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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

For the fiscal year ended October 31, 2001

OR

For the transition period from                              to                             

Commission File Number—333-31025

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

Registrant's telephone number including area code: 760-564-8000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

State the aggregate market value of the voting stock held by non-affiliates of the registrant: None

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

The number of shares of common stock ($.01 par value) outstanding at January 25, 2002 was 1,000 shares.

DOCUMENTS INCORPORATED BY REFERENCE: None

INDEX

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        Portions of this Annual Report on Form 10-K include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those projected or implied. The most significant of such risks, uncertainties and other factors are described in this Annual Report.

Part I.

Item 1. Business

General

        KSL Recreation Group, Inc. was incorporated on March 14, 1997, under the laws of the State of Delaware. KSL Recreation Group, Inc., together with its subsidiaries (the "Company"), is involved in two operating segments, Resort and Real Estate, which represented 95% and 5%, respectively of revenues, in fiscal 2001. The Resort segment has engaged in service-based recreation through the ownership and management of resorts, spas, golf courses, private clubs, and activities related thereto. The Company's Resort operations currently include: (i) La Quinta Resort & Club ("La Quinta") and PGA WEST ("PGA WEST"), located in the Palm Springs, California area, which together, constitute the Company's "Desert Resorts" operations; (ii) the Grand Wailea Resort Hotel & Spa ("Grand Wailea"), located in Maui, Hawaii; (iii) the Arizona Biltmore Resort and Spa ("The Biltmore"), located in Phoenix, Arizona; (iv) Doral Golf Resort and Spa ("Doral"), located near Miami, Florida; (v) The Claremont Resort & Spa ("The Claremont"), located near Berkeley, California; (vi) Grand Traverse Resort and Spa ("Grand Traverse"), located in the northwest portion of the lower peninsula of Michigan; and (vii) a hotel and recreational complex known as Lake Lanier Islands ("Lake Lanier") located on Lake Lanier near Atlanta, Georgia. The Resort segment's operations comprise numerous interrelated services, including lodging, conference services, corporate and individual guest hospitality programs and facilities, food and beverage, private and resort golf operations, spas, club membership programs, entertainment and athletic focused special events. The Real Estate segment develops and sells real estate in and around the Company's Resort operations. The Real Estate operations exist to support and enhance growth of the Company's Resort operations.

        In November 2001, the Company, through a wholly owned subsidiary, acquired La Costa Resort and Spa, located in Carlsbad, California.

        The Company is wholly owned by KSL Recreation Corporation (the "Parent"), a Delaware corporation incorporated on May 19, 1993, of which approximately 98.0% of the common stock as of October 31, 2001, (86.8% on a fully diluted basis) is owned by partnerships formed at the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR"). Shortly after the Company's formation in March 1997, the subsidiaries of the Parent which owned Desert Resorts and Doral, and managed Lake Lanier, became wholly owned subsidiaries of the Company. Additional wholly owned subsidiaries of the Company have been formed in connection with subsequent acquisitions.

        The Company's strategy has been to acquire unique, irreplaceable resorts and invest significantly in facilities-related improvements to enhance and expand the revenue base, introduce numerous operating efficiencies and develop an expanded membership base. These measures are also designed to diversify the Company's revenue streams and cash flows and have reduced the Company's reliance on rooms revenue.

Desert Resorts

        Desert Resorts is located in La Quinta, California, a golf and recreation destination near Palm Springs, California. Desert Resorts includes La Quinta, formerly known as the La Quinta Hotel, which opened in 1926. La Quinta currently offers 804 "casita"-style hotel rooms (Spanish-style cottages)

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spread over approximately 45 acres of grounds, featuring indigenous architecture and a campus-like setting, and caters to corporate groups, individual guests and recreation enthusiasts. Desert Resorts also includes PGA WEST, which together with La Quinta encompass approximately 1,490 acres, nine championship 18-hole golf courses, including the Greg Norman course which opened in December 1999, six clubhouses, several restaurants, 19,500 square feet of retail space, 42 hard, clay and grass tennis courts, 66,000 square feet of conference facilities, 25 swimming pools, 38 spas/hot tubs and the 23,000 square foot Spa La Quinta, which includes 48 treatment rooms, a salon, retail store, and extensive spa programming. At the end of fiscal 2001, Desert Resorts opened Azur by Le Bernardin, a co-branded fine dining restaurant.

        Both La Quinta's and PGA WEST's private club operations provide golf and tennis facilities, golf and tennis instruction, fitness facilities, special events, and dining and social activities to their members. A full golf membership at La Quinta currently requires a $90,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual golf dues of $6,660. A full golf membership at PGA WEST currently requires a $100,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual golf dues of $7,380.

Grand Wailea

        In December 1998, the Company acquired Grand Wailea Resort Hotel & Spa, located in Maui, Hawaii. It comprises forty acres situated close to the base of south Maui's Mount Haleakala, and includes sophisticated water features including elaborate pools, grottos and waterslides reflecting Grand Wailea's location on the Maui coast. The resort features 779 luxury hotel rooms and guest suites, six restaurants, twenty-two banquet and meeting rooms totaling 81,000 square feet, expansive water features and pool facilities, a wedding chapel, and a complete 50,000 square foot European-style spa and fitness center with 38 treatment rooms, the largest of its kind in Hawaii. In addition, guests at the Grand Wailea have access to preferred tee times on golf courses near the resort.

        Grand Wailea currently offers memberships which offer member programs, room upgrade offers, and preferred room rates to its members. Members are encouraged to plan their visits during the resort's low demand periods based on reservation eligibility, blackout periods, special activities and programming. Grand Wailea has recently introduced an additional membership program catering to local residents. Members of this program are provided use of the resort's facilities. The Grand Wailea memberships currently require a deposit of up to $20,000 depending on the type of membership and annual dues ranging from $100 to $2,400. The deposits are fully refundable in thirty years (or sooner under certain circumstances).

The Biltmore

        In December 2000, the Company acquired The Biltmore, which includes 730 rooms, suites and villas located on 39 acres in Phoenix Arizona. The Biltmore was first opened 1929 and features architecture inspired by Frank Lloyd Wright throughout the resort. The resort has numerous water features including its Paradise Pool Complex with a 92-foot water slide and seven other on-site pools. Facilities at the Biltmore also include approximately 64,000 square feet of conference space, approximately 20,000 square feet of spa space with 21 treatment rooms, seven lighted tennis courts, four food and beverage outlets, and six high-end retailers. In addition, guests at the Biltmore have access to preferred tee times on two golf courses adjacent to the resort.

Doral

        Doral is a golf destination resort located approximately fifteen miles from downtown Miami, Florida and approximately ten miles from Miami International Airport. Doral includes 645 hotel rooms, approximately 75,000 square feet of conference space, approximately 15,100 square feet of retail space;

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five championship 18-hole golf courses; four restaurants; the Arthur Ashe Tennis Center, featuring ten courts; the Blue Lagoon, a water feature and pool facility, and a private club members' facility that opened in March 2000. Facilities at Doral also include the Spa at Doral, which includes 48 guest suites, approximately 85,000 square feet of fitness and spa facilities, 52 treatment rooms, three swimming pools, two saunas and one restaurant.

        Members of Doral's private club are provided use of the resort's golf, tennis and fitness facilities, golf and tennis instruction, special events, dining and social activities. A full golf membership at Doral currently requires a $23,500 deposit which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues of approximately $4,400.

