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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 30, 2002.
OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission File Number 333-31025

KSL RECREATION GROUP, INC.
(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		33-0747103 (IRS Employer ID Number)
50-905 Avenida Bermudas La Quinta, California (Address of principal executive offices)		92253 (Zip Code)

760/564-8000
(Registrant's telephone number, including area code)

N/A
(Former name, address and fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý, No o.

Shares outstanding of the Registrant's common stock
as of June 10, 2002
1,000

Class
Common Stock, $0.01 par value

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (unaudited)
	Condensed consolidated statements of income and comprehensive income for the three and six months ended April 30, 2002 and 2001	3
	Condensed consolidated balance sheets, April 30, 2002 and October 31, 2001	4
	Condensed consolidated statements of cash flows for the six months ended April 30, 2002 and 2001	5
	Notes to condensed consolidated financial statements	6
Item 2. Management's discussion and analysis of financial condition and results of operations		13
Item 3. Quantitative and qualitative disclosures about market risk		20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 6. Exhibits and Reports on Form 8-K		20
Signature		21

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

			Three months ended April 30,						Six months ended April 30,
			2002			2001			2002			2001
			(in thousands, except share and per share data)
Revenues:
	Resort		$	170,573		$	172,040		$	295,079		$	292,539
	Real estate			1,666			14,016			6,595			16,145

		Total revenues		172,239			186,056			301,674			308,684
Expenses:
	Cost of real estate			—			11,121			2,332			12,503
	Payroll and benefits			47,570			46,043			90,315			86,991
	Other expenses			52,467			54,756			95,501			96,236
	Depreciation and amortization			16,733			15,902			33,332			29,413
	Corporate fee			2,764			2,962			5,026			5,925

		Total operating expenses		119,534			130,784			226,506			231,068

Income from operations				52,705			55,272			75,168			77,616
Other income (expense):
	Interest income			220			542			1,040			1,018
	Interest expense			(18,908	)		(20,381	)		(36,370	)		(36,893	)
	Other expense			(276	)		(246	)		(354	)		(318	)

		Other expense, net		(18,964	)		(20,085	)		(35,684	)		(36,193	)

Income before income taxes				33,741			35,187			39,484			41,423
Income tax expense				13,497			14,075			15,794			16,569

Net income			$	20,244		$	21,112		$	23,690		$	24,854

Basic and diluted earnings per share			$	20,244		$	21,112		$	23,690		$	24,854

Weighted average number of shares				1,000			1,000			1,000			1,000

Comprehensive income:
Net income			$	20,244		$	21,112		$	23,690		$	24,854
Cumulative effect of change in accounting principle, net of tax				—			—			—			2,728
Change in fair value of derivative instruments, net of tax				273			(1,805	)		1,351			(5,864	)
Reclassification adjustments, net of tax				1,559			—			3,118			—

Other comprehensive income (loss)				1,832			(1,805	)		4,469			(3,136	)

Comprehensive income			$	22,076		$	19,307		$	28,159		$	21,718

See accompanying notes to consolidated financial statements.

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

				April 30, 2002			October 31, 2001
				(in thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents			$	76,575		$	37,491
	Restricted cash				14,936			10,726
	Trade receivables, net of allowance for doubtful receivables of $1,208 and $993, respectively				46,556			21,513
	Inventories				17,235			15,849
	Current portion of notes receivable				10,434			7,207
	Other receivables				1,140			1,171
	Prepaid expenses and other current assets				5,324			2,339
	Receivable from Parent				2,078			2,832
	Deferred income taxes				4,636			4,636

			Total current assets		178,914			103,764
Real estate under development					924			2,199
Property and equipment, net of accumulated depreciation of $203,976 and $175,602, respectively					1,024,991			944,057
Notes receivable, less current portion					7,126			7,298
Restricted cash, less current portion					6,968			7,216
Goodwill					121,876			121,876
Other intangible assets, net					200,019			169,988
Other assets					12,288			11,588

				$	1,553,106		$	1,367,986

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Accounts payable			$	16,240		$	14,704
	Accrued liabilities				54,691			37,869
	Accrued interest payable				4,188			2,753
	Current portion of long-term debt				4,442			4,442
	Current portion of obligations under capital leases				2,069			1,124
	Customer and other deposits				28,353			27,446
	Deferred income and other				10,303			7,502

