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Vail Resorts 10-Q 2008
form10q.htm


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

FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2008

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to

Commission File Number:  001-09614

Vail Resorts, Inc.
(Exact Name of Registrant as Specified in Its Charter)


Delaware
 
51-0291762
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
     
390 Interlocken Crescent
Broomfield, Colorado
 
80021
(Address of Principal Executive Offices)
 
(Zip Code)

(303) 404-1800
(Registrant’s Telephone Number, Including Area Code)


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.
x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x                                                                             Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No

As of December 3, 2008, 36,719,865 shares of the registrant’s common stock were outstanding.


 
 

 



 
 

 



 
 

 

 
Consolidated Condensed Balance Sheets
 
(In thousands, except share and per share amounts)
 
                       
       
October 31,
   
July 31,
   
October 31,
 
       
2008
   
2008
   
2007
 
       
(unaudited)
         
(unaudited)
 
Assets
                 
Current assets:
                 
 
Cash and cash equivalents
$
102,668
 
$
162,345
 
$
166,044
 
 
Restricted cash
 
12,453
   
58,437
   
42,876
 
 
Trade receivables, net
 
44,468
   
50,185
   
24,954
 
 
Inventories, net
 
67,718
   
49,708
   
63,701
 
 
Other current assets
 
41,988
   
38,220
   
46,615
 
   
Total current assets
 
269,295
   
358,895
   
344,190
 
Property, plant and equipment, net (Note 5)
 
1,077,760
   
1,056,837
   
917,344
 
Real estate held for sale and investment
 
256,323
   
249,305
   
415,411
 
Goodwill, net
 
142,282
   
142,282
   
141,699
 
Intangible assets, net
 
72,463
   
72,530
   
73,243
 
Other assets
 
47,062
   
46,105
   
43,034
 
 
Total assets
$
1,865,185
 
$
1,925,954
 
$
1,934,921
 
                       
Liabilities and Stockholders' Equity
                 
Current liabilities:
                 
 
Accounts payable and accrued liabilities (Note 5)
$
327,516
 
$
294,182
 
$
360,352
 
 
Income taxes payable
 
49,784
   
57,474
   
34,708
 
 
Long-term debt due within one year (Note 4)
 
354
   
15,355
   
76,944
 
   
Total current liabilities
 
377,654
   
367,011
   
472,004
 
Long-term debt (Note 4)
 
491,778
   
541,350
   
534,527
 
Other long-term liabilities (Note 5)
 
223,381
   
183,643
   
168,131
 
Deferred income taxes
 
57,063
   
75,279
   
54,354
 
Commitments and contingencies (Note 8)
                 
Minority interest in net assets of consolidated subsidiaries
 
27,198
   
29,915
   
24,533
 
Stockholders' equity:
                 
 
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding
 
--
   
--
   
--
 
 
Common stock, $0.01 par value, 100,000,000 shares authorized, 40,000,502 (unaudited), 39,926,496 and 39,864,167 (unaudited) shares issued, respectively
 
400
   
399
   
399
 
Additional paid-in capital
 
547,043
   
545,773
   
538,009
 
Retained earnings
 
273,541
   
308,045
   
180,508
 
Treasury stock, at cost; 3,282,508 (unaudited), 3,004,108 and 906,004 (unaudited) shares, respectively (Note 10)
 
(132,873
)
 
 
(125,461
)
 
(37,544
)
 
Total stockholders' equity
 
688,111
   
728,756
   
681,372
 
   
Total liabilities and stockholders' equity
$
1,865,185
 
$
1,925,954
 
$
1,934,921
 

The accompanying Notes are an integral part of these consolidated condensed financial statements.

 
 

 
 
   
 
Consolidated Condensed Statements of Operations
 
(In thousands, except per share amounts)
 
(Unaudited)
 
                   
         
Three Months Ended
 
         
October 31,
 
         
2008
   
2007
 
Net revenue:
           
 
Mountain
$
40,778
 
$
42,536
 
 
Lodging
 
45,253
   
43,317
 
 
Real estate
 
66,750
   
12,034
 
Total net revenue
 
152,781
   
97,887
 
Segment operating expense:
           
 
Mountain
 
81,223
   
80,947
 
 
Lodging
 
44,898
   
41,236
 
 
Real estate
 
51,377
   
6,913
 
Total segment operating expense
 
177,498
   
129,096
 
Other operating expense:
           
 
Depreciation and amortization
 
(25,078
)
 
(20,761
)
 
Loss on disposal of fixed assets, net
 
(180
)
 
(234
)
Loss from operations
 
(49,975
)
 
(52,204
)
Mountain equity investment income, net
 
1,015
   
1,969
 
Investment income
 
643
   
3,218
 
Interest expense, net
 
(7,947
)
 
(7,644
)
Contract dispute credit, net  (Note 8)
 
--
   
11,920
 
Minority interest in loss of consolidated subsidiaries, net
 
2,351
   
2,063
 
 
Loss before benefit from income taxes
 
(53,913
)
 
(40,678
)
Benefit from income taxes
 
19,409
   
16,068
 
 
Net loss
$
(34,504
)
$
(24,610
)
             
Per share amounts (Note 3):
           
 
Basic net loss per share
$
(0.93
)
$
(0.63
)
 
Diluted net loss per share
$
(0.93
)
$
(0.63
)
 
The accompanying Notes are an integral part of these consolidated condensed financial statements.