The Claremont

        The Claremont is a historic 279-room hotel located near Berkeley, California. Located in the Berkeley Hills, the resort's Bay Area location enjoys views of the San Francisco Bay, the Oakland Bay Bridge and at night the lights of San Francisco and the surrounding Bay Area. The resort encompasses approximately twenty-two acres and its amenities include four restaurants, approximately 30,000 square feet of meeting space, two pools, ten tennis courts, and fitness facilities. In January 2001, The Claremont completed a new 20,000 square foot European style spa with 31 treatment rooms. The Claremont has recently opened Paragon, a co-branded fine dining restaurant at the resort. Since the Company acquired the Claremont, significant improvements have been made throughout the resort, including the aforementioned spa as well as extensive room and common area renovations.

        The Claremont's private club membership currently requires a $10,000 deposit, which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues ranging from $2,940 to $3,900. Members of Claremont's private club are permitted to use the resort fitness, spa and other facilities.

Grand Traverse

        Grand Traverse is a regional destination resort located in the northwest portion of the lower peninsula of Michigan, approximately six miles from Traverse City, Michigan. The resort covers over 1,000 acres and features a 426-room hotel, approximately 49,000 square feet of conference space, three championship 18-hole golf courses, a 22,000 square foot clubhouse, an 11,000 square foot spa, 15 treatment rooms, nine tennis courts, three swimming pools, three restaurants, approximately 73,000 square feet of fitness facilities, approximately 20,000 square feet of retail space and a private club operation. Grand Traverse also operates a condominium-leasing program comprised of approximately 234 rental units.

        Grand Traverse's private club operation provides golf, tennis and fitness facilities, sports instruction, special events, dining and social activities to its members. A full golf membership at Grand Traverse currently requires a $13,500 deposit which is fully refundable in thirty years (or sooner under certain circumstances), and annual dues of approximately $2,280.

Lake Lanier

        Lake Lanier is a regional destination resort and recreational complex comprised of 1,041 acres located approximately 45 miles northeast of downtown Atlanta, Georgia. It is situated on Lake Lanier, an approximately 38,000-acre lake with approximately 520 miles of shoreline and extensive lakeside primary and secondary homes. It is subleased from a government agency of the State of Georgia (which leases it from the U.S. Army Corps of Engineers) under a fifty-year sublease commencing August 1997.

        During fiscal 2001, the Company re-branded Lake Lanier as Emerald Pointe ending its affiliation with Hilton.

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        Lake Lanier features a 216-room hotel, 22,500 square feet of conference space, three retail outlets, three restaurants, a swimming pool, a golf course, three tennis courts, beach and water park facilities, a boat rental operation including group boats, houseboats, and ski boats, a 2,000 seat outdoor amphitheater, riding stables, campgrounds and pavilions and 30 two-bedroom lake house rental units.

Marketing and Sales Programs

        The Company attempts to position Desert Resorts, Grand Wailea, The Biltmore, Doral, and The Claremont at the premium end of the specific markets in which they compete. Lake Lanier is currently being positioned as an amenity-oriented, regional resort setting for corporate and other groups seeking alternatives to city-based conference centers, as a regional resort destination for individuals, and as "Atlanta's Playground" for daily attractions and special events. Grand Traverse is positioned as a regional resort for corporate groups and individuals from the Midwest.

        To effectively position its operations, the Company's operating subsidiaries use a number of marketing strategies and distribution channels. The marketing function is largely decentralized to allow managers who are most familiar with the guest or member population and with the specific property to play an active role in developing the appropriate marketing strategy. The Company uses a combination of print media, direct mail, internet, telemarketing, local and national public relations, to develop market awareness and brand positioning, and to market golf, lodging, memberships, food and beverage and special events to targeted consumers. Although specific marketing activities are largely decentralized, the Company's corporate office develops and implements national marketing and promotional programs, controls trademarks and trademark licensing agreements, conducts public relations and engages advertising agencies, coordinates communications with media sources, and develops video materials, interactive CDs, and Internet Web sites.

        Due to the complex and unique nature of each of the Company's resorts, reservations are taken locally rather than on a centralized basis. However, during fiscal 2001, the Company created a centralized customer database of all of its resorts' customers to facilitate cross-promotion of its resorts via traditional direct mail and internet based marketing campaigns.

        While the Company's customer base varies by resort (as discussed in the "Customers" section below), a significant portion of resort revenues are derived from corporate and other group business. The Company uses a national sales force to develop corporate and other group business for the resort facilities by focusing on identifying, obtaining and maintaining corporate and other group business through direct relationships with these accounts and through third party meeting managers. The Company has regional sales offices in the following markets: greater New York City, New Jersey and Connecticut; Washington D.C.; Chicago, Illinois; Atlanta, Georgia; Los Angeles and San Francisco, California; Detroit, Michigan; and Reston, Virginia.

Customers

        The Company's operations attract a broad range of customers. The customers typically include frequent independent travelers ("FIT" guests), corporate and other group participants as well as active users of recreational services. For the Company as a whole, approximately 55% of our guests are corporate or other group participants and approximately 45% are FIT guests. At Desert Resorts, Grand Wailea, The Biltmore and Doral, the customers are drawn from an international, national and regional customer base and typically exhibit the higher spending patterns of affluent corporate and leisure travelers. Desert Resorts' private clubs attract members and non-member guests on a national scale, with higher concentrations of customers from southern California. The private club at Doral typically attracts local corporate and individual golf and fitness enthusiasts.

        Lake Lanier draws customers from Georgia and the southeastern United States. The hotel operations at Lake Lanier draw significant numbers of both corporate and other group participants and

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FIT guests. Lake Lanier's other facilities attract a mix of customers with a wide array of interests, including active golfers and daily attraction users, such as boaters and water park attendees.

        Grand Traverse draws customers largely from Michigan and the Midwest. Its customers include affluent FIT and corporate guests. Grand Traverse's private club typically attracts local fitness and golf enthusiasts.

        The Claremont draws customers largely from affluent corporate guests visiting the San Francisco Bay area and surrounding communities, including Silicon Valley. The Claremont's private club appeals to and attracts local spa and fitness enthusiasts.

Certain Factors Affecting Resorts

        The Company currently operates resorts in six states, and may experience natural conditions, which are beyond its control (such as periods of extraordinarily dry, wet, hot and cold weather, or unforeseen natural events such as hurricanes, fires, floods, severe storms, tornadoes or earthquakes). These conditions may occur at any time and may have a significant impact on the condition and availability of its resort amenities and room base.

        In addition, the Company is highly dependent on the perceived and actual safety of domestic air travel in the United States. The recent, tragic events of September 11, 2001 highlight this factor. After the terrorist attacks on September 11^th, air travel within the United States came to a virtual halt and the Company experienced numerous cancellations across all segments of its customer base. Several of the Company's resorts are highly dependent on airlift (notably Grand Wailea, The Biltmore and Doral) and these resorts were hit particularly hard in the aftermath of September 11^th. The safety of air travel and the impact of terrorist attacks and other factors are beyond the Company's control. Further terrorist attacks or other "man-made" disasters could have a significant adverse impact on travel and thereby the Company's business, financial condition and results of operations.

Certain Uninsured Risks

        The Company currently carries comprehensive liability, fire, flood (for certain resorts) and extended coverage insurance with respect to its resorts and all of the golf courses owned with policy specifications and insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as those losses incurred as a result of earthquakes, which are of particular concern with respect to Desert Resorts and The Claremont, or hurricanes, which are of particular concern with respect to Doral and Grand Wailea) which may be either uninsurable, only partially insurable or not economically insurable. As a result, in the event of such a loss, the Company could lose all or a significant portion of both its capital invested in, and anticipated profits from, one or more of the Company's resorts and/or certain resort amenities.