			Total current liabilities		120,286			95,840
Long-term debt, less current portion					909,968			797,047
Obligations under capital leases, less current portion					33,171			32,306
Other liabilities					10,911			23,771
Member deposits					170,183			149,271
Deferred income taxes					20,048			15,216
Commitments and contingencies
Stockholder's equity:
	Common stock, $.01 par value, 25,000 shares authorized, 1,000 outstanding				—			—
	Additional paid-in capital				258,843			252,998
	Retained earnings				36,094			12,404
	Accumulated other comprehensive loss, net of tax				(6,398	)		(10,867	)

		Total stockholder's equity			288,539			254,535

				$	1,553,106		$	1,367,986

See accompanying notes to consolidated financial statements.

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

			For the six months ended April 30,
			2002			2001
			(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	23,690		$	24,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				33,332			29,413
Amortization of debt issuance costs				1,246			995
Provision for losses on trade and notes receivables				337			357
Change in deferred taxes				2,210			622
Loss on disposal of assets				215			171
Changes in operating assets and liabilities, net of effects from acquisition:
	Trade receivables			(22,685	)		(10,207	)
	Inventories			446			(665	)
	Prepaid expenses and other current assets			(2,939	)		(2,045	)
	Notes receivable			966			63
	Other receivables			31			(807	)
	Other assets			(705	)		1,073
	Accounts payable			(3,956	)		694
	Accrued liabilities			13,076			15,703
	Accrued interest payable			1,435			1,628
	Deferred income, customer and other deposits			1,583			5,971
	Other liabilities			76			83

		Net cash provided by operating activities		48,358			67,903
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired				(115,592	)		(286,075	)
Purchases of property and equipment				(11,952	)		(16,139	)
Restricted cash				(3,962	)		(4,329	)
Proceeds from disposal of assets				33			25
Sale of real estate under development				1,377			10,469
Investment in real estate under development				(102	)		(6,104	)

		Net cash used in investing activities		(130,198	)		(302,153	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit borrowings				128,000			126,500
Revolving line of credit payments				(61,500	)		(75,500	)
Principal payments on long-term debt and obligations under capital leases				(4,003	)		(2,173	)
Proceeds on borrowings of note payable				50,000			175,000
Member deposits and collections on member notes receivable				13,932			16,013
Membership refunds				(4,978	)		(5,317	)
Receivable from Parent				754			(1,373	)
Debt financing costs				(1,281	)		(4,905	)

Net cash provided by financing activities				120,924			228,245

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				39,084			(6,005	)
CASH AND CASH EQUIVALENTS, beginning of period				37,491			16,567

CASH AND CASH EQUIVALENTS, end of period			$	76,575		$	10,562

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Interest paid (net of amounts capitalized)		$	29,400		$	34,270

	Income taxes paid		$	281		$	429

See accompanying notes to consolidated financial statements.

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. Organization and Accounting Policies

KSL Recreation Group, Inc. and its subsidiaries (collectively, the Company) is engaged in the ownership and management of resorts, spas, golf courses, private clubs, and activities related thereto.

The unaudited interim condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q and do not include all of the information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, these condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position, results of operations and cash flows. These unaudited interim condensed consolidated financial statements should be read in conjunction with the other disclosures contained herein and with the Company's audited consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended October 31, 2001. Operating results for interim periods are not necessarily indicative of results that may be expected for the entire fiscal year. Certain reclassifications have been made in the consolidated financial statements to conform to the 2002 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

Change in Accounting for Derivative Instruments and Hedging Activities—Effective November 1, 2000, the Company adopted SFAS 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 $4.5 million and ($5.9) million during the six-months ended April 30, 2002 and 2001, respectively, which were included in OCI. In addition, $5.8 million was charged to earnings during the six-months ended April 30, 2002.

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 method assuming no ineffectiveness to account for its hedging instruments in accordance with SFAS No. 133.