 
 

 
 


Vail Resorts, Inc.
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
                   
         
Three Months Ended
 
         
October 31,
 
         
2008
   
2007
 
Cash flows from operating activities:
           
Net loss
$
(34,504
)
$
(24,610
)
Adjustments to reconcile net loss to net cash used in operating activities:
           
 
Depreciation and amortization
 
25,078
   
20,761
 
 
Real estate cost of sales
 
40,127
   
698
 
 
Stock-based compensation expense
 
2,567
   
2,246
 
 
Deferred income taxes, net
 
(19,188
)
 
(18,654
)
 
Minority interest in loss of consolidated subsidiaries, net
 
(2,351
)
 
(2,063
)
 
Other non-cash income, net
 
(1,807
)
 
(2,146
)
Changes in assets and liabilities:
           
 
Restricted cash
 
45,984
   
11,874
 
 
Accounts receivable, net
 
6,616
   
15,170
 
 
Inventories, net
 
(18,010
)
 
(15,637
)
 
Investments in real estate
 
(50,774
)
 
(64,330
)
 
Accounts payable and accrued liabilities
 
40,063
   
47,630
 
 
Deferred real estate deposits
 
(11,149
)
 
18,738
 
 
Private club deferred initiation fees and deposits
 
34,637
   
1,761
 
 
Other assets and liabilities, net
 
(6,370
)
 
(10,813
)
 
     Net cash provided by (used in) operating activities
 
50,919
   
(19,375
)
Cash flows from investing activities:
           
 
Capital expenditures
 
(43,384
)
 
(52,290
)
 
Other investing activities, net
 
(2,582
)
 
523
 
 
     Net cash used in investing activities
 
(45,966
)
 
(51,767
)
Cash flows from financing activities:
           
 
Repurchases of common stock
 
(7,412
)
 
(11,698
)
 
Proceeds from borrowings under Non-Recourse Real Estate Financings
 
9,013
   
17,586
 
 
Payments of Non-Recourse Real Estate Financings
 
(58,407
)
 
--
 
 
Proceeds from borrowings under other long-term debt
 
20,640
   
26,614
 
 
Payments of other long-term debt
 
(35,808
)
 
(26,840
)
 
Other financing activities, net
 
7,344
   
705
 
 
     Net cash (used in) provided by financing activities
 
(64,630
)
 
6,367
 
 
          Net decrease in cash and cash equivalents
 
(59,677
)
 
(64,775
)
Cash and cash equivalents:
           
 
Beginning of period
 
162,345
   
230,819
 
 
End of period
$
102,668
 
$
166,044
 
               
Cash paid for interest, net of amounts capitalized
$
15,776
 
$
11,960
 
Taxes paid, net
$
8,882
 
$
2,123
 
 
The accompanying Notes are an integral part of these consolidated condensed financial statements.

 
 

 


Vail Resorts, Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)

 
Vail Resorts, Inc. (“Vail Resorts” or the “Parent Company”) is organized as a holding company and operates through various subsidiaries.  Vail Resorts and its subsidiaries (collectively, the “Company”) currently operate in three business segments: Mountain, Lodging and Real Estate.  In the Mountain segment, the Company owns and operates five world-class ski resort properties at the Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado and the Heavenly Mountain Resort in the Lake Tahoe area of California and Nevada, as well as ancillary businesses, primarily including ski school, dining and retail/rental operations.  These resorts operate primarily on Federal land under the terms of Special Use Permits granted by the USDA Forest Service (the “Forest Service”).  The Company holds a 69.3% interest in SSI Venture, LLC (“SSV”), a retail/rental company.  In the Lodging segment, the Company owns and/or manages a collection of luxury hotels under its RockResorts International, LLC (“RockResorts”) brand, as well as other strategic lodging properties and a large number of condominiums located in proximity to the Company’s ski resorts, the Grand Teton Lodge Company (“GTLC”), which operates three destination resorts at Grand Teton National Park (under a National Park Service concessionaire contract), and golf courses.  Vail Resorts Development Company (“VRDC”), a wholly-owned subsidiary, conducts the operations of the Company’s Real Estate segment, which owns and develops real estate in and around the Company’s resort communities.  The Company’s mountain business and its lodging properties at or around the Company’s ski resorts are seasonal in nature with peak operating seasons from mid-November through mid-April.  The Company’s operations at GTLC and its golf courses generally operate from mid-May through mid-October.  The Company also has non-majority owned investments in various other entities, some of which are consolidated (see Note 6, Variable Interest Entities).

In the opinion of the Company, the accompanying Consolidated Condensed Financial Statements reflect all adjustments necessary to state fairly the Company's financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  Results for interim periods are not indicative of the results for the entire year.  The accompanying Consolidated Condensed Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended July 31, 2008.  Certain information and footnote disclosures, including significant accounting policies, normally included in fiscal year financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.  The July 31, 2008 Consolidated Condensed Balance Sheet was derived from audited financial statements.

