Dodge Corporation, Safeway Inc., Vodafone, Plc, Willis Group Ltd. and Xsrata AG. Mr. Hazen provides consulting services to KKR.
John K. Saer Jr. Mr. Saer has been a Director of the Parent and the Company since January 2002. Mr. Saer is an executive of the limited liability company, which serves as the general partner of KKR. Prior to joining KKR, Mr. Saer served as Vice President, Chief Financial Officer and Treasurer of the Company since its formation through December 29, 2000. Mr. Saer is also a director of Borden, Inc.
Messrs. Kravis and Roberts are first cousins.
The business address of Messrs. Kravis, Raether and Saer is 9 West 57th Street, Suite 200, New York, New York 10019. The business address of Mr. Roberts is 2800 Sand Hill Road, Suite 200, Menlo Park, California 94025. The business address of Mr. Hazen is 420 Montgomery St., San Francisco, CA 94104.
The following directors have been appointed to serve on the Company's Executive Committee during fiscal 2002: Messrs. Kravis, Raether, and Shannon. The following directors have been appointed to serve on the Company's Audit Committee during fiscal 2002: Messrs. Hazen, Lichliter, and Saer.
Item 11.
Item 11. Executive Compensation
The following table presents certain summary information concerning compensation paid or accrued by the Parent for services rendered in all capacities for the fiscal years ended October 31, 2002, 2001 and 2000 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, 2002 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)(2)
(1)The Parent has and will continue to pay all compensation for the Named Executive Officers; however, the Company will reimburse the Parent for the amount of all such compensation that is directly attributable to the operations of the Company. See "Certain Relationships and Related Transactions." All such compensation has been approved by the stockholders.
(2)The Named Executive Officers spend between 90% to 95% of their time on Company matters, with the exception of Mr. Lichliter who spends approximately 5% to 10% of his time on work related to the Company. Mr. Lichliter spends between 90% to 95% of his time on work related to KSL Land, an affiliate of the Company.
(3)The aggregate value of the Restricted Stock awarded to Mr. Shannon is $2,099,790 based on the fair market value of the Parent's common stock as of October 31, 2002. The Restricted Stock vests on January 1, 2005 and dividends are not paid on these shares. Other Compensation for Mr. Shannon represents cost of premiums for long-term disability insurance, Directors' compensation, and compensation for personal use of the Parent's leased corporate aircraft.
(4)The aggregate value of the Restricted Stock awarded to Mr. Lichliter is $1,050,840 based on the fair market value of the Parent's common stock as of October 31, 2002. The Restricted Stock vests on January 1, 2005 and dividends are not paid on these shares. Other Compensation for Mr. Lichliter represents cost of premiums for long-term disability insurance and for Directors' compensation. In Fiscal 2000, the Parent purchased 3,297 options to purchase the Parent's common stock from Mr. Lichliter for $1,800 per share, less the exercise price of $500 per share. See "Transactions with Management" included elsewhere herein.
(5)The aggregate value of the Restricted Stock awarded to Mr. Resnick is $2,468,340 based on the fair market value of the Parent's common stock as of October 31, 2002. The Restricted Stock vests
on January 1, 2005 and dividends are not paid on these shares. Other Compensation for Mr. Resnick represents relocation expenses paid by the Company on behalf of Mr. Resnick.
(6)The aggregate value of the Restricted Stock awarded to Ms. Dyal is $1,050,840 based on the fair market value of the Parent's common stock as of October 31, 2002. The Restricted Stock vests on January 1, 2005 and dividends are not paid on these shares. In Fiscal 2000, the Parent purchased 1,051 options to purchase the Parent's common stock from Ms. Dyal for $1,800 per share, less the exercise price of $500 per share. See "Transactions with Management" included elsewhere herein.
(7)The aggregate value of the Restricted Stock awarded to Mr. Dalecio is $1,311,660 based on the fair market value of the Parent's common stock as of October 31, 2002. The Restricted Stock vests on January 1, 2005 and dividends are not paid on these shares. Other Compensation for Mr. Dalecio represents compensation for personal use of the Parent's corporate aircraft. In Fiscal 2000, the Parent purchased 363 options to purchase the Parent's common stock from Mr. Dalecio for $1,800 per share, less the exercise price of $500 per share. See "Transactions with Management" included elsewhere herein. Stock Options of the Parent
Stock Option Plan
The Parent adopted the KSL Recreation Corporation 1995 Stock Purchase and Option Plan (the "Plan"), providing for the issuance to certain officers, directors and key employees (the "Optionees") of up to 77,225 shares of common stock of the Parent ("Stock"). The number of shares of common stock of the Parent for this Plan was increased to 125,908 during 2000 and to 135,051 during 2002. Unless sooner terminated by the Parent's Board of Directors, the Plan will expire on June 30, 2005.