Change in Accounting for Business Combinations and Goodwill and Other Intangible Assets—In June 2001, the Financial Accounting Standards Board (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. Existing goodwill and intangible assets will be evaluated against this new criteria, which may result in certain intangible assets being subsumed into 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 impact that the adoption of SFAS 142 had on net income and net income per share for the three and six months ended April 30, 2002 and 2001 is as follows:

	Three months ended April 30,				Six months ended April 30,
	2002		2001		2002		2001
	(in thousands, except per share data)
Reported net income for the period	$	20,244	$	21,112	$	23,690	$	24,854
Add back: Goodwill amortization, net of tax		—		742		—		1,485

Adjusted net income for the period	$	20,244	$	21,854	$	23,690	$	26,339

Basic and diluted net income per share—
Reported net income for the period	$	20,244	$	21,112	$	23,690	$	24,854

Adjusted net income for the period	$	20,244	$	21,854	$	23,690	$	26,339

There was no goodwill acquired or any goodwill impairment losses recognized during the three and six months ended April 30, 2002.

The gross carrying amount and accumulated amortization of the Company's other intangible assets as of April 30, 2002 and October 31, 2001 are as follows:

	April 30, 2002						October 31, 2001
Intangible Asset (Weighted- Average Amortization Period)	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(in thousands)
Trade names (23 years)	$	108,624	$	7,986	$	100,638	$	91,432	$	5,584	$	85,848
Management contracts (20 years)		41,384		4,067		37,317		26,872		3,045		23,827
Golf rights (25 years)		25,775		1,375		24,400		25,775		859		24,916
Membership contracts (15 years)		16,207		2,929		13,278		13,136		2,396		10,740
Debt issue costs (10 years)		16,464		6,952		9,512		15,183		5,706		9,477
Lease agreements (25 years)		19,667		4,793		14,874		19,667		4,487		15,180

Total	$	228,121	$	28,102	$	200,019	$	192,065	$	22,077	$	169,988

Amortization expense recorded on the intangible assets for the six months ended April 30, 2002 and for the year ended October 31, 2001 was $6.0 million and $8.8 million, respectively. As a result of adoption, there have been no changes to amortizable lives or methods. The estimated amortization expense for each of the five succeeding fiscal years is as follows:

For the year ended October 31,	(in thousands)
2002	$	12,277
2003		12,488
2004		12,488
2005		11,353
2006		10,830

Recently Issued Accounting Pronouncements—SFAS No. 143, "Accounting for Asset Retirement Obligations" addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 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.

NOTE 2. 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", or the "Biltmore"), 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. In addition, the Company assumed a mortgage of $59.4 million, secured by the Property. The acquisition was accounted for using

the purchase method of accounting. 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.

On November 16, 2001, the Company, through KSL La Costa Corporation, a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the La Costa Resort & Spa ("La Costa"), located in Carlsbad, California, pursuant to an agreement of purchase and sale, dated October 31, 2001, between La Costa Hotel and Spa Corporation ("Seller") and an independent third party ("Agreement"). The Agreement was assigned on November 1, 2001 to KSL La Costa Corporation. The purchase price of the Property was $120.0 million (excluding transaction costs of approximately $4.2 million, membership liabilities of $8.8 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, 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 Company is in the process of finalizing the valuation of certain assumed membership liabilities; thus, the allocation of the purchase price is subject to refinement.

		2002
		(in thousands)
Current assets		$	4,573
Property, plant, and equipment			96,375
Intangible assets			34,776
Other assets			861

	Total assets acquired		136,585
Current liabilities			(11,363	)
Membership liabilities and obligations under capital leases			(9,630	)

	Total liabilities assumed		(20,993	)
Net assets acquired		$	115,592

The acquired intangible assets consisted of trade name of $17.2 million, management contract of $14.5 million and club membership programs of $3.1 million and are being amortized using the straight-line method over a weighted average useful life of 15 years.

The following are the Company's unaudited pro forma consolidated results of operations for the six months ended April 30, assuming the Biltmore and La Costa transactions occurred as of November 1, 2000:

	2002		2001
	(in thousands, except per share data)
Revenues	$	303,566	$	349,982
Income before income taxes		38,735		41,770
Net income		23,241		25,062
Net income per share — basic and diluted		23,241		25,062

The unaudited pro forma results 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.