2.           Summary of Significant Accounting Policies

Use of Estimates-- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassification of Book Overdrafts-- Book overdrafts represent checks issued that had not been presented for payment to the banks and are classified as accounts payable in the Company’s Consolidated Condensed Balance Sheets.  The Company typically funds these overdrafts through normal collections of funds or transfers from other bank balances.  For the three months ended October 31, 2007, the Company revised its presentation of changes in book overdrafts from a financing activity to an operating activity in its Consolidated Condensed Statement of Cash Flows to conform to its current year presentation.  In the Company’s Annual Report on Form 10-K for the year ended July 31, 2008, the Company also presented changes in book overdrafts as an operating activity.  The effect of this change increased cash used in operating activities for the three months ended October 31, 2007 from $17.3 million (as previously disclosed in the prior year’s Quarterly Report on Form 10-Q) to $19.4 million with a corresponding increase in the cash flows provided by financing activities for the three months ended October 31, 2007 from $4.3 million (as previously disclosed in the prior year’s Quarterly Report on Form 10-Q) to $6.4 million.

New Accounting Pronouncements-- In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 does not require any new fair value measurements, but rather provides guidance on how to measure fair value by providing a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.  The Company adopted SFAS 157 beginning August 1, 2008 (see Note 7, Fair Value Measurements, for more information on the adoption of SFAS 157).

In February 2008, the FASB issued Staff Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”).  This FSP delays the effective date of SFAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 (the Company's fiscal year ending July 31, 2010) and interim periods within the fiscal year of adoption.  The Company has deferred the application of SFAS 157 for nonfinancial assets and liabilities as prescribed by FSP 157-2.  The Company is currently evaluating the impacts, if any, the adoption of the provisions of SFAS 157 for nonfinancial assets and liabilities will have on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 provides the Company the irrevocable option to carry many financial assets and liabilities at fair value, with changes in fair value recognized in earnings.  The requirements of SFAS 159 became effective for the Company beginning August 1, 2008; however, the Company did not elect the fair value measurement option for any of its financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination.  SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination.  SFAS 141R will be applicable prospectively to business combinations consummated after July 31, 2009 (the Company’s fiscal year ending July 31, 2010).

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the balance sheet.  Currently, noncontrolling interests (minority interests) are reported as a liability in the Company’s consolidated balance sheet and the related income (loss) attributable to minority interests is reflected as an expense (credit) in arriving at net income.  Upon adoption of SFAS 160, the Company will be required to report its minority interests as a separate component of stockholders’ equity and present net income allocable to the minority interests along with net income attributable to the stockholders of the Company separately in its consolidated statement of operations.  SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.  All other requirements of SFAS 160 shall be applied prospectively.  The requirements of SFAS 160 are effective for the Company beginning August 1, 2009 (the Company’s fiscal year ending July 31, 2010).


SFAS No. 128, “Earnings Per Share” (“SFAS 128”), establishes standards for computing and presenting earnings per share (“EPS”).  SFAS 128 requires the dual presentation of basic and diluted EPS on the face of the consolidated condensed statements of operations and requires a reconciliation of numerators (net income/loss) and denominators (weighted-average shares outstanding) for both basic and diluted EPS in the footnotes.  Basic EPS excludes dilution and is computed by dividing net income/loss available to holders of common stock by the weighted-average shares outstanding.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings of the Company.  Presented below is basic and diluted EPS for the three months ended October 31, 2008 and 2007 (in thousands, except per share amounts):

   
Three Months Ended October 31,
 
2008
 
2007
 
Basic
 
Diluted
 
Basic
 
Diluted
Net loss per common share:
                             
Net loss
$
(34,504
)
 
$
(34,504
)
 
$
(24,610
)
 
$
(24,610
)
                               
Weighted-average shares outstanding
 
36,922
     
36,922
     
38,892
     
38,892
 
Effect of dilutive securities
 
--
     
--
     
--
     
--
 
Total shares
 
36,922
     
36,922
     
38,892
     
38,892
 
                               
Net loss per common share
$
(0.93
)
 
$
(0.93
)
 
$
(0.63
)
 
$
(0.63
)

The number of shares issuable on the exercise of share based awards that were excluded from the calculation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive totaled 0.8 million and 1.0 million (maximum number of vested and unvested share based awards) for the three months ended October 31, 2008 and 2007, respectively.  

4.           Long-Term Debt

Long-term debt as of October 31, 2008, July 31, 2008 and October 31, 2007 is summarized as follows (in thousands):

   
October 31,
July 31,
October 31,
 
Maturity (a)
2008
2008
2007
Credit Facility Revolver
2012
$
--
$
--
$
--
SSV Facility
2011
 
--
 
--
 
--
Industrial Development Bonds (b)
2011-2020
 
42,700
 
57,700
 
57,700
Employee Housing Bonds
2027-2039
 
52,575
 
52,575
 
52,575
Non-Recourse Real Estate Financings (c)
--
 
--
 
49,394
 
104,468
6.75% Senior Subordinated Notes (“6.75% Notes”)
2014
 
390,000
 
390,000
 
390,000
Other
2009-2029
 
6,857
 
7,036
 
6,728
Total debt
   
492,132
 
556,705
 
611,471
Less:  Current maturities (d)
   
354
 
15,355
 
76,944
Long-term debt
 
$
491,778
$
541,350
$
534,527

(a)  
Maturities are based on the Company's July 31 fiscal year end.