The Compensation Committee of the Parent's Board of Directors, consisting of Messrs. Kravis and Raether (the "Committee"), administers the Plan. The Committee has the authority to determine the forms and amounts of awards made to Optionees (each, a "Grant"). Such Grants may take a variety of forms in the Committee's sole discretion including "incentive stock options" under Section 422 of the Code, other Stock options, stock appreciation rights, restricted Stock, purchase Stock, dividend equivalent rights, performance rights, performance shares or other stock-based grants.
Non-Qualified Stock Option Agreements
All options granted under the Plan to date have been non-qualified stock options granted pursuant to Non-Qualified Stock Option Agreements (the "Stock Option Agreements"). Under the terms of Stock Option Agreements, the exercise price of the options granted ranges from $500 to $2,000 per share, and options may be exercised based upon a schedule which refers to a date set forth in each Optionee's Stock Option Agreement (the "Option Trigger Date"). Generally, an Optionee's options will vest over periods ranging from one to five years from such Optionee's Option Trigger Date. Each Stock Option Agreement provides for acceleration of exercisability of some or all of an Optionee's options immediately prior to a change of control and immediately upon termination of employment because of death, permanent disability or retirement (at age 65 or over after three years of employment) of the Optionee.
Options granted under the Plan pursuant to a Stock Option Agreement expire upon the earliest of (i) ten years from the date of the grant, (ii) the date the option is terminated under the circumstances set forth in the Common Stock Purchase Agreement (as defined below), (iii) the termination of the Optionee's employment because of criminal conduct (other than traffic violations), (iv) if prior to the vesting 100% of Optionee's Options, the termination of employment for any reason other than involuntary termination of employment without cause, death, disability or retirement after the age of 65 and (v) if the Committee so determines, the merger or consolidation of the Parent into another
corporation or the exchange or acquisition by another corporation of all or substantially all of the Parent's assets or 80% of the Parent's then outstanding voting stock, or the reorganization, recapitalization, liquidation or dissolution of the Parent.
Management Common Stock Purchase Agreements
If an Optionee (the "Management Stockholders") exercises options under his or her Stock Option Agreement, he or she is required to enter into a Common Stock Purchase Agreement with the Parent. None of these Management Stockholders has exercised any options to date. Pursuant to each Common Stock Purchase Agreement, the Management Stockholder may not transfer any shares of Stock acquired thereby or upon exercise of vested options granted under the Plan (collectively, the "Plan Shares") within five years (although certain Management Stockholders may transfer their Plan Shares after they have been fully vested) after the date set forth in his or her Common Stock Purchase Agreement (the "Purchase Trigger Date").
Each Common Stock Purchase Agreement provides the Management Stockholder with the right to require the Parent to repurchase all of Management Stockholder's Plan Shares and pay Management Stockholder (or his or her estate or Management Stockholder Trust) a stated price for cancellation of options if (a) the Management Stockholder's employment is terminated as a result of his or her death or permanent disability, (b) the Management Stockholder dies or becomes permanently disabled after having retired from the Parent at or after age 65 after having been employed by the Parent for at least three years after the Purchase Trigger Date or (c) with the prior consent of the Parent's Board of Directors (which consent will not be withheld unless the Board reasonably determines that the Parent would be financially impaired if it made such a purchase), or (d) the Management Stockholder retires from the Parent on or after age 65 after having been employed by the Parent for at least three years after the Purchase Trigger Date. The Management Stockholder also has the right, until the later of five years after the Purchase Trigger Date or the first public offering in which the Partnerships participate, to have the Parent register a stated percentage of his Plan Shares under the Securities Act in connection with certain public offerings. (See Security Ownership of Certain Beneficial Owners and Management).
Each Common Stock Purchase Agreement also provides the Parent with (a) prior to a public offering, the right of first refusal to buy Plan Shares owned by each Management Stockholder on essentially the same terms and conditions as such Management Stockholder proposes in a sale of his Plan Shares to another bona fide third party purchaser and (b) the right to repurchase all of the Management Stockholder's Plan Shares and pay him a stated price for cancellation of his Options if (i) the Management Stockholder's employment is involuntarily terminated with cause, (ii) the Management Stockholder terminates his or her employment other than by reason of death, disability or retirement on or after the age of 65 or (iii) the Management Stockholder effects an unpermitted transfer of Plan Shares.