NOTE 3. Long-term Debt and Restricted Cash

Concurrent with the acquisition of the Biltmore on December 22, 2000, the Company amended its credit facility. The Amended and Restated Credit Facility allows for maximum borrowings of $529.3 million, including Term A and Term B loans of $47.5 million each, a Term C loan of $173.3 million and maximum borrowings under a revolving credit facility of $239.6 million, decreasing to $216.1 million and $186.6 million in May 2002 and 2003, respectively. Borrowings under the Amended and Restated Credit Facility as of April 30, 2002 bear interest at variable rates up to 2.875% above LIBOR or 1.875% above the syndication Agent's base rate. The Company paid approximately $4.9 million in financing costs in connection with such amendment, which is being amortized over the remaining life of the Amended and Restated Credit Facility. The Company's outstanding borrowings under the revolving credit line were $139.0 million at April 30, 2002. The terms of the Company's credit facility, including the revolving credit line, contain certain financial covenants. The Company was in compliance with the required financial covenants of the credit facility and other debt instruments at April 30, 2002.

In April 2002, La Costa entered into a Mortgage Loan Agreement with Wells Fargo Bank, NA. The loan agreement allows for maximum borrowings of $60.0 million, based on certain financial calculations, and bears interest at LIBOR plus 2.375%. As of April 30, 2002, the loan amount outstanding was $50.0 million.

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 condensed 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 condensed consolidated statements of operations over the life of the agreement. Effective November 1, 2001, the Company, KSL Recreation Corporation (the Parent) and the swap counter party 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 has been assumed by the Parent, and the reduction in the swap liability, net of tax, has been accounted for as a contribution of capital by the Parent. The Company has discontinued hedge accounting for this swap and the net loss relating to this swap shall remain in accumulated other comprehensive loss and be reclassified into earnings as interest expense over the remaining term of the hedged debt obligation. The Company's additional paid in capital increased $5.9 million, deferred tax assets decreased by $3.9 million, and other long-term liabilities decreased by $9.8 million. During the six month period ended April 30, 2002, the Company reclassed approximately $5.2 million from OCI into interest expense related to this swap.

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 $6.1 million at April 30, 2002) on the accompanying condensed consolidated balance sheet. The fair value of the swap at October 31, 2001 was $8.4 million and its change in fair value from November 1, 2001 to April 30, 2002 is reflected, net of tax, in OCI. The increase to OCI is attributable to gains on cash flow hedges during the six months ended April 30, 2002.

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. However, the swap does not qualify for hedge accounting under SFAS 133. The fair value of the swap at October 31, 2001 was a liability of $3.5 million. Its fair value as of April 30, 2002 was a liability of $2.6 million 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 rate 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 the six months ended April 30, 2002, the Company made net payments related to these swap agreements totaling $5.8 million. These amounts were recorded as increases to interest expense. Estimated net derivative losses of approximately $3.1 million included in OCI as of April 30, 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 April 30, 2003.

NOTE 4. 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. 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 1, Organization and 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 three and six months ended April 30, 2002 and 2001 are as follows:

		Three months ended April 30,				Six months ended April 30,
		2002		2001		2002		2001
Resort
	Revenues	$	170,573	$	172,040	$	295,079	$	292,539
	Income from Operations		51,088		52,856		71,075		74,555
Real Estate
	Revenues		1,666		14,016		6,595		16,145
	Income from Operations		1,617		2,416		4,093		3,061
Consolidated
	Revenues		172,239		186,056		301,674		308,684
	Income from Operations		52,705		55,272		75,168		77,616

The Real Estate segment's identifiable assets were $1.6 million and $3.6 million at April 30, 2002 and October 31, 2001, respectively. All of the remaining assets of the Company are related to the Resort segment, other than the deferred income taxes, which is considered a corporate asset and is not identifiable to either segment. Substantially all of the Company's capital expenditures and depreciation and amortization expense relates to the Resort segment.

NOTE 5. Subsequent Events

Subsequent to April 30, 2002, the Company refinanced its $275.0 million mortgage at Grand Wailea. The new mortgage matures in 3 years 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 November 2003. This refinanced debt is secured by the assets of Grand Wailea.

KSL RECREATION GROUP, INC.
(a wholly owned subsidiary of KSL Recreation Corporation)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. 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.