(b)  
The Company has outstanding $42.7 million of industrial development bonds (collectively, the “Industrial Development Bonds”), of which $41.2 million were issued by Eagle County, Colorado and mature, subject to prior redemption, on August 1, 2019.  The Series 1991 Sports Facilities Refunding Revenue Bonds, issued by Summit County, Colorado, have an aggregate outstanding principal amount of $1.5 million and mature, subject to prior redemption, on September 1, 2010.  On August 29, 2008, $15.0 million of borrowings under the Series 1990 Sports Facilities Refunding Revenue Bonds, issued by Summit County, Colorado were paid in full at maturity.

(c)  
Non-Recourse Real Estate Financings borrowings under the original $123.0 million construction agreement for The Chalets at The Lodge at Vail, LLC (“Chalets”) were paid in full during the three months ended October 31, 2008.  As of July 31, 2008 Non-Recourse Real Estate Financings included borrowings of $49.4 million under the construction agreement for the Chalets.  As of October 31, 2007 Non-Recourse Real Estate Financings consisted of borrowings under the original $175.0 million construction agreement for Arrabelle at Vail Square, LLC (“Arrabelle”) of $61.6 million and under the construction agreement for the Chalets of $42.9 million.

(d)  
Current maturities represent principal payments due in the next 12 months.

Aggregate maturities for debt outstanding as of October 31, 2008 reflected by fiscal year are as follows (in thousands):

2009
$
171
2010
 
349
2011
 
1,831
2012
 
305
2013
 
319
Thereafter
 
489,157
Total debt
$
492,132

The Company incurred gross interest expense of $9.7 million and $11.1 million for the three months ended October 31, 2008 and 2007, respectively, of which $0.8 million and $0.6 million was amortization of deferred financing costs.  The Company capitalized $1.7 million and $3.5 million of interest during the three months ended October 31, 2008 and 2007, respectively.


The composition of property, plant and equipment follows (in thousands):

 
October 31,
July 31,
October 31,
 
2008
2008
2007
Land and land improvements
$
266,194
 
$
265,123
 
$
249,834
 
Buildings and building improvements
 
729,211
   
685,393
   
555,784
 
Machinery and equipment
 
459,544
   
457,825
   
428,976
 
Furniture and fixtures
 
152,735
   
149,251
   
111,239
 
Software
 
40,359
   
39,605
   
33,706
 
Vehicles
 
29,588
   
28,829
   
26,950
 
Construction in progress
 
72,744
   
80,601
   
106,736
 
     Gross property, plant and equipment
 
1,750,375
   
1,706,627
   
1,513,225
 
Accumulated depreciation
 
(672,615
)
 
(649,790
)
 
(595,881
)
      Property, plant and equipment, net
$
1,077,760
 
$
1,056,837
 
$
917,344
 

The composition of accounts payable and accrued liabilities follows (in thousands):

   
October 31,
 
July 31,
 
October 31,
   
2008
 
2008
 
2007
Trade payables
$
73,348
 
$
53,187
 
$
96,896
 
Real estate development payables
 
57,001
   
52,574
   
35,322
 
Deferred revenue
 
82,343
   
45,805
   
69,568
 
Deferred real estate and other deposits
 
46,582
   
58,421
   
83,576
 
Accrued salaries, wages and deferred compensation
 
16,052
   
22,397
   
18,405
 
Accrued benefits
 
22,303
   
22,777
   
22,997
 
Accrued interest
 
6,722
   
14,552
   
6,919
 
Liabilities to complete real estate projects, short term
 
2,821
   
4,199
   
4,817
 
Other accruals
 
20,344
   
20,270
   
21,852
 
     Total accounts payable and accrued liabilities
$
327,516
 
$
 294,182
 
$
360,352
 

The composition of other long-term liabilities follows (in thousands):

   
October 31,
 
July 31,
October 31,
   
2008
 
2008
 
2007
Private club deferred initiation fee revenue
$
150,747
 
$
92,066
 
$
93,234
 
Deferred real estate deposits
 
45,856
   
45,775
   
42,657
 
Private club initiation deposits
 
5,453
   
29,881
   
18,745
 
Other long-term liabilities
 
21,325
   
15,921
   
13,495
 
     Total other long-term liabilities
   $
223,381
 
$
183,643
 
$
168,131
 


The Company is the primary beneficiary of four employee housing entities (collectively, the “Employee Housing Entities”), Breckenridge Terrace, LLC, The Tarnes at BC, LLC (“Tarnes”), BC Housing LLC and Tenderfoot Seasonal Housing, LLC, which are Variable Interest Entities (“VIEs”), and has consolidated them in its Consolidated Condensed Financial Statements.  As a group, as of October 31, 2008, the Employee Housing Entities had total assets of $38.0 million (primarily recorded in property, plant and equipment, net) and total liabilities of $69.7 million (primarily recorded in long-term debt as “Employee Housing Bonds”).  All of the assets ($7.9 million as of October 31, 2008) of Tarnes serve as collateral for Tarnes' Tranche B Employee Housing Bonds.  The Company has issued under its Credit Facility $38.3 million letters of credit related to the Tranche A Employee Housing Bonds and $12.6 million letters of credit related to the Tranche B Employee Housing Bonds.  The letters of credit would be triggered in the event that one of the entities defaults on required payments.  The letters of credit have no default provisions.

