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

FORM 10-Q

(Mark One)

/x/	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 30, 2001.

/ /	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)
55-880 PGA Boulevard 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 /x/ No / /.

Shares outstanding of the Registrant's common stock
as of June 11, 2001
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, 2001 and 2000	3
	Condensed consolidated balance sheets, April 30, 2001 and October 31, 2000	4
	Condensed consolidated statements of cash flows for the six months ended April 30, 2001 and 2000	5
	Notes to condensed consolidated financial statements	6
Item 2. Management's discussion and analysis of financial condition and results of operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders		16
Item 6. Exhibits and Reports on Form 8-K		16
Signature		17

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,
			2001			2000			2001			2000
			(in thousands, except share and per share data)
Revenues:
	Resort		$	172,040		$	134,141		$	292,539		$	235,547
	Real estate			14,016			9,875			16,145			12,387

		Total revenues		186,056			144,016			308,684			247,934
Expenses:
	Cost of real estate			11,121			7,624			12,503			9,806
	Payroll and benefits			46,043			38,558			86,991			74,211
	Other expenses			54,756			43,461			96,236			80,610
	Depreciation and amortization			15,902			12,373			29,413			24,272
	Corporate fee			2,962			2,555			5,925			5,110

		Total operating expenses		130,784			104,571			231,068			194,009

Income from operations				55,272			39,445			77,616			53,925
Other income (expense):
	Interest income			542			272			1,018			605
	Interest expense			(20,381	)		(12,103	)		(36,893	)		(24,517	)
	Other expense, net			(246	)		(11	)		(318	)		(82	)

		Other expense, net		(20,085	)		(11,842	)		(36,193	)		(23,994	)

Income before income taxes				35,187			27,603			41,423			29,931
Income tax expense				14,075			10,592			16,569			11,523

Net income			$	21,112		$	17,011		$	24,854		$	18,408

Basic and diluted earnings per share			$	21,112		$	17,011		$	24,854		$	18,408

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

Comprehensive income:
Net income			$	21,112		$	17,011		$	24,854		$	18,408
Cumulative effect of change in accounting principle, net of tax				—			—			2,728			—
Change in fair value of derivative instruments, net of tax				(1,805	)		—			(5,864	)		—

				(1,805	)		—			(3,136	)		—

Comprehensive income			$	19,307		$	17,011		$	21,718		$	18,408

See accompanying notes to condensed consolidated financial statements.

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

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

			April 30, 2001			October 31, 2000
			(in thousands, except share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	10,562		$	16,567
	Restricted cash			13,623			5,768
	Trade receivables, net of allowance for doubtful receivables of $1,172 and $882, respectively			44,583			23,219
	Inventories			16,685			13,436
	Current portion of notes receivable			12,258			6,623
	Other receivables			4,425			3,618
	Prepaid expenses and other current assets			5,116			2,771
	Deferred income taxes			2,697			2,697

		Total current assets		109,949			74,699
Real estate under development				2,521			6,886
Property and equipment, net of accumulated depreciation of $161,582 and $138,127, respectively				947,859			750,056
Notes receivable, less current portion				8,666			6,646
Restricted cash, less current portion				7,418			7,683
Excess of cost over net assets of acquired entities, net of accumulated amortization of $30,725 and $27,812, respectively				125,720			100,832
Other assets, net				190,848			87,655

			$	1,392,981		$	1,034,457

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Accounts payable		$	14,524		$	13,026
	Accrued liabilities			50,158			31,539
	Accrued interest payable			3,199			1,571
	Current portion of long-term debt			1,000			1,000
	Current portion of obligations under capital leases			940			926
	Customer and other deposits			24,386			18,165
	Payable to parent			467			1,840
	Deferred income and other			8,090			3,249

		Total current liabilities		102,764			71,316
Long-term debt, less current portion				813,787			530,000
Obligations under capital leases, less current portion				32,472			32,706
Other liabilities				7,814			1,847
Member deposits				143,950			125,986
Deferred income taxes				17,478			19,604
Commitments and contingencies
Stockholder's equity:
	Common stock, $.01 par value, 25,000 shares authorized, 1,000 outstanding			—			—
	Additional paid-in capital			252,998			252,998
	Accumulated other comprehensive loss, net of tax			(3,136	)		—
	Retained earnings			24,854			—