Long-Lived Assets—Management reviews long-lived assets, including certain identifiable intangibles and goodwill, for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated at the present value of future cash flows discounted at a rate commensurate with management's estimate of the business risks. Real estate assets, if any, for which management has committed to a plan to dispose of the assets, whether by sale or abandonment, are reported at the lower of carrying amount or fair value less cost to sell. Preparation of estimated expected future cash flows is inherently subjective and is based on management's best estimate of assumptions concerning expected future conditions. No impairments were identified as of April 30, 2002.

Management's assumption that its long-lived assets are not impaired at April 30, 2002 is based on management's estimates of future market conditions and cash flows. To the extent that management's assumptions regarding future cash flows and market conditions differ materially from actual cash flows and market conditions, the Company could have significant impairments of its property and equipment as well as other long-lived assets. These impairments, if any, could result in material write-downs of the Company's assets.

See Note 1 regarding recently issued accounting pronouncements.

Consolidated Results of Operations

Net income totaled $20.2 million for the three months ended April 30, 2002 ("2002 Second Quarter") as compared to $21.1 million for the three months ended April 30, 2001 ("2001 Second

Quarter"). For the six months ended April 30, 2002 ("2002 Six Months") net income totaled $23.7 million compared with $24.9 million for the six months ended April 30, 2001 ("2001 Six Months"). Income from operations totaled $52.7 million in the 2002 Second Quarter and $55.3 million in the 2001 Second Quarter. Similarly, income from operations decreased to $75.2 million in the 2002 Six Months from $77.6 million in the 2001 Six Months. The decline in operating results from the 2001 Second Quarter to the 2002 Second Quarter as well as from the 2001 Six Months to the 2002 Six Months relates primarily to the Resort segment, which was impacted by the aftermath of the tragic events of September 11, 2001 and their impact on the hospitality industry. Operating income for the Resort segment was also lower due to the operating loss of $1.2 million after depreciation and amortization at La Costa from November 16, 2001 (the date of acquisition) until April 30, 2002. This decline was partially offset by a full six months of results of operations for the Biltmore in 2002 as compared to 130 days of operations for the Biltmore in 2001. Additional information relating to the operating results for each business segment is set forth below.

Resort Segment

Select operating data for the Company's resort segment for the quarters indicated is as follows:

			Three months ended April 30,						Six months ended April 30,
			2002			2001			2002			2001
			(in thousands, except operating statistics)
Resort revenue:
	Rooms		$	68,967		$	69,939		$	117,415		$	118,148
	Food and beverage			44,098			43,585			76,397			73,824
	Golf fees			11,086			11,702			18,763			20,636
	Dues and fees			7,505			6,359			14,685			12,337
	Merchandise			7,952			8,398			13,616			14,526
	Spa			8,814			8,614			16,293			15,317
	Other			22,151			23,443			37,910			37,751

		Total resort revenue	$	170,573		$	172,040		$	295,079		$	292,539
Resort operating income			$	51,088		$	52,856		$	71,075		$	74,555
Operating statistics:
	Available room nights			415,410			369,606			837,990			712,480
	Occupancy			65.6	%		72.3	%		58.0	%		68.0	%
	ADR (average daily room rate)		$	252.47		$	261.37		$	240.82		$	242.92
	RevPAR (revenue per available room)		$	165.67		$	188.97		$	139.57		$	165.15

Resort revenues. Resort revenues decreased by $1.6 million or 0.9%, from $172.0 million in the 2001 Second Quarter to $170.6 million in the 2002 Second Quarter. In addition, resort revenues increased $2.6 million or 0.9% from $292.5 million in the 2001 Six Months to $295.1 million in the 2002 Six Months. Revenues at the resorts owned by the Company for over one year, "same stores" revenues, decreased $10.6 million or 6.2% in the 2002 Second Quarter as compared to the 2001 Second Quarter. Similarly, "same stores" revenues decreased $21.9 million or 8.9% in the 2002 Six Months as compared to the 2001 Six Months. These decreases can be attributed to the aftermath of the tragic events of September 11, 2001 and their impact on the hospitality industry. In the aftermath of September 11^th, occupancy for the 2002 Second Quarter and 2002 Six Months was approximately 66% and 58%, respectively, or 5 to 10 points lower than typical rates during these periods. The lower revenue and occupancy were also impacted by up to 230 rooms "out of order" for renovations at Doral during the 2002 Six Months and the 2002 Second Quarter. The lower occupancy had a direct impact on rooms revenue as well as other revenue categories as occupancy helps drive other revenue throughout the Company's resorts.