Upon a change of control of the Parent, the transfer restrictions, right of first refusal, and certain other rights with respect to sale and repurchase of the Plan Shares and cancellation of Options as described above will lapse.
The repurchase price of the Plan Shares under the Common Stock Purchase Agreements depends upon the nature of the event that triggers the repurchase and whether such repurchase occurs at the election of the Management Stockholder or the Parent. Generally, if the repurchase is at the Management Stockholder's election, the repurchase price per share will be the book value per share (as defined in the Common Stock Purchase Agreement) of Stock or, if the Stock is publicly traded, the market value per share of Stock. Generally, if the repurchase is at the Parent's election, the repurchase price per share will be the lesser of (a) the book value per share (as defined in the Common Stock
Purchase Agreement) of Stock (or if the Stock is publicly traded, the market value per share) and (b) the exercise price.
Option Grants in the Parent for Fiscal Year 2002 and Potential Realizable Values
The following sets forth as to each of the Named Executive Officers information with respect to options granted during fiscal year 2002: (i) the number of shares of common stock underlying options granted; (ii) the percent of total options granted to employees in fiscal year 2002; (iii) the exercise price of such options; (iv) the expiration date of such options and (v) the potential realizable values at assumed rates of such options.
The following table sets forth, as to each of the Named Executive Officers, information with respect to option exercises during fiscal year 2002 and the status of their options on October 31, 2002: (i) the number of shares of common stock underlying options exercised during fiscal year 2002, (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, 2002 and (iv) the aggregate dollar value of in-the-money exercisable and unexercisable options on October 31, 2002.
(1)The Common Stock is not publicly traded and the value of the options represents management's best judgment of value at October 31, 2002 and is based on a market value of $1,890 per share for the Parent common stock. Restricted Stock Awards of the Parent
During fiscal 2002, the Parent's Board of Directors approved the award of up to 7,143 restricted common shares of the Parent (the "Restricted Shares") and appointed a committee (the "Stock Committee") to direct the issuance of the Restricted Shares to certain senior managers of the Parent, its subsidiaries (including the Company) and affiliates (collectively, the Affiliate Companies") in exchange for services to the Parent and such entities, in such amounts to be determined by the Stock Committee. Subsequently the Stock Committee granted 7,030 Restricted Shares to certain senior
managers of the Parent and the Affiliate Companies ("Restricted Stock Grantees"). The Restricted Shares were issued effective August 1, 2002 and fully vest on January 1, 2005, pursuant to the terms and conditions of restricted stock agreements entered into between each of the Restricted Stock Grantees and the Parent (collectively, the "Restricted Stock Agreements").
The Restricted Stock Agreements provide that the Restricted Stock Grantees have the right to require the Parent to purchase up to 50% of their Restricted Shares on January 1, 2005, at the fair market value of the Parent's common stock as of that date. The Restricted Stock Agreements further provide that, if a Restricted Stock Grantee leaves the employ of the Parent or Affiliate Company prior to January 1, 2005 for any reason other than involuntary discharge by the Parent or Affiliate Company without cause, such Restricted Stock Grantee will forfeit all of the Restricted Shares held by such Grantee and receive no payment therefore. The Restricted Stock Agreements further provide that, commencing January 1, 2005, the Parent has the right to repurchase all of the Restricted Shares owned by a Restricted Stock Grantee for a stated price if (a) the Restricted Stock Grantee's employment is involuntarily terminated with cause, (b) the Restricted Stock Grantee terminates his or her employment other than by reason of death, disability or retirement on or after the age of 65 or (c) the Restricted Stock Grantee effects a transfer of Restricted Shares other than as permitted under the terms and conditions of the Restricted Stock Agreements.
Management Incentive Bonuses
Certain members of management of the Parent and the Company and its subsidiaries, including departmental managers and executive officers, including Named Executive Officers, are eligible to receive cash bonuses in addition to their annual salary compensation. Such awards are based on the performance of such individuals as determined by their direct supervisors and other senior management and the financial performance of the Parent, the Company and its subsidiaries. In addition, the Compensation Committee approved a Deferred Cash Bonus plan authorizing the payment of up to $2.5 million to certain employees of the Company and certain employees of the Parent who provide services to the Company. The Named Executives of the Company do not participate in the Deferred Cash Bonus Plan. This plan authorizes the payment of specified amounts to each grantee who remains employed with the Parent or the Company on January 1, 2005.