		Total stockholder's equity		274,716			252,998

			$	1,392,981		$	1,034,457

See accompanying notes to condensed 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,
			2001			2000
			(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	24,854		$	18,408
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				29,413			24,272
Amortization of debt issuance costs				995			508
Provision for losses on trade and notes receivables				357			337
Deferred income taxes				622			—
Loss on sale of property and equipment, net				171			58
Changes in operating assets and liabilities, net of effects from acquisition:
	Trade receivables			(10,207	)		(10,089	)
	Inventories			(665	)		(1,301	)
	Prepaid expenses and other current assets			(2,045	)		180
	Notes receivable			63			973
	Other receivables			(807	)		1,486
	Other assets			1,073			20
	Accounts payable			694			(1,346	)
	Accrued liabilities			15,703			(3,385	)
	Accrued interest payable			1,628			(134	)
	Deferred income, customer deposits and other			5,971			2,898
	Other liabilities			83			76

		Net cash provided by operating activities		67,903			32,961
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired				(286,075	)		—
Purchases of property and equipment				(16,139	)		(34,031	)
Restricted cash				(4,329	)		2,818
Investment in real estate under development, net				4,365			3,722
Proceeds from sale of property and equipment				25			—

		Net cash used in investing activities		(302,153	)		(27,491	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit borrowings (repayments), net				226,000			(15,000	)
Principal payments on long-term debt and obligations under capital leases				(2,173	)		(1,580	)
Member deposits and collections on member notes receivable				16,013			17,066
Membership refunds				(5,317	)		(3,894	)
Payable to Parent				(1,373	)		—
Debt financing costs				(4,905	)		—

Net cash provided by (used in) financing activities				228,245			(3,408	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS				(6,005	)		2,062
CASH AND CASH EQUIVALENTS, beginning of period				16,567			9,369

CASH AND CASH EQUIVALENTS, end of period			$	10,562		$	11,431

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Interest paid (net of amounts capitalized)		$	34,270		$	24,143

	Income taxes paid		$	429		$	11,960

See accompanying notes to condensed 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, 2000. 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 2001 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.

Effective November 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 was amended by SFAS 137, which modified the effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, SFAS 133 was further amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". SFAS 133, as amended, requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet at its fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 also requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Upon adoption of SFAS 133, the Company recorded an interest rate swap derivative asset of $4.6 million and a net of tax adjustment for the cumulative effect of change in accounting principle of $2.7 million as other comprehensive income (OCI). The fair value of this swap was a liability of $4.2 million at April 30, 2001. The change in this swap's carrying value, net of tax, during the period from November 1, 2000 to April 30, 2001 is reflected as a reduction to OCI in the accompanying condensed consolidated financial statements. The reduction to OCI is attributable to losses on cash flow hedges during the six months ended April 30, 2001.

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.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 effective upon issuance. The adoption of SAB 101 did not have a material effect on the Company's consolidated financial statements.

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 $2.3 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. The excess of cost over net assets acquired was $27.8 million, which is being amortized over 20 years. 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 (Note 3).

The following are the Company's unaudited pro forma consolidated results of operations for the six months ended April 30, assuming the Biltmore transaction occurred as of November 1, 1999:

	2001		2000
	(in thousands, except per share data)
Revenues	$	323,839	$	301,743
Net income before income taxes		43,733		30,984
Net income		26,240		19,040
Net income per share		26,240		19,040

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 Arizona Biltmore on December 22, 2000, the Company amended its credit facility. The Amended and Restated Credit Facility allows for maximum borrowings of $529.3 million, including Term A and Term B loans of $48.5 million each, a Term C loan of $175.0 million and maximum borrowings under a revolving credit facility of $257.3 million, decreasing to $239.6 million, $216.1 million and $186.6 million in May 2001, 2002 and 2003, respectively. Borrowings under the Amended and Restated Credit Facility as of April 30, 2001 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 $85.0 million at April 30, 2001. The terms of the Company's credit facility, including the revolving credit line, contain certain financial covenants. The Company is in compliance with the required financial covenants of the credit facility and other debt instruments at April 30, 2001.

In March 1999, the Company entered into an interest rate swap agreement to hedge the effects of changes in interest rates. The swap is designated as a cash flow hedge as defined by SFAS 133 and is recorded at its fair value (a liability of $4.2 million at April 30, 2001) on the accompanying condensed consolidated balance sheet, with the change in the swap's carrying value, net of tax, from November 1, 2000 to April 30, 2001 being reflected in OCI. The swap involves 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 is denominated in dollars, has a notional principal amount of $270.0 million and matures in November 2002.