The decrease in "same stores" revenue in the 2002 Second Quarter and the 2002 Six Months was offset by an increase in revenue from the acquisitions of La Costa on November 16, 2001 and the Biltmore on December 22, 2000. These transactions were accounted for as purchases and accordingly the results of both La Costa and the Biltmore are included from the date of their respective acquisitions. Accordingly, the 2002 Second Quarter and 2002 Six Months includes approximately 2¹/2 months and 5¹/2 months, respectively, of La Costa's results and a full 3 and 6 months, respectively, of Biltmore's results. By contrast, the 2001 Second Quarter and 2002 Six Months has 3 months and 4¹/2 months, respectively, of Biltmore's results and does not include La Costa's results.

Resort operating expenses. With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to the Resort segment. Operating expenses (excluding depreciation and amortization and the corporate fee) decreased by $0.4 million, or 0.5%, from $100.3 million in the 2001 Second Quarter to $99.9 million in the 2002 Second Quarter. In addition, operating expenses (excluding depreciation and amortization and the corporate fee) increased $3.0 million or 1.6% from $182.6 million in the 2001 Six Months to $185.6 million in the 2002 Six Months. "Same stores" operating expenses decreased $6.4 million or 6.5% in the 2002 Second Quarter as compared to the 2001 Second Quarter. Similarly, "same stores" operating expenses decreased $15.8 million or 10.0% in the 2002 Six Months as compared to the 2001 Six Months. These decreases can be attributed to the restructuring and stringent cost mitigation plan the Company implemented across its resorts portfolio in response to the impact of 9/11. The decrease in "same stores" operating expenses in the 2002 Second Quarter as well as the 2002 Six Months was offset by an increase in operating expenses due to the acquisitions of La Costa and the Biltmore described above.

Depreciation and amortization increased $0.8 million or 5.2% from $15.9 million in the 2001 Second Quarter to $16.7 million in the 2002 Second Quarter. The 2002 Six Months depreciation and amortization totaled $33.3 million, a $3.9 million or 13.3% increase from the 2001 Six Months. The increase can be attributed primarily to the acquisitions of La Costa and the Biltmore, which added approximately $1.7 million and $3.4 million in depreciation and amortization in the 2002 Second Quarter and 2002 Six Months, respectively, as well as fixed asset purchases and capital improvements across the Company's resorts. These increases in depreciation and amortization 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 amortization of approximately $1.5 million and $3.0 million in the 2002 Second Quarter and Six Months, respectively.

Resort operating income. Operating income decreased $1.8 million, or 3.3%, from $52.9 million in the 2001 Second Quarter to $51.1 million in the 2002 Second Quarter; similarly, operating income of $71.1 million in the 2002 Six Months was a decrease of $3.5 million or 4.7% from the 2001 Six Months. These decreases can be attributed to the factors detailed above. The operating income margin for the resort segment was 30.0% and 24.1% in the 2002 Second Quarter and 2002 Six Months, respectively, as compared to 30.7% and 25.5% in the 2001 Second Quarter and 2001 Six Months, respectively.

Real estate operations. Real estate revenue totaled $1.7 million in the 2002 Second Quarter as compared to $14.0 million in the 2001 Second Quarter, a decrease of $12.3 million; similarly, real estate revenue of $6.6 million in the 2002 Six Months was a decrease of $9.6 from the 2001 Six Months. Operating income earned by the real estate segment decreased $0.8 million from $2.4 million in the 2001 Second Quarter to $1.6 million in the 2002 Second Quarter, while real estate operating income for the 2002 Six Months was $4.1 million, a $1.0 million increase from the 2001 Six Months. The Company received the final installment in connection with the sale of the Cherry Key parcel near the Grand Traverse Resort and Spa for $2.8 million in the 2002 Six Months. Additionally, a contingency was satisfied related to the sale of a land parcel near La Quinta Resort and Spa in the 2002 Six

Months and the 2002 Second Quarter, and $1.4 million in revenue and operating income was recognized. In addition, the real estate segment closed sales of three resort homes on a site adjacent to La Quinta Resort and Spa, for approximately $1.9 million in the 2002 Six Months, with none closing in the 2002 Second Quarter. The Company had one resort home remaining in its real estate under development at April 30, 2002. In the 2001 Six Months, the real estate segment closed sales of twenty-one resort homes for approximately $14.7 million, with nineteen of these sales closing in the 2001 Second Quarter.