Factors Affecting Resort Visitors

        The success of efforts to attract visitors to resorts is dependent upon discretionary spending by consumers, which may be adversely affected by general and regional economic conditions. In the case of the Company's resorts, the regional economies of southern and northern California, south Florida, and the states of Arizona, Michigan, Georgia and Hawaii are significant to its operations, although Desert Resorts, Doral, Biltmore and Grand Wailea attract customers from throughout the United States and abroad.

        The ability to attract visitors to the Company's resorts is also dependent upon the safety of travel within or to the United States as discussed in "Certain Factors Affecting Resorts" above. A decrease in tourism or in consumer spending on travel and/or recreation could have a significant adverse effect on the Company's business, financial condition and results of operations.

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Competition

        The recreation industry is highly competitive. The Company's resorts compete with other golf and recreation-based resorts some of which have significantly more resources than the Company. These include premier independent resorts as well as national hotel chains. In addition, the Company's resorts compete with other recreational businesses, such as cruise ships and gaming casinos. The Company believes that it competes based on brand name recognition, location, room rates and the quality of its services and amenities. The number and quality of competing resorts and/or hotels in a particular area could have material effect on the Company's revenues.

        Golf courses at the Company's resorts compete for players and members with other golf courses located in the same geographic areas. The Company's golf courses compete based on the overall quality of their facilities (including the quality of its customer service), the maintenance of their facilities, available amenities, location and overall value. The number and quality of golf courses in a particular area could have a material effect on the revenue from the Company's membership programs, which could in turn affect the Company's financial performance and results of operations.

Seasonality

        The operations of some of the Company's properties are seasonal. Primarily due to the popularity of Desert Resorts, The Biltmore, and Doral during the winter and early spring months, approximately 60% of these properties' revenues are recognized in the first two quarters of the fiscal year, while Lake Lanier and Grand Traverse generate approximately 70% of their revenue during the summer and fall months, thereby being recorded in the last two quarters of the fiscal year. The Claremont and Grand Wailea generally reflect less seasonality in their operations.

Reliance on Key Personnel

        The operations of the Company are dependent on the continued efforts of senior management, in particular Michael S. Shannon, the Company's President and Chief Executive Officer. There are no employment agreements between the Company and the members of its senior management. There can be no assurance that members of the Company's senior management will continue in their present roles, and should any of the Company's senior managers be unable or choose not to do so, the Company's prospects could be adversely affected.

Licenses and Trademarks

        The Company is a party to the Professional Golfers' Association License Agreement ("PGA License Agreement") pursuant to which it is permitted and licensed to use the PGA WEST name and logos in sales, promotion, advertising, development and/or operations of certain property located in the city of La Quinta, California, known as "PGA WEST" (the "PGA WEST Property"). The PGA License Agreement provides the Company with (i) the exclusive rights in the United States to the name "PGA WEST" in connection with the PGA WEST Property and (ii) the exclusive rights in the states of California and Arizona to the names "PGA" and "PGA of America" in connection with the PGA WEST Property. The term of the PGA License Agreement extends through the later of (i) the date on which all of the residential units located on the PGA WEST Property have been sold and (ii) the date on which the Company ceases to use the name "PGA WEST" in the name of golf clubs, golf courses, hotels and/or any other commercial, office or residential developments then located on the PGA WEST Property. The Company believes that the PGA WEST logo is an important aspect of the Company's business because of the prestige associated with the Professional Golfers' Association. The PGA License Agreement provides for royalty payments on an annual basis through 2005, although the exact amount of any royalty payments with respect to the PGA mark will be determined by reference to the number and sales of residential units in the PGA WEST community.

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        KSL Land Corporation and its subsidiaries ("KSL Land"), an affiliate of the Company, has in the past made royalty payments attributable to sales of residential units. Third party acquirors of land at PGA WEST have agreed to make PGA royalty payments (through KSL Land) upon the closing of each residential unit. KSL Land is expected to continue to pay the royalty payments in the future; however, KSL Land has not agreed in writing to do so, is not controlled by the Company and no assurance can be given that KSL Land will pay any future royalty owing under the PGA License Agreement. Failure to comply with the terms of the PGA License Agreement, including any failure to pay royalties arising out of sales of residential units by KSL Land, could result in the payment of monetary damages by the Company. Such occurrence could have a material adverse affect on the Company.

        The Company is also a licensee under a license agreement with the PGA TOUR. The PGA TOUR license agreement provides the Company with the exclusive rights to use the names "PGA TOUR" and "TPC" in connection with the sales, promotion, marketing and operation of PGA WEST. The PGA TOUR agreement is expected to terminate no earlier than January 1, 2006.

        The Company owns the "Blue Monster" name and has an irrevocable, perpetual license for the "Doral" name in connection with the Company's operation, marketing and promotion of the facilities located at Doral. The licensor of the Doral mark is prohibited from licensing the Doral mark for any purpose anywhere in southern Florida, but retains the right to license the Doral mark elsewhere. Although failure by the Company to comply with the terms of the Doral license agreement could result in monetary damages, the licensor does not have the right to terminate the Doral license agreement in the event of a breach by the Company.

        KSL Grand Wailea Resort, Inc. owns certain trademarks which are integral to its business and operations. The most significant of these include Grand Wailea Resort Hotel & Spa (words and design) and Spa Grande. Such trademarks are currently registered in the State of Hawaii and with the United States Patent and Trademark Office.

        KSL Biltmore Resort, Inc. owns certain trademarks which are integral to its business and operations. The most significant of these include Arizona Biltmore Resort & Spa (words and design) and the Biltmore Block (design only). Such trademarks are currently registered in the State of Arizona. The Biltmore Block (design only) is currently registered in the United States Patent and Trademark Office and applications for registrations of the other above referenced items have been filed in the United States Patent and Trademark Office.

Employees

        For the year ended October 31, 2001, the Company employed approximately 8,000 persons during its peak seasons and approximately 6,500 persons during its off-peak seasons. In addition, the Parent employs approximately 45 persons who render services in connection with the Company's operations at its corporate headquarters. The Company believes that its employee relations are good. Other than at The Claremont, Biltmore and Grand Wailea, the Company's employees are not represented by a labor union. At The Claremont, three unions represent approximately 51% of employees. At Grand Wailea, one union represents approximately 76% of Grand Wailea's employees. At the Biltmore, one union represents less than 1% of its employees.

Governmental Regulation

        Environmental Matters.    Operations at the Company's facilities involve the use and storage of various hazardous materials such as herbicides, pesticides, fertilizers, batteries, solvents, motor oil and gasoline. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removing hazardous substances that are released on or in its property and for remediation of its property. Such laws often impose liability regardless of whether a property owner or operator knew of, or was responsible for, the release of hazardous

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materials. In addition, the failure to remediate contamination at a property may adversely affect the ability of a property owner to sell such real estate or to pledge such property as collateral for a loan. The Company believes that it is in compliance in all material respects with applicable federal, state and local environmental laws and regulations.

        General.    The Company is subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. Some of the Company's resort and golf course employees receive the federal minimum wage and any increase in the federal minimum wage would increase the Company's labor costs. In addition, the Company is subject to certain state "dram-shop" laws, which provide a person injured by an intoxicated individual the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. The Company is also subject to the Americans with Disabilities Act of 1990, the Equal Employment Opportunity Act and the Age Discrimination in Employment Act and similar state laws. The Company believes it is operating in substantial compliance with applicable laws and regulations governing its operations.