Options and Partnership Interests in Affiliates
Certain executive officers received distributions related to profit sharing units or partnership interests in an affiliate, KSL Oak Land, L.P. ("Oak") in prior years. Oak sold all of its net assets during fiscal 2002. The proceeds of this sale were distributed to the Oak partners including certain executive officers of the Company.
Certain executive officers received distributions related to profit sharing units or partnership interests in an affiliate, KSL Grove Land, L.P. ("Grove"), in prior years. Grove sold a significant portion of its net assets during Fiscal 2001. The proceeds of this sale were distributed to its partners including certain executive officers of the Company.
Certain executive officers received distributions related to profit sharing units or partnership interests in KSL Foster Land, L.P. ("Foster"), an affiliate, in prior years. Foster was dissolved during fiscal 2000, and its net assets were distributed to its partners including certain executive officers. Prior to and during fiscal 1997, certain executive officers received options and partnership interest in KSL Land and other partnerships affiliated therewith, but no allocation has been made for distribution of partnership interests related to these partnerships.
Board Compensation
All directors are reimbursed for their usual and customary expenses incurred in attending all Board and committee meetings. Prior to fiscal 2001, each director received an aggregate annual fee of $25,000 for serving on the Parent's and the Company's Boards of Directors. This payment was eliminated during fiscal 2001 and each director received actual fees of $12,500 for fiscal 2001. The Company paid no cash directors' fees in 2002. During fiscal 2002, the Parent granted 500 options to purchase shares of the Parent's common stock to each of its Directors with the exception of Mr. Hazen, who was granted 53 such options (excluding options issued in connection with Mr. Hazen's purchase of the Parent's common stock, discussed in item 13 below.)
Compensation Committee Interlocks and Insider Participation
The following directors participated in deliberations of the Parent's Board of Directors concerning executive officer compensation during fiscal year 2002 and have been appointed to serve on the Parent's Compensation Committee during fiscal year 2002: Messrs. Kravis and Hazen. During fiscal year 2003, no executive officer of the Parent served as a member of the compensation committee of another entity or as a director of another entity, one of whose executive officers served on the compensation committee or Board of Directors of the Parent.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of January 15, 2003 certain information concerning the ownership of shares of Common Stock of the Parent by (i) persons who own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each person who is a director of the Company; (iii) each person who is a Named Executive Officer; and (iv) all directors and executive officers of the Company as a group. The Parent owns 100% of the common stock of the Company. As of January 15, 2002, there are 551,135 shares of Common Stock of the Parent outstanding.
*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., Perry Golkin, Scott M. Stuart, Edward A. Gilhuly and Michael Tokarz. Messrs. Kravis, Roberts and Raether are also directors of the Company. Each of such individuals may be deemed to share beneficial ownership of the shares shown as beneficially owned by KKR Associates, L.P. Each of such individuals disclaims beneficial ownership of such shares.
(2)Shares of Common Stock shown as beneficially owned by KKR 1996 GP LLC are owned of record by KKR 1996 Fund L.P. KKR 1996 GP LLC is the general partner of KKR Associates 1996 L.P., which is the general partner of KKR 1996 Fund L.P. (the "New Partnership"). The members of KKR 1996 GP LLC are Messrs. Kravis, Roberts, MacDonnell, Raether, Michelson, Greene, Golkin, Stuart, Gilhuly, Tokarz, Todd Fisher, Johannes Huth, Alexander Navab, Jr. and Neil Richardson. Messrs. Kravis, Roberts and Raether 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 29,876 shares exercisable within 60 days.
(4)Includes options to purchase 14,003 shares exercisable within 60 days.
(5)Includes options to purchase 1,111 shares exercisable within 60 days.
(6)Includes options to purchase 3,652 shares exercisable within 60 days.
(7)Includes options to purchase 2,717 shares exercisable within 60 days.
(8)Includes options to purchase 55,804 shares exercisable within 60 days.
(9)The nature of beneficial ownership for all of the shares listed is sole voting and investment power.
Item 13.