The Company is the primary beneficiary of Avon Partners II, LLC (“APII”), which is a VIE.  APII owns commercial space and the Company currently leases substantially all of that space.  APII had total assets of $5.5 million (primarily recorded in property, plant and equipment, net) and no debt as of October 31, 2008.

The Company, through various lodging subsidiaries, manages hotels in which the Company has no ownership interest in the entities that own such hotels.  These entities were formed by unrelated third parties to acquire, own, operate and realize the value in resort hotel properties.  The Company managed the day-to-day operations of six hotel properties as of October 31, 2008.  The Company has determined that the entities that own the hotel properties are VIEs, and the management contracts are significant variable interests in these VIEs.  The Company has also determined that it is not the primary beneficiary of these entities and, accordingly, is not required to consolidate any of these entities.  Based upon the latest information provided by these third party entities, these VIEs had estimated total assets of approximately $246.1 million and total liabilities of approximately $147.2 million.  The Company's maximum exposure to loss as a result of its involvement with these VIEs is limited to a $2.2 million note receivable including accrued interest from one of the third parties and the net book value of the intangible asset associated with a management agreement in the amount of $0.7 million as of October 31, 2008.

7.           Fair Value Measurements

SFAS 157 establishes how reporting entities should measure fair value for measurement and disclosure purposes.  The Standard does not require any new fair value measurements but rather establishes a common definition of fair value applicable to all assets and liabilities measured at fair value.  SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The fair value hierarchy established by SFAS 157 prioritizes the inputs into valuation techniques used to measure fair value.  Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value.  The three levels of the hierarchy are as follows:

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities;

Level 2: Inputs include quoted prices for similar assets and liabilities in active and inactive markets or that are observable for the asset or liability either directly or indirectly; and

Level 3: Unobservable inputs which are supported by little or no market activity.

The table below summarizes the Company’s financial assets and liabilities measured at fair value in accordance with SFAS 157 as of October 31, 2008 (all other financial assets and liabilities applicable to SFAS 157 are immaterial) (in thousands):
 
     
Fair Value Measurements at Reporting Date Using
   
Balance at
           
   
October 31,
           
Description
 
2008
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
 
$
55,855
 
$
48,855
 
$
7,000
 
$
--

The Company’s cash equivalents include money market funds, time deposits and U.S. government debt securities which are measured using Level 1 and Level 2 inputs utilizing quoted market prices or pricing models whereby all significant inputs are either observable or corroborated by observable market data.


Metropolitan Districts

The Company credit-enhances $8.5 million of bonds issued by Holland Creek Metropolitan District (“HCMD”) through an $8.6 million letter of credit issued against the Company's Credit Facility.  HCMD's bonds were issued and used to build infrastructure associated with the Company's Red Sky Ranch residential development.  The Company has agreed to pay capital improvement fees to Red Sky Ranch Metropolitan District (“RSRMD”) until RSRMD's revenue streams from property taxes are sufficient to meet debt service requirements under HCMD's bonds, and the Company has recorded a liability of $1.5 million, $1.6 million and $1.0 million, primarily within “other long-term liabilities” in the accompanying Consolidated Condensed Balance Sheets, as of October 31, 2008, July 31, 2008 and October 31, 2007, respectively, with respect to the estimated present value of future RSRMD capital improvement fees.  The Company estimates that it will make capital improvement fee payments under this arrangement through the year ending July 31, 2016.

Guarantees

As of October 31, 2008, the Company had various other guarantees, primarily in the form of letters of credit in the amount of $94.6 million, consisting primarily of $51.0 million in support of the Employee Housing Bonds, $36.2 million of construction and development related guarantees and $6.1 million for workers’ compensation and general liability deductibles related to construction and development activities.

In addition to the guarantees noted above, the Company has entered into contracts in the normal course of business which include certain indemnifications within the scope of FASB Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) under which it could be required to make payments to third parties upon the occurrence or non-occurrence of certain future events.  These indemnities include indemnities to licensees in connection with the licensees’ use of the Company’s trademarks and logos, indemnities for liabilities associated with the infringement of other parties’ technology and software products, indemnities related to liabilities associated with the use of easements, indemnities related to employment of contract workers, the Company’s use of trustees, indemnities related to the Company’s use of public lands and environmental indemnifications.  The duration of these indemnities generally is indefinite and generally do not limit the future payments the Company could be obligated to make.

As permitted under applicable law, the Company and certain of its subsidiaries indemnify their directors and officers over their lifetimes for certain events or occurrences while the officer or director is, or was, serving the Company or its subsidiaries in such a capacity.  The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that should enable the Company to recover a portion of any future amounts paid.