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 $1.1 million at April 30, 2001) on the accompanying condensed consolidated balance sheet. The fair value of the swap at inception was $0 and its change in fair value from inception to April 30, 2001 is reflected, net of tax, in OCI.

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 purpose of this swap is to manage the Company's interest rate exposure on its variable rate borrowings. However, the swap does not qualify for hedge accounting under SFAS 133. The fair value of the swap at inception was $0. Its fair value as of April 30, 2001 was a liability of $0.6 million and is included on the accompanying condensed consolidated balance sheet. The change in value is recorded in interest expense.

The counter-parties to all of the Company's interest swap agreements are major financial institutions. 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, 2001, the Company received net payments related to these swap agreements totaling $0.6 million. These amounts were recorded as reductions to interest expense. Estimated net derivative losses of approximately $1.9 million included in OCI as of April 30, 2001, are expected to be reclassified into earnings during the twelve months ended April 30, 2002.

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, 2001 and 2000 are as follows:

		Three months ended April 30,				Six months ended April 30,
		2001		2000		2001		2000
Resort
	Revenues	$	172,040	$	134,141	$	292,539	$	235,547
	Income from Operations		52,856		37,577		74,555		51,850
Real Estate
	Revenues		14,016		9,875		16,145		12,387
	Income from Operations		2,416		1,868		3,061		2,075
Consolidated
	Revenues		186,056		144,016		308,684		247,934
	Income from Operations		55,272		39,445		77,616		53,925

The Real Estate segment's identifiable assets were $4.4 million and $8.5 million at April 30, 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 and depreciation and amortization expense relates to the Resort segment.

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.

Consolidated Results of Operations

Net income totaled $21.1 million for the three months ended April 30, 2001 ("2001 Second Quarter) as compared to $17.0 million for the three months ended April 30, 2000 ("2000 Second Quarter"). For the six months ended April 30, 2001 ("2001 Six Months") net income totaled $24.9 million compared with $18.4 million for the six months ended April 30, 2000 ("2000 Six Months"). Income from operations totaled $55.3 million in the 2001 Second Quarter and $39.4 million in the 2000 Second Quarter. Similarly, income from operations increased to $77.6 million in the 2001 Six Months from $53.9 million in the 2000 Six Months. The improvement in operating results from the 2000 Second Quarter to the 2001 Second Quarter as well as from the 2000 Six Months to the 2001 Six Months relates primarily to (i) the acquisition of the Biltmore; (ii) recently completed capital improvements; and (iii) internal growth, as the Company achieved significant increases in revenue per available room night ("RevPAR") at certain of its resorts, especially Grand Wailea. 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,
			2001			2000			2001			2000
			(in thousands, except operating statistics)
Resort revenue:
	Rooms		$	69,939		$	52,858		$	118,148		$	92,456
	Food and beverage			43,585			32,670			73,824			57,613
	Golf fees			11,702			13,067			20,636			21,122
	Dues and fees			6,359			5,187			12,337			10,372
	Merchandise			8,398			7,152			14,526			12,429
	Spa			8,614			6,873			15,317			12,195
	Other			23,443			16,334			37,751			29,360

		Total resort revenue	$	172,040		$	134,141		$	292,539		$	235,547
Resort operating income			$	52,856		$	37,577		$	74,555		$	51,850
Operating statistics:
	Available room nights			369,606			306,036			712,480			616,690
	Occupancy			72.3	%		73.8	%		68.0	%		65.2	%
	ADR (average daily room rate)		$	261.37		$	234.21		$	242.92		$	228.73
	RevPAR		$	188.97		$	172.85		$	165.15		$	149.13

Resort revenues. Resort revenues increased by $37.9 million or 28.3%, from $134.1 in the 2000 Second Quarter to $172.0 million in the 2001 Second Quarter. In addition, resort revenues increased $57.0 million or 24.2% from $235.5 million in the 2000 Six Months to $292.5 million in the 2001 Six Months. The majority of these increases can be attributed to the acquisition of the Biltmore on December 22, 2000. This transaction was accounted for as a purchase and accordingly Biltmore's results are included from the date of its acquisition. The revenue increase can also be attributed to "same stores" growth at resorts that the Company has owned for at least twelve months. The acquisition of the Biltmore and the same stores growth enabled significant revenue increases in rooms, food and beverage, dues and fees, merchandise, spa and other resort related revenues.

During the 2001 Second Quarter and the 2001 Six Months, 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 $7.9 million in the 2001 Second Quarter and $16.1 million in the 2001 Six Months.

Resort operating expenses. With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to the Resort segment. Operating expenses (excluding depreciation and amortization and the corporate fee) increased by $18.7 million or 22.9%, from $81.6 million in the 2000 Second Quarter to $100.3 million in the 2001 Second Quarter. Operating expenses (excluding depreciation and amortization and the corporate fee) increased by $28.3 million or 18.4% from $154.3 million in the 2000 Six Months to $182.6 million in the 2001 Six Months. Same stores operating expenses (excluding depreciation and amortization and the corporate fee) increased slightly in the 2001 Second Quarter as compared to the 2000 Second Quarter as well as in the 2001 Six Months as compared to the 2000 Six Months. The increases can be attributed to expenses related to revenue growth described above.

Depreciation and amortization increased $3.5 million or 28.5% in the 2001 Second Quarter as compared to the 2000 Second Quarter. The 2001 Six Months depreciation and amortization totaled $29.4 million, a $5.1 million or 21.2% increase from the 2000 Six Months. These increases can be attributed to the acquisition of the Biltmore, which added approximately $3.2 million of depreciation and amortization in the 2001 Second Quarter and $4.3 million of depreciation and amortization in the 2001 Six Months. The remainder of the increase in these expenses can be attributed to the ongoing capital improvements at each of the Company's resorts.

Resort operating income. Operating income increased $15.3 million, or 40.7%, from $37.6 million in the 2000 Second Quarter to $52.9 million in the 2001 Second Quarter; whereas operating income of $74.6 million in the 2001 Six Months was an increase of $22.7 million or 43.8% from the 2000 Six Months. These increases can be attributed to the revenue growth outpacing the expense growth due to the factors detailed above. The operating income margin for the resort segment was 30.7% in the 2001 Second Quarter as compared to 28.0% in the 2000 Second Quarter. During the 2001 Six Months, the operating income margin was 25.5% as compared to 22.0% during the same period in the prior year.

Real estate operations. Real estate revenue totaled $14.0 million in the 2001 Second Quarter as compared to $9.9 million in the 2000 Second Quarter, a quarter over quarter increase of $4.1 million or 41.9%. For the 2001 Six Months real estate revenue totaled $16.1 million as compared to real estate revenue of $12.4 million during the 2000 Six Months. Operating income earned by the real estate segment increased $0.5 million from $1.9 million in the 2000 Second Quarter to $2.4 million in the 2001 Second Quarter. During the 2001 Six Months, the real estate segment closed sales of twenty-one resort homes on a site adjacent to La Quinta Resort and Spa, for approximately $14.7 million with nineteen of these sales closing in the 2001 Second Quarter for approximately $13.0 million. During the 2000 Six Months, the real estate segment sold eighteen of these resort homes for approximately $11.5 with fourteen of these sales closing in the 2000 Second Quarter for approximately $9.2 million.

Net interest expense. Net interest expense increased by $8.0 million or 67.7% from $11.8 million in the 2000 Second Quarter to $19.8 million in the 2001 Second Quarter. Net interest expensed totaled $35.9 million for the 2001 Six Months, an increase of $12.0 million or 50.0% from the $23.9 million recorded in the corresponding period in the prior year. Interest expense for the 2001 Second Quarter and the 2001 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) $59.2 million mortgage secured by the Arizona Biltmore Resort and Spa; and (v) revolving borrowings under the Company's Amended and Restated Credit Facility. The increase in interest expense can be attributed to the Company's increased debt level due to the acquisition of the Biltmore offset slightly by a decrease in the effective interest rate on the Company's variable rate borrowings.

Income tax expense. Income tax expense increased to $14.1 million in the 2001 Second Quarter from $10.6 million in the 2000 Second Quarter due to the increase in income before taxes. The Company's effective tax rate for the 2001 Second Quarter was 40.0% as compared to 38.4% during the 2000 Second Quarter. Income tax expense during the 2001 Six Months increased to $16.6 million from $11.5 million for the corresponding period in the prior year again due to the increase in income before taxes. The Company's effective tax rate for the 2001 Six Months was 40.0% as compared to 38.5% for the 2000 Six Months.

Net income. Net income increased by $4.1 million or 24.1%, from $17.0 million in the 2000 Second Quarter to $21.1 million in the 2001 Second Quarter. Net income for the 2001 Six Months was $24.9 million, an increase of $6.4 million or 35.0% from the 2000 Six Months. These increases can be attributed to the factors detailed above.

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,
	2001		2000		2001		2000
	(in thousands, except share and per share data)
EBITDA(1)	$	70,928	$	51,807	$	106,711	$	78,115
Net Membership Deposits(2)		6,691		9,299		10,985		13,327
Non-cash items(3)		1,396		10		1,468		81

Adjusted EBITDA(4)	$	79,015	$	61,116	$	119,164	$	91,523

EBITDA and Adjusted EBITDA. EBITDA increased by $19.1 million or 36.9% from $51.8 million in the 2000 Second Quarter to $70.9 million in the 2001 Second Quarter. In the 2001 Six Months, EBITDA was $106.7 million, an increase of $28.6 million or 36.6% from $78.1 million. These increases are due largely to the acquisition of the Biltmore, as discussed above, and same stores EBITDA growth at certain of the Company's resorts, especially Grand Wailea.

Adjusted EBITDA increased by $17.9 million or 29.3% from $61.1 million in the 2000 Second Quarter to $79.0 million in the 2001 Second Quarter. In the 2001 Six Months, Adjusted EBITDA was $119.2 million, an increase $27.6 million or 30.2% from the same period in the prior year. These increases reflect the increases in EBITDA discussed above partially offset by a decline in net membership deposits in the 2001 Second Quarter. The decline in net membership deposits can be attributed to new members choosing to defer a greater portion of their initial deposits than in the prior

year and to a decline in the number of new members in the 2001 Second Quarter as compared to the 2000 Second Quarter.

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 accounting principles generally accepted in the United States of America ("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 in thirty years (or sooner under certain circumstances). In accordance with GAAP, the Company accounts for membership deposits as "cash provided from financing activities" in its statements of cash flows and reports a liability in its balance sheets equal to the amount of such membership deposits.
3): Other non-cash and non recurring items may consist of loss on sale of facility, gain on sale of subsidiary, extraordinary items, 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.

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 2001 Six Months, cash flow provided by operating activities was $67.9 million compared to $33.0 million in the 2000 Six Months. As of April 30, 2001, the Company had cash and cash equivalents of $10.6 million (excluding restricted cash of $21.0 million). The Company's long-term debt at April 30, 2001 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 $271.0 million drawn against the Company's Amended and Restated Credit Facility; (iv) $85.0 million of revolving borrowings under the Company's Amended and Restated Credit Facility; and (v) $58.8 million mortgage secured by the Arizona Biltmore Resort and Spa. Capital expenditures totaled $16.1 million and $34.0 million for the 2001 Six Months and the 2000 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.

As of April 30, 2001, the Company had a revolving credit facility, which allowed for maximum borrowings of $257.3 million. Maximum borrowings under the revolving credit line decrease to $239.6 million in May 2001, $216.1 million in May 2002 and $186.6 million in May 2003. Borrowings under the credit facility bear interest at variable rates up to 2.875% above LIBOR or 1.875% above the Syndication Agent's base rate. As of April 30, 2001 borrowings under the revolving credit facility were $85.0 million and bore interest at LIBOR plus 2.0% 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, 2001, the Company's debt consisted of approximately $125.0 million and $58.8 million of fixed rate debt at a weighted average interest rate of 10.25% and 8.25%, respectively, and $631.0 million of variable rate debt at a weighted average interest rate of 8.61%. The Company entered into interest swap agreements to reduce its exposure to interest rate fluctuations on its variable rate debt. As of April 30, 2001, the Company had swap agreements in effect with notional amounts totaling $545.0 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, 2001, the net impact on the Company's pre-tax earnings would have been approximately $0.1 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, 2001.

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

None

(b): Reports on Form 8-K

None

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 12, 2001		By:		/s/ ERIC C. RESNICK Vice President, Chief Financial Officer and Treasurer

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

PART II. OTHER INFORMATION

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

Item 6. Exhibits and Reports on Form 8-K

KSL RECREATION GROUP INC 10-Q