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Item 2. Properties

        Descriptions of the Company's significant properties are provided in the "Business" section. All properties are owned or leased by subsidiaries of the Company. The corporate office is located in La Quinta, California. In addition, subsequent to year-end the Company purchased the La Costa Resort & Spa, as described in the "Recent Events" section below. This resort, which is located in Carlsbad, California, was acquired by the Company on November 16, 2001.

Item 3. Legal Proceedings

        The Company is involved in certain legal proceedings generally incidental to its normal business activities. Management of the Company does not believe that the outcome of any of these proceedings will have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows.

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

        No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year 2001.

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Part II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        Currently, there is no market for the common stock of the Company or its Parent.

Item 6. Selected Consolidated Historical Financial Data

        The following information should be read in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.

1)

The Arizona Biltmore was acquired in December 2000. Accordingly, the Company's operating results for fiscal 2001 include approximately ten months of operations for The Arizona Biltmore.

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2)

Grand Wailea was acquired on December 28, 1998. Accordingly, the Company's operating results for fiscal 1999 include approximately ten months of operations for Grand Wailea. The Fairways Group was sold in September 1999. Accordingly, the Company's operating results for fiscal 1999 included approximately eleven months of operations for the Fairways Group. Additionally, the Company realized a pre-tax gain of $22.4 million from the sale of this subsidiary.

3)

The Claremont was acquired in April 1998. Accordingly, the Company's operating results for fiscal 1998 include approximately six months of operations for The Claremont.

4)

Full operations of Lake Lanier and Grand Traverse commenced in August 1997. Accordingly, the Company's operating results for fiscal 1997 included management fees for Lake Lanier through July, and approximately three months of operations of both Lake Lanier and Grand Traverse.

5)

EBITDA is defined as net income before (i) income tax expense; (ii) depreciation and amortization; and (iii) net interest expense. EBITDA is not defined under generally accepted accounting principles ("GAAP"), and it may not be comparable to similarly titled measures reported by other companies.

6)

Net Membership Deposits is defined as the amount of refundable membership deposits paid by new and upgraded resort club members and by existing members who have converted to new membership plans, in cash, plus principal payments in cash received on notes in respect thereof, minus the amount of any refunds paid in cash with respect to such deposits. These membership deposits are fully refundable in thirty years (or sooner under certain circumstances). The Company accounts for membership deposits as "cash provided by financing activities" in its statements of cash flows and reports a liability in its balance sheets equal to the amount of such membership deposits.

7)

Adjusted Net Membership Deposits is defined as Net Membership Deposits, excluding $8.1 million in fiscal 1999, because this amount, which relates to membership deposits assumed in connection with the acquisition of the Grand Wailea Resort, was considered non-recurring in nature.

8)

Other non-cash charges (income) and non-recurring items consist of losses on asset disposals, gain on sale of subsidiary, non-recurring charges such as restructuring charges and non-cash membership related items.

9)

Adjusted EBITDA is defined as EBITDA adjusted for (i) net membership deposits and (ii) other non-cash and non-recurring items. Adjusted EBITDA should not be construed as an indicator of the Company's operating performance or as an alternative to profitability measures as determined in accordance with GAAP. Additionally, Adjusted EBITDA should not be construed by investors as a measure of the Company's liquidity or ability to meet all cash needs or as an alternative to cash flows from operating, investing and financing activities as determined in accordance with GAAP, nor should Adjusted EBITDA be construed by investors as an alternative to any other determination under GAAP. The Company's Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

10)

For purposes of these ratios, (i) earnings have been calculated by adding interest expense, the estimated interest portion of rental expense, and minority interests in losses of subsidiary to earnings before income taxes and extraordinary items and (ii) fixed charges are comprised of interest expense and capitalized interest.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's historical consolidated financial statements and notes thereto included elsewhere in this document.

Consolidated Results of Operations

        Fiscal 2001 consisted of two distinct periods: the operations and results prior to September 11th and aftermath of the tragic events of that day. Prior to September 11^th through strong cost controls across every resort and "same-stores" revenue growth at certain of the Company's resorts, most notably Grand Wailea, the Company was able to post strong results. Immediately following September 11^th, hotel industry conditions were the worst in recent history with travel grinding to a virtual halt and only a slight pick up towards the end of October. Occupancy rates at the resorts immediately following the terrorist attacks ranged from 20%-40%, which is thirty to fifty points lower than typical rates at that time of year. October occupancy rates increased slightly from the post September 11^th lows, however occupancy rates at all the resorts were still well below normal levels. While lower occupancy obviously impacts room revenue, it also affects other revenue categories as discussed below.

        For the years ended October 31, 2001, 2000 and 1999, net income totaled $12.4 million, $16.1 million and $23.3 million, respectively. Net income in fiscal 1999 included a pre-tax gain of $22.4 million from the sale of a subsidiary. Income from operations totaled $100.7 million, $80.1 million and $69.5 million in fiscal 2001, 2000 and 1999, respectively. The improvement in operating results from the year ended October 31, 2000 to the year ended October 31, 2001 relates primarily to the impact of the acquisition of The Arizona Biltmore on December 22, 2000. The improvement in operating results from the year ended October 31, 1999 to the year ended October 31, 2000 relates primarily to increases in operating income by the resort segment and the full year impact of the acquisition of the Grand Wailea Resort offset partially by decreases in operating income by the real estate segment and the disposition of the Fairways subsidiary. Additional information relating to the operating results for each business segment is set forth below.

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Resort Segment

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

Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended October 31, 2000

        Resort Revenues.    Resort revenues increased by $60.9 million or 13.6%, from $447.7 million in fiscal 2000 to $508.6 million in fiscal 2001. The increase can be attributed to the acquisition of The Biltmore in fiscal 2001. The acquisition of The Biltmore was accounted for as a purchase and from the date of its acquisition through the end of the fiscal 2001 this resort generated $76.4 million in revenue. For the full year, rooms revenue for the Company increased by $32.1 million or 18.7%; food and beverage sales increased by $14.7 million or 13.0%; dues and fees increased $3.7 million or 17.3%; merchandise sales increased by $1.5 million or 6.8%; spa revenue increased by $4.9 million or 21.0%; and other revenue increased by $6.4 million or 10.2%. Golf fees decreased by $2.4 million or 7.3%, due to the decrease in occupancy as well as an increase in high-end competition at the Company's golf resorts.

        The increase in revenue was offset by a reduction in revenues at the resorts owned for over one year. These reductions can be attributed to the tragic events of September 11^th as discussed above. In the 48 days from September 11^th through our fiscal year end, management estimates that the Company lost between $25-$35 million in revenues. This lost revenue can be attributed to significant group and FIT cancellations at our resorts. Subsequent to September 11^th through the end of our fiscal year, we received cancellations totaling approximately 70,000 room nights or over 5% of our annual rooms demand. In addition the Company experienced a considerable reduction in bookings and arrivals by potential customers through the end of the fiscal year. The result of these two factors was occupancy approximately 25 points below the same period in fiscal 2000. The lower occupancy had a negative impact on rooms revenue as well as the ancillary revenues that our guests typically spend at our resorts.

        During fiscal 2001, the Company was engaged in ongoing capital improvements at all of its resorts, which the Company believes will add to future revenues. These capital improvements equaled approximately $43.4 million in fiscal 2001. While management believes these capital improvements will enhance the guest experience and provide future revenue growth, their short-term impact caused some disruption to normal business levels and hence dampened revenue growth.