Unless otherwise noted, the Company has not recorded any significant liabilities for the letters of credit, indemnities and other guarantees noted above in the accompanying Consolidated Condensed Financial Statements, either because the Company has recorded on its Consolidated Condensed Balance Sheets the underlying liability associated with the guarantee, the guarantee or indemnification existed prior to January 1, 2003, the guarantee is with respect to the Company’s own performance and is therefore not subject to the measurement requirements of FIN 45, or because the Company has calculated the fair value of the indemnification or guarantee to be immaterial based upon the current facts and circumstances that would trigger a payment under the indemnification clause.  In addition, with respect to certain indemnifications it is not possible to determine the maximum potential amount of liability under these guarantees due to the unique set of facts and circumstances that are likely to be involved in each particular claim and indemnification provision.  Historically, payments made by the Company under these obligations have not been material.

As noted above, the Company makes certain indemnifications to licensees in connection with their use of the Company’s trademarks and logos.  The Company does not record any liabilities with respect to these indemnifications.

Commitments

In the ordinary course of obtaining necessary zoning and other approvals for the Company's potential real estate development projects, the Company may contingently commit to the completion of certain infrastructure, improvements and other costs related to the projects.  Fulfillment of such commitments is required only if the Company moves forward with the development project.  The determination whether to complete a development project is entirely at the Company's discretion, and is generally contingent upon, among other considerations, receipt of satisfactory zoning and other approvals and the current status of the Company's analysis of the economic viability of the project, including the costs associated with the contingent commitments.  The Company currently has obligations, recorded as liabilities in the accompanying Consolidated Condensed Balance Sheet, to complete or fund certain improvements with respect to real estate developments; the Company has estimated such costs to be approximately $3.4 million as of October 31, 2008, and anticipates completion of the majority of these commitments within the next two years.

Self Insurance

The Company is self-insured for claims under its health benefit plans and for workers’ compensation claims, subject to a stop loss policy.  The self-insurance liability related to workers' compensation is determined actuarially based on claims filed.  The self-insurance liability related to claims under the Company’s health benefit plans is determined based on analysis of actual claims.  The amounts related to these claims are included as a component of accrued benefits in accounts payable and accrued liabilities (see Note 5, Supplementary Balance Sheet Information).

Legal

The Company is a party to various lawsuits arising in the ordinary course of business, including Resort (Mountain and Lodging) related cases and contractual and commercial litigation that arises from time to time in connection with the Company's real estate operations.  Management believes the Company has adequate insurance coverage or has accrued for loss contingencies for all known matters that are deemed to be probable losses and estimable.  As of October 31, 2008, July 31, 2008 and October 31, 2007 the accrual for the above loss contingencies was not material individually and in the aggregate.

Cheeca Lodge & Spa Contract Dispute

On October 19, 2007, RockResorts received payment of the final settlement from Cheeca Holdings, LLC, related to the disputed contract termination of the formerly managed RockResorts Cheeca Lodge & Spa property, in the amount of $13.5 million, of which $11.9 million (net of final attorney’s fees) is recorded in “contract dispute credit, net” in the Consolidated Condensed Statement of Operations for the three months ended October 31, 2007.

9.           Segment Information

The Company has three reportable segments: Mountain, Lodging and Real Estate.  The Mountain segment includes the operations of the Company’s ski resorts and related ancillary activities.  The Lodging segment includes the operations of all of the Company’s owned hotels, RockResorts, GTLC, condominium management and golf operations.  The Resort segment is the combination of the Mountain and Lodging segments.  The Real Estate segment owns and develops real estate in and around the Company’s resort communities.  The Company’s reportable segments, although integral to the success of the others, offer distinctly different products and services and require different types of management focus.  As such, these segments are managed separately.
 
The Company reports its segment results using Reported EBITDA (defined as segment net revenue less segment operating expenses, plus or minus segment equity investment income or loss), which is a non-GAAP financial measure.  SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires the Company to report segment results in a manner consistent with management’s internal reporting of operating results to the chief operating decision maker (Chief Executive Officer) for purposes of evaluating segment performance.

Reported EBITDA is not a measure of financial performance under GAAP.  Items excluded from Reported EBITDA are significant components in understanding and assessing financial performance.  Reported EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income (loss), net change in cash and cash equivalents or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.  Because Reported EBITDA is not a measurement determined in accordance with GAAP and thus is susceptible to varying calculations, Reported EBITDA as presented may not be comparable to other similarly titled measures of other companies.

The Company utilizes Reported EBITDA in evaluating performance of the Company and in allocating resources to its segments.  Mountain Reported EBITDA consists of Mountain net revenue less Mountain operating expense plus Mountain equity investment income.  Lodging Reported EBITDA consists of Lodging net revenue less Lodging operating expense.  Real Estate Reported EBITDA consists of Real Estate net revenue less Real Estate operating expense.  All segment expenses include an allocation of corporate administrative expense.  Assets are not allocated between segments, or used to evaluate performance, except as shown in the table below.