Net interest expense. Net interest expense decreased by $1.1 million or 5.8% from $19.8 million in the 2001 Second Quarter to $18.7 million in the 2002 Second Quarter. Net interest expense totaled $35.3 million for the 2002 Six Months, a decrease of $0.5 million or 1.5% from the $35.8 million in the 2001 Six Months. Interest expense for the 2002 Second Quarter and 2002 Six Months 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; (iv) $57.2 million mortgage secured by the Arizona Biltmore Resort and Spa; (v) $50.0 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 the 2002 Second Quarter and the 2002 Six Months, offset by the Company's increased debt level due to the acquisition of La Costa.

Income tax expense. Income tax expense decreased to $13.5 million in the 2002 Second Quarter from $14.1 million in the 2001 Second Quarter; similarly income tax expense decreased to $15.8 million in the 2002 Six Months from $16.6 million in the 2001 Six Months due to the factors described above. The Company's effective tax rate for the 2002 and 2001 Second Quarter and 2002 and 2001 Six Months was 40.0%.

Net income. Net income decreased $0.9 million or 4.1%, from $21.1 million in the 2001 Second Quarter to $20.2 million in the 2002 Second Quarter; similarly net income decreased $1.2 million or 4.7%, from $24.9 million in the 2001 Six Months to $23.7 million in the 2002 Six Months due to the factors described above.

Cash Flows, EBITDA and Adjusted EBITDA Analysis

The following includes comparative financial information of the Company's EBITDA and Adjusted EBITDA for the three and six months ended April 30, 2001 and 2000:

	Three months ended April 30,						Six months ended April 30,
	2002			2001			2002			2001
	(in thousands, except share and per share data)
Cash flows from operating activities	$	25,466		$	36,941		$	48,358		$	67,903
Cash flows from investing activities		(4,898	)		(2,642	)		(130,198	)		(302,153	)
Cash flows from financing activities		5,767			(35,070	)		120,924			228,245
EBITDA (1)	$	69,162		$	70,928		$	108,146		$	106,711
Net Membership Deposits (2)		5,221			6,691			9,206			10,985
Non-cash items (3)		276			1,396			354			1,468

Adjusted EBITDA (4)	$	74,659		$	79,015		$	117,706		$	119,164

1): EBITDA is defined as net income before (i) income tax expense; (ii) depreciation and amortization; and (iii) net interest expense. EBITDA is not defined as an alternative to profitability measures as determined under generally accepted accounting principles ("GAAP"), and it may not be comparable to similarly titled measures reported by other companies.
2): 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 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. The Company accounts for membership deposits as "cash provided from financing activities" in its statements of cash flows and reports a long-term liability in its balance sheets equal to the amount of such membership deposits.
3): Other non-cash charges (Income) and non-recurring items consist of losses on Asset Disposals, non-recurring charges and non-cash membership related items.
4): Adjusted EBITDA is defined as EBITDA adjusted for (i) net membership deposits and (ii) other non-cash and/or non-recurring items. Adjusted EBITDA should not be construed as an indicator of the Company's operating performance or as an alternative to profitability measures as determined in accordance with GAAP. Additionally, Adjusted EBITDA should not be construed by investors as a measure of the Company's liquidity or ability to meet all cash needs or as an alternative to cash flows from operating, investing and financing activities as determined in accordance with GAAP, nor should Adjusted EBITDA be construed by investors as an alternative to any other determination under GAAP. The Company's Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are calculated in accordance with 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. EBITDA decreased by $1.8 million or 2.5% from $70.9 million in the 2001 Second Quarter to $69.1 million in the 2002 Second Quarter. In the 2002 Six Months, EBITDA was $108.2 million, an increase of $1.4 million or 1.3% from $106.7 million, due largely to the acquisitions of La Costa and the Biltmore, partially offset by the weakness in the travel industry as discussed above.