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        Resort operating expenses.    With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to the Resort segment. Operating expenses (excluding depreciation and amortization, the corporate fee, and restructuring expense) increased by $33.2 million, or 10.7%, from $309.9 million in fiscal 2000 to $343.0 million in fiscal 2001. The increase can be attributed to the acquisition of the Arizona Biltmore, which represented $45.1 million of operating expenses in fiscal 2001. This increase was offset by strong expense controls across all resorts. Prior to September 11^th, the Company was aggressively reducing costs in an effort to match its cost structure with the economic slowdown which began in January 2001. Subsequent to September 11^th, the Company strengthened its focus on expense reduction by eliminating non-essential spending as discussed in the "Restructuring Expense" section below.

        Depreciation and amortization increased $12.5 million or 24.6%. This increase was due to the impact of the acquisition of the Arizona Biltmore and ongoing capital improvements at each of the resorts.

        Restructuring expense:    Responding to the reduced business levels following the tragic events of September 11^th, the Company implemented a stringent cost mitigation plan across its resort portfolio. The plan included the reduction of approximately 15% of the Company's salaried management workforce accomplished by the elimination of 113 management positions. In addition, the Company reduced its hourly labor costs by eliminating 333 hourly positions and by reducing the number of hours of many of our hourly employees. The cost of severance payments related to the elimination of positions totaled $0.5 million and was recorded as restructuring expense and paid in fiscal 2001. In addition, the Company eliminated non-essential spending such as travel and entertainment, supplies and similar expenses. The Company expects operating expenses to decrease 10-15% as a result of the cost mitigation plan.

        Resort operating income.    Operating income increased $17.2 million, or 22.5%, from $76.4 million in fiscal 2000 to $93.6 million in fiscal 2001 due to the factors detailed above. The operating income margin for the resort segment was 18.4% in fiscal 2001 as compared to 17.1% in fiscal 2000.

        Real Estate Operations.    Real estate revenue totaled $28.1 million in fiscal 2001 as compared to $17.3 million in fiscal 2000, a year over year increase of $10.8 million or 62.6%. Operating income earned by the real estate segment increased $3.5 million or 95.1% from $3.6 million in 2000 to $7.1 million in 2001. The increases in real estate revenue and operating income can be attributed to: (i) the sale of "The Grove" parcel of land in July 2001 for $8.2 million, (net of $1.4 million deferred pending satisfaction of certain contingencies) which generated operating income of $3.8 million; and (ii) an increase in the sales price of guest casitas adjacent to La Quinta Resort and Spa in fiscal 2001 as compared to fiscal 2000.

        Beginning in 1999, the real estate segment developed 98 single-family "casitas-style" homes adjacent to La Quinta (the "La Quinta Resort Homes") in four phases. The final phase of the La Quinta Resort Homes was completed in Fiscal 2001. The real estate segment sold 25 guest casitas for approximately $18.0 million in fiscal 2001, compared to fiscal 2000 when the real estate segment sold 26 of these casitas for approximately $16.6 million. The year over year difference in unit sales had an immaterial impact on operating income for the real estate segment as operating income related to these sales was comparable in fiscal 2000 to fiscal 2001. At the end of fiscal 2001, five of these homes remained available for purchase and the Company expects to complete their sale in fiscal 2002.

        Net interest expense.    Net interest expense increased by $24.5 million or 49.9% from $49.2 million in fiscal 2000 to $73.7 million in fiscal 2001. Interest expense for the year ended October 31, 2001 consisted primarily of interest on the Company's (i) $125.0 million 10¹/4% Senior Subordinated Notes due 2007; (ii) a $275.0 million Mortgage secured by the Grand Wailea Resort; (iii) Term A, Term B and Term C Notes drawn against the Company's Amended and Restated Credit Facility; (iv) revolving

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borrowings under the Company's Amended and Restated Credit Facility; and (v) a $58.0 million mortgage secured by the Arizona Biltmore Resort and Spa. The acquisition of the Arizona Biltmore during fiscal 2001 was fully financed with debt and resulted in higher debt balances in fiscal 2001 as compared to fiscal 2000. The higher interest expense associated with this higher debt load was partially offset by lower average interest rates in fiscal 2001 as compared to fiscal 2000.

        Income Tax Expense.    Income tax expense decreased to $9.8 million in fiscal 2001 from $11.0 million in fiscal 2000. The Company's effective tax rate for fiscal 2001 was 44.2% as compared to 40.5% in fiscal 2000. The higher effective tax rate in fiscal 2001 can be primarily attributed to the change in the Company's federal tax rate during the current year. The Company's net deferred tax liabilities generated prior to fiscal 2000 were created based on a 34% federal income tax rate as the Company had taxable income less than $10 million during that period. In fiscal 2001, the Company's taxable income increased to over $10 million and thus the Company federal tax rate has increased from 34% to 35%. As the Company expects to continue to be subject to the 35% tax rate in the foreseeable future, the net deferred tax liabilities will likely become current deferred tax liabilities at a 35% rate. The change in the carrying value of these deferred tax liabilities resulted in an approximate 4.0 percentage point increase in the Company's effective tax rate in fiscal 2001.

        Net income.    Net income decreased by $3.7 million or 23.1% from $16.1 million in fiscal 2000 to $12.4 million in fiscal 2001.

        Adjusted EBITDA.    Adjusted EBITDA increased by $29.6 million or 18.5% from $159.7 million in fiscal 2000 to $189.3 million in fiscal 2001 primarily due to the factors described above as well as an increase in other non-cash items of $3.6 million or 94.2%, from $3.8 million in fiscal 2000 to $7.3 million in fiscal 2001. This increase was offset by a decrease in Adjusted Net Membership Deposits of $6.1 million or 20.9%, from $29.0 million in fiscal 2000 to $22.9 million in fiscal 2001. In addition, management estimates that the Company lost between $15-$20 million of Adjusted EBITDA in the forty-eight days subsequent to the terrorist attacks discussed above through the end of the fiscal year.

Fiscal Year Ended October 31, 2000 Compared to Fiscal Year Ended October 31, 1999

        Resort Revenues.    Resort revenues increased by $28.4 million or 6.8%, from $419.3 million in fiscal 1999 to $447.7 million in fiscal 2000. The increase can be attributed to: (i) internal growth as the Company achieved significant increases in occupancy and ADR at its resorts, especially at Grand Wailea; (ii) revenue growth related to recently completed capital improvements; and (iii) a full year of operations at Grand Wailea in fiscal 2000 compared to ten months of operations in fiscal 1999. These increases totaled $73.6 million and were offset by the disposition of Fairways in September 1999, which had revenues of $45.2 million in fiscal 1999. Rooms revenue increased by $26.8 million or 18.4%; food and beverage sales increased by $9.0 million or 8.7%; merchandise sales increased by $1.3 million or 6.4%; spa revenue increased by $6.2 million or 35.9%; and other revenue increased by $9.8 million or 18.6%. As impacted by the sale of Fairways, golf fees decreased by $15.8 million or 32.5% and dues and fees decreased by $9.0 million.

        During fiscal 2000, the Company was engaged in ongoing capital improvements at all of its resorts, which the Company believes will add to future revenues. These capital improvements equaled approximately $59.9 million in fiscal 2000. While management believes these capital improvements will enhance the guest experience and provide future revenue growth, their short-term impact included some disruption in normal business levels and hence, dampened revenue growth.