Following is key financial information by reportable segment which is used by management in evaluating performance and allocating resources (in thousands):
 
   
Three Months Ended October 31,
 
   
2008
 
2007
 
Net revenue:
               
Lift tickets
 
$
--
   
$
--
 
Ski school
   
--
     
--
 
Dining
   
3,929
     
4,762
 
Retail/rental
   
22,426
     
23,540
 
Other
   
14,423
     
14,234
 
Total Mountain net revenue
   
40,778
     
42,536
 
Lodging
   
45,253
     
43,317
 
Resort
   
86,031
     
85,853
 
Real estate
   
66,750
     
12,034
 
Total net revenue
 
$
152,781
   
$
97,887
 
Segment operating expense:
               
Mountain
 
$
81,223
   
$
80,947
 
Lodging
   
44,898
     
41,236
 
Resort
   
126,121
     
122,183
 
Real estate
   
51,377
     
6,913
 
Total segment operating expense
 
$
177,498
   
$
129,096
 
Mountain equity investment income, net
 
$
1,015
   
$
1,969
 
                 
Reported EBITDA:
               
Mountain
 
$
(39,430
)
 
$
(36,442
)
Lodging
   
355
     
2,081
 
Resort
   
(39,075
)
   
(34,361
)
Real estate
   
15,373
     
5,121
 
Total Reported EBITDA
 
$
(23,702)
   
$
(29,240
)
                 
Reconciliation to net loss:  
               
Total Reported EBITDA
 
$
 (23,702
)
 
$
(29,240
)
Depreciation and amortization
   
(25,078
)
   
(20,761
)
Loss on disposal of fixed assets, net
   
(180
)
   
(234
)
Investment income
   
643
     
3,218
 
Interest expense, net
   
(7,947
)
   
(7,644
)
Contract dispute credit, net
   
--
     
11,920
 
Minority interest in loss of consolidated subsidiaries, net
   
2,351
     
2,063
 
Loss before benefit from income taxes
   
(53,913
)
   
(40,678
)
Benefit from income taxes
   
19,409
     
16,068
 
Net loss
 
$
(34,504
)
 
$
(24,610
)
                 
Real estate held for sale and investment
 
$
256,323
   
$
415,411
 

10.           Stock Repurchase Plan

On March 9, 2006, the Company’s Board of Directors approved the repurchase of up to 3,000,000 shares of common stock and on July 16, 2008 approved an increase of the Company’s common stock repurchase authorization by an additional 3,000,000 shares.  During the three months ended October 31, 2008, the Company repurchased 278,400 shares of common stock at a cost of $7.4 million.  Since inception of this stock repurchase plan through October 31, 2008, the Company has repurchased 3,282,508 shares at a cost of approximately $132.9 million.  As of October 31, 2008, 2,717,492 shares remained available to repurchase under the existing repurchase authorization.  Shares of common stock purchased pursuant to the repurchase program will be held as treasury shares and may be used for the issuance of shares under the Company's employee share award plans.


The Company’s payment obligations under the 6.75% Notes (see Note 4, Long-Term Debt) are fully and unconditionally guaranteed on a joint and several, senior subordinated basis by substantially all of the Company’s consolidated subsidiaries (collectively, and excluding Non-Guarantor Subsidiaries (as defined below), the “Guarantor Subsidiaries”) except for Eagle Park Reservoir Company, Gros Ventre Utility Company, Mountain Thunder, Inc., SSV, Larkspur Restaurant & Bar, LLC, Arrabelle, Gore Creek Place, LLC, Chalets and certain other insignificant entities (together, the “Non-Guarantor Subsidiaries”).  APII and the Employee Housing Entities are included with the Non-Guarantor Subsidiaries for purposes of the consolidated financial information, but are not considered subsidiaries under the indenture governing the 6.75% Notes.

Presented below is the consolidated financial information of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries.  Financial information for the Non-Guarantor Subsidiaries is presented in the column titled “Other Subsidiaries.”  Balance sheet data is presented as of October 31, 2008, July 31, 2008 and October 31, 2007.  Statement of operations and condensed statement of cash flows data are presented for the three months ended October 31, 2008 and 2007.

Investments in subsidiaries are accounted for by the Parent Company and Guarantor Subsidiaries using the equity method of accounting.  Net income (loss) of Guarantor and Non-Guarantor Subsidiaries is, therefore, reflected in the Parent Company's and Guarantor Subsidiaries' investments in and advances to (from) subsidiaries.  Net income (loss) of the Guarantor and Non-Guarantor Subsidiaries is reflected in Guarantor Subsidiaries and Parent Company as equity in consolidated subsidiaries.  The elimination entries eliminate investments in Other Subsidiaries and intercompany balances and transactions for consolidated reporting purposes.
 
 
 

 
 
 
Supplemental Condensed Consolidating Balance Sheet
 
As of October 31, 2008
 
(in thousands)
 
                                       
           
100% Owned
                         
     
Parent
 
Guarantor
 
Other
 
Eliminating
       
     
Company
 
Subsidiaries
 
Subsidiaries
 
Entries
 
Consolidated
 
Current assets:
                                       