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% (74.8% and 13.3%, on a fully diluted basis), respectively, of the Parent's outstanding shares of Common Stock as of January 15, 2001. The general partners of KKR Associates, L.P. are Messrs. Henry R. Kravis, George R. Roberts, Robert I. MacDonnell, Paul E. Raether, Michael W. Michelson, James H. Greene, Jr., Perry Golkin, Scott M. Stuart, Edward A. Gilhuly and Michael Tokarz. Messrs. Kravis, Roberts and Raether are also directors of the Company. The members of the KKR 1996 GP LLC are Messrs. Kravis, Roberts, MacDonnell, Raether, Michelson, Greene, Golkin, Stuart, Gilhuly, Tokarz, Todd Fisher, Johannes Huth, Alexander Navab, Jr. and Neil Richardson. Each of the general partners of KKR Associates, L.P., with the exception of Messrs. MacDonnell and Takorz, is also a member of the limited liability company which serves as the general partner of Kohlberg Kravis Roberts & Co. ("KKR"). KKR receives an annual fee of $500,000 in connection with providing financial advisory services to the Parent and may receive customary investment banking fees for services rendered to the Parent and/or the Company in connection with divestitures, acquisitions and certain other transactions.
See "Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners and Management."
The limited partners of KKR Associates are certain past and present employees of KKR and partnerships and trusts for the benefit of the families of the general partners and past and present employees and a former partner of KKR.
Each of the Partnerships has the right to require the Parent to register under the Securities Act shares of Common Stock held by it pursuant to several registration rights agreements. Such registration rights will generally be available to each of the Partnerships until registration under the Securities Act is no longer required to enable it to resell the Common Stock owned by it. Such registration rights agreements provide, among other things, that the Parent will pay all expenses in connection with the first six registrations requested by each such Partnership and in connection with any registration commenced by the Parent as a primary offering.
Transactions with the Parent and Affiliates of the Parent
The Company and the Parent are parties to an Expense Allocation Agreement pursuant to which the Parent performs management services requested by the Company and the Company reimburses the Parent for expenses incurred by the Parent and directly attributable to the Company and its subsidiaries. The allocation includes consideration for compensation paid to employees of the Parent who provided services to the Company. The allocation for compensation is based on the amount of time that each employee spends providing services to the Company and is based on compensation expense (including expense related to Restricted Stock awards and Deferred Cash Bonus grants described above) recorded by the Parent. 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) of $10.2 million, $9.7 million and $10.7 million to the Parent in fiscal years 2002, 2001 and 2000, respectively.
The Company's liability for taxes is determined based upon a Tax Sharing Agreement entered into by the members of the affiliated group of corporations (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code")) of which the Parent is the common parent (the "Parent Affiliated Group"). Under the tax sharing agreement, the Company and its subsidiaries are generally responsible for Federal taxes based upon the amount that would be due if the Company and its subsidiaries filed Federal tax returns as a separate affiliated group of corporations rather than as part of the Parent's consolidated federal tax returns. The allocation of tax liability pursuant to the Tax Sharing Agreement may not reflect the Company's actual tax liability that would be imposed on the Company had it not filed tax returns as part of the Parent Affiliated Group. The combined state tax liabilities are allocated to the Company and its subsidiaries based on similar principles.
Effective April 1, 1998, Desert Resorts entered into a management agreement with an unconsolidated affiliate, KSL Land II Corporation ("Land II"), whereby Land II provides development services for the entitlement, subdivision, construction, marketing, and sale of approximately 97 single family detached units on approximately eleven acres of real estate currently owned by Desert Resorts. The development site is adjacent to the Desert Resorts' La Quinta Resort & Club. The contractor and project management fees for these services are calculated as 6.0% of the Project Sales Revenues, as defined. Also, Land II is to be paid by Desert Resorts a marketing fee in an amount equal to 2.75% of the Project Sales Revenues. Such marketing fee will be used by Land primarily to pay marketing, sale and promotional expenses to third parties. Desert Resorts paid $203,000, $1,693,000, and $1,563,000, in Fiscal 2002, 2001 and 2000, respectively, to Land II for project management and marketing fees.
During fiscal 2002 and 2001, several of the properties entered into a construction management agreement with an unconsolidated affiliate, KSL Land Corp. (Land Corp.), whereby Land Corp. will provide construction management services for certain construction projects. Land Corp. is to be paid by
the properties a management fee for these services in an amount equal to 5.0% to 6.5% of the total gross contracted amount of the project. In fiscal 2002 and 2001, the Company paid $1,884 and $645, respectively, for project management fees to Land Corp.
Transactions with Management and Directors
Common Stock and Common Stock Option Purchases
In July 2000, the Parent purchased 3,509 shares of its common stock from the Named Executive Officers. The common stock was purchased at $1,800 per share. The Parent purchased 2,945 and 564 shares of the Parent's common stock from Messrs. Shannon and Lichliter, respectively.
In July 2000, the Parent purchased 13,060 of the options to purchase the Parent's common stock from 24 optionees of which 5,341 were purchased from the Named Executive Officers. These options were purchased at $1,800 per share, less the exercise price of $500 per share. The Parent purchased 3,297 and 363 options from Messrs. Lichliter and Dalecio, respectively, and 1,051 options from Ms. Dyal.