        Resort operating expenses.    With the exception of the cost of real estate sold, substantially all of the Company's operating expenses, including depreciation and amortization and the corporate fee, relate to the Resort segment. Operating expenses (excluding depreciation and amortization and the corporate fee) increased by $14.1 million, or 4.8%, from $295.8 million in fiscal 1999 to $309.9 million in fiscal

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2000. Excluding Fairways, operating expenses (other than depreciation and amortization and the corporate fee) increased $48.7 million from fiscal 1999. The increase can be attributed to increased expenses related to revenue growth discussed above. Depreciation and amortization decreased $4.9 million or 8.8%. The decrease can be attributed primarily to the disposition of Fairways, which had depreciation and amortization of $8.0 million in fiscal 1999. This decrease was partially offset by increased depreciation due to the ongoing capital improvements at each of the resorts and the full year impact of the acquisition of Grand Wailea.

        Resort operating income.    Operating income increased $18.2 million, or 31.4%, from $58.2 million in fiscal 1999 to $76.4 million in fiscal 2000 due to the factors detailed above. The operating income for the resort segment margin was 17.1% in fiscal 2000 as compared to 13.9% in fiscal 1999.

        Real Estate Operations.    Real estate revenue totaled $17.3 million in fiscal 2000 as compared to $34.4 million in fiscal 1999, a year over year decrease of $17.1 million or 49.7%. Operating income earned by the real estate segment decreased $7.6 million or 67.3% from $11.3 million in 1999 to $3.7 million in 2000. The decreases in real estate revenue and operating income can be attributed to: (i) the sale of a parcel of land adjacent to Doral and (ii) fewer sales of guest casitas on site adjacent to La Quinta Resort and Spa in fiscal 2000 as compared to fiscal 1999. The Company sold the land adjacent to Doral for $9.5 million, which resulted in operating income of $8.0 million for the real estate segment in fiscal 1999. In addition, the real estate segment sold 42 guest casitas for approximately $24.4 million on a site adjacent to La Quinta Resort and Spa in fiscal 1999. In fiscal 2000, the real estate segment sold 26 of these casitas for approximately $16.6 million. The year over year difference in unit sales had minimal impact on operating income for the real estate segment as operating income related to these sales was comparable in fiscal 1999 and fiscal 2000.

        Net interest expense.    Net interest expense increased by $0.5 million or 1.0% from $48.7 million in fiscal 1999 to $49.2 in fiscal 2000. Interest expense for the year ended October 31, 2000 consisted primarily of interest on the Company's (i) $125.0 million 10¹/4% Senior Subordinated Notes due 2007; (ii) a $275.0 million Mortgage secured by the Grand Wailea Resort; (iii) Term A and Term B Notes drawn against the Company's Amended and Restated Credit Facility; and (iv) revolving borrowings under the Company's Amended and Restated Credit Facility. Slightly lower average debt balances in fiscal 2000 were offset by a slightly higher effective interest rate in fiscal 2000.

        Income Tax Expense.    Income tax expense decreased to $11.0 million in fiscal 2000 from $17.6 million in fiscal 1999. The Company's effective tax rate for fiscal 2000 was 40.5% as compared to 43.0% in fiscal 1999.

        Net income.    Net income decreased by $7.2 or 30.8% from $23.3 million in fiscal 1999 to $16.1 million in fiscal 2000. Included in fiscal 1999 net income is a $22.4 million pre-tax gain from the sale of a subsidiary.

        Adjusted EBITDA.    Adjusted EBITDA increased by $15.5 million or 10.7% from $144.2 million in fiscal 1999 to $159.7 million in fiscal 2000 primarily due to the factors described above and an increase in Adjusted Net Membership Deposits of $9.9 million or 52.0%, from $19.1 million in fiscal 1999 to $29.0 million in fiscal 2000.

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

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operations through a combination of borrowings under its credit facility and cash generated from operations.

        During fiscal 2001, cash flow provided by operating activities was $123.1 million compared to $68.6 million in fiscal 2000. Fiscal 2001 included cash paid for taxes of $7.2 million compared to cash paid for taxes of $20.1 million in fiscal 2000. Excluding the impact of cash paid for taxes, operating cash flow in fiscal 2001 increased $41.5 million or 46.8% from fiscal 2000. The increase can be attributed primarily to the acquisition of The Biltmore. As of October 31, 2001, the Company had cash and cash equivalents of $37.5 million (excluding restricted cash of $17.9 million). The Company's long-term debt at October 31, 2001 included (i) $125.0 million 10¹/4% Senior Subordinated Notes due 2007; (ii) a $275.0 million mortgage secured by the Grand Wailea Resort; (iii) Term A, Term B and Term C Notes totaling $271.0 million drawn against the Company's Amended and Restated Credit Facility; (iv) $72.5 million of revolving borrowings under the Company's Amended and Restated Credit Facility; and (v) $58.0 million mortgage secured by the Arizona Biltmore Resort and Spa. Capital expenditures totaled $43.4 million, $59.9 million and $63.7 million for the fiscal years ended October 31, 2001, 2000 and 1999, respectively. Although the Company has no material firm commitments for capital expenditures, the Company expects to invest significant capital in its Resort properties in the future to drive revenue growth. For fiscal 2002, the Company expects to invest $60-$70 million in capital improvements at its various resorts, including the recently acquired La Costa Resort & Spa as discussed in the "Recent Events" section below.

        The following represents a summary of the Company's contractual obligations and related scheduled maturities as of October 31, 2001 (in thousands):

        The Company also has standby letters of credit under its credit facility for approximately $4.2 million in connection with the Company's self insurance programs.

        The terms of the credit facility contain certain financial covenants including interest coverage, fixed charges, leverage ratios and restrictions on dividends. Certain of the long-term debt agreements provide that any distributions of profits must satisfy certain terms and must be approved by the lenders, require the Company to maintain specified financial ratios and, in some instances, govern investments, capital expenditures, asset dispositions and borrowings. In addition, mandatory prepayments are required under certain circumstances, including the sale of assets. The credit facility contains provisions under which commitment fees and interest rates for the revolving credit facility will be adjusted in increments based on the achievement of certain performance goals. The Company was in compliance with the financial covenants at October 31, 2001.

        If any event of default shall occur for any reason, whether voluntary or involuntary, the lenders can declare all or any portion of the outstanding principal amount of the loans and other obligations to be due and payable and/or the commitments to be terminated, whereupon the full unpaid amount of

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such loans and other obligations become immediately due and payable, without further notice, and the Company shall automatically and immediately be obligated to deposit with the lenders cash collateral in an amount equal to all letters of credit outstanding..

        As of October 31, 2001, 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 October 31, 2001 borrowings under the revolving credit facility were $72.5 million and bore interest at LIBOR plus 1.75% and mature on April 30, 2004. Subsequent to the end of the fiscal year, the Company purchased La Costa Resort & Spa as discussed in the "Recent Events" section below. This acquisition was financed fully with incremental borrowings under the revolving credit facility.

        The Company is continually engaged in evaluating potential acquisition candidates to add to its portfolio of properties. The Company expects that funding for future acquisitions may come from a variety of sources, depending on the size and nature of any such acquisitions. Potential sources of capital include cash generated from operations, borrowings under the credit facility, additional equity investments from the Parent or partnerships formed at the direction of KKR, or other external debt or equity financings. There can be no assurance that such additional capital sources will be available to the Company on terms which the Company finds acceptable, or be available at all.

        The Company believes that its liquidity, capital resources and cash flows from existing operations will be sufficient to fund capital expenditures, working capital requirements and interest and principal payments on its indebtedness for at least the next twelve months. However, a variety of factors could impact the Company's ability to fund capital expenditures, working capital requirements and interest and principal payments, including a prolonged or severe economic recession in the United States, departures from currently expected demographic trends or the Company's inability to achieve operating improvements at existing and acquired operations at currently expected levels.