 
Cash and cash equivalents
 
$
--
   
$
92,806
   
$
9,862
   
$
--
   
$
102,668
 
 
Restricted cash
   
--
     
12,193
     
260
     
--
     
12,453
 
 
Trade receivables, net
   
--
     
43,662
     
806
     
--
     
44,468
 
 
Inventories, net
   
--
     
10,965
     
56,753
     
--
     
67,718
 
 
Other current assets
   
16,115
     
21,622
     
4,251
     
--
     
41,988
 
 
Total current assets
   
16,115
     
181,248
     
71,932
     
--
     
269,295
 
 
Property, plant and equipment, net
   
--
     
828,390
     
249,370
     
--
     
1,077,760
 
 
Real estate held for sale and investment
   
--
     
204,323
     
52,000
     
--
     
256,323
 
 
Goodwill, net
   
--
     
123,034
     
19,248
     
--
     
142,282
 
 
Intangible assets, net
   
--
     
56,584
     
15,879
     
--
     
72,463
 
 
Other assets
   
3,758
     
36,570
     
6,734
     
--
     
47,062
 
 
Investments in subsidiaries and advances to (from) parent
   
1,174,116
     
713,098
     
(114,512
)
   
(1,772,702
)
   
--
 
 
Total assets
 
$
1,193,989
   
$
2,143,247
   
$
300,651
   
$
(1,772,702
)
 
$
1,865,185
 
                                           
 
Current liabilities:
                                       
 
Accounts payable and accrued liabilities
 
$
5,889
   
$
224,520
   
$
97,107
   
$
--
   
$
327,516
 
 
Income taxes payable
   
49,784
     
--
     
--
     
--
     
49,784
 
 
Long-term debt due within one year
   
--
     
11
     
343
     
--
     
354
 
 
Total current liabilities
   
55,673
     
224,531
     
97,450
     
--
     
377,654
 
 
Long-term debt
   
390,000
     
42,721
     
59,057
     
--
     
491,778
 
 
Other long-term liabilities
   
3,142
     
217,436
     
2,803
     
--
     
223,381
 
 
Deferred income taxes
   
57,063
     
--
     
--
     
--
     
57,063
 
 
Minority interest in net assets of consolidated subsidiaries
   
--
     
--
     
--
     
27,198
     
27,198
 
 
Total stockholders’ equity
   
688,111
     
1,658,559
     
141,341
     
(1,799,900
)
   
688,111
 
 
Total liabilities and stockholders’ equity
 
$
1,193,989
   
$
2,143,247
   
$
300,651
   
$
(1,772,702
)
 
$
1,865,185
 


 
 

 

Supplemental Condensed Consolidating Balance Sheet
As of July 31, 2008
(in thousands)

           
100% Owned
                       
   
Parent
 
Guarantor
 
Other
 
Eliminating
       
   
Company
 
Subsidiaries
 
Subsidiaries
 
Entries
 
Consolidated
Current assets:
                                       
Cash and cash equivalents
 
$
--
   
$
156,782
   
$
5,563
   
$
--
   
$
162,345
 
Restricted cash
   
--
     
10,526
     
47,911
     
--
     
58,437
 
Trade receivables, net
   
--
     
47,953
     
2,232
     
--
     
50,185
 
Inventories, net
   
--
     
11,786
     
37,922
     
--
     
49,708
 
Other current assets
   
15,142
     
19,205
     
3,873
     
--
     
38,220
 
Total current assets
   
15,142
     
246,252
     
97,501
     
--
     
358,895
 
Property, plant and equipment, net
   
--
     
806,696
     
250,141
     
--
     
1,056,837
 
Real estate held for sale and investment
   
--
     
204,260
     
45,045
     
--
     
249,305
 
Goodwill, net
   
--
     
123,034
     
19,248
     
--
     
142,282
 
Intangible assets, net
   
--
     
56,650
     
15,880
     
--
     
72,530
 
Other assets
   
3,936
     
34,922
     
7,247
     
--
     
46,105
 
Investments in subsidiaries and advances to (from) parent
   
1,248,019
     
599,199
     
(61,968
)
   
(1,785,250
)
   
--
 
Total assets
 
$
1,267,097
   
$
2,071,013
   
$
373,094
   
$
(1,785,250
)
 
$
1,925,954
 
                                         
Current liabilities:
                                       
Accounts payable and accrued liabilities
 
$
12,446
   
$
196,360
   
$
85,376
   
$
--
   
$
294,182
 
Income taxes payable
   
57,474
     
--
     
--
     
--
     
57,474
 
Long-term debt due within one year
   
--
     
15,022
     
333
     
--
     
15,355
 
Total current liabilities
   
69,920
     
211,382
     
85,709
     
--
     
367,011
 
Long-term debt
   
390,000
     
42,722
     
108,628
     
--
     
541,350
 
Other long-term liabilities
   
3,142
     
149,557
     
30,944
     
--
     
183,643
 
Deferred income taxes
   
75,279
     
--
     
--
     
--
     
75,279
 
Minority interest in net assets of consolidated subsidiaries
   
--
     
--
     
--
     
29,915
     
29,915
 
Total stockholders’ equity
   
728,756
     
1,667,352
     
147,813
     
(1,815,165
)
   
728,756
 
Total liabilities and stockholders’ equity
 
$
1,267,097
   
$
2,071,013
   
$
373,094
   
$
(1,785,250
)
 
$
1,925,954
 



 
 

 




Supplemental Condensed Consolidating Balance Sheet
 
As of October 31, 2007
 
(in thousands)
 
                                       
           
100% Owned