In August 2002, Mr. Hazen purchased 132 shares of the Parent's common stock for $1,890 per share for an aggregate purchase price of $250,000. In connection with the purchase, Mr. Hazen was issued 529 options to purchase the Parent's common stock for $1,890 per share. The transaction was approved by the Parent's shareholders and was completed at fair market value.
Loans to Management
The Parent made loans to Ms. Dyal and Mr. Dalecio to fund the purchase of the Parent's common stock. Ms. Dyal and Mr. Dalecio each borrowed $250,000, all of which remained outstanding as of October 31, 2002. The Parent also made loans to other executives of the Parent and the Company to fund purchases of the Parent's common stock. The aggregate balance of these loans was $625,000 as of October 31, 2002. The loans are due November 1, 2003 and bear interest at 5.0% per annum.
Purchases of Real Estate Products
During fiscal year 1999, Messrs. Shannon and Lichliter each purchased a "La Quinta Resort Home" which are homes developed and sold by a subsidiary of the Company in a project located adjacent to the Company's La Quinta property. Mr. Shannon paid $820,000 for his home and Mr. Lichliter paid $700,000 for his home. These prices were the retail "list" prices offered to the public at the time of their purchases and were not discounted. Each of Messrs. Shannon and Lichliter subsequently entered into a rental management agreement with a real estate leasing subsidiary of the Company on standard terms and conditions applicable to other purchasers of La Quinta Resort Homes who entered into rental management agreements with such subsidiary. For fiscal years 2002, 2001 and 2000, Mr. Shannon received $81,382, $120,515 and $49,501, respectively of rental income under his rental management agreement. Mr. Lichliter received $56,652 of rental income in 2000 under his rental management agreement, and did not receive any rental income related to this house in 2002 and 2001 as he subsequently sold this home.
During fiscal year 2001, Mr. Lichliter paid $2,092,000 for three additional homes, again these prices were the retail "list" prices offered to the public at the time of his purchases and were not discounted. Mr. Lichliter entered into a leaseback program and was paid $37,347 and $238,400 in fiscal 2002 and 2001, respectively. The length of the leasebacks ranges from ten to twenty-three months. The leaseback program was offered on standard terms and conditions offered to other purchasers.
Item 14.
Item 14. Controls and Procedures
As of January 15, 2003, the Company, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934.)
Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports the Company files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required. There were no significant changes in the Company's internal controls subsequent to January 15, 2003, including any corrective actions with regard to significant deficiencies and material weaknesses.
Part IV.
Item 15.
Item 15. 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 Income and Comprehensive Income for the years ended October 31, 2002, 2001 and 2000
Consolidated Balance Sheets as of October 31, 2002 and 2001
Consolidated Statements of Stockholder's Equity for the years ended October 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended October 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(2)Financial Schedules
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
Financial statements and schedules not listed are omitted because of the absence of the conditions under which they are required or because all material information is included in the consolidated financial statements or notes thereto.
(3)Exhibits
3.1
Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
3.2
Certificate of Amendment of Certificate of Incorporation of the Company (changing name to KSL Recreation Group, Inc.), filed as Exhibit 3.2 to the Company's Form fiscal 1997 10-K, File No. 333-31025, is hereby incorporated by reference.
3.3
By-laws of the Company, filed as Exhibit 3.2 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
4.1
Senior Subordinated Notes Indenture, dated as of April 30, 1997, among KSL Recreation Group, Inc. and First Trust of New York National Association, Trustee, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
4.2
Form of 101/4% Senior Subordinated Note due 2007, filed as Exhibit 4.2 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference. (Included as part of Senior Subordinated Notes Indenture filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, File No. 333-31025, and hereby incorporated by reference.)
4.3
Form of 101/4% Series B Senior Subordinated Note due 2007, filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference. (Included as part of Senior Subordinated Notes Indenture filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4, File No. 333-31025, and hereby incorporated by reference.)