Adjusted EBITDA decreased by $4.3 million or 5.5% from $79.0 million in the 2001 Second Quarter to $74.7 million in the 2002 Second Quarter. In the 2002 Six Months, Adjusted EBITDA was $117.7 million, a decrease of $1.5 million or 1.2% from the same period in the prior year. These decreases reflect the changes in EBITDA discussed above partially offset by the decline in net membership deposits in the 2002 Second Quarter and 2002 Six Months. However, Adjusted EBITDA

was negatively impacted by a 22.0% and 16.2% decrease in net membership deposits in the 2002 Second Quarter and 2002 Six Months, respectively, as membership "sales" were more difficult in the slower economic environment in the current 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 for the three and six months ended April 30, assuming the Biltmore and La Costa transactions occurred as of November 1, 2000:

	Three months ended April 30,						Six months ended April 30,
	2002			2001			2002			2001
	(in thousands, except operating statistics)
Revenues	$	172,242		$	199,785		$	303,566		$	349,982
Net income	$	20,244		$	23,154		$	23,241		$	25,062
EBITDA	$	69,439		$	75,237		$	108,676		$	119,927
Adjusted EBITDA	$	74,659		$	82,390		$	117,882		$	131,677
Operating statistics:
Occupancy		65.6	%		71.1	%		57.7	%		66.7	%
ADR (average daily room rate)	$	252.47		$	257.11		$	240.48		$	239.08
RevPAR (revenue per available room)	$	165.62		$	182.81		$	138.76		$	159.47

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 the 2002 Six Months, cash flow provided by operating activities was $48.4 million compared to $67.9 million in the 2001 Six Months. As of April 30, 2002, the Company had cash and cash equivalents of $76.6 million (excluding restricted cash of $21.9 million). The Company's long-term debt at April 30, 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) $139.0 million of revolving borrowings under the Company's Amended and Restated Credit Facility; (v) $57.6 million mortgage secured by the Arizona Biltmore Resort and Spa; and (vi) $50.0 million mortgage secured by the La Costa Resort and Spa. Capital expenditures totaled $12.0 million and $16.1 million for the 2002 Six Months and the 2001 Six Months, 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 and to remain competitive in each of the Company's Resorts' geographical markets

As of April 30, 2002, the Company had a revolving credit facility, which allowed for maximum borrowings of $239.6 million. Maximum borrowings under the revolving credit line decrease to $216.1 million in May 2002 and $186.6 million in May 2003. Borrowings under the credit facility bear interest at variable rates up to 2.875% above LIBOR or 1.875% above the syndication Agent's base rate. As of April 30, 2002 borrowings under the revolving credit facility were $139.0 million, bore interest at LIBOR plus 1.75% 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 Kohlberg Kravis Roberts & Co., L.P. ("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. Moreover, the Company currently expects that it will acquire additional resorts, golf facilities or other recreational facilities, and in connection therewith, expects to incur additional indebtedness. In the event that the Company incurs such additional indebtedness, its ability to make principal and interest payments on its existing indebtedness may be adversely impacted.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

The statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations concerning future events, activities, conditions and any and all statements that are not historical facts are forward-looking statements. Actual results may differ materially from those projected. Forward-looking statements involve risks and uncertainties. A change in any one or a combination of factors could affect the Company's future financial performance. Also, the Company's past performance is not necessarily evidence of or an indication of the Company's future financial performance.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's most significant "market risk" exposure is the effect of changing interest rates. The Company manages its interest expense by using a combination of fixed and variable rate debt and interest rate cap and swap agreements. At April 30, 2002, the Company's debt consisted of approximately $125.0 million and $57.2 million of fixed rate debt at a weighted average interest rate of 10.25% and 8.25%, respectively, and $732.3 million of variable rate debt at a weighted average interest rate of 5.45%. The Company entered into interest swap agreements to reduce its exposure to interest rate fluctuations on its variable rate debt. As of April 30, 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 eighth of one percent for the six months ended April 30, 2002, the net impact on the Company's pre-tax earnings would have been approximately $0.2 million.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of Security Holders of the Company during the quarter ended April 30, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

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 Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		KSL RECREATION GROUP, INC.
Dated: June 14, 2002		By:	/s/ ERIC C. RESNICK Vice President, Chief Financial Officer and Treasurer

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KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation)
KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation) CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
KSL RECREATION GROUP, INC. (a wholly owned subsidiary of KSL Recreation Corporation) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

KSL RECREATION GROUP INC 10-Q