        The Company is highly dependent on operating cash flow to fund its liquidity requirements. As discussed above, the events of September 11^thmaterially impacted the Company's cash flow from operations. Natural and/or man-made disasters can have a significant adverse impact on the Company's operating cash flow. There can be no assurance that an unforeseen disaster will not have a material adverse affect on the Company's liquidity. However, if certain events (including unforeseen disasters) were to occur, the Company expects that it would have several options to meet its liquidity requirements including (i) securing additional borrowings under its existing credit facility; (ii) suspending all non-essential spending, including spending on capital projects; (iii) securing additional equity investments from the Parent or partnerships formed at the direction of KKR; (iv) obtaining other debt or equity financing; and (v) monetizing certain of the Company's assets.

        The Company currently expects that it will acquire additional resorts, golf facilities or other recreational facilities, and in connection therewith, expects to incur additional indebtedness. In the event that the Company incurs such additional indebtedness, its ability to make principal and interest payments on its existing indebtedness may be adversely impacted.

Inflation

        Inflation and changing prices have not had a material impact on the Company's revenue and results of operations. Based on the current economic climate, the Company does not expect that inflation and changing prices will have a material impact on the Company's revenue or earnings during fiscal 2001. However, there can be no assurance that increases in labor and other operating costs due to inflation will not have a material impact on the Company's future profitability.

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Economic Downturn

        Resort revenues are derived from discretionary recreational spending that can be impacted by a significant economic downturn, which, in turn could adversely impact the Company's operating results. There can be no assurance that a decrease in the level of discretionary spending by consumers in the future would not have an adverse effect on the Company.

Accounting Pronouncements

        On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 was amended by SFAS 137, which modified the effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, SFAS 133 was further amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". SFAS 133, as amended, requires that every derivative instrument, including certain derivative instruments embedded in other contracts, and hedging activities be recorded on the balance sheet at its fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 also requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS 133 as of November 1, 2000. On that date the Company recorded an asset of $4.6 million in "Other Long-Term Assets" and a net of tax adjustment of $2.7 million recorded as "Other Comprehensive Income".

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 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 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 intangible assets the Company acquired after June 30, 2001. Upon adoption, the Company will cease amortizing goodwill against its results of operations, reducing annual amortization expense by approximately $6.1 million. Under SFAS142, the Company must complete the goodwill transition impairment test by April 30, 2002, however, management does not expect to recognize an impairment charge at such time. Annual impairment reviews may result in charges against earnings to write down the value of goodwill.

        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 No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position and will adopt such standards on November 1, 2002, as required.

        In August 2001, the FASB issued SFAS No. 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

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operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets. The Company believes the adoption of SFAS No. 144 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.

Recent Events

        On November 16, 2001, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the La Costa Resort & Spa ("La Costa"), located in Carlsbad, California, 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, a wholly-owned subsidiary of the Company, a Delaware corporation. La Costa consists of 479 rooms and suites on 400 acres of rolling hills in the greater San Diego area.

        The purchase price of the Property was $120.0 million (excluding transaction costs of approximately $4.2 million and a purchase adjustment of $3.6 million for working capital and other items). 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. The acquisition was accounted for using the purchase method of accounting.

        The Company intends to continue to operate the Property as a resort hotel and spa.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

        The Company's most significant "market risk" exposure is the effect of changing interest rates. The Company manages its interest expense risk by using a combination of fixed and variable rate debt and interest rate cap and swap agreements. At October 31, 2001, the Company's debt consisted of approximately $125.0 million and $58.0 million of fixed rate debt at a weighted average interest rate of 10.25% and 8.25%, respectively, and $618.0 million of variable rate debt at a weighted average interest rate of 8.39% for the fiscal year. The Company entered into interest swap agreements to reduce its exposure to interest rate fluctuations on its variable rate debt. As of October 31, 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 percent for the year ended October 31, 2001, the net impact on the Company's pre-tax earnings would have been approximately $0.7 million.

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Item 8. Financial Statements and Supplementary Data

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
KSL Recreation Group, Inc.:

        We have audited the accompanying consolidated balance sheets of KSL Recreation Group, Inc. and subsidiaries (the Company) (a wholly owned subsidiary of KSL Recreation Corporation) as of October 31, 2001 and 2000, and the related consolidated statements of income and comprehensive income, stockholder's equity and cash flows for each of the three years in the period ended October 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and this financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and this financial statement schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KSL Recreation Group, Inc. and subsidiaries as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 2 to the financial statements, during the year ended October 31, 2001 the Company changed its method of accounting for derivative instruments and hedging activities.

Deloitte & Touche LLP

Costa Mesa, California
January 25, 2002

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KSL RECREATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 and 1999

See accompanying notes to consolidated financial statements.

24

KSL RECREATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2001 and 2000

See accompanying notes to consolidated financial statements.

25

KSL RECREATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 and 1999

See accompanying notes to consolidated financial statements.

26

KSL RECREATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 and 1999

See accompanying notes to consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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KSL RECREATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
(Dollars in Thousands)

1.    GENERAL

        KSL Recreation Group, Inc. (Group), is a wholly-owned subsidiary of KSL Recreation Corporation (the Parent). Group and its subsidiaries (collectively, the Company) are engaged in the ownership and management of resorts, golf courses, private clubs, spas and activities related thereto.

        As of October 31, 2001, the Company has seven principal wholly-owned investments: (1) KSL Desert Resorts, Inc. (Desert Resorts), a Delaware corporation; (2) KSL Grand Wailea Resort, Inc. (Grand Wailea), a Delaware corporation; (3) KSL Arizona Biltmore, Inc. (The Biltmore), a Delaware corporation; (4) KSL Florida Holdings, Inc. (Doral), a Delaware corporation (5) KSL Claremont Resort, Inc. (The Claremont), a Delaware corporation; (6) KSL Grand Traverse Holdings, Inc. (Grand Traverse), a Delaware corporation; and (7) KSL Georgia Holdings, Inc. (Lake Lanier), a Delaware corporation. Doral owns and operates the Doral Golf Resort and Spa in Miami, Florida. Desert Resorts owns and operates the PGA WEST golf courses, the La Quinta Resort & Club and related activities in La Quinta, California. Lake Lanier leases and manages a resort recreation area known as Lake Lanier, outside of Atlanta, Georgia. Grand Traverse owns and operates the Grand Traverse Resort & Spa and related activities outside of Traverse City, Michigan. The Claremont owns and operates The Claremont Resort & Spa and related activities in the Berkeley Hills area near San Francisco, California. Grand Wailea owns and operates the Grand Wailea Resort Hotel & Spa in Maui, Hawaii (Note 14). The Biltmore owns and operates the Arizona Biltmore Resort and Spa and related activities in Phoenix, Arizona (Note 14).

        In December 1998, the Company, through a wholly-owned subsidiary, acquired substantially all the assets and certain liabilities of Grand Wailea, a 779-room resort in Maui, Hawaii, for approximately $372,775 (exclusive of closing costs), including the assumption of approximately $275,000 in mortgage financing (Notes 7 and 14).

        On September 30, 1999, the Company sold all of the common stock of its indirectly wholly-owned subsidiary, KSL Fairways Golf Corporation (Fairways Golf), pursuant to a stock purchase agreement with a third party. The Company owned 100% of Fairways Golf, which in turn owned an approximate 95.8% majority interest in the Fairways Group L.P., (TFG L.P.). TFG L.P. and Fairways Golf operated 24 golf facilities, 22 of which were owned, principally in the mid-Atlantic, Southeast and mid-Western United States. The Company recognized a gain of approximately $22,393 (Note 15).