10.1
Sublease, executed between Lake Lanier Islands Development Authority and KSL Lake Lanier, Inc., filed as Exhibit 10.2 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.2
License Agreement, dated March 5, 1994, between The Professional Golfer's Association and LML Development Corp. of California as assigned by the Assignment and Assumption Agreement, dated December 24, 1993, by and between Landmark Land Company of California, Inc. and KSL Landmark Corporation, filed as Exhibit 10.4 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.3
Trademark Agreement, dated January 10, 1985, between PGA Tour, Inc. and Landmark Land Company of California, Inc. as assigned by the Assignment and Assumption Agreement, dated December 24, 1993, by and between Landmark Land Company of California, Inc. and KSL Landmark Corporation, filed as Exhibit 10.5 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.4
License Agreement, dated December 30, 1993, among Carol Management Corporation, C.A.H. Spa of Florida Corp., KSL Hotel Corp., and KSL Spa Corp. (subsequently merged into KSL Hotel Corp.), filed as Exhibit 10.7 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.5
KSL Recreation Corporation 1995 Stock Purchase and Option Plan, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.6
Form of KSL Recreation Corporation Common Stock Purchase Agreement, filed as Exhibit 10.9 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.7
Form of KSL Recreation Corporation Non-Qualified Stock Option Agreement, filed as Exhibit 10.10 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.8
Expense Allocation Agreement, dated April 30, 1997, between KSL Recreation Corporation and KSL Recreation Group, Inc., filed as Exhibit 10.11 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.9
Tax Sharing Agreement and Amendment to Tax Sharing Agreement, dated April 30, 1997, by and between KSL Recreation Corporation, KSL Recreation Group, Inc., KSL Landmark Corporation, KSL Desert Resorts, Inc., KSL Vacation Resorts, Inc., Xochimilco Properties, Inc., Wild West Desert Properties, Inc., KSL Travel, Inc., KSL Golf Holdings, Inc., KSL Fairways Golf Corporation, KSL Florida Holdings, Inc., KSL Hotel Corp., KSL Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL Land Corporation and KSL Land II Corporation, filed as Exhibit 10.12 to the Company's Registration Statement on Form S-4, File No. 333-31025, is hereby incorporated by reference.
10.10
Second Amendment to the Tax Sharing Agreement, dated November 1, 1997, by and among KSL Recreation Corporation, KSL Recreation Corporation, KSL Recreation Group, Inc., KSL Land Holdings, Inc., KSL Landmark Corporation, KSL Desert Resorts, Inc., Las Casitas Corporation, KSL Real Estate Company, KSL Travel, Inc., Casitas Plaza Corporation, KSL Golf Holdings, Inc., KSL Fairways Golf Corporation, KSL Florida Holdings, Inc., KSL Hotel Corp., KSL Silver Properties, Inc., KSL Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL Grand Traverse Holdings, Inc., KSL Grand Traverse Land, Inc., KSL Grand Traverse Realty, Inc., KSL Grand Traverse Resort, Inc., KSL Water Works, Inc., KSL Land Corporation, KSL Citrus Properties, Inc., KSL Development Corporation, KSL Land II Corporation, KSL Land III Corporation, KSL Land IV Corporation and Landaq, Inc., filed as Exhibit 10.13 to the Company's fiscal 1997 10-K, File No. 333-31025, is hereby incorporated by reference.
10.11
Agreement of Purchase and Sale and Joint Escrow Instructions between International Hotel Acquisitions, LLC, and KSL Recreation Corporation, dated November 5, 1998, filed as exhibit 10.1 of the Company's most recent Form 8-K, File 333-31025, is hereby incorporated by reference.
10.12
First Amendment to Agreement for Purchase and Sale and Joint Escrow Instructions between International Hotel Acquisitions, LLC and KSL Recreation Corporation dated November 12, 1998, filed as Exhibit 10.2 of the Company's Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.13
Assignment of Agreement of Purchase and Sale between KSL Recreation Corporation and KSL Grand Wailea Resort, Inc., dated December 10, 1998, filed as Exhibit 10.3 of the Company's Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.14
Management Agreement by and between KSL Desert Resorts, Inc. and KSL Land II Corporation, dated April 1, 1998, is hereby incorporated by reference.
10.15
Stock Purchase Agreement among Apollo Real Estate Investment Fund IV, L.P. and KSL Fairways Golf Corporation and KSL Golf Holdings, Inc., dated August 9, 1999, Exhibit 10.1, Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.16
Fourth Amendment to the Tax Sharing Agreement, dated, October 1, 1999 by and among KSL Recreation Corporation, KSL Recreation Group, Inc., KSL Land Holdings, Inc., KSL Desert Resorts, Inc., Las Casitas Corporation, KSL Real Estate Company, Casitas Plaza Corporation (renamed KSL La Quinta Corporation), KSL Golf Holdings, Inc., KSL Resorts Group, Inc., KSL Florida Holdings, Inc., KSL Hotel Corp., KSL Silver Properties, KSL Development Corp., KSL Georgia Holdings, Inc., KSL Lake Lanier, Inc., KSL Land Corporation, KSL Citrus Properties, Inc., KSL Development Corporation, KSL Land II Corporation, KSL Land III Corporation, KSL Land IV Corporation, Landaq, Inc., KSL Grand Traverse Holdings, Inc., KSL Grand Traverse Realty, Inc., KSL Grand Traverse Resort, Inc., KSL Water Works, Inc., KSL Hawaii Holdings I, Inc., KSL Hawaii Holdings II, Inc., KSL Hawaii Holdings III, Inc., KSL Hawaii Holdings IV, Inc., KSL Hawaii Holdings V, Inc., KSL Grand Wailea Hospitality Corporation and KSL Grand Wailea Resort, Inc. Form 8-K, File No. 333-31025, Exhibit 10.2, Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.17
Agreement and Release, dated November 29, 1999, by and among KSL Golf Holdings, Inc., Fairways Acquisition Company, Apollo Real Estate Investment Fund IV, L.P. and Fairways Golf Corporation, filed as Exhibit 10.27 to the Company's fiscal 1999 10-K, File No. 333-31025, is hereby incorporated by reference.
10.18
Agreement of Purchase and Sale between Biltmore Hotel Partners, LLLP and KSL Biltmore Resort, Inc., filed as Exhibit 10-2, Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.19
Amended and Restated Credit Agreement dated December, 22, 2000 among KSL Recreation Group, Inc. and various Financial Institutions, as the lenders, Credit Suisse First Boston, as lead arranger, The Bank of Nova Scotia, as administrative agent, and Salomon Smith Barney, as the Syndication agent, filed as Exhibit 10.2, Form 8-K, File No. 333-31025, is hereby incorporated by reference.
10.20
Purchase and Sale Agreement between La Costa Hotel and Spa Corporation and Century World, PTE., Ltd dated October 31, 2001.
10.21
Assignment and Assumption Agreement regarding contract rights between Century World PTE., Ltd and KSL La Costa Resort Corporation dated November 1, 2001.
*11
Computation of Earnings (Loss) Per Share
*12
Computation of Ratio of Earnings to Fixed Charges
*21
List of Subsidiaries of the Company
*99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Filed herewith.
(4)Reports on Form 8-K, is hereby incorporated by reference. On March 21, 2002, Amendment No. 2 on Form 8-K/A was filed to amend a Form 8-K filing dated January 8, 2001. The Form 8-K filing reported the acquisition of certain assets and the assumption of certain liabilities comprising the Arizona Biltmore Resort & Spa pursuant to an agreement of purchase and sale between Biltmore Hotel Partners, LLLP, an Arizona limited liability limited partnership, and the Company, through KSL Biltmore Resort, Inc, an indirect wholly-owned subsidiary of the Company. The acquisition closed December 22, 2000. The Form 8-K/A filing included pro forma financial information and financial statements.
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 21, 2003.
KSL RECREATION GROUP, INC.
By:
/s/ ERIC C. RESNICK Eric C. Resnick
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 21, 2003.
Signatures
Title
/s/ MICHAEL S. SHANNON (Michael S. Shannon)
President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ LARRY E. LICHLITER (Larry E. Lichliter)
Executive Vice President and Director
/s/ HENRY R. KRAVIS (Henry R. Kravis)
Director
/s/ GEORGE R. ROBERTS (George R. Roberts)
Director
/s/ PAUL E. RAETHER (Paul E. Raether)
Director
/s/ PAUL M. HAZEN (Paul M. Hazen)
Director
/s/ JOHN K. SAER JR. (John K. Saer Jr.)
Director
/s/ ERIC C. RESNICK (Eric C. Resnick)
Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
/s/ SAMUEL J. BARTON (Samuel J. Barton)
Controller (Principal Accounting Officer)
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Michael S. Shannon, certify that:
1. I have reviewed this annual report on Form 10-K of KSL Recreation Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 21, 2003
/s/ MICHAEL S. SHANNON Michael S. Shannon
CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Eric C. Resnick, certify that:
1. I have reviewed this annual report on Form 10-K of KSL Recreation Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 21, 2003
/s/ ERIC C. RESNICK Eric C. Resnick
CHIEF FINANCIAL OFFICER
INDEX
Part I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Historical Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2002 and 2001
KSL RECREATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
KSL RECREATION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE(1)(2)
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 and 2000
SIGNATURES
CERTIFICATIONS
CERTIFICATION OF CHIEF FINANCIAL OFFICER