        On December 22, 2000, the Company, through a wholly-owned subsidiary, acquired certain assets and assumed certain liabilities comprising the Arizona Biltmore Resort & Spa, located in Phoenix, Arizona. The purchase price of the Property was $335.0 million (excluding transaction costs of $1.5 million and a working capital purchase price adjustment of $8.3 million). As part of the purchase consideration, the Company assumed a mortgage of $59.4 million (Note 14).

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

        Basis of Consolidation—The consolidated financial statements include the accounts of Group and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

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        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 $4,585 (included in "Other Long-Term Assets"). The cumulative effect of the change in accounting for derivatives and hedging activities, net of tax, of $2,728 was recognized in "Other Comprehensive Income". This change in accounting also resulted in recognition of derivative losses, net of income taxes, of which $13,595 were included in "Other Comprehensive Income", and $3,541 were charged to earnings, during the year ended October 31, 2001.

        Cash Equivalents—The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

        Restricted Cash—Certain cash balances are restricted primarily to uses for debt service, capital expenditures, real estate taxes, insurance payments, membership deposits and letters of credit required for construction in progress (Note 7).

        Inventories—Inventories are stated primarily at the lower of cost, determined on the weighted average method, or market. Base stock consisting of china, silver, glassware and linens is recorded using the base stock inventory method.

        Real Estate Under Development—All direct and indirect land costs, offsite and onsite improvements, and applicable interest and carrying costs are capitalized to real estate under development. Capitalized costs are included in real estate under development and expensed as real estate is sold; marketing costs are expensed in the period incurred. Land and land development costs are accumulated by project and are allocated to individual residential units, principally using the relative sales value method. Profit from sales of real estate under development is recognized upon closing using the full accrual method of accounting, provided that all the requirements prescribed by Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate", have been met.

        Property and Equipment—Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Generally, the estimated useful lives are 15 to 40 years for buildings and improvements and 3 to 10 years for furniture, fixtures and equipment. Improvements are capitalized while maintenance and repairs are charged to expense as incurred. Assets under capital leases are amortized using the straight-line method over the shorter of the lease term or estimated useful lives of the assets. Depreciation of assets under capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations.

        Long-Lived Assets—Management reviews real estate and other long-lived assets, including certain identifiable intangibles and goodwill, for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less

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than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated at the present value of future cash flows discounted at a rate commensurate with management's estimate of the business risks. Real estate assets, if any, for which management has committed to a plan to dispose of the assets, whether by sale or abandonment, are reported at the lower of carrying amount or fair value less cost to sell. Preparation of estimated expected future cash flows is inherently subjective and is based on management's best estimate of assumptions concerning expected future conditions. No impairments were identified as of October 31, 2001.

        Excess of Cost Over Net Assets of Acquired Entities—The excess of the cost over the fair value of acquired entities (goodwill) is capitalized and amortized on a straight-line basis over 15 to 30 years. Amortization expense related to goodwill was approximately $6,119, $4,949 and $5,253 for fiscal years 2001, 2000 and 1999, respectively. The Company periodically evaluates the recoverability of goodwill by comparing the carrying value of goodwill to undiscounted estimated future cash flows from related operations. No impairments were identified as of October 31, 2001.

        Debt Issue Cost—Debt issue costs are amortized over the life of the related debt and the associated amortization expense is included in interest expense in the accompanying consolidated financial statements.

        Minority Interests in Equity of Subsidiary—Minority interests in equity of subsidiary represented minority shareholders' proportionate share of the equity in TFG L.P. The Company owned approximately 95.8% of TFG L.P. at October 31, 1999. The Company reduced the minority interest allocation of TFG L.P.'s net loss by the Partner's share of $118 in Fiscal 1999. The Company sold its investment in TFG L.P. in September 1999 (Note 15).

        Member Deposits—Member deposits represent the required deposits for certain membership plans which entitle the member to the usage of various golf, tennis and social facilities and services. Member deposits are refundable, without interest, in thirty years or sooner under certain criteria and circumstances.

        Income Taxes—The Company accounts for income taxes using an asset and liability approach. Under this method, a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences in the recognition of accounting transactions for tax and reporting purposes and from carryforwards. Measurement of the deferred items is based on enacted tax laws. In the event the future consequence of differences result in a deferred tax asset, management determines the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company is included in the consolidated federal and combined state income tax returns filed by the Parent. Pursuant to the terms of an agreement between the Company and the Parent, current and deferred income tax expenses and benefits are provided to the members of the tax sharing group, including the Company, based on their allocable share of the consolidated taxable income or loss. Under the tax sharing agreement, the Company and its subsidiaries are generally responsible for Federal taxes based upon the amount that would be due if the Company and its subsidiaries filed Federal tax returns as a separate affiliated group of corporations rather than as part of the Parent's consolidated federal tax returns. To the extent that the Federal tax losses of the Company are utilized by the Parent or other of the Parent's subsidiaries, the Company is compensated. The combined state tax liabilities will be allocated based on each member's apportioned share of the combined state tax liabilities.

        Revenue Recognition—Revenues related to dues and fees are recognized as income in the period in which the service is provided. Non-refundable membership initiation fees are recognized as revenue over the expected membership life. Other revenues are recognized at the time of delivery of products or rendering of service.

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        Fair Value of Financial Instruments—The carrying amounts of cash and cash equivalents, trade receivables, other receivables, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these financial instruments. Notes receivable approximate fair value as the interest rates charged approximate currently available market rates. Based on the borrowing rates currently available to the Company for debt with similar terms and maturities, the fair value of notes payable and obligations under capital leases approximate the carrying value of these liabilities in all material respects.

Member deposits represent liabilities with no defined maturities and are payable on demand, subject to certain conditions, and, accordingly, approximate fair value.

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

        Estimated workers' compensation and general liability reserves of $7,014 and $6,165 are included in accrued expenses in the accompanying balance sheets as of October 31, 2001 and 2000, respectively.

        Earnings per Share—Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common share equivalents, if any, during the respective periods. Common share equivalents include the effect of dilutive stock options calculated using the treasury stock method. The Company had no potentially dilutive securities outstanding in 2001, 2000 or 1999.

        Comprehensive Income—The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income". This standard defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholders transactions. Accordingly, comprehensive income includes certain changes in equity that are excluded from net income. The Company's only comprehensive income items were net income and the change in fair value of derivative instruments.

        Accounting Pronouncements—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.

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 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 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 intangible assets the Company acquired after June 30, 2001. Upon adoption, the Company will cease amortizing goodwill against its results of operations, reducing annual amortization expense by approximately $6.1 million. Under SFAS142, the

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Company must complete the goodwill transition impairment test by April 30, 2002, however, management does not expect to recognize an impairment charge at such time.

        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 No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position and will adopt such standards on November 1, 2002, as required.

        In August 2001, the FASB issued SFAS No. 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.

        Reclassification—Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform to the 2001 presentation.

3.    NOTES RECEIVABLE

        Notes receivable of $12,324 and $11,005 at October 31, 2001 and 2000, respectively, primarily represent notes from members related to member deposits and bear interest primarily at 10%. The majority of these notes are due within three years.

        Notes receivable of $2,181 and $2,264 as of October 31, 2001 and 2000, respectively, primarily represent purchase money mortgage notes received in connection with the sale of various land parcels and a golf facility. Such notes are due at various dates primarily through 2003.

4.    INVENTORIES

        Inventories consist of the following:

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5.    PROPERTY AND EQUIPMENT

        Property and equipment consist of the following:

6.    OTHER ASSETS

        Other assets consist of the following: