UNITED STATES


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

FORM 10-K. --ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X]

Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

[Fee Required]

 

For the fiscal year ended

July 31, 2002                                                                                                                           

[   ]

Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

[No Fee Required]

 

 

 

For the transition period from

                                                                       to                                                             

 

 

Commission File Number:

  1-9614                                                                                                                                

           Vail Resorts, Inc.            

(Exact name of registrant as specified in its charter)

                                Delaware                                

 

                                51-0291762                                

(State or other jurisdiction of

 

(I.R.S. Employer

Incorporation or organization)

 

Identification No.)

 

 

 

           Post Office Box 7 Vail, Colorado           

 

                              81658                              

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(Registrant's telephone number, including area code)

                                                 (970) 476-5601                             

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class:

 

Name of each exchange on which registered:

             Common Stock, $0.01 par value             

 

                  New York Stock Exchange                  

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

                                                                                          None.                                                                                          

(Title of class)

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 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 amendments to this Form 10-K. [X]

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $448.9 million on October 14, 2002, and was calculated using the per share closing price thereof on the New York Stock Exchange Composite Tape. As of October 14, 2002, 35,182,541 shares were issued and outstanding, of which 7,439,834 shares were Class A Common Stock and 27,742,707 shares were Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

 

The Proxy Statement for the Annual Meeting of Shareholders to be held December 9, 2002 is incorporated by reference herein into Part III, Items 10 through 13.

 

This Form 10-K constitutes the Annual Report on Form 10-K for the following subsidiaries:

 

Entity

IRS Employer

Identification No.

Year Ended

Larkspur Restaurant & Bar, LLC

84-1510919

July 31, 2002

RockResorts International, LLC

84-1606606

July 31, 2002

This Form 10-K also constitutes an Interim Report for the following subsidiary:

 

Entity

IRS Employer

Identification No.

Interim Period Ended

JHL&S LLC

83-0332983

July 31, 2002

Financial statements have been included for the following equity method investee:

 

Entity

IRS Employer

Identification No.

Year Ended

Keystone/Intrawest, LLC

84-1438490

June 30, 2002   

 

 

 

 

 

Table of Contents

 

PART I

 

 

Item 1.

Business.

4

Item 2. 

Properties.

13

Item 3.    

Legal Proceedings.

14

Item 4.    

Submission of Matters to a Vote of Security Holders.

15

 

 

PART II

 

 

 

Item 5.    

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

16

Item 6.    

Selected Financial Data.

18

Item 7.    

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

21

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk.

34

Item 8.    

Financial Statements and Supplementary Data.

F-1

Item 9.    

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

35

 

 

PART III

 

 

 

Item 10.  

Directors and Executive Officers of the Registrant.

36

Item 11.  

Executive Compensation.

36

Item 12.  

Security Ownership of Certain Beneficial Owners and Management.

36

Item 13.  

Certain Relationships and Related Transactions.

36

 

 

PART IV

 

 

 

Item 14.  

Exhibits, Financial Statement Schedules and Reports on Form 8-K.

36

FORWARD-LOOKING STATEMENTS

Except for any historical information contained herein, the matters discussed in this Annual Report on Form 10-K contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.

These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar terms and phrases, including references to assumptions.

Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from our forward-looking statements include, among others, economic downturns; terrorist acts upon the United States; unfavorable weather conditions; our ability to obtain financing on terms acceptable to us to finance our capital expenditure and growth strategy; our ability to develop our resort and real estate operations; competition in our mountain and lodging businesses; our reliance on government permits for our use of federal land; our ability to integrate and successfully operate future acquisitions; and adverse changes in the real estate market. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this Annual Report on Form 10-K, including investors and prospective investors, are cautioned not to place undue reliance on such forward-looking statements. We will not update these forward-looking statements, even if new information, future events or other circumstances have made them incorrect or misleading.

PART I

ITEM 1.  BUSINESS

General

Vail Resorts, Inc. was organized as a holding company in 1997 and operates through various subsidiaries (collectively, the "Company"). The Company's operations are grouped into three segments: Mountain, Lodging, and Real Estate, which represented approximately 66%, 24%, and 10%, respectively, of the Company's revenues for the 2002 fiscal year. As a result of a change in the Company's business operations, the Company stopped reporting Technology as a separate segment as of April 30, 2002. Effective with this filing, the Company has established two new segments, Mountain and Lodging in place of its former Resort segment. The Company's Mountain segment owns and operates five premier ski resort properties which provide a comprehensive resort experience throughout the year to a diverse clientele with an attractive demographic profile. The Company's Lodging segment owns and/or manages a collection of luxury hotels, a destination resort at Grand Teton National Park, and a series of strategic properties located in proximity to the Company's mountain operations. The Company's Real Estate segment holds, develops, buys and sells real estate in and around the Company's resort communities. Financial information by segment is presented in Note 10, Segment Information, of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report.

Mountain Segment

The Company's portfolio of ski resorts currently includes:

  • Vail Mountain ("Vail")--the largest single ski mountain complex in North America, currently ranked as the number one ski resort in North America by SKI magazine and the most visited ski resort in the United States for the 2001/02 ski season;
  • Beaver Creek Resort ("Beaver Creek")--one of the world's premier family-oriented mountain resorts, currently ranked as the number five ski resort in North America by SKI magazine;
  • Breckenridge Mountain ("Breckenridge")--an attractive destination resort with numerous après-ski activities and an extensive bed base, currently ranked as the number ten ski resort in North America by SKI magazine and the second most visited resort in the United States for the 2001/02 ski season;
  • Heavenly Valley Ski Resort ("Heavenly")--the third largest ski resort in North America, currently ranked as the number fifteen ski resort in North America by SKI magazine; and
  • Keystone Resort ("Keystone")--a year-round family vacation destination, currently ranked as the number nineteen ski resort in North America by SKI magazine.

The Company's mountain segment derives revenue primarily through the sale of lift tickets and passes. This revenue source is supported and augmented by a comprehensive package of amenities available to guests, including ski and snowboard lesson packages, retail and equipment rental outlets, a variety of dining venues, meeting and event planning services, private club operations, and other year-round recreational activities. In addition to providing extensive guest amenities, the Company also engages in commercial leasing of restaurant, retail and other commercial space, and real estate brokerage services.

Vail, Beaver Creek, Breckenridge and Keystone, all located in the Colorado Rocky Mountains, and Heavenly, located in the Lake Tahoe area of California/Nevada, are year-round mountain resorts. Each offers a full complement of recreational activities, including skiing, snowboarding, snowshoeing, tubing, mountain biking, golf, and other recreational activities.

The following paragraphs discuss certain ski industry related statistics. Colorado ski statistics are derived from information from Colorado Ski Country USA. Canadian ski statistics are from the Canadian Ski Council. U.S. and California ski statistics are derived from the Kottke National End of Season Survey 2001/02.

There are approximately 800 ski areas in North America and approximately 490 in the United States, ranging from small ski area operations which service day skiers to large resorts which attract both day skiers and destination resort guests looking for a comprehensive vacation experience. The primary ski industry statistic for measuring performance is "skier visit", defined as one person using a ski area for all or any part of a day or night, and includes both paid and complimentary access. During the 2001/02 ski season, combined skier visits for all North American ski areas were approximately 73.4 million, and U.S. skier visits approximated 54.4 million, a decline of approximately 3.4% and 5.1% from the record-breaking 2000/01 ski season, respectively. Including the approximate 831,000 skier visits reported by Heavenly for the 2001/02 season, the Company's ski resorts had 5.6 million skier visits during the 2001/02 ski season, or slightly over 10% of U.S. skier visits, and an approximate 7.6% share of the North American market's ski visits.

The Company's Colorado ski resorts appeal to both day skiers and destination guests due to the resorts' proximity to Colorado's Front Range (Denver/Colorado Springs metropolitan areas), accessibility from Denver International Airport, Vail/Eagle County Airport and Colorado Springs Airport, and the wide range of amenities available at each resort. Colorado has approximately 25 ski areas, eight of which are classified as "Front Range Destination Resorts", catering to both the Front Range and destination skier markets. All Colorado ski resorts combined recorded approximately 11.1 million skier visits for the 2001/02 ski season, down approximately 4.6% from the 2000/01 ski season. Skier visits at the Company's Colorado ski resorts totaled more than 4.7 million, and accounted for approximately 68% of total Colorado skier visits in the Front Range Destination Resort market and 42.3% of all Colorado skier visits for the 2001/02 ski season.

Lake Tahoe, which straddles the border of California and Nevada, is a major skiing destination less than 100 miles from Sacramento, Reno and Tahoe City and approximately 200 miles from San Francisco, making it a convenient destination for driving and for destination guests using one of two major area airports. Lake Tahoe is also a popular year-round vacation destination, featuring extensive summer attractions and casinos in addition to its winter sports offerings. Heavenly is proximate to both the Reno/Tahoe International Airport and the Sacramento International Airport. Lake Tahoe has approximately 13 ski resorts with 182 ski trails on more than 8,000 total resort acres. Heavenly recorded 831,000 skier visits for the 2001/02 ski season, capturing 11.3% of California's 7.3 million total skier visits for the ski season.

The ski resort industry has undergone a period of consolidation in recent years, as the cost of capital improvements and infrastructure required to remain competitive has increased. As a result, the 2001/02 season marked the lowest number of operating resorts in the U.S. in at least 20 seasons. Despite this consolidation, the industry remains highly fragmented, as no other single resort operator accounted for more than 10% of the United States' 54.4 million skier visits during the 2001/02 season. The Company believes that the consolidation trend will continue, and as such the Company will continue to selectively review and pursue those acquisition opportunities which the Company believes will advance its strategy and provide attractive investment returns.

The ski resort industry is highly competitive. The Company competes with other ski areas throughout the United States, and worldwide, as well as with other non-ski vacation destinations for guests. The Company's major U.S. competitors include ski resorts in Utah, New England and other major Colorado and Lake Tahoe ski areas including the Aspen area resorts, Copper Mountain, Crested Butte, Steamboat Springs, Telluride, Winter Park, Squaw Valley and Northstar at Tahoe. Ski resorts compete for skiers in a variety of categories, including terrain, challenge, grooming, service, lifts, accessibility, value, weather/snow and on- and off-mountain amenities. The Company's resorts consistently rank in the top 20 ski resorts in North America according to industry surveys. In recent years, the ski industry has also seen increased competition from beach resorts, golf resorts and amusement parks.

The Company's ski resorts compete effectively in all categories with respect to attracting day skiers and destination guests for the following reasons:

  • The Company has some of the most expansive and varied terrain of any resort in North America--Vail alone offers 5,289 skiable acres. The Company's five ski resorts offer over 15,600 skiable acres, with substantial offerings for beginner, intermediate and advanced skiers.
  • The Company has added Heavenly to its ski portfolio for the 2002/03 ski season and has expanded primarily intermediate skier terrain at Breckenridge for the 2002/03 season to include 165 acres of new trails on Peak 7 accessed by a new high speed lift.
  • The Company's locations in the Colorado Rocky Mountains and the Sierra Nevada Mountains provide average yearly snowfall of between 20 and 30 feet, which is significantly higher than the average for all U.S. ski resorts.
  • The Company's Colorado resorts are proximate to both Denver International Airport and Vail/Eagle County Airport, and Heavenly is proximate to both Reno/Tahoe International Airport and Sacramento International Airport. This provides ease of access to the Company's resorts for destination visitors.
  • The Colorado Front Range market, with a population of approximately 3.6 million is within a two-hour drive from each of the Company's Colorado resorts, with access via a major interstate highway.
  • Heavenly is proximate to two large California population centers, the Sacramento/Central Valley and the San Francisco Bay area, with a combined population of 8.7 million.
  • The Company continues to invest in the latest technology in ticketing and snowmaking systems, and the Company has one of the most extensive fleets of grooming equipment in the world.
  • The Company systematically replaces lifts and in the past several years the Company has installed 13 high-speed four-passenger chairlifts across its resorts, a state-of-the-art gondola in Vail, a high-speed six-passenger lift at Keystone, and a double-loading high-speed six-passenger chairlift at Breckenridge.
  • The Company provides a wide variety of quality dining venues both on- and off-mountain, ranging from top-rated fine dining establishments to trailside express food service outlets.
  • The Company's ten hotels and inventory of over 2,000 managed condominiums (included in the operations of the Lodging segment) located in proximity to the Company's Colorado ski resorts provide accommodation options for all guests, with a variety of prices ranging from high upscale to more affordable, to appeal to the varied needs of guests and families.
  • The Company is an industry leader in providing on- and off-mountain amenities, including substantial full-service retail and equipment rental facilities, our Adventure Ridge and Adventure Point mountain-top activities centers, and resort-wide charging, which enables guests to use a lift ticket product to make purchases at many resort facilities.
  • The Company's innovative frequent guest programs and extensive array of lift ticket products at varied price points provide value to guests.
  • The Company is strongly committed to providing quality guest service, from best-of-class ski and snowboarding schools, to teams of on-mountain hosts and new technology centers, where guests can try the latest technical innovations in equipment. The Company solicits guest feedback through extensive use of surveys, which the Company utilizes to ensure high levels of customer satisfaction.
  • The Company continually upgrades and expands available services and amenities through capital improvements and real estate development activities. Current projects include the revitalization of the primary portal to Vail Mountain known as Vail's "Front Door", planning new villages at the base of Breckenridge's Peaks 7 and 8, preparing for the redevelopment of the Lionshead base area and other land holdings within the Town of Vail, upgrading dining, snowmaking, and lift services at Heavenly and additional planning and development projects in and around each of the Company's resorts. The Company must obtain a variety of necessary approvals for these projects before the Company can proceed with its plans.

The Company promotes its resorts through an extensive marketing and sales program, which includes print media advertising in ski industry and lifestyle publications, direct marketing to a targeted audience, promotional programs, loyalty programs which reward frequent guests, and sales and marketing directed at attracting groups, corporate meetings, and convention business. Additionally, the Company markets directly to many of its guests through its websites, which provide visitors with information regarding each of the Company's resorts, including services and amenities, reservations information and virtual tours (nothing contained on the websites shall be deemed incorporated herein). The Company continues to enhance its website and Internet capabilities, which will provide the opportunity to improve the overall guest experience and more successfully market the Company's resorts as use of the Internet grows as a vacation-planning tool.

Ski resort operations are highly seasonal in nature, with a typical ski season beginning in early November and running through April. In an effort to counter-balance the concentration of revenues in the winter months, the Company offers many non-ski season attractions, such as golf, tennis, guided fishing, float trips, and mountain biking.

Lodging Segment

The Company's Lodging segment includes the following operations:

  • RockResorts International LLC ("RockResorts")--a luxury hotel management company with a portfolio of five Company-owned and five managed resort hotels with locations across the U.S.,
  • Grand Teton Lodge Company ("GTLC")--a summer destination resort with three resort properties in Grand Teton National Park and Jackson Hole Golf & Tennis Club near Jackson, WY,
  • the operations of eight independently flagged Company-owned hotels and condominium management operations in and around the Company's Colorado ski resorts, and
  • the operations of six resort golf courses.

The lodging segment includes over 4,700 hotel and condominium rooms in seven states. All of the Company's resort hotels are mid-size and offer a wide range of services to guests.

The Company's portfolio of luxury and resort hotels currently includes:

 

 

 

 

Name

Location

Own/Manage

Rooms

 

 

 

 

RockResorts:

 

 

 

Lodge at Rancho Mirage

Rancho Mirage, CA

Own

240

Cheeca Lodge & Spa

Florida Keys, FL

Manage

203

The Equinox

Manchester Village, VT

Manage

183

The Lodge at Vail

Vail, CO

Own

171

Snake River Lodge & Spa1

Teton Village, WY

Joint Venture

167

La Posada de Santa Fe

Santa Fe, NM

Manage

159

The Keystone Lodge

Keystone, CO

Own

152

Rosario Resort & Spa

San Juan Islands, WA

Manage

115

The Pines Lodge

Beaver Creek, CO

Own

60

Casa Madrona

Sausalito, CA

Manage

65

 

 

 

 

Other Hotels:

 

 

 

Vail Marriott Mountain Resort

Vail, CO

Own

346

Ritz-Carlton, Bachelor Gulch2

Beaver Creek, CO

Joint Venture

237

Jackson Lake Lodge

Grand Teton Nat'l Pk., WY

Own

385

Colter Bay Village

Grand Teton Nat'l Pk., WY

Own

166

Jenny Lake Lodge

Grand Teton Nat'l Pk., WY

Own

37

Inn at Keystone

Keystone, CO

Own

103

The Great Divide

Breckenridge, CO

Own

208

Breckenridge Mountain Lodge

Breckenridge, CO

Own

71

Village Hotel

Breckenridge, CO

Own

60

Inn at Beaver Creek

Beaver Creek, CO

Own

42

Ski Tip Lodge

Keystone, CO

Own

10

 

 

 

 

1 Snake River Lodge & Spa is a 51%-owned fully consolidated joint venture.

 

2 The Ritz-Carlton, Bachelor Gulch is near completion and is expected to open in time for the 2002/03 ski season. The Company has a 49% equity-method investment in the joint venture.

The Company acquired the RockResorts brand in November 2001 as a basis for uniting our unique luxury resorts in North America that complement the Company's world-class ski resort properties and to serve as a platform for our future growth. In connection with the acquisition of the RockResorts brand the Company received the management contracts for five leading resort hotels with a total of 725 rooms across the United States: the Cheeca Lodge in the Florida Keys, The Equinox in Manchester Village, Vermont, La Posada de Santa Fe Resort & Spa in Santa Fe, New Mexico, Rosario Resort in the San Juan Islands, Washington and Casa Madrona in Sausalito, California. The Company also re-flagged five of our existing luxury hotels with a total of 790 rooms as RockResorts: The Lodge at Vail, The Keystone Lodge, The Pines Lodge at Beaver Creek, Snake River Lodge & Spa in Teton Village, Wyoming and the Lodge at Rancho Mirage in the Palm Springs area of California. The Company's ten hotel properties currently under the RockResorts brand provide the Company with a presence throughout the United States, with 1,515 rooms in the aggregate.

Hotels are categorized by Smith Travel Research, a leading lodging industry research firm, as upper-upscale, upscale, midscale and economy. The service quality and level of accommodations of the Company's resort hotels place them in the upper-upscale segment of the hotel market, which represents hotels achieving the highest average daily rates ("ADR") in the industry, and includes such brands as the Ritz-Carlton, Four Seasons and Westin hotels. The upper-upscale segment consists of over 605,000 rooms at over 1,670 properties worldwide as of July 2002, according to Smith Travel Research. During fiscal 2002, our owned hotels had an overall average ADR of $161.37 and paid occupancy rate of 59.3%, while the upper-upscale industry segment's average for the same period was ADR of $140.15 and occupancy of 64.0% (according to Smith Travel Research).

Competition in the hotel industry is generally based on quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price and other factors. The Company's properties compete with other hotels and resorts, including facilities owned by local interests and facilities owned by national and international chains, in their geographic markets, including such brands as Ritz-Carlton, Four Seasons, Westin, Hyatt and Marriott hotels. The Company's lodging strategy, through RockResorts, is focused on the resort hotel niche within the upper-upscale market. The Company believes it is highly competitive in this niche for the following reasons:

  • All of the Company's hotels are located in highly desirable resort destinations.
  • The Company's hotel portfolio has achieved some of the most prestigious hotel designations in the world, including three hotels designated as Leading Hotels of the World, four designated as Preferred Hotels & Resorts, two designated Historic Hotels of America and one designated as a Small Luxury Hotel.
  • The RockResorts brand is an established brand name with a rich tradition associated with high quality luxury resort hotels.
  • The Company's hotels are designed to provide a look that feels indigenous to their resort surroundings, enhancing the guest's vacation experience.
  • Each of the Company's hotels provides a wide array of amenities available to the guest including access to world-class ski and golf resorts, spa facilities, water sports and a number of other outdoor activities as well as highly acclaimed dining options.
  • Conference space with the latest technology is available at most of the Company's hotels; in addition, guests at Keystone Resort can use the Company-owned Keystone Conference Center, the largest conference facility in the Colorado Rocky Mountain region with more than 100,000 square feet of meeting, exhibit and function space.
  • The Company has a central reservations system in Colorado which leverages off of its ski resort reservations system, and has implemented the first phase of a web-based central reservation system that provides guests with the ability to plan their entire vacation online. Non-Colorado properties are served by a central reservations system and global distribution system provided by a third party, Pegasus Solutions.
  • The Company actively upgrades the quality of the accommodations and amenities available at its hotels through capital improvement. Capital for non-owned properties is provided by the owners of the properties. Recent and planned projects include the renovation of the lobby and guestrooms of the Vail Marriott, renovation of the public spaces, guestrooms and lobby of the Lodge at Rancho Mirage in order to better reflect the California desert setting of the hotel, the planned construction of a new spa at the Lodge at Vail in connection with the "Front Door" project in Vail, construction of a new spa and ballroom at The Equinox, the expansion of Casa Madrona, which nearly doubled the number of rooms available and included a new spa and restaurant, the renovation of nine beach-front rooms at Cheeca Lodge, and the ongoing renovation of the mansion at Rosario Resort (subject to receipt of final approvals).

The Company promotes its luxury and resort hotels by using its marketing network initially established at the Company's mountain resorts. The Company's marketing network includes local, national, and international travel relationships which provide the Company's central reservation systems with a significant volume of transient customers. The hotels and the Company have an active sales force which generates conference and group business. The Company is leveraging its marketing network and group and conference coordination skills to maximize lodging revenues.

The Company also owns and operates Grand Teton Lodge Company ("GTLC"), which was the Company's first resort with a predominantly summer operating season. GTLC is based in the Jackson Hole Valley in Wyoming and operates within Grand Teton National Park under a concessionaire contract with the National Park Service, which will be subject to competitive renewal next year. GTLC also owns and operates the Jackson Hole Golf & Tennis Club ("JHG&TC"), which is located outside of Grand Teton National Park. GTLC's operations within the Park and JHG&TC have operating seasons that generally run from mid-May to mid-October.

There are over 375 areas within the National Park System covering more than 83 million acres across the United States and its territories. Of the over 375 areas, approximately 55 are classified as National Parks. There are more than 630 National Park Service concessionaires, ranging from small privately held businesses to large corporate conglomerates. The National Park Service uses "recreation visits" to measure visitations within the National Park System. In calendar 2001, areas designated as National Parks received over 87 million recreation visits. Grand Teton National Park, which spans approximately 310,000 acres, had 4.0 million recreation visits during calendar 2001, or approximately 5% of total National Park recreation visits. Four concessionaires provide accommodations within the Park, including GTLC. GTLC offers three lodging options within the Park: Jackson Lake Lodge, a full-service 385-room resort with conference facilities which can accommodate up to 650 people; the Jenny Lake Lodge, a small, rustically elegant retreat with 37 cabins; and Colter Bay Village, a family-oriented facility with 166 log cabins, 66 tent cabins, and a 112-space RV park. GTLC offers dining options as extensive as its lodging options, with cafeterias, casual eateries, and fine-dining establishments. GTLC's resorts provide a wide range of activities for guests to enjoy, including cruises on Jackson Lake, boat rentals, horseback riding, guided fishing, float trips, golf and guided park tours. Because of the extensive amenities offered as well as the tremendous popularity of the National Park System, GTLC's resorts within the Park operate near full capacity during their operating season.

The Company is a minority partner in a joint venture that is constructing the Ritz-Carlton, Bachelor Gulch in Beaver Creek, which is expected to be completed at the beginning of the 2002-03 ski season. The 237-room hotel will feature a 20,000 square foot spa and fitness center, ski rental, retail space, restaurants, meeting space and an exclusive members' lounge for the Bachelor Gulch Club. Twenty-one privately owned luxury penthouse residences, all of which are closed or currently under contract, are also being built above the hotel.

The Company's lodging business is highly seasonal in nature, with peak seasons primarily in the winter months (with the exception of GTLC and certain managed properties as noted above).

Real Estate Segment

The Company has extensive holdings of real property at its resorts throughout Summit and Eagle Counties in Colorado and in the Jackson Hole Valley in Wyoming. The Company's real estate operations include the planning, oversight, marketing, infrastructure improvement and development of the Company's real property holdings. In addition to the substantial cash flow generated from real estate sales, these development activities benefit the Company's mountain resort and lodging operations through (1) the creation of additional resort lodging which is available to guests, (2) the ability to control the architectural theming of the Company's resorts, (3) the creation of unique facilities and venues (primarily restaurant and retail operations) which provide the Company with the opportunity to create new sources of recurring revenue and (4) the expansion of the Company's property management and brokerage operations, which are the preferred providers of these services for all developments on our land.

The Company facilitates the development and sale of its real estate holdings by using cash generated from the development activities of Vail Resorts Development Company ("VRDC"), a wholly owned subsidiary of the Company, to make mountain improvements, such as ski lifts, snowmaking equipment and trail construction. While these mountain improvements enhance the value of the real estate held for sale (for example, by providing ski-in/ski-out accessibility), they also benefit mountain and lodging operations. VRDC seeks to minimize the Company's exposure to development risks and maximize the long-term value of the Company's real property holdings by selling developed and entitled land to third party developers for cash payments prior to the commencement of construction, while retaining approval of the development plans as well as an interest in the developer's profit. The Company also typically retains the option to purchase at cost any retail/commercial space created in a development. The Company is able to secure these benefits from third-party developers because of the high property values and strong demand associated with property in close proximity to the Company's mountain resort facilities. In some cases, VRDC develops the Company's real estate holdings itself and may adopt this model more in the future for some planned projects at the base of the Company's ski resorts.

VRDC's principal activities include (1) the sale of single-family homesites to individual purchasers, (2) the sale of certain land parcels to third-party developers for condominium, townhome, cluster home, lodge and mixed use developments, (3) the zoning, planning and marketing of new resort communities (such as Beaver Creek, Bachelor Gulch Village, Red Sky Ranch and Arrowhead), (4) arranging for the construction of the necessary roads, utilities and mountain infrastructure for new resort communities, (5) the development of certain mixed-use condominium projects which are integral to the Company's mountain resort and lodging operations (such as properties located at a main base facility) and (6) the purchase of selected strategic land parcels, which we believe can augment our existing land holdings or resort operations.

Our current development activities are focused on (1) continued work on the Vail "Front Door" redevelopment, (2) preparing for the redevelopment of the Lionshead base area and other land holdings located within the Town of Vail, (3) the infrastructure for the Breckenridge Timber Trail single-family homesite development, (4) the Jackson Hole area residential and golf development, and (5) additional planning and development projects in and around each of the Company's resorts.

Employees

The Company currently employs approximately 4,700 year-round and 10,100 seasonal employees. The Company's managed RockResorts properties currently employ 890 year-round and 220 seasonal employees. Approximately 1% of the seasonal employees are unionized. We consider our employee relations to be good.

 

Regulation and Legislation

The Company has been granted the right to use federal land as the site for ski lifts and trails and related activities, under the terms of permits with the United States Forest Service. The Forest Service has the right to review and approve the location, design and construction of improvements in the permit area and many operational matters. While virtually all of the skiable terrain on Vail Mountain, Breckenridge, Heavenly and Keystone is located on Forest Service land, a significant portion of the skiable terrain on Beaver Creek Mountain, primarily in the Bachelor Gulch and Arrowhead Mountain areas, is located on Company-owned land.

The U.S. Army Corps of Engineers alleged in 1999 that certain road construction which the Company undertook as part of the Blue Sky Basin expansion involved discharges of fill material into wetlands in violation of the Clean Water Act. A subsequent review confirmed that the wetland impact involved approximately seven-tenths of one acre, although subsequent judicial decisions under the Clean Water Act may reduce the extent of the jurisdictional impact. Subsequently, the Environmental Protection Agency, the lead enforcement agency in this matter, ordered the Company to stabilize the road temporarily and restore the wetland in the summer of 2000. (EPA--Region VIII, Docket No. CWA-8-2000-01). The Company has completed the restoration work on the wetland impact (subject to future monitoring requirements), pursuant to the restoration plan approved by the EPA. The EPA is considering enforcement action, and settlement discussions between the EPA and the Company are continuing. Although the Company cannot guarantee a particular result, based on the facts and circumstances of the matter, the Company does not anticipate that the ultimate outcome will have a material adverse impact on its financial condition or results of operations.

In August 1998, the Company received the approval of the Forest Service to develop a chairlift, other skier facilities and associated skiing terrain on Peak 7 and a teaching chairlift, two new ski trails and additional snowmaking on Peak 9, all located at Breckenridge. As part of that process, certain federal agencies expressed concern about the analysis of potential future development on private land that the Company owns at the base of Peak 7. In response to an administrative appeal of the Forest Service approval decision by certain individuals and groups, the Regional Forester upheld the approval of the Peak 7 and 9 projects in November 1998. The Forest Service subsequently reviewed the Company's proposed changes to develop gondola access to the Peak 7 base area and to move the lower terminal of the lift servicing the terrain and base area from public lands to private land owned by the Company. Based on an interdisciplinary review of the proposed changes, the Forest Service determined in September 2000 that the new information and changes to the proposal did not require an update or revision of the 1998 Environmental Assessment or decision notice. The U.S. Army Corps of Engineers considered the development of the base facilities on private land and the ski area improvements on public land as combined actions and issued one permit for the combined projects. The permit contains strict conditions related to the permissible impact to wetlands connected with the real estate project. Part of the trail and mountain improvements on Peak 7 have been completed and the new trails were open for skiing for the 2001/02 ski season, although the trails will not be directly served by new chairlift access until the 2002/03 ski season. In May 2002, the Company signed a Preliminary Agreement with the Town of Breckenridge, which allows us to proceed with the review of the Master Plan with specified density. In September 2002, the town approved a Development Agreement which allows the Planing Commission to review our Master Plan amendment with certain components that would otherwise have varied from the town's Development Code. The amended Master Plan has been submitted to the town and is in the review process.

In 1997, the Company sought approval from the Forest Service and other agencies to develop chairlifts, associated skiing terrain, and snowmaking in Jones Gulch, which is located within the current Keystone permit area. In April 2002, the Company modified the area of its requested development known as the Ski Tip Portal. This development will be the subject of an environmental review, and work continues in this effort. Other agencies will conduct related reviews. The initial issues include the potential effect of the expansion on wildlife and water quality, and it is possible that the future resolution of these issues could affect whether, in what form, and under what conditions the project is approved. In December 1998, the U.S. Army Corps of Engineers notified Keystone that it had preliminarily determined that the wetlands permit for Keystone's snowmaking diversion limits such diversions to 550 acre-feet annually. The Company requested that the permit be modified to allow Keystone to withdraw up to 1,350 acre-feet annually for snowmaking and in April 2000, the U.S. Army Corps of Engineers approved our request, subject to certain conditions which the Company believes can be satisfied. In March 2000, the Company announced that Keystone and the Forest Service would conduct a joint water quality study of snowmaking at Keystone. The study was completed and indicated that levels of tested metals were well within water quality standards.

In the spring of 2000, the Company submitted a proposal to the Forest Service concerning additional snowmaking at Vail Mountain and race facility expansion at Golden Peak. The Company withdrew this proposal in lieu of plans to make a new proposal. The Company intends to submit, after resolution of the White River National Forest Plan appeals process, a proposal to combine additional snowmaking and race facilities at Golden Peak, with a new master plan for the "front side" of Vail Mountain. Also, the Company is in the process of a land exchange with the Forest Service involving land at the base of Vail Mountain at the Vista Bahn chairlift in connection with one of the Company's development projects. In addition, the Company submitted a separate proposal to the U.S. Forest Service concerning a proposed Beaver Creek gondola, a portion of which would cross public lands on Beaver Creek Mountain within our existing permit boundaries. Analysis is ongoing, the draft environmental assessment has been completed, but no decision has been made.

The White River National Forest Plan was issued by the Forest Service in the summer of 2002, which affects all federal lands within the White River National Forest. The Company, and several other interested parties, including environmental groups with positions opposed to many positions supported by the Company, have filed administrative appeals of the Plan to the Chief of the Forest Service. It is impossible to predict the final outcome or time it will take to resolve the appeals. However, resolution of one or more matters under appeal by the Company and others in ways opposed to the Company's positions could have a material adverse impact on the Company.

Certain of the Company's resort and lodging operations require permits and approvals from certain federal, state, and local authorities, in addition to the Forest Service and U.S. Army Corps of Engineers approvals discussed above. In particular, the Company's operations are subject to environmental laws and regulations, and compliance with such laws and regulations may require expenditures or modifications of the Company's development plans and operations in a manner that could have a detrimental effect on it. There can be no assurance that new applications of existing laws, regulations, and policies, or changes in such laws, regulations, and policies, will not occur in a manner that could have a detrimental effect to the Company, or that material permits, licenses, or approvals will not be terminated, non-renewed or renewed on terms or interpreted in ways that are materially less favorable to the Company. Although the Company believes that it will be successful in implementing its development plans and operations in ways satisfactory to it, no assurance can be given that any particular permits and approvals will be obtained or upheld on judicial review.

The permits originally granted by the Forest Service were (1) Term Special Use Permits granted for 30-year terms, but which may be terminated upon 30 days written notice by the Forest Service if it determines that the public interest requires such termination and (2) Special Use Permits that are terminable at will by the Forest Service. In November 1986, a new law was enacted providing that Term Special Use Permits and Special Use Permits may be combined into a unified single Term Special Use Permit that can be issued for up to 40 years. Vail Mountain operates under a unified permit for the use of 12,590 acres that expires October 31, 2031. Breckenridge operates under a Term Special Use Permit for the use of 3,156 acres that expires on December 31, 2029. Keystone operates under a Term Special Use Permit for the use of 5,571 acres that expires on December 31, 2032. Beaver Creek Mountain Resort operates under a Term Special Use Permit for the use of 2,695 acres that expires on December 31, 2038. The White River Forest Plan has or will affect the permit boundaries and areas under the permits at all of the Company's Colorado resorts, although these changes are not material to the Company's plans. Heavenly Ski Resort operates under a Ski Area Term Special Use Permit from the Forest Service, which covers 7,050 acres and is administered by the Lake Tahoe Basin Management Unit. The permit runs through 2042. In addition, Heavenly operates four separate base areas, all of which are located on private lands. In 1996, the Heavenly Ski Area Master Plan was approved by the Forest Service, the Tahoe Regional Planning Agency and the underlying units of local government with jurisdiction. The Company is requesting revisions to the Master Plan to update certain components and address new and upgraded runs, lifts, lodges and other facilities. The Master Plan is required in order to expand or substantially modify the existing resort. The Amendment process is a multi-year process.

The Forest Service can terminate most of the Company's permits if it determines that termination is required in the public interest. However, to our knowledge, no recreational Special Use Permit or Term Special Use Permit for any major ski resort then in operation has ever been terminated by the Forest Service over the opposition of the permitee.

Prior to the Company's acquisition of Heavenly, the State of California Regional Water Quality Control Board, Lahontan Region, and the El Dorado County Department of Environmental Management required Heavenly's prior owner to conduct an environmental compliance cleanup at a vehicle maintenance facility at Heavenly. This requirement was imposed in response to an accidental release of waste oil at a vehicle maintenance shop in 1998. The required remediation is ongoing and will be substantially completed at the end of this year.

For use of our permits, we pay a fee to the Forest Service ranging from 1.5% to 4.25% of sales occurring on Forest Service land. Included in the calculation are sales from, among other things, lift tickets, ski school lessons, food and beverages, rental equipment and retail merchandise sales.

GTLC operates three resort properties within Grand Teton National Park under a concession contract with the National Park Service. The Park Service has notified us of its intent to extend the expiration date of the concession contract until December 31, 2003. The contract renewal is subject to a competitive bidding process under the final rules promulgated earlier this year to implement the concession provisions of the National Park Omnibus Management Act of 1998. The renewal process is expected to occur during calendar 2003. The renewal provision of the new regulation is less favorable to the existing concessionaire than the comparable provision under the old regulation. The Company cannot predict or guarantee its prospects for renewal, although the Company believes it will be well positioned to obtain the renewal of the contract on satisfactory terms. Should the Company not receive the renewal of the concession contract, it would be compensated for the value of our "possessory interest" in the assets of the three resort properties operated under the concession contract, which is generally defined as the reconstruction cost of such assets less depreciation.

ITEM 2. PROPERTIES.

The following table sets forth the principal properties owned or leased by the Company:

                        Location                     

 

           Ownership          

 

                                   Use                                

Arrowhead Mountain 

 

Owned

 

Ski trails and ski resort operations, including ski lifts, buildings and other improvements, commercial space, real estate held for sale or development

Avon

 

Owned

 

Real estate held for sale or development

Avon

 

Owned

 

Warehouse and commercial facility

Bachelor Gulch Village  

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space, real estate held for sale or development

Beaver Creek Mountain 

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space, real estate held for sale or development

Beaver Creek Mountain (2,695 acres)

 

Term Special Use Permit

 

Ski trails

Beaver Creek Resort 

 

Owned

 

Golf course, commercial space, employee housing and residential spaces

Breckenridge Mountain

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space, real estate held for sale or development

Breckenridge Mountain (3,156 acres)

 

Term Special Use Permit

 

Ski trails

Colter Bay Village

 

Concessionaire contract

 

Lodging and resort operations, dining

Great Divide Lodge

 

Owned

 

Lodging, dining and conference facilities

Heavenly Valley Ski Resort

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space, real estate held for sale or development

Heavenly Mountain (7,050 acres)

 

Term Special Use Permit

 

Ski trails

Inn at Beaver Creek

 

Owned

 

Lodging, dining and conference facilities

Inn at Keystone

 

Owned

 

Lodging, dining and conference facilities

Jackson Hole Golf and Tennis Club

 

Owned

 

Golf course, tennis facilities, dining, real estate held for sale or development

Jackson Lake Lodge

 

Concessionaire contract

 

Lodging and resort operations, dining, conference facilities

Jenny Lake Lodge

 

Concessionaire contract

 

Lodging and resort operations, dining

Keystone Conference Center

 

Owned

 

Conference facility

Keystone Lodge

 

Owned

 

Lodging and resort operations

Keystone Mountain

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space

Keystone Mountain (5,571 acres)

 

Term Special Use Permit

 

Ski trails

Keystone Ranch

 

Owned

 

Golf course and restaurant facilities

Keystone Resort

 

Owned

 

Resort operations, dining, commercial space, conference facilities, real estate held for sale or development

Red Sky Ranch

 

Owned

 

Golf course under construction and real estate held for sale and development

River Course at Keystone

 

Owned

 

Golf course and club

Seasons at Avon

 

Leased

 

Corporate offices

Ski Tip Lodge

 

Owned

 

Lodging and dining facilities

Snake River Lodge & Spa

 

51%-owned

 

Lodging, dining, conference and spa facilities

The Lodge at Rancho Mirage

 

Owned

 

Lodging, dining, golf and spa facilities

The Lodge at Vail

 

Owned

 

Lodging, dining and conference facilities, real estate held for sale or development

The Pines Lodge at Beaver Creek

 

Owned

 

Lodging and dining facilities

The Ritz-Carlton, Bachelor Gulch

 

49%-owned

 

Lodging, dining, conference and spa facilities (opening fall 2002)

Vail Marriott Mountain Resort

 

Owned

 

Lodging, dining, conference and spa facilities

Vail Mountain 

 

Owned

 

Ski resort operations, including ski lifts, buildings and other improvements, commercial space

Vail Mountain (12,590 acres)

 

Term Special Use Permit

 

Ski trails

Village at Breckenridge

 

Owned

 

Lodging, dining, conference facilities and commercial space

SSV Properties

 

51.2%-owned

 

Over 100 retail stores for recreational products

The Vail Mountain and Beaver Creek Mountain Forest Service Permits are encumbered as security under the Eagle County Industrial Development Bonds, and the Forest Service Permits for the Colorado resorts similarly are encumbered as collateral for the Bank Credit Agreement. Many of the Company's properties are used across all segments in complimentary and interdependent ways.

ITEM 3. LEGAL PROCEEDINGS.

The Company is a party to various lawsuits arising in the ordinary course of business. Management believes the Company has adequate insurance coverage and accrued loss contingencies for all matters and that, although the ultimate outcome of such claims cannot be ascertained, current pending and threatened claims are not expected to have a material adverse impact on the financial position, results of operations and cash flows of the Company.

The U.S. Army Corps of Engineers alleged in 1999 that certain road construction which the Company undertook as part of the Blue Sky Basin expansion involved discharges of fill material into wetlands in violation of the Clean Water Act. A subsequent review confirmed that the wetland impact involved approximately seven-tenths of one acre, although subsequent judicial decisions under the Clean Water Act may reduce the extent of the jurisdictional impact. Subsequently, the Environmental Protection Agency, the lead enforcement agency in this matter, ordered the Company to stabilize the road temporarily and restore the wetland in the summer of 2000. (EPA--Region VIII, Docket No. CWA-8-2000-01). The Company has completed the restoration work on the wetland impact (subject to future monitoring requirements), pursuant to the restoration plan approved by the EPA. The EPA is considering enforcement action, and settlement discussions between the EPA and the Company are continuing. Although the Company cannot guarantee a particular result, based on the facts and circumstances of the matter, the Company does not anticipate that the ultimate outcome will have a material adverse impact on its financial condition or results of operations.

In September 2002, the Company's subsidiary that is the 50% member of the Intrawest/Keystone LLC filed suit in Delaware Chancery Court against the Intrawest member and related Intrawest entities. The suit alleges, among other things, breach of contract against the Intrawest member and seeks injunctive and other relief. The Company believes that the announcement by Intrawest Corporation of its plans to enter into a long term lease with the City and County of Denver to operate the Winter Park ski area and develop real estate in and around the base of Winter Park violates the covenant not to compete in real estate development projects in certain locations in Colorado, unless certain conditions are met. No answer has yet been filed. It is too early and impossible to predict the outcome of the lawsuit, or the effect of the suit on the ongoing business of the Intrawest/Keystone LLC.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock is traded on the New York Stock Exchange under the symbol "MTN". The Company's Class A Common Stock is not listed on any exchange and is not publicly traded. Class A Common Stock is convertible into Common Stock. As of October 14, 2002, 35,182,541 shares of common stock were issued and outstanding, of which 7,439,834 shares were Class A Common Stock held by approximately three holders and 27,742,707 shares were Common Stock held by approximately 5,200 holders.

Other than a rights distribution in October 1996 which gave each stockholder of record the right to receive $2.44 per share of Common Stock held, the Company has never paid nor declared a cash dividend on its Common Stock or Class A Common Stock. The declaration of cash dividends in the future will depend on the Company's earnings, financial condition and capital needs and on other factors deemed relevant by the Board of Directors at that time. It is the current policy of the Company's Board of Directors to retain earnings to finance the operations and expansion of the Company's business, and the Company does not anticipate paying any cash dividends on its shares of Common Stock or Class A Common Stock in the foreseeable future.

The following table sets forth, for the fiscal years ended July 31, 2002 and 2001, and quarters indicated (ended October 31, January 31, April 30, and July 31) the range of high and low per share sales prices of Vail Resorts, Inc. Common Stock as reported on the New York Stock Exchange Composite Tape.

 

Vail Resorts

 

Common Stock

 

    High    

 

    Low    

Year Ended July 31, 2002

 

 

 

 

1st Quarter

$ 20.63

 

$ 12.95

 

2nd Quarter

18.80

 

16.20

 

3rd Quarter

21.80

 

14.76

 

4th Quarter

19.50

 

14.85

 

 

 

 

Year Ended July 31, 2001

 

 

 

 

1st Quarter

$ 21.88

 

$ 17.31

 

2nd Quarter

24.75

 

21.06

 

3rd Quarter

24.20

 

18.40

 

4th Quarter

22.00

 

18.40

Securities authorized for issuance under equity compensation plans

The following table summarizes the Company's equity compensation plans as of July 31, 2002:

 

(a)

(b)

(c)

 

Number of securities to

Weighted average

 

 

be issued upon exercise

exercise price of

Number of securities

 

of outstanding options,

outstanding options,

remaining available for

              Plan category              

warrants and rights

warrants and rights

     future issuance     

 

(in thousands)

 

(in thousands)

Equity compensation plans approved by security holders (1)

3,810

$ 19.67

324

Equity compensation plans not approved by security holders

       --

           --

       --

Total

3,810

$ 19.67

   324

 

 

 

 

(1)

Column (a) does not include 182,750 shares of restricted stock which are subject to vesting over the next two years.

The Company's stock-based compensation plans are described in Note 11, Stock Compensation Plans, of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report.

 

ITEM 6.  SELECTED FINANCIAL DATA.

The following table presents selected historical consolidated financial data of the Company for the periods indicated. The financial data for the fiscal years ended July 31, 2002, 2001, 2000 and 1999 and the ten-month fiscal period ended July 31, 1998 are derived from the Consolidated Financial Statements of the Company. The financial data for the fiscal years ended July 31, 2002, 2001, and 2000 should be read in conjunction with the Consolidated Financial Statements, related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Form 10-K. The data presented below are in thousands, except per share amounts and percentages.

 

 

 

 

 

 

 

 

 

 

Ten-Month

 

 

 

 

 

 

 

 

 

 

Fiscal Period

 

 

 

 

 

 

 

 

 

 

Ended

 

 

               Fiscal Year Ended July 31,             

 

July 31,

 

 

   2002(11)   

 

   2001(11)   

 

   2000(11)   

 

 1999(10) (11) 

 

 1998(1) (10) (11)

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Mountain

 

$  400,478

 

$  391,373

 

$  373,786

 

$    424,647

 

$     336,547

 

Lodging

 

150,928

 

124,207

 

116,610

 

N/A

 

N/A

 

Real estate

 

      63,854

 

      28,200

 

      48,660

 

       36,878

 

       73,722

 

Total net revenue

 

615,260

 

543,780

 

539,056

 

461,525

 

410,269

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Mountain

 

309,201

 

298,014

 

284,136

 

346,936

 

222,201

 

Lodging

 

137,190

 

109,316

 

103,570

 

N/A

 

N/A

 

Real estate

 

51,352

 

22,971

 

42,066

 

34,386

 

62,619

 

Depreciation and amortization

 

      67,027

 

      65,478

 

      61,748

 

      53,569

 

        36,838

 

Total operating expenses

 

    564,770

 

    495,779

 

    491,520

 

    434,891

 

      321,658

Income from operations

 

50,490

 

48,001

 

47,536

 

26,634

 

88,611

Mountain equity investment income

 

1,977

 

1,514

 

2,713

 

2,413

 

N/A

Lodging equity investment loss

 

--

 

(1,245)

 

--

 

N/A

 

N/A

Real estate equity investment income

 

2,744

 

7,043

 

3,024

 

7,034

 

N/A

Income before cumulative effect of change in accounting principle

 

9,273

 

13,631

 

10,362

 

8,860

 

41,018

Net income

 

7,565

 

13,631

 

10,362

 

8,860

 

41,018

Diluted per share income before cumulative effect of change in accounting principle

 

$        0.26

 

$        0.39

 

$        0.30

 

$         0.26

 

$           1.18

Diluted per share net income

 

$        0.21

 

$        0.39

 

$        0.30

 

$         0.25

 

$           1.18

Other Data:

 

 

 

 

 

 

 

 

 

 

Mountain

 

 

 

 

 

 

 

 

 

 

 

Mountain EBITDA (2)

 

$    93,254

 

$    94,873

 

$    92,363

 

N/A

 

N/A

 

Mountain EBITDA margin (4)

 

23.2%

 

24.1%

 

24.5%

 

N/A

 

N/A

 

Skier visits(8)

 

4,732

 

4,975

 

4,595

 

4,606

 

4,717

Lodging

 

 

 

 

 

 

 

 

 

 

 

Lodging EBITDA (3)

 

$ 13,738

 

$    13,646

 

$    13,040

 

N/A

 

N/A

 

Lodging EBITDA margin (4)

 

9.1%

 

11.1%

 

11.2%

 

N/A

 

N/A

Resort

 

 

 

 

 

 

 

 

 

 

 

Resort EBITDA (7)

 

$  106,992

 

$  108,519

 

$  105,403

 

$      80,124

 

$      114,346

 

Resort revenue per skier visit(9)

 

$    106.53

 

$      97.67

 

$    100.96

 

$        90.25

 

$          71.35

Real Estate

 

 

 

 

 

 

 

 

 

 

 

Real estate EBITDA(5)

 

$    15,246

 

$    12,272

 

$      9,618

 

$        9,526

 

$        11,103

 

Real estate held for sale and investment(6)

 

161,778

 

159,177

 

147,172

 

152,508

 

138,916

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

1,447,710

 

1,188,128

 

1,135,481

 

1,094,548

 

912,122

 

Long-term debt (including current maturities)

 

602,786

 

388,380

 

394,235

 

398,186

 

284,014

 

Stockholders' equity

 

$  507,268

 

$  496,749

 

$  476,361

 

$    464,504

 

$      462,624

(footnotes appear on following page)

Footnotes to Selected Financial Data:

(1)

The Company recently filed an Amendment to Form 10-K for the year ended July 31, 2001 which restates the Consolidated Financial Statements for the periods ended July 31, 2001, 2000 and 1999 for a change in accounting for club initiation fees and certain other adjustments. This report on Form 10-K reflects those restated results. The ten-month period ended July 31, 1998 is not presented on a restated basis in this Form 10-K.

(2)

Mountain EBITDA is defined as revenues from mountain operations plus mountain equity investment income less mountain operating expenses, including allocated corporate selling, general & administrative ("SG&A") expenses. Mountain EBITDA is not a term that has an established meaning underGAAP, and it might not be comparable to similarly titled measures reported by other companies. The information concerning mountain EBITDA is included because the Company believes it is an indicative measure of a resort company's operating performance and is generally used by investors to evaluate companies in the resort industry. Mountain EBITDA does not purport to represent cash provided by operating activities, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. For information regarding our historical cash flows from operating, investing and financing activities, see our Consolidated Financial Statements included elsewhere in this Form 10-K.

(3)

Lodging EBITDA is defined as revenue from lodging operations plus lodging equity investment income less lodging operating expenses, including allocated corporate SG&A expenses. Lodging EBITDA is not a term that has an established meaning under generally accepted accounting principles ("GAAP"), and it might not be comparable to similarly titled measures reported by other companies. The information concerning lodging EBITDA is included because the Company believes it is an indicative measure of a lodging company's operating performance and is generally used by investors to evaluate companies in the lodging industry. Lodging EBITDA does not purport to represent cash provided by operating activities, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. For information regarding our historical cash flows from operating, investing and financing activities, see our Consolidated Financial Statements included elsewhere in this Form 10-K.

(4)

The calculation of the EBITDA margin for both mountain and lodging includes equity investment income as part of total revenue. EBITDA margin is defined as applicable EBITDA divided by applicable total revenues.

(5)

Real estate EBITDA is defined as revenue from real estate operations plus real estate equity investment income less real estate costs and expenses, which include selling and holding costs, operating expenses, and an allocation of the land, infrastructure, mountain improvement and other costs relating to property sold. Real estate costs and expenses exclude charges for depreciation and amortization, as the Company has determined that the portion of those expenses allocable to real estate are not significant. Real estate EBITDA is not a term that has an established meaning under GAAP and it might not be comparable to similarly titled measures reported by other companies. For information regarding our historical cash flows from operating, investing and financing activities, see our Consolidated Financial Statements included elsewhere in this Form 10-K.

(6)

Real estate held for sale and investment includes all land, development costs and other improvements associated with real estate held for sale and investment, as well as investments in real estate joint ventures.

(7)

Resort EBITDA is defined as Mountain EBITDA plus Lodging EBITDA.

(8)

A skier visit represents one guest accessing a ski mountain for all or any part of a day or night and includes both paid and complimentary tickets and ski passes.

(9)

Resort revenue per skier visit is calculated by combining revenue from both mountain and lodging (including equity investment income) and excludes revenue generated by GTLC, SRL&S, RockResorts and Lodge at Rancho Mirage from the calculation because those businesses do not support the Company's ski area operations.

(10)

As previously indicated, the Company established two new reporting segments as of July 31, 2002 which replaced the former Resort segment. The two new segments, mountain and lodging, represent the former Resort segment on a combined basis. The financial data presented herein for fiscal 1999 and 1998 does not reflect the new segmentation, and as such the amounts presented on the line items for mountain revenue, mountain operating expense and mountain equity income represent Resort revenue, Resort operating expense and Resort equity income for fiscal 1999 and 1998.

(11)

The following table sets forth the aggregate incremental revenue and net income related to businesses acquired during the respective year that might affect comparability between fiscal years (in thousands):

 

                                  Fiscal Year Ended July 31,                                   

 

2002

2001

2000

1999

Net revenue

$34,775

$2,482

--

$60,143

Net income (loss)

(737)

(510)

--

3,436

 

See Note 16, Acquisitions and Business Combinations, to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for more information regarding acquisitions.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is an analysis of the Company's results of operations, liquidity and capital resources and should be read in conjunction with the Consolidated Financial Statements included in this Form 10-K. To the extent that the following Management's Discussion and Analysis contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include, but are not limited to, changes in the competitive environment of the mountain and lodging industries, general business and economic conditions, the weather and other factors discussed elsewhere herein and in the Company's filings with the Securities and Exchange Commission.

The following discussion of the Company's financial performance makes reference to Mountain EBITDA and Lodging EBITDA. Mountain EBITDA is defined as revenues from mountain operations plus mountain equity investment income less mountain operating expenses. Lodging EBITDA is defined as revenues from lodging operations plus lodging equity investment income less lodging operating expenses. Mountain EBITDA and Lodging EBITDA are not terms that have an established meaning under generally accepted accounting principles ("GAAP"), and they might not be comparable to similarly titled measures reported by other companies. Information concerning Mountain EBITDA and Lodging EBITDA has been included because management believes it is an indicative measure of a resort company's operating performance and is generally used by investors to evaluate companies in the resort industry. Mountain EBITDA and Lodging EBITDA do not purport to represent cash provided by operating activities, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. For information regarding the Company's historical cash flows from operating, investing and financing activities see the Company's Consolidated Financial Statements included elsewhere in this Form 10-K.

As a result of a change in the Company's business operations, the Company stopped reporting Technology as a separate segment on April 30, 2002. In addition, as of July 31, 2002, the Company has broken down its former Resort segment into two new reporting segments: Mountain, which includes the operations of the Company's ski resorts and related ancillary activities, and Lodging, which includes the operations of all of the Company's owned hotels, RockResorts, GTLC, condominium management, and golf operations.

Fiscal 2002 was highlighted by: 1) stronger than expected season pass sales, 2) increased ticket prices, 3) strong retail/rental sales, 4) lodging acquisitions, 5) conscious discounting of room rates at the Company's lodging properties near the Company's ski resorts to attract incremental vacationers, 6) soft visitation for group and corporate business stemming from the slow national economy and the events of September 11, 2001, 7) close management of costs while continuing to provide a high-quality guest experience, and 8) a greater than expected decline in international guests.

Despite below average ski season snowfall, the weak economy and nation-wide declines in leisure travel, fiscal 2002 mountain revenue was strong. Mountain revenue (including equity investment income) increased 2.4% for fiscal 2002 as compared to fiscal 2001, primarily driven by lift ticket revenue and "other" mountain revenue. Increased ticket prices and strong season pass sales led to record lift ticket revenues for the 2001/02 ski season. Although skier visits for the year were down 4.9% on a year-over-year basis, the decline is consistent with the declines in the Colorado and national markets, which had overall 2001/02 skier visit declines of 4.6% and 5.1%, respectively, compared to 2000/01.

Fiscal 2002 lodging revenue (including equity investment income) growth was generated primarily by the $29.4 million of revenue gained through the November and December acquisitions of RockResorts, Rancho Mirage and the Vail Marriott. On a "same-store" basis, lodging revenues declined 4.6% year-over-year due to the recession, slow rebound in the general U.S. travel industry following September 11, and the above-mentioned room rate discounting during the ski season.

The Company's real estate segment had an 89% increase in revenue (including equity investment income) for fiscal 2002 as compared to fiscal 2001 generated by the success of the Company's Red Sky Ranch and Arrowhead Mountain developments.

The Company believes that growth in revenue and EBITDA can be achieved in both the mountain and lodging segments in fiscal 2003, from the acquisitions made in fiscal 2002 as well as from same-store-growth. The Company also anticipates another strong year in real estate operations in fiscal 2003, as the high-end real estate sales market continues to hold its own. While the Company is optimistic regarding its growth prospects for 2003, there can be no assurance that such growth will be achieved. Adverse consequences to the Company's anticipated results could occur if the economic recessions continues or deepens and if the lodging and travel industries do not rebound and given the uncertainties of terrorism and war, whether real or just threatened.

Presented below is more detailed comparative data regarding the Company's results of operations for the following periods:

  • fiscal year ended July 31, 2002 versus fiscal year ended July 31, 2001, and
  • fiscal year ended July 31, 2001 versus fiscal year ended July 31, 2000.

Results of Operations

Fiscal Year Ended July 31, 2002 versus Fiscal Year Ended July 31, 2001 (dollars in thousands, except ETP amounts)

 

Fiscal Year Ended

 

 

 

 

 

July 31,

 

 

 

Percentage

 

    2002    

 

    2001    

 

 Increase 

 

    Increase   

 

(audited)

 

 

 

 

 

 

 

 

 

 

 

 

Mountain:

 

 

 

 

 

 

 

 

Mountain operating revenue

$ 400,478

 

$ 391,373

 

$    9,105

 

2.3%

 

Mountain equity investment income

       1,977

 

       1,514

 

          463

 

30.6%

Total mountain revenue

402,455

 

392,887

 

9,568

 

2.4%

Mountain operating expense

309,201

 

298,014

 

11,187

 

3.8%

 

 

 

 

 

 

 

 

Lodging:

 

 

 

 

 

 

 

 

Lodging operating revenue

$ 150,928

 

$ 124,207

 

$  26,721

 

21.5%

 

Lodging equity investment loss

             --

 

    (1,245)

 

       1,245

 

100.0%

Total lodging revenue

 150,928

 

 122,962

 

  27,966

 

22.7%

Lodging operating expense

137,190

 

109,316

 

27,874

 

25.5%

Mountain revenue. The following discussion of mountain revenue covers revenue from operations as well as equity investment income. Mountain revenue for the fiscal years ended July 31, 2002 and 2001 is presented by category as follows:

 

Fiscal Year Ended

 

 

 

Percentage

 

July 31,

 

Increase

 

Increase

 

    2002    

 

    2001    

 

(Decrease)

 

(Decrease)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Lift tickets

$161,923

 

$159,088

 

$    2,835

 

1.8%

Ski school

46,000

 

46,427

 

(427)

 

(0.9)%

Dining

45,378

 

49,570

 

(4,192)

 

(8.5)%

Retail/rental

94,126

 

91,241

 

2,885

 

3.2%

Other

    55,028

 

    46,561

 

       8,467

 

  18.2%

Total mountain revenue

$402,455

 

$392,887

 

$     9,568

 

    2.4%

 

 

 

 

 

 

 

 

Total skier visits

4,732

 

4,975

 

(243)

 

(4.9)%

 

 

 

 

 

 

 

 

ETP

$    34.22

 

$    31.98

 

$     2.24

 

7.0%

Fiscal 2002 mountain revenue increased $9.6 million, or 2.4%, as compared to fiscal 2001. This increase in mountain revenue is due primarily to an $8.5 million increase in other revenue and increases in lift ticket and retail/rental revenue, offset by a decline in dining revenue. The increase in other revenue is attributable to $2.2 million from summer operations of the recently acquired Heavenly resort, a full year of operations from RTP, LLC ("RTP", a technology joint venture acquired by the Company in March 2001), and increased brokerage, commercial leasing and private club operations. The $2.8 million increase in lift ticket revenue for fiscal 2002 compared to fiscal 2001 is due to a 7.0% increase in ETP (effective ticket price, "ETP", is defined as total lift ticket revenue divided by total skier visits) offset by a 4.9% decrease in skier visits. The 7.0% increase in ETP is due primarily to increased pricing, particularly within peak periods. The 4.9% decline in skier visits is a result of the early Thanksgiving holiday (the early season snow conditions impact visitation of this key holiday weekend), an overall decrease in travel as a result of the events of September 11, 2001, a weak national economy and the early Easter holiday. Retail/rental revenue increased due primarily to the acquisition of additional retail/rental outlets by SSI Venture LLC ("SSV", a 51.9%-owned, fully consolidated retail/rental joint venture) and the benefit of efficiencies gained in the second year of operation of SSV's Bicycle Village stores, which SSV acquired in fiscal 2001. The decrease in fiscal 2002 dining revenue compared to fiscal 2001 is attributable to the decline in skier visits and also the poor economy, which impacted group and corporate travel, a significant source of revenue for the Company's dining operations.

Mountain operating expense. Mountain operating expense for fiscal 2002 was $309.2 million, an increase of $11.2 million, or 3.8%, compared to fiscal 2001. Much of this increase is commensurate with the increase in operating revenue for fiscal 2002. The acquisition of Heavenly in May 2002 contributed to the increase in mountain operating expense, as the resort generally tends to generate operating losses during this off-season period from May through July. In addition, administrative expenses increased 17.3%, as compared to prior year. Some of the increase was attributable to certain one time, non-recurring rise in costs due to 1) legal, accounting, and tax work associated with the restatement and re-audit of fiscal 1999 through 2001, 2) recognition of compensation expense related to the May 2001 employment agreement of the Company's chief executive officer and 3) increased bad debt expense relating to the aftermath of the September 11 terrorist attacks and the faltering economy. Other administrative expense increases were due to the rising cost of medical care which impacted both the Company's self-insured medical plan and its worker's compensation expense. In addition, the Company had an increase in airline subsidies. A significant portion of the administrative costs are allocated to the mountain segment and thereby impacted operating expense. Some of the operating expense increase was offset by an aggressive cost savings program throughout the year which included a partial year wage and hiring freeze, delay of seasonal staffing by three to five weeks, strategic snowmaking and restricted discretionary expenditures.

Lodging revenue. The following discussion of lodging revenue covers revenue from operations as well as equity investment losses. Lodging revenue is derived from a variety of sources, including operations of the Company's owned hotels (including ancillary operations such as food and beverage), all operations of GTLC, golf operations, condominium management, and revenue generated by RockResorts through its management of luxury hotel properties. Fiscal 2001 equity investment losses relate to the Company's investment in the reservations technology company, Lowther Ltd. In fiscal 2002 the Company sold its investment in Lowther, Ltd. and purchased a software license from it. Therefore, the Company no longer participates in the equity income/loss of that joint venture. The $28.0 million increase in fiscal 2002 lodging revenue as compared to fiscal 2001 is the result of the Company's successful implementation of its strategy to expand the lodging business; and consummation of the three lodging acquisitions in fiscal 2002: the Lodge at Rancho Mirage and RockResorts in November 2001 and the Vail Marriott in December 2001. These three acquisitions are the primary drivers of the year-over-year increase in lodging revenue with $29.4 million revenue in the aggregate. The Company's fiscal 2002 ADR for its owned hotels and condominium management operations was $187.25, an increase of over $3 compared to fiscal 2001. The increase in ADR is attributable to the acquisitions of the Vail Marriott and Lodge at Rancho Mirage, both of which achieve higher than average ADR's and are larger in size compared to the Company's other hotels; in addition, SRL&S's ADR increased significantly over fiscal 2001 due primarily to the completion of the remodeling and renovation of the hotel and the hotel's new inventory of condominiums, which have rates typically two to three times higher than SRL&S's regular hotel rooms. The ADR increases resulting from the acquisitions and SRL&S's renovations and condominiums are offset by the Company's strategy to discount room rates at its hotels in proximity to the Company's ski resorts in an effort to drive skier visits. Lodging revenue was also negatively impacted by the overall downturn in the travel industry as a result of the September 11 terrorist attacks and the weak national economy.

Lodging operating expense. Lodging operating expense for fiscal 2002 was $137.2 million, an increase of $27.9 million, or 25.5%, compared to fiscal 2001. The increase in lodging operating expense is primarily attributable to the lodging acquisitions in fiscal 2002 and the expansion of infrastructure within the segment in order to better position it for growth. The increases relating to administrative expense discussed above in Mountain operating expense also pertain to Lodging operating expense, although in a smaller amount.

Real estate revenue. The following discussion of real estate revenue includes both revenue from operations and real estate equity income. Real estate equity investment income includes both the Company's equity investment in Keystone/Intrawest LLC (the "Keystone JV"), the joint venture developing the River Run development at Keystone, and the Company's equity investment in the joint venture developing the Bachelor Gulch Ritz-Carlton. Revenue from real estate operations for fiscal 2002 was $66.6 million, an increase of $31.4 million, or 89.0%, compared to fiscal 2001. The increase in real estate revenue as compared to fiscal 2001 was due primarily to single-family home-site sales at the new Arrowhead Mountain and Red Sky Ranch developments, offset by a decrease in equity income from the Keystone JV, as the River Run development is nearing total sell out and there are lower levels of real estate inventory available for sale.

Real estate operating expense. Real estate operating expense for fiscal 2002 was $51.4 million, an increase of $28.4 million, or 123.6%, compared to fiscal 2001. Real estate operating expense consists primarily of the cost of sales and related real estate commissions associated with sales of real estate. Real estate operating expense also includes the selling, general and administrative expenses associated with the Company's real estate operations. The increase in real estate operating expense for fiscal 2002 as compared to fiscal 2001 is commensurate with the increase in real estate sales noted above.

Depreciation and amortization. Depreciation and amortization expense was $67.0 million, an increase of $1.5 million, or 2.4%, for fiscal 2002 as compared to fiscal 2001. The increase was primarily attributable to an increased fixed asset base due to the acquisitions of the Lodge at Rancho Mirage, the Vail Marriott and Heavenly as well as fiscal 2002 capital improvements, offset by the reduced amortization expense from the adoption of FAS No. 142.

Interest expense. During fiscal 2002 and 2001 the Company recorded interest expense of $39.3 million and $32.1 million, respectively, relating primarily to the Credit Facility, the Industrial Development Bonds and the 1999 Notes. Interest on the 2001 Notes, which were issued in November 2001, also comprise a portion of total fiscal 2002 interest expense, and represent the primary reason for the increase in interest expense over fiscal 2001. The increase in interest expense related to the 2001 Notes is partially offset by lower interest rates on the Company's floating-rate debt in fiscal 2002 as well as a lower average outstanding balance on the Credit Facility for fiscal 2002 compared to fiscal 2001.

Fiscal Year Ended July 31, 2001 versus Fiscal Year Ended July 31, 2000 (dollars in thousands, except ETP amounts)

 

Fiscal Year Ended

 

 

 

Percentage

 

July 31,

 

  Increase

 

Increase

 

    2001    

 

    2000    

 

(Decrease)

 

   (Decrease)  

 

(audited)

 

 

 

 

 

 

 

 

 

 

 

 

Mountain:

 

 

 

 

 

 

 

 

Mountain operating revenue

$ 391,373

 

$ 373,786

 

$   17,587

 

4.7%

 

Mountain equity investment income

       1,514

 

       2,713

 

    (1,199)

 

(44.2)%

Total mountain revenue

392,887

 

376,499

 

16,388

 

4.4%

Mountain operating expense

298,014

 

284,136

 

13,878

 

4.9%

 

 

 

 

 

 

 

 

Lodging:

 

 

 

 

 

 

 

 

Lodging operating revenue

$ 124,207

 

$ 116,610

 

$     7,597

 

6.5%

 

Lodging equity investment loss

    (1,245)

 

             --

 

     (1,245)

 

(100.0)%

Total lodging revenue

 122,962

 

116,610

 

6,352

 

5.4%

Lodging operating expense

109,316

 

103,570

 

5,746

 

5.5%

 

Mountain revenue. The following discussion of mountain revenue covers revenue from operations as well as equity investment income. Mountain revenue for the fiscal years ended July 31, 2001 and 2000 is presented by category as follows:

 

Fiscal Year Ended

 

 

 

Percentage

 

July 31,

 

Increase

 

Increase

 

    2001    

 

    2000    

 

(Decrease)

 

(Decrease)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Lift tickets

$159,088

 

$143,547

 

$   15,541

 

10.8%

Ski school

46,427

 

42,107

 

4,320

 

10.3%

Dining

49,570

 

47,357

 

2,213

 

4.7%

Retail/rental

91,241

 

78,831

 

12,410

 

15.7%

Other

    46,561

 

    64,657

 

    (18,096)

 

(28.0)%

Total mountain revenue

$392,887

 

$376,499

 

$   16,388

 

4.4%

 

 

 

 

 

 

 

 

Total skier visits

4,975

 

4,595

 

380

 

8.3%

 

 

 

 

 

 

 

 

ETP

$    31.98

 

$    31.24

 

$       0.74

 

2.4%

Fiscal 2001 mountain revenue increased $16.4 million, or 4.4%, as compared to fiscal 2000. This increase in mountain revenue is due primarily to an 8.3% increase in skier visits and a 2.4% increase in ETP compared to fiscal 2000. Front Range skiers, who tend to generate less revenue per skier visit in all mountain revenue categories as compared to destination skiers, constituted a significant portion of the overall increase in skier visits. The 2.4% increase in ETP is due primarily to increased pricing. All categories of mountain revenue except "other" had increased revenue as compared to fiscal 2000. In addition to the increase in skier visits, mountain revenue was also enhanced by innovative ski school product offerings, increased conference and banquet business in the first fiscal quarter of 2001, an increase in the number of retail/rental outlets operated by SSV, and internet-based rental sales.

The $18.1 million decrease in other mountain revenue for fiscal 2001 as compared to fiscal 2000 is due primarily to the absence of $15.9 million of skier day insurance revenue and $5.6 million of business interruption insurance that was recorded in fiscal 2000. Other resort revenue also consists of ancillary recreation operations such as Adventure Ridge and Adventure Point, private club operations, municipal support services for the resort villages, brokerage operations and commercial leasing.

Mountain operating expense. Mountain operating expense for fiscal 2001 was $298.0 million, an increase of $13.9 million, or 4.9%, compared to fiscal 2000. The increase in mountain operating expense is primarily attributable to the increase in revenue over fiscal 2000, particularly with respect to non-lift ticket businesses, which have a higher percentage of associated variable expenses. The increased variable expenses are partially offset by a successful cost management program that was implemented at all levels of the Company's operations throughout fiscal 2001.

Lodging revenue. The following discussion of lodging revenue covers revenue from operations as well as lodging equity investment income. The $6.4 million increase in lodging revenue and equity investment income for fiscal 2001 as compared to fiscal 2000 is due primarily to an increase in the Company's inventory of managed condominiums, aggressive lodging marketing strategies during the late summer and fall seasons, and the Company's acquisition of SRL&S in December 2000.

Lodging operating expense. Lodging operating expense for fiscal 2000 was $109.3 million, an increase of $5.7 million compared to fiscal 2000. The increase in lodging operating expense is commensurate with the increase in revenue as compared to fiscal 2000.

Real estate revenue. The following discussion of real estate revenue includes both operating revenue and equity investment income. Revenue from real estate operations for fiscal 2001 was $35.2 million, a decrease of $16.4 million, or 31.8%, compared to fiscal 2000. The decrease in real estate revenue as compared to fiscal 2000 was expected, as the Company's inventory of available "for sale" real estate had declined, offset by the Keystone JV's completion and sale of an increased number of condominiums and single-family lots compared to fiscal 2000.

Real estate operating expense. Real estate operating expense for fiscal 2001 was $23.0 million, a decrease of $19.1 million, or 45.4%, compared to fiscal 2000. Real estate operating expense consists primarily of the cost of sales and related real estate commissions associated with sales of real estate. Real estate operating expense also includes the selling, general and administrative expenses associated with the Company's real estate operations. The decrease in real estate operating expense for fiscal 2001 as compared to fiscal 2000 is commensurate with the decrease in real estate sales noted above.

Depreciation and amortization. Depreciation and amortization expense was $65.5 million, an increase of $3.7 million, or 6.0%, for fiscal 2001 as compared to fiscal 2000. The increase was primarily attributable to an increased fixed asset base due to the acquisitions of SRL&S and the Company's 51% interest in RTP as well as fiscal 2001 capital improvements.

Interest expense. During fiscal 2001 and 2000 the Company recorded interest expense of $32.1 million and $35.2 million, respectively, relating primarily to the Credit Facility, the Industrial Development Bonds and 1999 Notes. The decrease in interest expense for fiscal 2001 compared to fiscal 2000 is attributable to a decrease in the average balance outstanding under the Credit Facility combined with reduced interest rates during fiscal 2001.

Recent Developments

On October 29, 2002, the Company announced that, as a counterbalance to the possibility of slower performance in the nationwide leisure travel and lodging market in the coming year, it has implemented a cost reduction plan of approximately $10 million in actual year-over-year cost reductions. The Company is also tightly managing all its planned expenses, attempting to contain the impact of inflation and rigorously managing other discretionary expenditures.

These actual year-over-year cost reductions include the elimination of approximately 100 positions, or less than 1% of the total employee force, across all locations, through a combination of approximately 50 layoffs and the elimination of approximately 50 vacant positions. The cost reduction plan also includes changes designed to improve operational effectiveness, such as optimizing snowmaking expenditures, modifying lift operating times during off-peak periods, converting certain year round positions to seasonal, managing employee housing levels more effectively, reducing back-of-the-house administrative expenses, as well as other measures. The Company estimates that related severance expenses from the workforce reduction will result in a fiscal 2003 pre-tax charge of approximately $2.5 million. The Company also announced a management reorganization, which will streamline operations and contribute further to the cost reduction plan.

Liquidity and Capital Resources

The Company has historically provided for operating expenditures, debt service, capital expenditures and acquisitions through a combination of cash flow from operations (including sales of real estate) and short-term and long-term borrowings.

Cash flows from the Company's operating activities were $131.7 million for the period ending July 31, 2002. Operating cash flows were comprised primarily of $7.6 million of net income, non-cash costs related to real estate sold of $30.3 million, depreciation and amortization expense of $67.0 million, deferred revenues related to Red Sky Ranch initiation fees of $23.0 million, and deferred revenues related to other clubs of $2.5 million, net of $4.7 million of non-cash equity-method investment income and a deferred tax decrease of $2.7 million.

Cash flows used in investing activities have historically consisted of payments for acquisitions, capital expenditures, and investments in real estate. Capital expenditures for fiscal 2002 were $76.2 million and investments in real estate for that period were $68.7 million. The primary projects included in capital expenditures were (i) the expansion of Peak 7 at Breckenridge, including 165 acres of new slopes and trails and a new high-speed four-passenger chairlift, (ii) complete renovation of the Vail Marriott, (iii) implementation and upgrades of back office information systems, (iv) a new children's ski school facility at Breckenridge, (v) vehicle fleet purchases and (vi) renovations of the Village Hotel in Breckenridge. The primary projects included in investments in real estate were (i) continued construction of the Red Sky Ranch golf courses and the related residential lot developments, (ii) construction of the Mountain Thunder Lodge condominium project at Breckenridge, (iii) planning activities related to the Vail "Front Door" redevelopment, and (iv) investments in developable land and the planning and development of projects in and around each of the Company's resorts.

The Company estimates that it will make capital expenditures of approximately $50 million to $70 million during fiscal 2003. The primary projects are anticipated to include (i) snowmaking, on-mountain dining, and lift improvements at Heavenly, (ii) continued planning and development of Peak 7 in Breckenridge which includes slopes and trails, power and telecommunications, construction of a patrol hut and the purchase of snowmaking equipment, (iii) expansion and enhancement of grooming and snowmaking equipment at the Company's Colorado ski resorts, (iv) renovation of the public spaces, guestrooms and lobby of the Lodge at Rancho Mirage, and (v) completion of the renovation of the lobby and guestrooms of the Vail Marriott. Investments in real estate during fiscal 2003 are expected to total approximately $50 to $65 million. The primary projects are anticipated to include (i) continued development of Red Sky Ranch, (ii) continued work on the Vail "Front Door" redevelopment, (iii) preparing for the redevelopment of the Lionshead base area and other land holdings located within the Town of Vail, (iv) the infrastructure for the Breckenridge Timber Trail single-family homesite development, (v) the Jackson Hole area residential and golf development, and (vi) additional planning and development projects in and around each of the Company's resorts.

The Company's cash flows used in investing activities also included $164.8 million in cash paid in the acquisitions of Heavenly, the Lodge at Rancho Mirage, the Vail Marriott and RockResorts, $2.0 million of advances to affiliates, $6.5 million in net distributions received from equity-method investments, and $0.3 million cash received from the sale of fixed assets.

During fiscal 2002, the Company's financing activities provided $177.6 million cash , consisting of $186.5 million in net long-term debt borrowings and $0.2 million in proceeds from the exercise of stock options , net of $7.8 million in payments of financing costs. As of July 31, 2002, the Company had $93.9 million in outstanding letters of credit issued against the Credit Facility, primarily related to construction and development activity. See Note 9, Commitments and Contingencies, of the Consolidated Financial Statements, for more information regarding these letters of credit. 24,977 employee stock options were exercised at exercise prices ranging from $6.850 to $19.125. Additionally, 8,270 shares of restricted stock were issued to management.

For the year ended July 31, 2001, cash flows from operating activities were $108.6 million. Capital expenditures for fiscal 2001 were $57.8 million and investments in real estate for that period were $39.2 million. The Company's cash flows used in investing activities also included $19.5 million in cash paid for two hotels and other acquisitions, a $7.4 million loan to a joint venture, $15.9 million in net distributions from equity-method investments, and $0.5 million cash received from the sale of fixed assets. During fiscal 2001, the Company used $1.3 million in cash in its financing activities, consisting of $5.9 million in net long-term debt payments net of $4.3 million in proceeds from the exercise of stock options and $0.2 million used in other financing activities.

For the year ended July 31, 2000, cash flows from operations were $110.7 million. Capital expenditures were $76.7 million and investments in real estate for that period were $40.4 million. During the year ended July 31, 2000, the Company used $6.3 million in cash in its financing activities, consisting of net payments on long-term debt of $5.1 million and $1.2 million used in other financing activities.

The Company's Credit Facility provides for affirmative and negative covenants that restrict, among other things, the Company's ability to incur indebtedness, dispose of assets, make capital expenditures and make investments. In addition, the agreement includes certain restrictive financial covenants, the most restrictive of which are the funded debt to adjusted EBITDA ratio (as defined), senior debt to adjusted EBITDA ratio, minimum fixed charge coverage ratio, minimum net worth and the interest coverage ratio.

The Company was in compliance with all relevant covenants in its debt instruments as of July 31, 2002. The Credit Facility was amended on October 28, 2002, to increase the funded debt to adjusted EBITDA ratio to be measured for the covenant compliance period ending October 31, 2002. The Company's anticipated ability to comply with the formerly applicable ratio had been adversely impacted by poorer than expected performance for first quarter of fiscal 2003 and by the Company's change in revenue recognition for initiation fee revenue, as disclosed in the recently filed Amendment to Form 10-K for the year ended July 31, 2001. The Company expects it will meet all applicable quarterly financial tests in its debt instruments, including the funded debt ratio contained in the Credit Facility, in fiscal 2003. However, there can be no assurance that the Company will meet its financial covenants. If such covenants are not met, the Company would be required to seek a waiver or amendment from the banks participating in the Credit Facility. While the Company anticipates that it would obtain such waiver or amendment, if any were necessary, there can be no assurance that such waiver would be granted, which could have a material adverse impact on the liquidity of the Company.

As part of its ongoing operations, the Company enters into arrangements that obligate the Company to make future payments under contracts such as lease agreements and debt agreements. Debt obligations, which total $602.8 million, are currently recognized as liabilities in the Company's Consolidated Balance Sheet. Operating lease obligations, which total $47.6 million, are not recognized as liabilities in the Company's Consolidated Balance Sheet, which is in accordance with generally accepted accounting principles. A summary of the Company's contractual obligations at the end of fiscal 2002 is as follows:

 

Payments Due by Period (in thousands)

Contractual Obligations

Total

Less than

1 year

2-3

years

4 - 5

years

After 5

years

Long-Term Debt

$ 602,786

$    4,754

$  179,282

$    4,941

$   413,809

Operating Leases

47,606

8,475

11,221

8,521

19,389

Other Long-Term Obligations (1)

16,700

--

--

--

--

Total Contractual Cash Obligations

$    667,092

$  13,229

$  190,503

$  13,462

$    433,198

 

 

 

 

 

 

(1)

Other long-term obligations include amounts which become due based on deficits in underlying cash flows of the various metro districts as described in Note 9, Commitments and Contingencies, of the Consolidated Financial Statement. This amount has been recorded as a liability of the Company; however, the specific time period of performance is currently unknown.

In addition to the above contractual obligations, as part of its ongoing operations, the Company enters into certain arrangements that obligate the Company to make future payment only upon the occurrence of a future event that will result in the Company making a cash payment (e.g. guarantee debt of a third party should the third party be unable to perform). The following commercial obligations are not recognized as liabilities in the Company's Consolidated Balance Sheet, which is in accordance with generally accepted accounting principles. A summary of the company's other commercial commitments, including commitments associated with equity method investments at the end of fiscal 2002, is as follows:

 

Amount of Commitment Expiration Per Period

(in thousands)

Other Commercial Commitments

Total Amounts Committed

Less than

1 year

2-3

years

4 - 5

years

After 5

years

Letters of Credit

$ 93,895

$    8,993

$    84,857

$             45

--

Guarantees (2)

14,800

--

--

--

--

Total Commercial Commitments

$ 108,695

$    8,993

$    84,857

$             45

--

 

 

 

 

 

 

(2)

This amount represents guarantees by a third party related to the Tranche B Housing Bonds as discussed in Note 9, Commitments and Contingencies, of the Consolidated Financial Statements, which, should the third party default, the Company would be required to perform under these guarantees; however, the specific time period of performance is currently unknown.

Based on current levels of operations and cash availability, management believes the Company is in a position to satisfy its current working capital, debt service, and capital expenditure requirements for at least the next twelve months.

Critical Accounting Policies

The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles requires the Company to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying the Company's accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in the Consolidated Financial Statements.

In response to the Securities and Exchange Commission's ("SEC") Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies", the Company has identified the most critical accounting policies upon which the Company's financial status depends. The critical principles were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to (i) revenue recognition; (ii) reserve estimates; (iii) intangible assets, (iv) income taxes and (v) real estate held for sale.

Revenue Recognition. Mountain and lodging revenues are derived from a wide variety of sources, including sales of lift tickets, ski/snowboard school tuition, dining, retail stores, equipment rental, hotel operations, property management services, travel reservation services, private club dues and fees, real estate brokerage, conventions, golf course greens fees, licensing and sponsoring activities and other recreational activities, and are recognized as products are delivered or services are performed. Revenues from real estate sales are not recognized until title has been transferred, and revenue is deferred if the related receivable is subject to subordination until such time that all costs have been recovered. Until the initial down payment and subsequent collection of principal and interest are by contract substantial, cash received from the buyer is reported as a deposit on the contract. Revenues from club initiation fees are initially deferred and recognized over the expected life of the club facilities.

Deferred Revenue. In addition to deferring certain revenues related to the Real Estate segment, the Company records deferred revenue related to the sale of season ski passes, certain daily lift ticket products and private club initiation fees. Season pass revenue is recognized each time a season pass is used to access a ski resort based on a rate established using the total estimated visits of a season pass holder for the ski season. During the ski season the estimated visits are compared to the actual visits and adjustments are made if necessary. Initiation fees are recognized over the expected life of the club facilities.

Reserve Estimates. The Company uses estimates to record reserves for certain liabilities, including medical claims and workers' compensation (for which the Company is self-insured), legal liabilities and liabilities for the completion of real estate sold by the Company, among other items. The Company estimates the total potential costs related to these liabilities that will be incurred, and records that amount as a liability in its financial statements. These estimates are reviewed and appropriately adjusted as the facts and circumstances related to the liabilities change.

Intangible Assets. The Company frequently obtains intangible assets, primarily through business combinations. The assignment of value to individual intangible assets generally requires the use of specialist, such as an appraiser. The assumptions used in the appraisal process are forward-looking, and thus are subject to significant interpretation. Because individual intangible assets (i) may be expensed immediately upon acquisition; (ii) amortized over their estimated useful life; or (iii) not amortized, the assigned values could have a material effect on current and future period results of operations. Further, intangibles are subject to certain judgments when evaluating impairment pursuant to Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets", discussed more below.

Income Taxes. The Company is required to estimate its income taxes in each jurisdiction in which it operates. This process requires the Company to estimate the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities on the Company's Consolidated Balance Sheets. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent recovery is not likely, must establish a valuation allowance. As of July 31, 2002, the Company had a net current deferred tax asset of $10.4 million, which represented approximately 0.7% of total assets. The net deferred tax asset contains a valuation allowance representing the portion that management does not believe will be recovered from future taxable income. Management believes that sufficient taxable income will be generated in the future to realize the benefit of the Company's net deferred tax assets. The Company's assumptions of future profitable operations are supported by the Company's strong operating performance over the last several years and the absence of factors that would indicate this trend would be unlikely to continue.

Real Estate Held for Sale. The Company capitalizes as land held for sale the original acquisition cost, direct construction and development costs, property taxes, interest incurred on costs related to land under development, and other related costs (engineering, surveying, landscaping, etc.) until the property reaches its intended use. The cost of sales for individual parcels of real estate or condominium units within a project is determined using the relative sales value method. Selling expenses are charged against income in the period incurred. Estimates to complete for units that have been sold are accrued at the date of sale based on management's best estimate of the remaining costs to be incurred.

New Accounting Pronouncements

The Company early adopted SFAS No. 142, "Goodwill and Other Intangible Assets", as of August 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, instead being subject to impairment tests at least annually. Other intangible assets will continue to be amortized over their contractual lives. Application of the non-amortization provisions of SFAS No. 142 for the years ended July 31, 2001 and 2000 would have increased net income by $4.1 million and $4.0 million, respectively and increased earnings per share by $0.12 in each year.

The first step of the "two-step" impairment approach to testing goodwill involves a screen for potential impairment and the second step measures the amount of impairment. Under the transitional provisions of SFAS No. 142, the Company completed the first step of its goodwill impairment testing by the end of its second fiscal quarter and the transitional impairment testing of its other intangible assets by the end of its first fiscal quarter of 2002. The Company utilized discounted cash flow techniques to estimate the fair value of its reporting units. As allowed under the transitional provisions of SFAS No. 142, the Company completed the second step in the fourth quarter of fiscal 2002. As a result, the Company recorded a goodwill impairment loss associated with the Village at Breckenridge reporting unit of $1.7 million, net of income taxes, in the first quarter of fiscal 2002, which has been recorded as a cumulative effect of change in accounting principle in the Consolidated Statements of Operations. The impairment is the result of the failure of the related reporting unit to meet the earnings expectations set by the Company at the time the reporting unit was acquired. The following table reconciles fiscal 2002, 2001 and 2000 net income to adjusted income as if SFAS No. 142 was effective in those years (in thousands, except per share amounts):

 

For the Year Ended

July 31,

 

2002

 

2001

 

2000

Net Income:

 

 

 

 

 

Reported net income

$    7,565

 

$  13,631

 

$  10,362

 

Goodwill amortization

--

 

2,790

 

2,709

 

Excess reorganization value amortization

--

 

572

 

572

 

Trademark amortization

--

 

683

 

693

 

Other intangible asset amortization

            --

 

          69

 

          69

Adjusted net income

$    7,565

 

$  17,745

 

$  14,405

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Reported earnings per share

$      0.21

 

$      0.39

 

$      0.30

 

Goodwill amortization

--

 

0.08

 

0.08

 

Excess reorganization value amortization

--

 

0.02

 

0.02

 

Trademark amortization

--

 

0.02

 

0.02

 

Other intangible asset amortization

            --

 

       0.00

 

       0.00

Adjusted earnings per share

$      0.21

 

$      0.51

 

$      0.42

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Reported earnings per share

$      0.21

 

$      0.39

 

$      0.30

 

Goodwill amortization

--

 

0.08

 

0.08

 

Excess reorganization value amortization

--

 

0.02

 

0.02

 

Trademark amortization

--

 

0.02

 

0.02

 

Other intangible asset amortization

            --

 

       0.00

 

       0.00

Adjusted earnings per share

$      0.21

 

$      0.51

 

$      0.42

The changes in the carrying amount of goodwill for the years ended July 31, 2002, 2001 and 2000 are as follows (in thousands):

Balance at July 31, 1999

 

$     135,775

Goodwill of acquired businesses

 

1,487

Goodwill amortization

 

        (4,369)

Balance at July 31, 2000

 

$     132,893

Goodwill of acquired businesses

 

5,112

Goodwill amortization

 

        (4,500)

Balance at July 31, 2001

 

 $     133,505

Goodwill of acquired businesses

 

8,849

Transitional impairment charge

 

       (2,754)

Balance at July 31, 2002

 

$     139,600

The goodwill acquired in fiscal year 2002 is related to the mountain and lodging segments in the amounts of $1.0 million and $7.8 million, respectively.

The carrying value of intangibles assets, other than goodwill, not currently subject to amortization (as of August 1, 2001) totaled $53.6 million and $47.0 million as of July 31, 2002 and 2001, respectively, and include primarily trademarks and trade names.

The carrying value of other intangible assets (net of accumulated amortization) subject to amortization for the fiscal years ended July 31, 2002 and 2001 is as follows (in thousands):

 

For the year ended July 31,

 

     2002     

 

     2001     

Gross carrying value

$           57,184

 

$          43,846

Accumulated amortization

         (32,823)

 

      (29,414)

Net carrying value

$           24,361

 

$         14,432

Amortization expense for intangible assets for the fiscal years ended July 31, 2002, 2001 and 2000 totaled $3.4 million, $9.9 million and $9.6 million, respectively, and is estimated to be approximately $4.6 million annually for the next five fiscal years.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will adopt the provisions of SFAS No. 143 on August 1, 2002. The Company does not currently have any obligations falling under the scope of SFAS No. 143, and therefore does not believe its adoption will have a material impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", but retains the requirements of SFAS No.121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144 removes goodwill from its scope as the impairment of goodwill is addressed pursuant to SFAS No. 142. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those years. The Company will adopt the provisions of SFAS No. 144 on August 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is generally effective for the Company for fiscal year 2003. The Company does not expect the adoption of SFAS No. 145 to have a significant effect on its results of operations or financial position.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. This statement nullifies the guidance of the Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)". Under EITF No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. SFAS No. 146 acknowledges that an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact that the implementation will have on its financial statements.

In May 2002, the EITF reached consensus on EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred". This issue requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. EITF Issue No. 01-14 should be applied in financial reporting periods beginning after December 15, 2001. The Company will adopt the provisions of EITF Issue 01-14 on August 1, 2002. The Company is currently evaluating the impact that the implementation of EITF Issue 01-14 will have on its financial statements.

Inflation

Although the Company cannot accurately determine the precise effect of inflation on its operations, management does not believe inflation has had a material effect on the results of operations in the last three fiscal years. When the cost of operating resorts increases, the Company generally has been able to pass the increase on to its customers. However, there can be no assurance that increases in labor and other operating costs due to inflation will not have an impact on the Company's future profitability.

Seasonality and Quarterly Results

The Company's mountain and lodging operations are seasonal in nature. In particular, revenues and profits for the Company's mountain and most of its lodging operations are substantially lower and historically result in losses in the summer months. Conversely, GTLC's and certain managed properties' peak operating seasons occur during the summer months while the winter season generally results in operating losses due to closure of all revenue generating operations. However, revenues and profits generated by GTLC's summer operations and management fees from those managed properties are not sufficient to fully offset the Company's off-season losses from its mountain and lodging operations. During the 2002 fiscal year, 76.3% of total combined mountain and lodging revenues were earned during the second and third fiscal quarters. Quarterly results may be materially affected by the timing of snowfall and the integration of acquisitions. Therefore, the operating results for any three-month period are not necessarily indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. The Company is taking steps to smooth its earnings cycle by investing in additional summer activities, such as golf course development, and also through lodging acquisitions. (See Note 13 of the Notes to Consolidated Financial Statements for Selected Quarterly Financial Data).

Economic Downturn

Skiing and tourism are discretionary recreational activities that can be impacted by a significant economic slowdown, which, in turn, could impact the Company's operating results. Although historically economic downturns have not had an adverse impact on the Company's operating results, there can be no assurance that a decrease in the amount of discretionary spending by the public in the future would not have an adverse effect on the Company.

Unfavorable Weather Conditions

The ski industry's ability to attract visitors to its resorts is influenced by weather conditions and the amount and timing of snowfall during the ski season. Unfavorable weather conditions can adversely affect skier visits. In the past 20 years the Company's ski resorts have averaged between 20 and 30 feet of annual snowfall, significantly in excess of the average for U.S. ski resorts. However, there is no assurance that the Company's resorts will receive seasonal snowfalls near the historical average in the upcoming or future seasons. Also, the early season snow conditions and skier perceptions of early season snow conditions influence the momentum and success of the overall season. The Company believes that poor snow conditions early in the ski season during the 1998/99 and 1999/2000 ski seasons had an adverse effect on operating results for those periods. A severe and prolonged drought could affect the Company's otherwise adequate snowmaking water supplies. There is no way for the Company to predict future weather patterns or the impact that weather patterns may have on results of operations or visitation.

Labor Market

The Company 's resort and lodging operations are largely dependent on a seasonal workforce. The Company recruits worldwide to fill staffing needs each season, and utilizes H2B visas to enable the use of foreign workers. In addition, the Company manages seasonal wages and timing of the hiring process to ensure the appropriate workforce is in place. While the Company does not currently foresee the need to increase seasonal wages to attract employees, it cannot guarantee that such an increase would not be necessary in the future. In addition, the Company cannot guarantee that it will be able to obtain the visas necessary to hire foreign workers, who are an important source for the seasonal workforce. Increased seasonal wages or an inadequate workforce could have an adverse impact on the Company's results of operations; however, the Company is unable to predict with any certainty whether such situations will arise or the potential impact to results of operations.

Terrorist Acts upon the United States

The terrorist acts carried out against the United States on September 11, 2001 have had an adverse effect on the global travel and leisure industry. The Company cannot guarantee if or when normal travel and vacation patterns will resume. In addition, additional terrorist acts against the United States and the declaration of war by the United States could result in further degradation of discretionary travel upon which the Company's operations are highly dependent. Such degradation could have a material adverse impact on the Company's results of operations.

Cautionary Statement

Statements in this Form 10-K, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as "may", "will", "expect", "plan", "intend", "anticipate", "believe", "estimate", and "continue" or similar words. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Such risks and uncertainties include, but are not limited to:

  • a significant downturn in general business and economic conditions,
  • unfavorable weather conditions, including inadequate snowfall in the early season,
  • failure to achieve expected benefits of the cost reduction plan,
  • failure to obtain necessary approvals needed to implement planned development projects,
  • competition in the ski, hospitality and resort industries,
  • failure to successfully integrate acquisitions,
  • adverse changes in vacation real estate markets, and
  • adverse trends in the leisure and travel industry as a result of terrorist activities.

Readers are also referred to the uncertainties and risks identified in the Company's Registration Statement on Form S-4 for its Senior Subordinated Debt exchange notes (Commission File No. 333-76956-01) and elsewhere in this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk. The Company's exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness. At July 31, 2002, the Company had $155.8 million of variable rate indebtedness, representing 26% of the Company's total debt outstanding, at an average interest rate during fiscal 2002 of 7.0% (see Note 4 of the Notes to Consolidated Financial Statements). Based on average floating-rate borrowings outstanding during the year ended July 31, 2002, a 100-basis point change in LIBOR would have caused the Company's annual interest expense to change by $938,000. Management does not consider these amounts material to the Company's results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Vail Resorts, Inc.

Consolidated Financial Statements for the Years Ended July 31, 2002, 2001 and 2000

Report of Independent Accountants

F-2

 

 

Consolidated Financial Statements

 

 

Consolidated Balance Sheets

F-3

 

Consolidated Statements of Operations

F-4

 

Consolidated Statements of Stockholders' Equity

F-5

 

Consolidated Statements of Cash Flows

F-6

 

Notes to Consolidated Financial Statements

F-8

Report of Independent Accountants

 

To the Shareholders and Board of Directors of

Vail Resorts, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Vail Resorts, Inc. and its subsidiaries (the "Company") at July 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the accompanying consolidated financial statements, the Company has adopted SFAS No. 142, "Goodwill and Intangible Assets," on August 1, 2001.

 

        /s/ PricewaterhouseCoopers LLP        

Denver, Colorado

October 28, 2002

 

 

Vail Resorts, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)

 

July 31,

 

      2002     

 

      2001     

Assets

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$     13,110

 

$       8,685

 

Restricted cash

12,855

 

19,309

 

Trade receivables, net of allowances of $367 and $1,158, respectively

31,837

 

25,752

 

Income taxes receivable

--

 

939

 

Inventories, net of reserves of $1,242 and $1,038, respectively

32,326

 

26,891

 

Deferred income taxes (Note 7)

10,433

 

12,647

 

Other current assets

         8,855

 

         8,677

 

 

Total current assets

109,416

 

102,900

Property, plant and equipment, net (Note 5)

913,806

 

691,117

Real estate held for sale and investment

161,778

 

159,177

Deferred charges and other assets

34,159

 

29,089

Notes receivable

10,965

 

10,881

Goodwill, net (Note 5)

139,600

 

133,505

Intangible assets, net (Note 5)

      77,986

 

      61,459

 

Total assets

$1,447,710

 

$1,188,128

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued expenses (Note 5)

$   140,230

 

$   129,150

 

Income taxes payable (Note 7)

7,934

 

--

 

Long-term debt due within one year (Note 4)

         4,754

 

         1,746

 

Total current liabilities

152,918

 

130,896

Long-term debt (Note 4)

598,032

 

386,634

Other long-term liabilities

90,584

 

61,178

Deferred income taxes (Note 7)

73,434

 

91,590

Commitments and contingencies (Note 9)

--

 

--

Minority interest in net assets of consolidated joint ventures

25,474

 

21,081

Stockholders' equity (Note 12):

 

 

 

 

Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding

--

 

--

 

Common stock:

 

 

 

 

Class A common stock, convertible to common stock, $0.01 par value, 20,000,000 shares authorized, 7,439,834 shares issued and outstanding

74

 

74

 

Common stock, $0.01 par value, 80,000,000 shares authorized, 27,714,220 and 27,681,391 shares issued and outstanding as of July 31, 2002 and 2001, respectively

277

 

277

Additional paid-in capital

415,688

 

411,860

Deferred compensation

(1,348)

 

(474)

Retained earnings

       92,577

 

       85,012

 

Total stockholders' equity

     507,268

 

     496,749

 

Total liabilities and stockholders' equity

$1,447,710

 

$1,188,128

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

Vail Resorts, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)

 

Year Ended

 

July 31,

 

    2002    

 

    2001    

 

    2000    

Net revenues:

 

 

 

 

 

 

Mountain

$400,478

 

$391,373

 

$373,786

 

Lodging

150,928

 

124,207

 

116,610

 

Real estate

    63,854

 

    28,200

 

    48,660

 

Total net revenues

615,260

 

543,780

 

539,056

Operating expenses:

 

 

 

 

 

 

Mountain

309,201

 

298,014

 

284,136

 

Lodging

137,190

 

109,316

 

103,570

 

Real estate

51,352

 

22,971

 

42,066

 

Depreciation and amortization

    67,027

 

    65,478

 

    61,748

 

Total operating expenses

  564,770

 

  495,779

 

  491,520

Income from operations

50,490

 

48,001

 

47,536

Other income (expense):

 

 

 

 

 

 

Mountain equity investment income

1,977

 

1,514

 

2,713

 

Lodging equity investment loss

--

 

(1,245)

 

--

 

Real estate equity investment income

2,744

 

7,043

 

3,024

 

Investment income

1,644

 

2,547

 

1,843

 

Interest expense

(39,271)

 

(32,093)

 

(35,162)

 

Loss on disposal of fixed assets

(226)

 

(143)

 

(104)

 

Other income (expense)

155

 

(38)

 

32

 

Minority interest in income of consolidated joint ventures

        (850)

 

        (785)

 

        (713)

Income before provision for income taxes

16,663

 

24,801

 

19,169

 

Provision for income taxes (Note 7)

     (7,390)

 

   (11,170)

 

   (8,807)

Income before cumulative effect of change in accounting principle

9,273

 

13,631

 

10,362

 

Cumulative effect of change in accounting principle, net of income taxes of $1,046 (Note 2)

     (1,708)

 

            --

 

            --

Net income

$    7,565

 

$  13,631

 

$  10,362

 

 

 

 

 

 

Per share amounts (basic) (Note 3):

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

$      0.26

 

$      0.39

 

$      0.30

 

Cumulative effect of change in accounting principle, net of income taxes (Note 2)

       (0.05)

 

            --

 

            --

 

Net income

$      0.21

 

$      0.39

 

$      0.30

 

 

 

 

 

 

 

Per share amounts (diluted) (Note 3):

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

$      0.26

 

$      0.39

 

$      0.30

 

Cumulative effect of change in accounting principle, net of income taxes (Note 2)

       (0.05)

 

            --

 

            --

 

Net income

$      0.21

 

$      0.39

 

$      0.30

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

Vail Resorts, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)

 

               Common Stock              

 

Additional

Paid-in

Capital

 

Deferred Compensation

 

Retained

Earnings

 

Total Stockholders' Equity

 

          Shares          

 

 

 

 

 

 

 

 

 

 

 

Class A

 

Common

 

Total

 

Amount

 

 

 

 

 

 

 

 

Balance, July 31, 1999

7,439,834

 

27,092,901

 

34,532,735

 

$ 345

 

$ 403,564

 

$ (424)

 

$ 61,019

 

$ 464,504

 

Net Income

--

 

--

 

--

 

--

 

--

 

--

 

10,362

 

10,362

 

Amortization of deferred compensation

--

 

--

 

--

 

--

 

--

 

259

 

--

 

259

 

Issuance of shares pursuant to options exercised and the issuance of restricted stock (Note 12)

--

 

48,809

 

48,809

 

--

 

 

 

163

 

 

 

--

 

 

 

--

 

163

 

Tax effect of stock option exercises

--

 

--

 

--

 

--

 

183

 

--

 

--

 

183

 

Issuance of shares in purchase of technology company

            --

 

     40,413

 

     40,413

 

          1

 

        889

 

               --

 

           --

 

           890

Balance, July 31, 2000

7,439,834

 

27,182,123

 

34,621,957

 

346

 

  404,799

 

(165)

 

71,381

 

476,361

 

Net Income

--

 

--

 

--

 

--

 

--

 

--

 

13,631

 

13,631

 

Amortization of deferred compensation

--

 

--

 

--

 

--

 

--

 

387

 

--

 

387

 

Issuance of shares pursuant to options exercised and the issuance of restricted stock (Note 12)

--

 

499,268

 

499,268

 

5

 

 

 

4,319

 

 

 

--

 

 

 

--

 

4,324

 

Tax effect of stock option exercises

--

 

--

 

--

 

--

 

2,046

 

--

 

--

 

2,046

 

Restricted stock granted

            --

 

            --

 

            --

 

            --

 

        696

 

            (696)

 

            --

 

            --

Balance, July 31, 2001

7,439,834

 

27,681,391

 

35,121,225

 

351

 

411,860

 

(474)

 

  85,012

 

496,749

 

Net Income

--

 

--

 

--

 

--

 

--

 

--

 

7,565

 

7,565

 

Amortization of deferred compensation

--

 

--

 

--

 

--

 

--

 

1,403

 

--

 

1,403

 

Issuance of shares pursuant to options exercised and issuance of restricted stock (Note 12)

--

 

32,829

 

32,829

 

--

 

 

 

151

 

 

 

--

 

 

 

--

 

151

 

Tax effect of stock option exercises

--

 

--

 

--

 

--

 

47

 

--

 

--

 

47

 

Reduction of deferred tax asset created in bankruptcy

--

 

--

 

--

 

--

 

1,353

 

--

 

--

 

1,353

 

Restricted stock granted

            --

 

            --

 

            --

 

            --

 

     2,277

 

        (2,277)

 

            --

 

            --

Balance, July 31, 2002

7,439,834

 

27,714,220

 

35,154,054

 

$ 351

 

$ 415,688

 

$ (1,348)

 

$ 92,577

 

$ 507,268

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

Vail Resorts, Inc.
Consolidated Statements of Cash Flows
(In thousands)

 

Year Ended

 

July 31,

 

     2002    

 

     2001    

 

     2000    

Cash flows from operating activities:

 

 

 

 

 

 

Net income

$7,565

 

$  13,631

 

$  10,362

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

67,027

 

65,478

 

61,748

 

Non-cash cost of real estate sales

30,317

 

7,687

 

27,402

 

Non-cash compensation related to stock grants (Note 11)

1,403

 

387

 

259

 

Other non-cash compensation

2,374

 

--

 

--

 

Non-cash equity income

(4,721)

 

(7,312)

 

(5,737)

 

Other non-cash income

(677)

 

(569)

 

(1,440)

 

Deferred financing costs amortized

2,544

 

1,772

 

1,734

 

Amortization of debt discount

1,386

 

--

 

--

 

Loss on disposal of fixed assets

226

 

143

 

104

 

Deferred income taxes, net (Note 7)

(2,715)

 

5,790

 

4,839

 

Tax benefit related to issuance of stock options

47

 

2,046

 

183

 

Minority interest in net income of consolidated joint venture

850

 

785

 

713

 

Cumulative effect of change in accounting principle, net

1,708

 

--

 

--

 

Changes in assets and liabilities:

 

 

 

 

 

 

Restricted cash

6,454

 

(9,462)

 

(2,825)

 

Accounts receivable, net

(4,594)

 

13,675

 

(9,777)

 

Notes receivable, net

(84)

 

--

 

(2,045)

 

Inventories

(2,711)

 

(2,799)

 

(1,287)

 

Accounts payable and accrued expenses

(11,629)

 

16,955

 

16,017

 

Income taxes receivable/payable

8,873

 

(3,584)

 

1,012

 

Other assets and liabilities

  28,031

 

     3,980

 

      9,485

 

Net cash provided by operating activities

131,674

 

108,603

 

110,747

Cash flows from investing activities:

 

 

 

 

 

 

Cash paid in ski resort acquisition, net of cash acquired

(99,359)

 

--

 

--

 

Cash paid in hotel acquisitions, net of cash acquired

(57,376)

 

(16,927)

 

--

 

Cash paid in other acquisitions, net of cash acquired

(8,035)

 

(2,547)

 

--

 

Investments in joint ventures

(120)

 

(4,795)

 

(4,106)

 

Distributions from joint ventures

6,669

 

20,681

 

5,156

 

Advances to affiliate

(2,000)

 

(7,400)

 

--

 

Capital expenditures

(76,234)

 

(57,814)

 

(76,656)

 

Investments in real estate

(68,705)

 

(39,172)

 

(40,410)

 

Cash received from disposal of fixed assets

        267

 

         546

 

      2,063

 

Net cash used in investing activities

(304,893)

 

(107,428)

 

(113,953)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

151

 

4,324

 

163

 

Payment of financing costs

(7,766)

 

--

 

(619)

 

Distribution from joint venture to minority shareholder

(1,261)

 

(856)

 

(743)

 

Proceeds from cancellation of swap agreements

--

 

1,076

 

--

 

Proceeds from borrowings under long-term debt

737,331

 

224,071

 

204,572

 

Payments on long-term debt

(550,811)

 

(229,926)

 

(209,648)

 

Net cash provided by (used in) financing activities

  177,644

 

    (1,311)

 

    (6,275)

 

Net increase (decrease) in cash and cash equivalents

4,425

 

(136)

 

(9,481)

Cash and cash equivalents:

 

 

 

 

 

 

Beginning of period

     8,685

 

      8,821

 

    18,302

 

End of period

$  13,110

 

$    8,685

 

$    8,821

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

$  33,158

 

$  29,738

 

$  35,470

Taxes paid, net of refunds received

$    2,335

 

$    6,780

 

$    2,768

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

Vail Resorts, Inc.
Supplemental Schedule of Non-Cash Transactions

(In thousands)

 

Year Ended

 

July 31,

 

     2002    

 

     2001    

 

     2000    

 

Note issued in acquisition of hotel

$    21,600

 

$          --

 

$          --

 

Debt assumed in acquisitions

    3,037

 

          --

 

          --

 

Note issued in exchange for Mission Hills Country Club memberships

    1,863

 

          --

 

          --

 

Land contribution in formation of Bachelor Gulch Resort, LLC

          --

 

    3,438

 

         --

 

Note issued in purchase of software

          --

 

          --

 

    1,126

 

Stock issued in acquisition of technology company

--

 

          --

 

890

 

 

 

 

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

Notes to Consolidated Financial Statements

1.  Organization and Business

Vail Resorts, Inc. ("Vail Resorts") 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. As a result of a change in the Company's business operations, the Company stopped reporting Technology as a separate segment on April 30, 2002. The Vail Corporation (d/b/a Vail Associates, Inc.), an indirect wholly owned subsidiary of Vail Resorts, and its subsidiaries (collectively, "Vail Associates") operate four world-class ski resorts and related amenities at Vail, Breckenridge, Keystone and Beaver Creek mountains in Colorado. In May 2002, the Company acquired through its subsidiaries 100% ownership interest in Heavenly Valley Limited Partnership which operates Heavenly Ski Resort ("Heavenly") in the Lake Tahoe area of California and Nevada. In addition to the ski resorts, Vail Associates owns Grand Teton Lodge Company ("GTLC"), which operates three resorts within Grand Teton National Park (under a National Park Service concessionaire contract) and the Jackson Hole Golf & Tennis Club in Wyoming. Vail Associates also owns a 51% interest in Snake River Lodge & Spa ("SRL&S") located near Jackson, Wyoming and owns 100% of the Lodge at Rancho Mirage ("Rancho Mirage") near Palm Springs, California. The Company also holds a majority interest in RockResorts, a luxury hotel management company that manages five Company-owned and five other non-owned luxury resort properties. Vail Resorts Development Company ("VRDC"), a wholly owned subsidiary of Vail Associates, conducts the operations of the Company's Real Estate segment. The Company's mountain and lodging businesses are seasonal in nature. The Company's mountain and most of its lodging operations typically have operating seasons from late October through April; the Company's operations at GTLC generally run from mid-May through mid-October.

2.  Summary of Significant Accounting Policies

Principles of Consolidation--The accompanying Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and subsidiaries in which the Company holds a controlling interest. Investments in joint ventures in which the Company does not have a controlling interest are accounted for under the equity method. All significant intercompany transactions have been eliminated in consolidation.

Cash and Cash Equivalents--The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Restricted Cash--Restricted cash represents amounts held as reserves for self-insured workers' compensation claims, owner and guest advance deposits held in escrow for lodging reservations, advance deposits held in escrow for real estate sales and compensating balances on the Company's depository accounts. Pursuant to the Company's compensating balance agreements, the balances maintained in these accounts are higher during the Company's ski season than at other times during the year.

Inventories--The Company's inventories consist primarily of purchased retail goods, food and beverage items, and spare parts. Inventories are stated at the lower of cost or fair value, determined using primarily an average weighted cost method. The Company records a reserve for anticipated shrinkage and obsolete or unusable inventory.

Property, Plant and Equipment--Property, plant and equipment is carried at cost net of accumulated depreciation. Routine repairs and maintenance are expensed as incurred. Expenditures that improve the functionality of the related equipment or extend the useful life are capitalized. When property, plant, and equipment are retired or otherwise disposed of, the related gain or loss is included in other income. Depreciation is calculated on the straight-line method based on the following useful lives:

 

Estimated Life

 

       in Years       

 

 

Land improvements

40

Buildings and terminals

30-40

Ski lifts

15

Machinery, equipment, furniture and fixtures

1-12

Automobiles and trucks

3-5

Ski trails are depreciated over the life of the respective United States Forest Service permits.

Real Estate Held for Sale--The Company capitalizes as land held for sale the original acquisition cost, direct construction and development costs, property taxes, interest incurred on costs related to land under development, and other related costs (engineering, surveying, landscaping, etc.) until the property reaches its intended use. The cost of sales for individual parcels of real estate or condominium units within a project is determined using the relative sales value method. Selling expenses are charged against income in the period incurred. Interest capitalized on real estate development projects during fiscal years 2002, 2001 and 2000 totaled $1.6 million, $1.3 million and $0.2 million, respectively.

The Company is a member in the Keystone JV, which is a joint venture with Intrawest Resorts, Inc. formed to develop land at the base of Keystone Mountain. The Company contributed 500 acres of development land as well as certain other funds to the joint venture. The Company's investment in the Keystone JV, including the Company's equity earnings from the inception of the Keystone JV, is reported as real estate held for sale in the accompanying consolidated balance sheets as of July 31, 2002 and 2001. The Company recorded $2.7 million, $7.0 million and $3.0 million in equity income for the fiscal years ended July 31, 2002, 2001, and 2000 respectively, related to the Keystone JV.

Deferred Financing Costs--Costs incurred with the issuance of debt securities are included in deferred charges and other assets, net of accumulated amortization. Amortization is charged to interest expense over the respective original lives of the applicable debt issues.

Interest Rate Agreements--At July 31, 2000, the Company had in effect interest rate swap agreements ("Swap Agreements") with notional amounts totaling $75.0 million maturing in December 2002. In October 2000, the Company canceled the Swap Agreements in exchange for a cash payment of $1.1 million. The $1.1 million gain was deferred and is being recognized over the remaining life of the related debt, in accordance with Financial Accounting Standards Board ("FASB") Emerging Issues Task Force Issue No. 84-7 ("EITF"), "Termination of Interest Rate Swaps". As of July 31, 2002, the Company has recognized $0.9 million of the total gain related to the cancellation of the Swap Agreements.

Intangible Assets--Upon emergence from bankruptcy on October 8, 1992, the Company's reorganization value exceeded the amounts allocated to the net tangible and other intangible assets of the Company. This excess reorganization value has been classified as an intangible asset on the Company's consolidated balance sheet. The Company has classified as goodwill the cost in excess of fair value of the net assets of companies acquired in purchase transactions. The Company's major intangible asset classes are trademarks, tradenames and other intangible assets. As prescribed in SFAS No. 142, goodwill and certain indefinite lived intangible assets, including excess reorganization value and trademarks, are no longer amortized, but are subject to impairment charges. Other intangibles are recorded net of accumulated amortization in the accompanying balance sheets and amortized using the straight-line method over their estimated useful lives (1-20 years). See the New Accounting Pronouncements portion of Note 2, Summary of Significant Accounting Policies, for additional information regarding the Company's adoption of SFAS No. 142.

Long-lived Assets--The Company evaluates potential impairment of long-lived assets and long-lived assets to be disposed of in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 establishes procedures for the review of recoverability and measurement of impairment, if necessary, of long-lived assets held and used by an entity. SFAS No. 121 requires that those assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. SFAS No. 121 also requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less estimated selling costs. As of July 31, 2002 management believes that there have not been any indicators of impairment of the Company's long-lived assets.

Revenue Recognition--Mountain and lodging revenues are derived from a wide variety of sources, including sales of lift tickets, ski school tuition, dining, retail stores, equipment rental, hotel operations, property management services, travel reservation services, private club dues and fees, real estate brokerage, conventions, golf course greens fees, licensing and sponsoring activities and other recreational activities, and are recognized as products are delivered or services are performed. Revenues from club initiation fees are recognized over the estimated life of the club facilities. Revenues from real estate sales are not recognized until title has been transferred, and revenue is deferred if the receivable is subject to subordination until such time as all costs have been recovered. Until the initial down payment and subsequent collection of principal and interest are by contract substantial, cash received from the buyer is reported as a deposit on the contract.

The Company recognizes website development and consulting revenue in multiple-element arrangements under EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables". Accordingly, arrangements with objective and reliable evidence of fair value are bifurcated and revenue is recognized on each element of the deliverable individually. Revenue is allocated to elements of the arrangement based on their relative fair values. Revenue is reduced by the Company's estimate of the amount of returns that will be honored as a result of the Company's failure to deliver any of the elements of the arrangement.

Deferred Revenue-- In addition to deferring certain revenues related to the Real Estate segment, the Company records deferred revenue related to the sale of season ski passes and certain daily lift ticket products. The number of season pass holder visits is estimated based on historical data, and the deferred revenue is recognized throughout the season based on this estimate. During the ski season the estimated visits are compared to the actual visits and adjustments are made if necessary. The Company also records deferred revenue related to the initiation fees collected in association with the Company's private membership clubs, which are then recognized over the estimated life of the club facilities.

Reserve Estimates. The Company uses estimates to record reserves for certain liabilities, including medical claims and workers' compensation (for which the Company is self-insured), legal liabilities and liabilities for the completion of real estate sold by the Company, among other items. The Company estimates the total potential costs related to these liabilities that will be incurred, and records that amount as a liability in its financial statements. These estimates are reviewed and appropriately adjusted as the facts and circumstances related to the liabilities change.

Advertising Costs--Advertising costs are expensed the first time the advertising takes place. Advertising expense for the fiscal years ended July 31, 2002, 2001 and 2000 was $16.5 million, $18.5 million and $18.0 million, respectively. At July 31, 2002 and 2001, prepaid advertising costs of $57,000 and $0.5 million, respectively, are reported as current assets in the Company's consolidated balance sheets.

Income Taxes--The Company uses the liability method of accounting for income taxes as prescribed by SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheet and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. The Company's deferred tax assets have been reduced by a valuation allowance to the extent it is deemed to be more likely than not that some or all of the deferred tax assets will not be realized. (See Note 7).

Net Income Per Share--In accordance with SFAS No. 128, "Earnings Per Share", the Company computes net income per share on both the basic and diluted basis (See Note 3).

Fair Value of Financial Instruments--The recorded amounts for cash and cash equivalents, receivables, other current assets, and accounts payable and accrued expenses approximate fair value due to the short-term nature of these financial instruments. The fair value of amounts outstanding under the Company's Credit Facilities approximates book value due to the variable nature of the interest rate associated with that debt. The fair values of the Company's Senior Subordinated Notes, Industrial Development Bonds and other long-term debt have been estimated using discounted cash flow analyses based on current borrowing rates for debt with similar maturities and ratings. The estimated fair values of the Senior Subordinated Notes, Industrial Development Bonds and other long-term debt at July 31, 2002 and 2001 are presented below (in thousands):

 

       July 31, 2002    

 

     July 31, 2001     

 

Carrying

 

Fair

 

Carrying

 

Fair

   Value  

   Value  

   Value   

   Value  

Senior Subordinated Notes

$353,108

 

$355,470

 

$200,000

 

$195,380

Industrial Development Bonds

63,200

 

71,761

 

63,200

 

68,509

Other Long-Term Debt

31,578

 

33,913

 

3,780

 

4,146

Stock Compensation-- The Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25") and related interpretations. The Company adopted the disclosure-only requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which allows entities to continue to apply the provisions of APB No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants made as if the fair value-based method of accounting prescribed in SFAS No. 123 had been applied to those transactions. The Company applies the provisions of SFAS No. 123 and related interpretations to stock-based compensation arrangements with non-employees (see Note 11).

Concentration of Credit Risk--The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments in high quality credit institutions. At times, such investments may be in excess of FDIC insurance limits. Concentration of credit risk with respect to trade receivables is limited due to the wide variety of customers and markets into which the Company transacts, as well as their dispersion across many geographical areas. As a result, as of July 31, 2002, the Company did not consider itself to have any significant concentrations of credit risk. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for potential credit losses, but does require advance deposits on certain transactions, and historical losses have been within management's expectations. The Company does not enter into financial instruments for trading or speculative purposes. The Company has no financial instrument contracts currently outstanding.

Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications--Certain reclassifications have been made to the accompanying Consolidated Financial Statements for the years ended July 31, 2001 and 2000 to conform to the current period presentation.

New Accounting Pronouncements-- The Company early adopted SFAS No. 142, "Goodwill and Other Intangible Assets", as of August 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, instead being subject to impairment tests at least annually. Other intangible assets will continue to be amortized over their contractual lives. Application of the non-amortization provisions of SFAS No. 142 for the years ended July 31, 2001 and 2000 would have increased net income by $4.1 million and $4.0 million, respectively, and increased earnings per share by $0.12 in each year.

The first step of the "two-step" impairment approach to testing goodwill involves a screen for potential impairment and the second step measures the amount of impairment. Under the transitional provisions of SFAS No. 142, the Company completed the first step of its goodwill impairment testing by the end of its second fiscal quarter and the transitional impairment testing of its other intangible assets by the end of its first fiscal quarter of 2002. The Company utilized discounted cash flow techniques to estimate the fair value of its reporting units. As allowed under the transitional provisions of SFAS No. 142, the Company completed the second step in the fourth quarter of fiscal 2002. As a result, the Company recorded a goodwill impairment loss associated with the Village at Breckenridge reporting unit of $1.7 million, net of income taxes, in the first quarter of fiscal 2002, which has been recorded as a cumulative effect of change in accounting principle in the Consolidated Statements of Operations. The impairment is the result of the failure of the related reporting unit to meet the earnings expectations set by the Company at the time the reporting unit was acquired. The following table reconciles fiscal 2002, 2001 and 2000 net income to adjusted income as if SFAS No. 142 was effective in those years (in thousands, except per share amounts):

 

For the Year Ended

July 31,

 

2002

 

2001

 

2000

Net Income:

 

 

 

 

 

Reported net income

$    7,565

 

$  13,631

 

$  10,362

 

Goodwill amortization

--

 

2,790

 

2,709

 

Excess reorganization value amortization

--

 

572

 

572

 

Trademark amortization

--

 

683

 

693

 

Other intangible asset amortization

            --

 

          69

 

          69

Adjusted net income

$    7,565

 

$  17,745

 

$  14,405

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Reported earnings per share

$      0.21

 

$      0.39

 

$      0.30

 

Goodwill amortization

--

 

0.08

 

0.08

 

Excess reorganization value amortization

--

 

0.02

 

0.02

 

Trademark amortization

--

 

0.02

 

0.02

 

Other intangible asset amortization

            --

 

       0.00

 

       0.00

Adjusted earnings per share

$      0.21

 

$      0.51

 

$      0.42

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Reported earnings per share

$      0.21

 

$      0.39

 

$      0.30

 

Goodwill amortization

--

 

0.08

 

0.08

 

Excess reorganization value amortization

--

 

0.02

 

0.02

 

Trademark amortization

--

 

0.02

 

0.02

 

Other intangible asset amortization

            --

 

       0.00

 

       0.00

Adjusted earnings per share

$      0.21

 

$      0.51

 

$      0.42

The changes in the carrying amount of goodwill for the years ended July 31, 2002, 2001 and 2000 are as follows (in thousands):

Balance at July 31, 1999

 

$     135,775

Goodwill of acquired businesses

 

1,487

Goodwill amortization

 

        (4,369)

Balance at July 31, 2000

 

$     132,893

Goodwill of acquired businesses

 

5,112

Goodwill amortization

 

        (4,500)

Balance at July 31, 2001

 

 $     133,505

Goodwill of acquired businesses

 

8,849

Transitional impairment charge

 

       (2,754)

Balance at July 31, 2002

 

$     139,600

The goodwill acquired in fiscal year 2002 is related to the mountain and lodging segments in the amounts of $1.0 million and $7.8 million, respectively.

The carrying value of intangibles assets, other than goodwill, not currently subject to amortization (as of August 1, 2001) totaled $53.6 million and $47.0 million as of July 31, 2002 and 2001, respectively, and include primarily trademarks and trade names.

The carrying value of other intangible assets (net of accumulated amortization) subject to amortization for the fiscal years ended July 31, 2002 and 2001 is as follows (in thousands):

 

For the year ended July 31,

 

2002

 

2001

Gross carrying value

$           57,184

 

$          43,846

Accumulated amortization

         (32,823)

 

      (29,414)

Net carrying value

$           24,361

 

$         14,432

Amortization expense for intangible assets subject for the fiscal years ended July 31, 2002, 2001 and 2000 totaled $3.4 million, $9.9 million and $9.6 million, respectively, and is estimated to be approximately $4.6 million annually for the next five fiscal years.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002 and the Company will adopt the provisions of SFAS No. 143 on August 1, 2002. The Company does not currently have any obligations falling under the scope of SFAS No. 143, and therefore does not believe its adoption will have a material impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", but retains the requirements of SFAS No.121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. SFAS No. 144 removes goodwill from its scope as the impairment of goodwill is addressed pursuant to SFAS No. 142. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those years. The Company will adopt the provisions of SFAS No. 144 on August 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is generally effective for the Company for fiscal year 2003. The Company does not expect the adoption of SFAS No. 145 will have a significant effect on its results of operations or financial position.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. This statement nullifies the guidance of the Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)". Under EITF No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. SFAS No. 146 acknowledges that an entity's commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the impact that the implementation will have on its financial statements.

In May 2002, the EITF reached consensus on EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred". This issue requires that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. EITF Issue No. 01-14 should be applied in financial reporting periods beginning after December 15, 2001. The Company will adopt the provisions of EITF Issue 01-14 on August 1, 2002. The Company is currently evaluating the impact that the implementation of EITF Issue 01-14 will have on its financial statements.

3.  Net Income Per Common Share

SFAS No. 128, "Earnings Per Share" ("EPS"), establishes standards for computing and presenting EPS. SFAS No. 128 requires the dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of numerators (net income) 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 available to common shareholders 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 common shares that would then share in the earnings of the Company.

 

Fiscal Year Ended

 

July 31,

 

            2002            

 

            2001            

 

             2000             

 

(In thousands, except per share amounts)

 

   Basic   

 

 Diluted 

 

   Basic   

 

 Diluted 

 

   Basic   

 

 Diluted 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle

$   9,273

 

$   9,273

 

$ 13,631

 

$ 13,631

 

$ 10,362

 

$ 10,362

 

Cumulative effect of change in accounting principle, net of income taxes

  (1,708)

 

  (1,708)

 

           --

 

           --

 

           --

 

           --

Net income

$   7,565

 

$   7,565

 

$ 13,631

 

$ 13,631

 

$ 10,362

 

$ 10,362

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

35,141

 

35,141

 

34,910

 

34,910

 

34,599

 

34,599

Effect of dilutive securities

           --

 

          41

 

           --

 

        213

 

           --

 

        180

Total shares

   35,141

 

   35,182

 

   34,910

 

   35,123

 

   34,599

 

   34,779

 

 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle per common share

$     0.26

 

$     0.26

 

$     0.39

 

$     0.39

 

$     0.30

 

$     0.30

 

Cumulative effect of change in accounting principle, net of income taxes, per common share

    (0.05)

 

    (0.05)

 

           --

 

           --

 

           --

 

           --

Net income per common share

$     0.21

 

$     0.21

 

$     0.39

 

$     0.39

 

$     0.30

 

$     0.30

The number of shares issuable on the exercise of common stock options that were excluded from the calculation of diluted net income per share because the effect of their inclusion would have been anti-dilutive totaled 2,215,000, 1,214,000 and 2,371,000, in 2002, 2001 and 2000, respectively. The shares were anti-dilutive because their exercise price was greater than the average share price during the respective fiscal years.

 

4.  Long-Term Debt

Long-term debt as of July 31, 2002 and July, 31 2001 is summarized as follows (in thousands):

 

 

 

July 31,

 

July 31,

 

 Maturity (f)

 

    2002    

 

    2001    

 

 

 

 

 

 

Industrial Development Bonds (a)

2003-2020

 

$    63,200

 

$   63,200

Credit Facilities (b)

2004-2005

 

154,900

 

121,400

Senior Subordinated Notes(c)

2009

 

360,000

 

200,000

Discount on Senior Subordinated Notes (c)

 

 

(6,892)

 

--

Olympus Note (d)

2004

 

25,563

 

--

Discount on Olympus Note (d)

 

 

(2,655)

 

--

Other (e)

2002-2029

 

       8,670

 

      3,780

 

 

 

602,786

 

388,380

Less: Current Maturities

 

 

       4,754

 

      1,746

 

 

 

$  598,032

 

$  386,634

(a)

The Company has $63.2 million of outstanding Industrial Development Bonds (the "Industrial Development Bonds"). $41.2 million of the Industrial Development Bonds were issued by Eagle County, Colorado and mature, subject to prior redemption, on August 1, 2019. These bonds accrue interest at 6.95% per annum, with interest being payable semi-annually on February 1 and August 1. In addition, the Company has outstanding two series of refunding bonds. The Series 1990 Sports Facilities Refunding Revenue Bonds, issued by Summit County, Colorado, have an aggregate outstanding principal amount of $19.0 million, which matures in installments in 2006 and 2008. These bonds bear interest at a rate of 7.75% for bonds maturing in 2006 and 7.875% for bonds maturing in 2008. The Series 1991 Sports Facilities Refunding Revenue Bonds, issued by Summit County, Colorado, have an aggregate outstanding principal amount of $3 million and bear interest at 7.125% for bonds maturing in September 2002 and 7.375% for bonds maturing in 2010. The Promissory Note between Summit County and the Company is pledged and endorsed to The Bank of New York as Trustee under the Indenture of Trust. The Promissory Note is also collateralized in accordance with a Guaranty from Ralston Purina Company (subsequently assumed by The Vail Corporation) to the Trustee for the benefit of the registered owners of the bonds.

 

 

(b)

In November 2001, the Company entered into a new three-year revolving credit facility ("Credit Facility") to replace its existing credit facility, which had been scheduled to terminate at the end of 2002. The Company's subsidiary, The Vail Corporation, is the borrower under the Credit Facility with Bank of America, N.A. as agent and certain other financial institutions as lenders. The Credit Facility provides for debt financing up to an aggregate principal amount of $421.0 million. The Vail Corporation's obligations under the Credit Facility are guaranteed by the Company and certain of its subsidiaries and are collateralized by a pledge of all of the capital stock of The Vail Corporation and substantially all of its subsidiaries. The proceeds of the loans made under the Credit Facility may be used to fund the Company's working capital needs, capital expenditures and other general corporate purposes, including the issuance of letters of credit. Borrowings under the Credit Facility, as amended, bear interest annually at the Company's option at the rate of (i) LIBOR (1.82% at July 31, 2002) plus a margin or (ii) the agent's prime lending rate, (4.75% at July 31, 2002) plus a margin. The Company also pays a quarterly unused commitment fee ranging from 0.35% to 0.50%. The interest margins fluctuate based upon the ratio of the Company's total Funded Debt to the Company's Adjusted EBITDA (as defined in the underlying Credit Facility). The Credit Facility matures on November 13, 2004. There was $141 million outstanding under the Credit Facility as of July 31, 2002. The Company's Credit Facility provides for affirmative and negative covenants that restrict, among other things, the Company's ability to incur indebtedness, dispose of assets, make capital expenditures and make investments. In addition, the agreement includes certain restrictive financial covenants, the most restrictive of which are the funded debt to adjusted EBITDA ratio (as defined), senior debt to adjusted EBITDA ratio, minimum fixed charge coverage ratio, minimum net worth and the interest coverage ratio. The Company was in compliance with all relevant covenants in its debt instruments as of July 31, 2002. The Credit Facility was amended on October 28, 2002, to increase the funded debt to adjusted EBITDA ratio to be measured for the covenant compliance period ending October 31, 2002. The Company's anticipated ability to comply with the formerly applicable ratio had been adversely impacted by poorer than expected performance for first quarter of fiscal 2003 and by the Company's change in revenue recognition for initiation fee revenue, as disclosed in the recently filed Amendment to Form 10-K for the year ended July 31, 2001. The Company expects it will meet all applicable quarterly financial tests in its debt instruments, including the funded debt ratio contained in the Credit Facility, in fiscal 2003. However, there can be no assurance that the Company will meet its financial covenants. If such covenants are not met, the Company would be required to seek a waiver or amendment from the banks participating in the Credit Facility. While the Company anticipates that it would obtain such waiver or amendment, if any were necessary, there can be no assurance that such waiver would be granted, which could have a material adverse impact on the liquidity of the Company.

 

 

 

SSI Venture LLC ("SSV"), a retail/rental joint venture in which the company has a 51.9% ownership interest, has a credit facility ("SSV Facility") that provides debt financing up to an aggregate principal amount of $25 million. The SSV Facility consists of (i) a $15 million Tranche A revolving credit facility and (ii) a $10 million Tranche B term loan facility. The SSV Facility matures on the earlier of December 31, 2003 or the termination date of the Credit Facility discussed above. The Vail Corporation guarantees the SSV Facility. The principal amount outstanding on the Tranche A revolving loan was $7.4 million as of July 31, 2002. The principal amount outstanding on the Tranche B term loan was $6.5 million at July 31, 2002. Future minimum amortization under the Tranche B term loan facility is $1.0 million and $5.5 million during fiscal years 2003 and 2004, respectively. The SSV Facility bears interest annually at the rates prescribed above for the Credit Facility. SSV also pays a quarterly unused commitment fee at the same rates as the unused commitment fee for the Credit Facility.

 

 

(c)

The Company has outstanding $360 million of Senior Subordinated Notes (the "Notes"), $200 million of which were issued in May 1999 (the "1999 Notes") and $160 million of which were issued in November 2001 (the "2001 Notes"). The 1999 Notes and 2001 Notes have substantially similar terms. The 2001 Notes were issued with an original issue discount for federal income tax purposes that yielded gross proceeds to the Company of approximately $152.6 million. The proceeds of the 2001 Notes were used to repay a portion of the indebtedness under the Credit Facility. The exchange offer for the 2001 Notes has been registered under the Securities Act of 1933. The Notes have a fixed annual interest rate of 8.75%, with interest due semi-annually on May 15 and November 15. The Notes will mature on May 15, 2009 and no principal payments are due to be paid until maturity. The Company has certain early redemption options under the terms of the Notes. Substantially all of the Company's subsidiaries have guaranteed the Notes (see Note 14). The Notes are subordinated to certain of the Company's debts, including the Credit Facility, and will be subordinated to certain of the Company's future debts. The Company's payment obligations under the Notes are jointly and severally guaranteed by all of the Company's consolidated subsidiaries designated as Guarantors, as defined in the terms of the Notes.

 

 

(d)

In connection with the Company's acquisition of Rancho Mirage in November 2001, the Company entered into a note payable to Olympus Real Estate Partners (the "Olympus Note"). The Olympus Note has a principal amount of $25 million and matures November 15, 2003. The terms of the Olympus Note do not provide for interest; therefore, the Company has imputed an interest rate of 8% per annum, which has been recorded as a discount on the Olympus Note and is being amortized as interest expense over the life of the Olympus Note.

 

 

(e)

Other obligations bear interest at rates ranging from 5.45% to 18.3% and have maturities ranging from 2002 to 2029.

 

 

(f)

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

Aggregate maturities for debt outstanding as of July 31, 2002 are as follows (in thousands):

2003

 

$    4,754

2004

 

36,775

2005

 

142,507

2006

 

733

2007

 

4,208

Thereafter

 

  413,809

Total debt

 

$602,786

The Company was in compliance with all of its financial and operating covenants required to be maintained under its debt instruments for all periods presented.

5.  Supplementary Balance Sheet Information (in thousands)

The composition of property, plant and equipment follows:

 

July 31,

 

     2002     

 

     2001     

 

 

 

 

Land and land improvements

$ 223,753

 

$ 164,950

Buildings and terminals

475,706

 

367,462

Machinery and equipment

264,019

 

278,118

Automobiles and trucks

18,581

 

16,519

Furniture and fixtures

145,725

 

72,827

Construction in progress

     63,284

 

     21,343

 

1,191,068

 

921,219

Accumulated depreciation

  (277,262)

 

  (230,102)

Property, plant and equipment, net

$ 913,806

 

$ 691,117

Depreciation expense for the fiscal years ended July 31, 2002, 2001 and 2000 totaled $63.6 million, $55.6 million and $52.1 million, respectively.

The composition of intangible assets follows:

 

July 31,

 

    2002    

 

    2001    

 

 

 

 

Indefinite lived intangibles

 

 

 

 

Trademarks

$  58,008

 

$  42,741

 

Other intangible assets

6,224

 

4,445

 

Goodwill

156,955

 

151,373

 

Excess reorganization value

    14,145

 

    24,594

 

 

235,332

 

223,153

 

 

 

 

 

Amortizable intangible assets

 

 

 

 

Trademarks

$       250

 

$          --

 

Other intangible assets

   56,934

 

  43,846

 

57,184

 

43,846

 

 

 

 

Total intangible assets

$292,516

 

$266,999

Accumulated amortization

   (74,930)

 

   (72,035)

 

$217,586

 

$194,964

Amortization expense for the fiscal years ended July 31, 2002, 2001 and 2000 totaled $3.4 million, $9.9 million and $9.6 million, respectively. The Company acquired $13.3 million of amortizable intangible assets through business combinations in fiscal 2002, consisting of $9.4 million of property management contracts, $3.4 million for a franchise agreement, $250,000 of trademarks and $200,000 of other intangibles, with useful lives ranging from 1 to 20 years. In addition, the Company acquired $25.9 million of non-amortizable intangible assets through business combinations in fiscal 2002 consisting of $15.3 million of trademarks, $8.8 million of goodwill and $1.8 million of other intangible assets. These additions were offset by a reduction of excess reorganization value of $10.4 million and the write-off of goodwill related to Village at Breckenridge of $3.3 million.

The composition of accounts payable and accrued expenses follows:

 

July 31,

 

    2002    

 

    2001    

 

 

 

 

Trade payables

$ 55,586

 

$ 41,880

Deferred revenue

15,158

 

23,952

Deposits

15,720

 

13,501

Accrued salaries and wages

16,439

 

18,478

Self insurance reserves (medical and worker's comp)

11,169

 

9,925

Accrued interest

8,159

 

5,323

Property taxes

6,666

 

4,579

Liability to complete real estate sold, short term

3,507

 

5,723

Other accruals

      7,826

 

      5,789

 

$140,230

 

$129,150

6.  Retirement and Profit Sharing Plans

The Company maintains a defined contribution retirement plan (the "Plan"), qualified under Section 401(k) of the Internal Revenue Code, for its employees. Employees are eligible to participate in the Plan upon satisfying the following requirements: (1) the employees must be at least 21 years old, and (2) the employees must complete either (a) 1,500 hours of service since employment commencement date, provided that no employees who complete 1,500 hours of service are eligible to participate in the Plan earlier than the first anniversary of their employment commencement date, or (b) a 12-consecutive-month period beginning on their employment commencement date, or any subsequent 12-consecutive-month period beginning on the anniversary of their employment commencement date, during which they are credited with 1,000 or more hours of service. Participants may contribute from 2% to 22% of their qualifying annual compensation up to the annual maximum specified by the Internal Revenue Code. The Company matches an amount equal to 50% of each participant's contribution up to 6% of a participant's annual qualifying compensation. The Company's matching contribution is entirely discretionary and may be reduced or eliminated at any time.

Total retirement plan expense recognized by the Company for the fiscal years ended July 31, 2002, 2001 and 2000 was $1.9 million, $1.8 million and $1.5 million, respectively.

7.  Income Taxes

At July 31, 2002, the Company has total federal net operating loss ("NOL") carryovers of approximately $257 million for income tax purposes that expire in the calendar years 2004 through 2008. The Company will only be able to use these NOLs to the extent of approximately $8.0 million per year through October 8, 2007 (Section 382 amount). Consequently, the accompanying financial statements and table of deferred items only recognize benefits related to the NOLs to the extent of the Section 382 amount.

At July 31, 2002 the Company has approximately $1.1 million in unused general business credit carryovers that expire in the years 2010 through 2021.

The decrease in the valuation allowance of $0.5 million from July 31, 2001 to July 31, 2002 is based on the completion of certain income tax examinations and management's on-going judgements regarding the realizability of deferred tax assets. Management has determined that it is more likely than not that a portion of the deferred tax assets may not be realized.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of July 31, 2002 and 2001 are as follows (in thousands):

 

July 31,

 

    2002   

 

    2001   

Deferred income tax liabilities:

 

 

 

 

Fixed assets

$ 92,548

 

$ 88,207

 

Intangible assets

17,742

 

18,944

 

Other, net

     3,147

 

     5,692

 

Total

113,437

 

112,843

Deferred income tax assets:

 

 

 

 

Accrued expenses

5,190

 

6,889

 

Net operating loss carryforwards

15,162

 

5,294

 

Minimum and other tax credits

1,097

 

6,474

 

Deferred membership revenue

19,515

 

11,127

 

Other, net

     9,936

 

     5,157

 

Total

50,900

 

34,941

Valuation allowance for deferred income taxes

     (464)

 

  (1,041)

Deferred income tax assets, net of valuation allowance

   50,436

 

   33,900

Net deferred income tax liability

 $63,001

 

$ 78,943

The net current and non-current components of deferred income taxes recognized in the July 31, 2002 and 2001 balance sheets are as follows (in thousands):

 

July 31,

 

    2002    

 

    2001    

 

 

 

 

Net current deferred income tax asset

$  10,433

 

$ 12,647

Net non-current deferred income tax liability

   73,434

 

    91,590

 

Net deferred income tax liability

$  63,001

 

 $ 78,943

Significant components of the provision for income taxes from continuing operations are as follows (in thousands):

 

Fiscal Year Ended

 

July 31,

 

    2002   

 

    2001   

 

    2000   

Current:

 

 

 

 

 

 

Federal

$    7,506

 

$    2,551

 

$   2,381

 

State

      2,552

 

         783

 

     1,404

 

Total current

10,058

 

3,334

 

3,785

Deferred:

 

 

 

 

 

 

Federal

(1,489)

 

6,332

 

4,384

 

State

   (1,226)

 

      (542)

 

        455 

 

Total deferred

(2,715)

 

5,790

 

4,839

Tax benefit related to exercise of stock options and issuance of restricted stock

           47

 

      2,046

 

        183

 

$    7,390

 

$  11,170

 

$   8,807

A reconciliation of the income tax provision from continuing operations and the amount computed by applying the U.S. federal statutory income tax rate to income from continuing operations before income taxes is as follows:

 

Fiscal Year Ended

 

July 31,

 

    2002   

 

    2001  

 

    2000   

 

 

 

 

 

 

At U.S. federal income tax rate

35.0%

 

35.0%

 

35.0%

State income tax, net of federal benefit

5.2%

 

2.9%

 

3.0%

Benefit of state tax reduction

0.0%

 

(0.8%)

 

0.0%

Goodwill and excess reorganization value amortization

0.0%

 

4.8%

 

6.2%

Nondeductible compensation

7.0%

 

0.0%

 

0.0%

Other

   (2.9%)

 

     3.1%

 

     1.7%

 

   44.3%

 

   45.0%

 

   45.9%

8.  Related Party Transactions

Operating expenses include an annual fee for management services provided by Apollo Advisors, an affiliate of the majority holder of the Company's Class A Common Stock. This fee is generally settled partly in cash and partly in services rendered by the Company to Apollo Advisors and its affiliates. The fee for the years ended July 31, 2002, 2001 and 2000 was $500,000 each year. At July 31, 2002, the Company had a receivable with respect to this arrangement of $0.1 million. At July 31, 2001, the Company's liability with respect to this arrangement was $0.4 million.

Vail Associates has the right to appoint 4 of 9 directors of the Beaver Creek Resort Company of Colorado ("Resort Company"), a non-profit entity formed for the benefit of property owners and certain others in Beaver Creek. Vail Associates has a management agreement with the Resort Company, renewable for one-year periods, to provide management services on a fixed fee basis. During fiscal years 1991 through 2002, the Resort Company was able to meet its operating requirements through its own operations. Management fees and reimbursement of operating expenses paid to the Company under its agreement with the Resort Company during the years ended July 31, 2002, 2001 and 2000 totaled $6.7 million, $6.6 million and $5.7 million, respectively. At July 31, 2002 the Company had a receivable with respect to this arrangement of $0.6 million; there was no receivable as of July 31, 2001.

In 1991, the Company loaned to Andrew P. Daly, the Company's President, $300,000, $150,000 of which bears interest at 9% per annum and the remainder of which is non-interest bearing. The principal sum plus accrued interest is due no later than October 1, 2003, or, if earlier, the first anniversary of the date on which Mr. Daly's employment agreement with the Company is terminated for any reason other than (i) by Vail without "cause" or (ii) by Mr. Daly for "good reason", as defined in the employment agreement. The proceeds of the loan were used to finance the purchase and improvement of real property. The loan is collateralized by a deed of trust on such property.

In 1995, the spouse of Andrew P. Daly, the Company's President, received financial terms more favorable than those available to the general public in connection with her purchase of a homesite at Bachelor Gulch Village. Rather than payment of an earnest money deposit with the entire balance due in cash at closing, the contract provides for no earnest money deposit with the entire purchase price (which was below fair market value) to be paid under a promissory note of $438,750. Mrs. Daly's note is collateralized by a first deed of trust and amortized over 25 years at a rate of 8% per annum interest, with a balloon payment due on the earlier of December 30, 2006 or one year from the date Mr. Daly's employment with the Company is terminated.

In 1999, the Company entered into an agreement with William A. Jensen, Senior Vice President and Chief Operating Officer for Vail, whereby the Company invested in the purchase of a primary residence for Mr. and Mrs. Jensen in Vail, Colorado. The Company contributed $1,000,000 towards the purchase price of the residence and thereby obtained an approximate 49% undivided ownership interest in such residence. The Company shall be entitled to receive its proportionate share of the resale price of the residence, less certain deductions, upon the earlier of the resale of the residence or within approximately 18 months after Mr. Jensen's termination of employment from the Company.

In February 2001, the Company invested in the purchase of a primary residence in the Vail Valley for Martin White, Senior Vice President of Marketing for the Company. The Company contributed $600,000 towards the purchase price of the residence and thereby obtained an approximate 37.5% undivided ownership interest in such residence. In addition, the Company has agreed to fund certain future improvements to the property, not to exceed 50% of the fair value of the property. The Company shall be entitled to receive its proportionate share of the resale price of the residence, less certain deductions, upon the earlier of the resale of the residence or within approximately 18 months after Mr. White's termination of employment from the Company.

In February 2001, the Company invested in the purchase of a primary residence in Breckenridge, Colorado for Roger McCarthy, Chief Operating Officer for Breckenridge. The Company contributed $400,000 towards the purchase price of the residence and thereby obtained an approximate 40% undivided ownership interest in such residence. The Company shall be entitled to receive its proportionate share of the resale price of the residence, less certain deductions, upon the earlier of the resale of the residence or within approximately 18 months after Mr. McCarthy's termination of employment from the Company.

In July 2002, RockResorts entered into an agreement with Edward E. Mace, President of RockResorts and of Vail Resorts Lodging Company, whereby RockResorts invested in the purchase of a residence for Mr. Mace and his family in Eagle County, Colorado. RockResorts contributed $900,000 towards the purchase price of the residence and thereby obtained an approximate 47% undivided ownership in such residence. Upon the resale of the residence, or within 18 months of the termination of Mr. Mace's employment with the Company, whichever is earlier, RockResorts shall be entitled to receive its proportionate share of the resale price of the residence, less certain deductions.

In July 2002, the Company purchased from Richard Lesman, Vice President of Sales for the Company, and his spouse, Mary Lesman, his former residence located in Carmel, Indiana, for a price of $511,250, which approximates the recently appraised value. The purchase was made to facilitate Mr. Lesman's move in connection with his employment by the Company. The residence is currently held for sale.

RockResorts serves as the management company for five luxury resorts that are owned indirectly by Olympus Real Estate Partners ("Olympus"), the Company's minority partner in the RockResorts joint venture. Management and other receivables from these five properties amount to $279,000 at July 31, 2002, which is included in trade receivables in the accompanying 2002 balance sheet.

9.  Commitments and Contingencies

Smith Creek Metropolitan District ("SCMD") and Bachelor Gulch Metropolitan District ("BGMD") were organized in November 1994 to cooperate in the financing, construction and operation of basic public infrastructure serving the Company's Bachelor Gulch Village development. SCMD was organized primarily to own, operate and maintain water, street, traffic and safety, transportation, fire protection, parks and recreation, television relay and translation, sanitation and certain other facilities and equipment of the BGMD. SCMD is comprised of approximately 150 acres of open space land owned by the Company and members of the Board of Directors of the SCMD. In two planned unit developments, Eagle County has granted zoning approval for 1,395 dwelling units within Bachelor Gulch Village, including various single-family homesites, cluster homes and townhomes, and lodging units. As of July 31, 2002, the Company has sold 104 single-family homesites and 21 parcels to developers for the construction of various types of dwelling units. Currently, SCMD has outstanding $27.9 million of variable rate revenue bonds maturing on October 1, 2035, which have been enhanced with a $29.6 million letter of credit issued against the Company's Credit Facility. It is anticipated that as the Bachelor Gulch community expands, BGMD will become self supporting and that within 25 to 30 years will issue general obligation bonds, the proceeds of which will be used to retire the SCMD revenue bonds. Until that time, the Company has agreed to subsidize the interest payments on the SCMD revenue bonds. The Company has estimated that the present value of this aggregate subsidy to be $14.8 million at July 31, 2002, and has recorded the entire amount as a liability in the accompanying financial statements. The total subsidy incurred as of July 31, 2002 and 2001 was $10.0 million and $8.5 million, respectively.

Holland Creek Metropolitan District ("HCMD") and Red Sky Ranch Metropolitan District ("RSRMD") were organized in December 2000 to cooperate in the financing, construction and operation of basic public infrastructure serving the Company's Red Sky Ranch development. HCMD was organized primarily to own, operate and maintain water, street, traffic and safety, transportation, fire protection, parks and recreation, television relay and translation, sanitation and certain other facilities and equipment of RSRMD. HCMD is comprised of approximately 150 acres of open space land owned by the Company and members of the Board of Directors of HCMD. In two planned unit developments, Eagle County has granted zoning approval for 87 dwelling units, two golf courses, and related facilities for the property within the districts. Seven of the dwelling units are owned by a third party developer. The Company's current plans call for approximately 53 home sites to be sold over the next two years, and all 80 units to be constructed over the next eleven years. As of July 31, 2002, the Company has sold 30 of the 53 home sites, and has placed an additional 14 home sites under contract. The Company expects to begin closing on these lots before the end of the calendar year 2002. Currently, HCMD has outstanding $12 million of variable rate revenue bonds maturing on June 1, 2041, which have been enhanced with a $12.1 million letter of credit issued against the Company's Credit Facility (as defined herein). It is anticipated that, as Red Sky Ranch expands, RSRMD will become self supporting and that within 5 to 15 years it will issue general obligation bonds, the proceeds of which will be used to retire the HCMD revenue bonds. Until that time, the Company has agreed to subsidize the interest payments on the HCMD revenue bonds. The Company has estimated that the present value of this aggregate subsidy to be $1.9 million at July 31, 2002, and has recorded that amount as a liability in the accompanying financial statements. The total subsidy incurred as of July 31, 2002 and 2001 was $317,000 and $0, respectively.

The Company has ownership interests in four entities (BC Housing LLC, The Tarnes at BC, LLC, Tenderfoot Seasonal Housing, LLC and Breckenridge Terrace, LLC) which were formed to construct, own and operate employee housing facilities in and around Beaver Creek, Keystone and Breckenridge. The Company's ownership interest in each entity ranges from 26% to 50%. Each entity has issued interest only taxable bonds with weekly low-floater rates tied to LIBOR (the "Housing Bonds") in two series, Tranche A and Tranche B. The Housing Bonds do not have stated maturity dates. The Tranche A Housing Bonds have principal amounts which range from $5.7 million to $15 million ($37.8 million in the aggregate), enhanced with letters of credit issued against the Company's Credit Facility in amounts ranging from $5.8 million to $15.2 million ($38.3 million in aggregate). The Tranche B Housing Bonds range in principal amount from $1.5 million to $5.9 million ($14.8 million in aggregate) and are collateralized by the assets of the entities. The proceeds of the Housing Bonds were used to construct the housing facilities. The housing facilities (except Breckenridge Terrace, LLC) are located on land owned by the Company which is leased to each respective entity. The Company has the right to use a certain percentage of the units in the housing facilities to provide seasonal housing for its employees in return for a rental payment. In aggregate, the Company paid rents of $7.0 million, $6.5 million and $2.8 million to the four entities for the fiscal years ended July 31, 2002, 2001 and 2000, respectively.

At July 31, 2002, the Company had various other letters of credit outstanding in the aggregate amount of $13.8 million.

The Company is self-insured for medical and workers' compensation. The self-insurance liability related to workers' compensation is determined actuarially based on claims filed. The self-insurance liability related to medical claims includes an estimate for claims incurred but not yet reported based on the time lag between when a claim is incurred and when the claim is paid by the Company. The amounts related to these claims are included as a component of accounts payable and accrued expenses as noted in Note 5. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, reserves are adequate to cover the future payment of claims. However, it is reasonably possible that recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded from ultimate claims payments will be reflected in operations in the period in which such adjustments are known.

In June 1998, the Company and GSSI LLC ("GSSI") formed a joint venture, SSV, a retail/rental operation. At any time during the sixty-day period beginning August 1, 2003 and during the corresponding sixty-day period every year thereafter, each of the Company and GSSI have the right to require the Company to purchase from GSSI, and GSSI to sell to the Company, GSSI's ownership interest in SSV. The put/call purchase price will be based on a multiple of earnings before interest, taxes, and amortization.

The Company has executed as lessee operating leases for the rental of office space, employee residential units and office equipment through fiscal 2008. For the fiscal years ended July 31, 2002, 2001 and 2000, the Company recorded lease expense related to these agreements of $15.4 million, $22.9 million and $20.1 million, respectively, which is included in the accompanying consolidated statements of operations.

Future minimum lease payments under these leases as of July 31, 2002 are as follows (in thousands):

2003

$ 8,475

2004

6,088

2005

5,133

2006

4,781

2007

3,740

Thereafter

  19,389

Total

$ 47,606

The Company is a party to various lawsuits arising in the ordinary course of business. Management believes the Company has adequate insurance coverage and accrued loss contingencies for all matters and that, although the ultimate outcome of such claims cannot be ascertained, current pending and threatened claims are not expected to have a material adverse impact on the financial position, results of operations and cash flows of the Company.

The U.S. Army Corps of Engineers alleged in 1999 that certain road construction which the Company undertook as part of the Blue Sky Basin expansion involved discharges of fill material into wetlands in violation of the Clean Water Act. A subsequent review confirmed that the wetland impact involved approximately seven-tenths of one acre, although subsequent judicial decisions under the Clean Water Act may reduce the extent of the jurisdictional impact. Subsequently, the Environmental Protection Agency, the lead enforcement agency in this matter, ordered the Company to stabilize the road temporarily and restore the wetland in the summer of 2000. (EPA--Region VIII, Docket No. CWA-8-2000-01). The Company has completed the restoration work on the wetland impact (subject to future monitoring requirements), pursuant to the restoration plan approved by the EPA. The EPA is considering enforcement action, and settlement discussions between the EPA and the Company are continuing. Although the Company cannot guarantee a particular result, based on the facts and circumstances of the matter, the Company does not anticipate that the ultimate outcome will have a material adverse impact on its financial condition or results of operations.

10. Segment Information

The Company has three reportable segments: mountain, lodging and real estate operations. As a result of a change in the Company's business operations, the Company stopped reporting Technology as a separate segment on April 30, 2002. In addition, as of July 31, 2002, the Company has broken down its former Resort segment into two new reporting segments: Mountain, which includes the operations of the Company's ski resorts and related ancillary activities, and Lodging, which includes the operations of all of the Company's owned hotels, RockResorts, GTLC, condominium management, and golf operations. The real estate segment develops, buys and sells real estate in and around the Company's mountain 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 evaluates performance and allocates resources to its segments based on EBITDA, as previously defined. Mountain EBITDA consists of net mountain revenue plus mountain equity investment income less mountain operating expense. Lodging EBITDA consists of net lodging revenue plus lodging equity investment income less lodging operating expense. Real estate EBITDA consists of net real estate revenue plus real estate equity investment income less real estate operating expense. All segment expenses include an allocation of corporate administrative expense. Assets are not allocated between segments, except as shown in the table below, or used to evaluate performance or allocate resources to the segments. The accounting policies specific to each segment are the same as those described in the Summary of Significant Accounting Policies (Note 2).

Following is key financial information by reportable segment and is used by management in evaluating performance and allocating resources (in thousands):

 

Fiscal Year Ended

 

July 31,

 

     2002   

 

     2001   

 

    2000    

Net revenue:

 

 

 

 

 

 

Mountain

$  400,478

 

$391,373

 

$373,786

 

Lodging

150,928

 

124,207

 

116,610

 

Real estate

      63,854

 

    28,200

 

    48,660

 

$  615,260

 

$543,780

 

$539,056

Equity investment income/(loss):

 

 

 

 

 

 

Mountain

$      1,977

 

$    1,514

 

$    2,713

 

Lodging

--

 

(1,245)

 

--

 

Real estate

        2,744

 

     7,043

 

      3,024

 

$      4,721

 

$    7,312

 

$    5,737

EBITDA:

 

 

 

 

 

 

Mountain

$    93,254

 

$  94,873

 

$  92,363

 

Lodging

13,738

 

13,646

 

13,040

 

Real estate

      15,246

 

   12,272

 

      9,618

 

$  122,238

 

$120,791

 

$115,021

Capital expenditures:

 

 

 

 

 

 

Mountain and lodging

$    76,234

 

$  57,814

 

$  76,656

 

Real estate

      68,705

 

    39,172

 

    40,410

 

$  144,939

 

$  96,986

 

$117,066

Identifiable assets:

 

 

 

 

 

 

Mountain and lodging

$  913,806

 

$691,117

 

$660,450

 

Real estate

    161,778

 

  159,177

 

  147,172

 

$1,075,584

 

$850,294

 

$807,622

 

 

 

 

 

 

Reconciliation to consolidated income before provision for income taxes:

 

 

 

 

 

Mountain EBITDA

$     93,254

 

$  94,873

 

$  92,363

Lodging EBITDA

13,738

 

13,646

 

13,040

Real estate EBITDA

     15,246

 

   12,272

 

     9,618

 

Total EBITDA

122,238

 

120,791

 

115,021

Depreciation and amortization expense

(67,027)

 

(65,478)

 

(61,748)

Other income (expense):

 

 

 

 

 

 

Investment income

1,644

 

2,547

 

1,843

 

Interest expense

(39,271)

 

(32,093)

 

(35,162)

 

Loss on disposal of fixed assets

(226)

 

(143)

 

(104)

 

Other income (expense)

155

 

(38)

 

32

 

Minority interest in income of consolidated joint venture

         (850)

 

      (785)

 

      (713)

Income before provision for income taxes

$    16,663

 

$ 24,801

 

$ 19,169

11.  Stock Compensation Plans

At July 31, 2002, the Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for stock-based compensation to employees. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's three stock-based compensation plans been determined consistent with SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

 

July 31,

 

    2002   

 

    2001   

 

    2000   

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

As reported

$  7,565

 

$13,631

 

$10,362

 

Pro forma

4,060

 

9,897

 

6,594

 

 

 

 

 

 

Basic net income per common share

 

 

 

 

 

 

As reported

$    0.21

 

$    0.39

 

$    0.30

 

Pro forma

0.12

 

0.28

 

0.19

 

 

 

 

 

 

Diluted net income per common share

 

 

 

 

 

 

As reported

$    0.21

 

$    0.39

 

$    0.30

 

Pro forma

0.12

 

0.28

 

0.19

The Company has three fixed option plans--the 1993 Stock Option Plan ("1993 Plan"), the 1996 Long Term Incentive and Share Award Plan ("1996 Plan") and the 1999 Long Term Incentive and Share Award Plan ("1999 Plan"). Under the 1993 Plan, incentive stock options (as defined under Section 422 of the Internal Revenue Code of 1986) or non-incentive stock options covering an aggregate of 2,045,510 shares of Common Stock may be issued to key employees, directors, consultants, and advisors of the Company or its subsidiaries. Exercise prices and vesting dates for options granted under the 1993 Plan are set by the Compensation Committee of the Company's Board of Directors ("Compensation Committee"), except that the vesting period must be at least six months and exercise prices for incentive stock options may not be less than the stock's market price on the date of grant. The terms of the options granted under the 1993 Plan are determined by the Compensation Committee, provided that all incentive stock options granted have a maximum life of ten years. 1,500,000 and 2,500,000 shares of Common Stock may be issued in the form of options, stock appreciation rights ("SARs"), restricted shares, restricted share units, performance shares, performance share units, dividend equivalents or other share-based awards under the 1996 Plan and the 1999 Plan, respectively. Under the 1996 Plan and the 1999 Plan, awards may be granted to employees, directors or consultants of the Company or its subsidiaries or affiliates. The terms of awards granted under the 1996 Plan and 1999 Plan, including exercise price, vesting period and life, are set by the Compensation Committee. To date, no options have been granted to non-employees (except those granted to non-employee members of the board of directors of a consolidated subsidiary) under any of the three plans. At July 31, 2002, approximately 53,000, 88,000 and 183,000 options were available under the 1993 Plan, 1996 Plan and 1999 Plan, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yield of 0% for each year, expected volatility of 38.5%, 35.9% and 39.9%; risk-free interest rates of 3.92%, 5.99% and 6.03%; and an expected life of five years for each year. A summary of the status of the Company's three fixed stock option plans as of July 31, 2002, 2001 and 2000 and changes during the years ended July 31, 2002, 2001 and 2000 is presented below (in thousands, except per share amounts):

 

Shares Subject to

 

Weighted Average Exercise Price

Fixed Options

Option

 

Per Share

Balance at July 31, 1999

2,379

 

$ 19.65

 

Granted

766

 

19.61

 

Exercised

(36)

 

8.82

 

Forfeited

     (123)

 

    23.24

Balance at July 31, 2000

2,986

 

$ 19.54

 

Granted

714

 

19.22

 

Exercised

(490)

 

9.16

 

Forfeited

     (172)

 

    21.83

Balance at July 31, 2001

   3,038

 

 $ 21.24

 

Granted

881

 

14.35

 

Exercised

(25)

 

12.49

 

Forfeited

     (84)

 

    19.54

Balance at July 31, 2002

   3,810

 

 $ 19.67

The following table summarizes information about fixed stock options outstanding at July 31, 2002, 2001 and 2000 (in thousands, except per share and life amounts):

 

 

                  Options Outstanding                

 

    Options Exercisable    

Exercise Price Range Per

 

Shares

 

Weighted-Average Remaining Contractual Life Per

 

Weighted-Average Exercise Price Per

 

Shares

 

Weighted-Average Exercise Price Per

    Share     

 

Outstanding

 

      Share      

 

      Share     

 

Exercisable

 

      Share     

July 31, 2002:

 

 

 

 

 

 

 

 

$      6-11

 

75

 

2.0

 

$    9.28

 

75

 

$    9.28

16-20

 

2,414

 

7.6

 

17.65

 

1,039

 

19.36

>20-25

 

1,184

 

6.0

 

23.55

 

1,072

 

23.84

    >25-29

 

     137

 

  5.9

 

      27.31

 

     127

 

      27.38

$      6-29

 

3,810

 

6.9

 

$  19.67

 

2,313

 

$  21.55

July 31, 2001:

 

 

 

 

 

 

 

 

$      6-11

 

89

 

2.9

 

$    9.16

 

89

 

$    9.16

16-20

 

1,608

 

7.7

 

19.62

 

658

 

19.55

>20-25

 

805

 

6.8

 

22.90

 

604

 

23.56

    >25-29

 

     536

 

  7.2

 

      25.59

 

     386

 

      25.74

$      6-29

 

3,038

 

7.2

 

$  21.24

 

1,737

 

$  21.79

July 31, 2000:

 

 

 

 

 

 

 

 

$      6-11

 

563

 

3.4

 

$    8.86

 

548

 

$    8.81

16-20

 

1,051

 

8.0

 

19.29

 

385

 

19.82

>20-25

 

1,223

 

7.9

 

23.73

 

551

 

24.01

   >25-29

 

      149

 

  7.9

 

     27.31

 

       87

 

     27.42

$      6-29

 

2,986

 

7.1

 

$  19.54

 

1,571

 

$  17.87

During fiscal years 2002 and 2001 the Company granted restricted stock to certain executives under the 1999 Plan and the 1996 Plan. The aggregate number of shares granted totaled 165,000 and 36,375 in fiscal 2002 and 2001, respectively. The shares vest and are issued in equal increments over periods ranging from 22 months to three years. Compensation expense related to these restricted stock awards is charged ratably over the respective vesting periods. During fiscal 2002, 2001 and 2000 the Company issued 8,270, 8,619 and 13,176 shares of restricted stock, respectively.

12.  Capital Stock

The Company has two classes of Common Stock outstanding, Class A Common Stock and Common Stock. The rights of holders of Class A Common Stock and Common Stock are substantially identical, except that, while any Class A Common Stock is outstanding, holders of Class A Common Stock elect a class of directors that constitutes two-thirds of the Board of Directors and holders of Common Stock elect another class of directors constituting one-third of the Board of Directors. At July 31, 2002 and 2001, one shareholder owned substantially all of the Class A Common Stock and, as a result, has effective control of the Company's Board of Directors. The Class A Common Stock is convertible into Common Stock (i) at the option of the holder, (ii) automatically, upon transfer to a non-affiliate and (iii) automatically if less than 5,000,000 shares (as such number shall be adjusted by reason of any stock split, reclassification or other similar transaction) of Class A Common Stock are outstanding. The Common Stock is not convertible. Each outstanding share of Class A Common Stock and Common Stock is entitled to vote on all matters submitted to a vote of stockholders. There were no shares of Class A Common Stock converted to Common Stock during fiscal 2002, 2001, or 2000.

13.  Selected Quarterly Financial Data (Unaudited--In thousands, except per share amounts)

 

                                        Fiscal 2002                                        

 

Year

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

July 31,

 

July 31,

 

April 30,

 

January 31,

 

October 31,

 

   2002   

 

   2002   

 

   2002   

 

   2002   

 

      2001      

 

 

 

 

 

 

 

 

 

 

Mountain revenue

$400,478

 

$  31,858

 

$193,243

 

$    145,960

 

$      29,417

Lodging revenue

150,928

 

40,708

 

49,096

 

32,517

 

28,607

Real estate revenue

    63,854

 

      9,500

 

      4,323

 

        35,037

 

        14,994

 

Total revenue

615,260

 

82,066

 

246,662

 

213,514

 

73,018

Income (loss) from operations

50,490

 

(46,995)

 

88,109

 

44,354

 

(34,978)

Income (loss) before cumulative effect of change in accounting principle

9,273

 

(35,064)

 

47,033

 

21,727

 

(24,423)

 

Cumulative effect of change in accounting principle

   (1,708)

 

            --

 

            --

 

                 --

 

       (1,708)

Net income (loss)

7,565

 

(35,064)

 

47,033

 

21,727

 

(26,131)

Income (loss) before cumulative effect of change in accounting principle, per common share

0.26

 

(1.00)

 

1.34

 

0.62

 

(0.70)

Cumulative effect of change in accounting principle, per common share

     (0.05)

 

            --

 

            --

 

                 --

 

          (0.05)

Basic net income (loss) per common share

0.21

 

(1.00)

 

1.34

 

0.62

 

(0.75)

Diluted net income (loss) per common share

$      0.21

 

(1.00)

 

$      1.34

 

$          0.62

 

$        (0.75)

 

 

 

 

 

 

 

 

 

 

 

                                        Fiscal 2001                                         

 

Year

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

July 31,

 

July 31,

 

April 30,

 

January 31,

 

October 31,

 

   2001  

 

   2001   

 

   2001   

 

      2001      

 

      2000      

 

 

 

 

 

 

 

 

 

 

Mountain revenue

$391,373

 

$  26,844

 

$184,997

 

$    153,284

 

$      26,248

Lodging revenue

124,207

 

32,807

 

34,764

 

25,383

 

31,253

Real estate revenue

    28,200

 

      2,999

 

      6,414

 

          9,811

 

          8,976

 

Total revenue

543,780

 

62,650

 

226,175

 

188,478

 

66,477

Income (loss) from operations

48,001

 

(36,498)

 

79,948

 

37,986

 

(33,435)

Net income (loss)

13,631

 

(19,094)

 

40,798

 

15,561

 

(23,634)

Basic net income (loss) per common share

0.39

 

(0.54)

 

1.17

 

0.44

 

(0.68)

Diluted net income (loss) per common share

$      0.39

 

(0.54)

 

$      1.17

 

$          0.44

 

$        (0.68)

As announced in the Company's Form 10-Q for the nine months ended April 30, 2002, the Company changed its method of revenue recognition for private club membership initiation fees from an immediate-recognition basis to a deferred basis. At the time the Company filed its April 30, 2002 Form 10-Q, the Company used a period of 12 years as the deferral period for membership initiation fee recognition. After consultation with the Securities and Exchange Commission, the Company is now deferring membership initiation fee revenue over the estimated life of the club facilities, which the Company has estimated to be 30 years. The Company has also reclassified income from equity-method investments out of operating income and is now presented as a component of other income and expense. The following table presents a comparison of the quarterly financial data as reported in the April 30, 2002 Form 10-Q to the Company's current presentation.

 

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

 

 

April 30, 2002

 

January 31, 2002

 

October 31, 2001

 

 

 

As

 

Previously

 

Percent

 

As

 

Previously

 

Percent

 

As

 

Previously

 

Percent

 

 

 

Restated

 

Reported

 

Change

 

Restated

 

Reported

 

Change

 

Restated

 

Reported

 

Change

Mountain revenue

 

$ 193,243

 

$ 193,892

 

(0.3)%

 

$ 145,960

 

$ 147,064

 

(0.8)%

 

$ 29,417

 

$ 30,188

 

(2.6)%

Lodging revenue

 

49,096

 

49,096

 

0.0 %

 

32,517

 

32,517

 

0.0 %

 

28,607

 

28,607

 

0.0 %

Real estate revenue

 

4,323

 

4,526

 

(4.5)%

 

35,037

 

36,651

 

(4.4)%

 

14,994

 

15,850

 

(5.4)%

 

Total revenue

 

246,662

 

247,514

 

(0.3)%

 

213,514

 

216,232

 

(1.3)%

 

73,018

 

74,645

 

(2.2)%

Income (loss) from operations

 

88,109

 

88,961

 

(1.0)%

 

44,354

 

47,072

 

(5.8)%

 

(34,978)

 

(33,351)

 

4.9 %

Income before cumulative effect of change in accounting principle

47,033

 

47,250

 

(0.5)%

 

21,727

 

21,941

 

(1.0)%

 

(24,423)

 

(24,224)

 

0.8 %

 

Cumulative effect of change in accounting principle

-

 

-

 

0.0 %

 

-

 

-

 

0.0 %

 

(1,708)

 

-

 

(100.0)%

Net income (loss)

 

47,033

 

47,250

 

(0.5)%

 

21,727

 

21,941

 

(1.0)%

 

(26,131)

 

(24,224)

 

7.9 %

Income before cumulative effect of change in accounting principle, per common share

$ 1.34

 

$ 1.34

 

0.0 %

 

$ 0.62

 

$ 0.62

 

0.0 %

 

$ (0.70)

 

$ (0.69)

 

1.4 %

 

Cumulative effect of change in accounting principle, per common share

-

 

-

 

0.0 %

 

-

 

-

 

0.0 %

 

(0.05)

 

-

 

(100.0)%

Basic net income (loss) per common share

1.34

 

1.34

 

0.0 %

 

0.62

 

0.62

 

0.0 %

 

(0.75)

 

(0.69)

 

8.7 %

Diluted net income (loss) per common share

$ 1.34

 

$ 1.34

 

0.0 %

 

$ 0.62

 

$ 0.62

 

0.0 %

 

$ (0.75)

 

$ (0.69)

 

8.7%

 

14.  Guarantor Subsidiaries and Non-Guarantor Subsidiaries

The Company's payment obligations under the 8.75% Senior Subordinated Notes due 2009 (see Note 4), 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 Boulder/Beaver LLC, Colter Bay Corporation, Eagle Park Reservoir Company, Forest Ridge Holdings, Inc., Gros Ventre Utility Company, Jackson Lake Lodge Corporation, Jenny Lake Lodge, Inc., Mountain Thunder, Inc., Resort Technology Partners, LLC, RT Partners, Inc., SSV, Vail Associates Investments, Inc., and VR Holdings, Inc. (together, the "Non-Guarantor Subsidiaries").

Presented below is the consolidated condensed financial information of Vail Resorts, Inc. (the "Parent Company"), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Financial information for Larkspur Restaurant & Bar, LLC ("Larkspur"), RockResorts and JHL&S, LLC ("JHL&S") are presented separately as the Company owns less than 100% of these Guarantor Subsidiaries. In 2002, Boulder/Beaver LLC, Resort Technology Partners, LLC and RT Partners, Inc are presented with Non-Guarantor Subsidiaries; in prior years they were presented with Guarantor Subsidiaries. Financial information for the Non-Guarantor subsidiaries is presented in the column titled "Other Subsidiaries". Balance sheet data is presented as of July 31, 2002 and 2001. Statement of operations and statement of cash flows data are presented for the years ended July 31 2002, 2001 and 2000.

Investments in subsidiaries are accounted for by the Parent Company and Guarantor Subsidiaries using the equity method of accounting. Net income 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 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 July 31, 2002

(in thousands of dollars)

Parent Company

100% Owned Guarantor Subsidiaries

JHL&S

Rock

Resorts

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Current assets:

Cash and cash equivalents

-

23,111

124

-

51

2,679

-

25,965

Receivables

-

27,595

881

602

117

2,642

-

31,837

Inventories, net

-

11,194

89

-

129

20,914

-

32,326

Deferred income taxes

1,138

9,294

-

-

-

1

-

10,433

Other current assets

-

7,657

137

-

7

1,054

-

8,855

Total current assets

1,138

78,851

1,231

602

304

27,290

-

109,416

Property, plant and equipment, net

-

867,117

30,203

-

852

15,634

-

913,806

Real estate held for sale

-

150,651

-

900

-

10,227

-

161,778

Deferred charges and other assets

9,450

24,154

-

34

-

521

-

34,159

Notes receivable

-

10,965

-

-

-

-

-

10,965

Intangible assets, net

-

184,852

2,077

10,617

-

20,040

-

217,586

Investments in subsidiaries and advances to (from) parent

865,717

(217,450)

(15,705)

-

-

(10,313)

(622,248)

-

Total assets

876,305

1,099,139

17,806

12,153

1,156

63,399

(622,248)

1,447,710

Current liabilities:

Accounts payable and accrued expenses

7,728

112,265

1,535

1,852

178

16,672

-

140,230

Income taxes payable

7,934

-

-

-

-

-

-

7,934

Long-term debt due within one year

-

2,854

900

-

-

1,000

-

4,754

Total current liabilities

15,662

115,119

2,435

1,852

178

17,672

-

152,918

Long-term debt

353,108

231,898

-

-

126

12,900

-

598,032

Other long-term liabilities

267

90,317

-

-

-

-

-

90,584

Deferred income taxes

-

71,791

-

-

-

1,643

-

73,434

Minority interest in net assets of consolidated subsidiaries

-

1,454

7,531

3,231

100

13,158

-

25,474

Total stockholders' equity

507,268

588,561

7,839

 7,070

752

18,026

(622,248)

507,268

Total liabilities and stockholders' equity

876,305

1,099,139

17,806

12,153

1,156

63,399

(6,22,248)

1,447,710

 

Supplemental Condensed Consolidating Balance Sheet

For the Year Ended July 31, 2001

(in thousands of dollars)

Parent Company

100% Owned Guarantor Subsidiaries

JHL&S

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Current assets:

Cash and cash equivalents

-

26,963

568

48

415

-

27,994

Receivables, net

-

24,053

596

77

1,026

-

25,752

Taxes receivable

939

-

-

-

-

-

939

Inventories, net

-

8,771

22

140

17,958

-

26,891

Deferred income taxes

1,138

10,495

-

-

1,014

-

12,647

Other current assets

-

7,755

6

42

874

-

8,677

Total current assets

2,077

78,037

1,192

307

21,287

-

102,900

Property, plant and equipment, net

-

653,062

22,183

975

14,897

-

691,117

Real estate held for sale

-

148,950

-

-

10,227

-

159,177

Deferred charges and other assets

5,750

23,259

-

-

80

-

29,089

Notes receivable

-

10,881

-

-

-

-

10,881

Intangible assets, net

-

180,179

2,041

-

12,744

-

194,964

Investments in subsidiaries and advances to (from) parent

694,159

(2,843)

(6,678)

-

(10,909)

(673,729)

-

Total assets

   701,986

   1,091,525

    18,738

   1,282

   48,326

   (673,729)

   1,188,128

Current liabilities:

Accounts payable and accrued expenses

4,703

111,329

1,092

179

11,847

-

129,150

Long-term debt due within one year

-

746

-

-

1,000

-

1,746

Total current liabilities

4,703

112,075

1,092

179

12,847

-

130,896

Long-term debt

200,000

171,306

-

128

15,200

-

386,634

Other long-term liabilities

534

60,644

-

-

-

-

61,178

Deferred income taxes

-

91,590

-

-

-

-

91,590

Minority interest in net assets of consolidated subsidiaries

-

4,365

8,647

100

7,969

-

21,081

Total stockholders' equity

496,749

651,545

8,999

875

12,310

(673,729)

496,749

Total liabilities and stockholders' equity

   701,986

   1,091,525

   18,738

   1,282

   48,326

   (673,729)

   1,188,128

 

 

Supplemental Condensed Consolidating Statement of Operations

For the Year Ended July 31, 2002

(in thousands of dollars)

Parent Company

100 % Owned Guarantor Subsidiaries

JHL&S

Rock Resorts

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Total revenues

        --

489,973

4,233

1,662

2,689

105,296

11,407

615,260

Total operating expenses

11,570

429,868

6,217

2,627

3,014

100,067

11,407

564,770

Income from operations

(11,570)

60,105

(1,984)

(965)

(325)

5,229

--

50,490

Other income (expense)

(27,998)

(8,507)

(291)

--

(1)

(901)

--

(37,698)

Equity investment income

--

4,721

--

--

--

--

--

4,721

Minority interest in net income of consolidated susidiaries

--

39

1,115

--

--

(2,004)

--

(850)

Income (loss) before income taxes

(39,568)

56,358

(1,160)

(965)

(326)

2,324

--

16,663

Benefit (provision) for income taxes

17,529

(24,919)

--

--

--

--

--

(7,390)

Net income (loss) before equity in

income of consolidated subsidiaries

(22,039)

31,439

(1,160)

(965)

(326)

2,324

--

9,273

Cumulative effect of change in accounting principle

--

(1,708)

--

--

--

--

--

(1,708)

Equity in income of consolidated

subsidiaries

29,604

(126)

--

--

--

--

(29,478)

--

Net income (loss)

7,565

29,605

(1,160)

(965)

(326)

2,324

(29,478)

7,565

 

Supplemental Condensed Consolidating Statement of Operations

For the Year Ended July 31, 2001

(in thousands of dollars)

Parent Company

100% Owned Guarantor Subsidiaries

JHL&S

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Total revenues

-

449,737

2,482

2,913

92,223

(3,575)

543,780

Total operating expenses

1,723

404,311

3,056

3,197

87,067

(3,575)

495,779

Income from operations

(1,723)

45,426

(574)

(284)

5,156

-

48,001

Other income (expense)

(18,219)

(10,133)

(247)

(16)

(1,112)

-

(29,727)

Equity investment income

-

7,312

0

-

-

-

7,312

Minority interest in net income of

consolidated subsidiaries

-

404

     402

-

(1,591)

-

(785)

Income (loss) before income taxes

(19,942)

43,009

(419)

(300)

2,453

-

24,801

Benefit (provision) for income taxes

8,635

(19,770)

   -

-

(35)

-

(11,170)

Net income (loss) before equity in

income of consolidated subsidiaries

(11,307)

23,239

(419)

(300)

2,418

-

13,631

Equity in income of consolidated

subsidiaries

24,938

1,699

  -

-

-

(26,637)

-

Net income (loss)

13,631

24,938

(419)

(300)

2,418

(26,637)

13,631

 

 

Supplemental Condensed Consolidating Statement of Operations

For the Year Ended July 31, 2000

(in thousands of dollars)

Parent Company

100% Owned Guarantor Subsidiaries

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Total revenues

-

460,900

2,074

78,713

(2,631)

539,056

Total operating expenses

1,656

414,204

2,538

75,753

(2,631)

491,520

Income from operations

(1,656)

46,696

(464)

2,960

-

47,536

Other income (expense)

(18,133)

(13,749)

(31)

(1,478)

-

(33,391)

Equity investment income

-

5,737

-

-

-

5,737

Minority interest in net income of

consolidated subsidiary

-

-

-

(713)

-

(713)

Income (loss) before income taxes

(19,789)

38,684

(495)

769

-

19,169

Benefit (provision) for income taxes

8,628

(17,435)

-

-

-

(8,807)

Net income (loss) before equity in

income of consolidated subsidiaries

(11,161)

21,249

(495)

769

-

10,362

Equity in income of consolidated

subsidiaries

21,523

274

-

-

(21,797)

-

Net income (loss)

10,362

21,523

(495)

769

(21,797)

10,362

 

 

 

Supplemental Condensed Consolidating Statement of Cash Flows

 

For the Year Ended July 31, 2002

 

(in thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent Company

100% Owned Guarantor Subsidiaries

JHL&S

 

Rock Resorts

Larkspur

 

Other Subsidiaries

Eliminating Entries

Consolidated

Cash flows from operating activities

16,999

 

106,108

 

(737)

 

900

 

(175)

 

8,579

 

-

 

131,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

-

 

(61,536)

 

(8,734)

 

-

 

(34)

 

(5,930)

 

-

 

(76,234)

Investments in real estate

-

 

(67,805)

 

-

 

(900)

 

-

 

-

 

-

 

(68,705)

Cash paid in acquisitions

-

 

(163,130)

 

-

 

-

 

-

 

(1,640)

 

-

 

(164,770)

Investments in/distributions from equity investments

-

 

6,549

 

-

 

-

 

-

 

-

 

-

 

6,549

Advances to (from) affiliates

(164,957)

 

153,092

 

9,027

 

 

 

 

 

838

 

-

 

(2,000)

Other investing activities

-

 

223

 

-

 

-

 

-

 

44

 

-

 

267

Net cash provided by (used in) investing activities

(164,957)

 

(132,607)

 

293

 

(900)

 

(34)

 

(6,688)

 

-

 

(304,893)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financing activities

(4,688)

 

(2,968)

 

-

 

-

 

41

 

-

 

-

 

(7,615)

Proceeds from borrowings under long-term debt

152,646

 

584,035

 

-

 

-

 

650

 

-

 

-

 

737,331

Payments on long-term debt

-

 

(548,033)

 

-

 

-

 

(478)

 

(2,300)

 

-

 

(550,811)

Distributions to minority shareholders

-

 

                    -

 

-

 

-

 

-

 

          (1,261)

 

-

 

(1,261)

Net cash provided by (used in) financing activities

147,958

 

33,034

 

-

 

-

 

213

 

(3,561)

 

-

 

177,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

-

 

6,535

 

(444)

 

-

 

4

 

(1,670)

 

-

 

4,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

-

 

4,972

 

568

 

-

 

48

 

3,097

 

-

 

8,685

End of period

-

 

11,507

 

124

 

-

 

52

 

1,427

 

-

 

13,110

 

Supplemental Condensed Consolidating Statement of Cash Flows

July 31, 2001

(in thousands of dollars)

Parent Company

Guarantor Subsidiaries

JHL&S

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Cash flows from operating activities

(18,037)

118,192

(453)

(270)

9,171

-

108,603

Cash flows from investing activities:

Capital expenditures

-

(49,128)

(1,977)

(6)

(6,703)

-

(57,814)

Investments in real estate

-

(39,172)

-

-

-

-

(39,172)

Cash paid in acquisitions

-

(20,794)

1,320

-

-

-

(19,474)

Cash financing provided to equity method investees

-

(7,400)

-

-

-

(7,400)

Investments in equity investments

-

(4,795)

-

-

-

-

(4,795)

Distributions from equity investments

-

20,681

-

-

-

20,681

Other investing activities

-

2,252

-

-

(1,706)

-

546

Net cash used in investing activities

-

(98,356)

(657)

(6)

(8,409)

-

(107,428)

Cash flows from financing activities:

Other financing activities

4,324

1,063

-

13

-

-

5,400

Distributions to minority shareholder

-

-

-

-

(856)

-

(856)

Proceeds from borrowings under long-term debt

-

220,251

-

620

3,200

-

224,071

Payments on long-term debt

-

(228,572)

-

(354)

(1,000)

-

(229,926)

Advances to (from) affiliates

13,713

(13,307)

1,678

-

(2,084)

-

-

Net cash provided by (used in) financing activities

18,037

(20,565)

1,678

279

(740)

-

(1,311)

Net increase (decrease) in cash and cash equivalents

-

(729)

568

3

22

-

(136)

Cash and cash equivalents:

Beginning of period

-

8,454

-

45

322

-

8,821

End of period

-

7,725

568

48

344

-

8,685

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Year Ended July 31,2000

(in thousands of dollars)

Parent Company

100% Owned Guarantor Subsidiaries

Larkspur

Other Subsidiaries

Eliminating Entries

Consolidated

Cash flows from operating activities

34,055

69,394

(447)

7,745

-

110,747

Cash flows from investing activities:

Capital expenditures

-

(69,884)

(1,225)

(5,547)

-

(76,656)

Investments in real estate

-

(40,410)

-

-

-

(40,410)

Investments in joint ventures

-

(4,106)

-

-

-

(4,106)

Distributions from joint ventures

-

5,156

-

-

-

5,156

Cash received from sale of assets

-

2,111

-

           (48)

-

2,063

Net cash used in investing activities

-

(107,133)

(1,225)

(5,595)

-

(113,953)

Cash flows from financing activities:

Other financing activities

(305)

(151)

-

-

-

(456)

Distributions to minority shareholder

-

-

-

(743)

-

(743)

Proceeds from borrowings under long-term debt

-

202,480

1,892

200

-

204,572

Payments on long-term debt

-

(208,436)

(175)

(1,037)

-

(209,648)

Advances to (from) affiliates

(33,750)

34,225

-

          (475)

-

-

Net cash provided by (used in) financing activities

(34,055)

28,118

1,717

(2,055)

-

(6,275)

Net increase (decrease) in cash and cash equivalents

-

(9,621)

45

95

-

(9,481)

Cash and cash equivalents:

Beginning of period

-

18,075

-

227

-

18,302

End of period

-

8,454

45

322

-

8,821

15.  Investments in Affiliates

The Company held the following investments in equity method affiliates as of July 31, 2002:

Equity Method Investees

 

Ownership Interest

Keystone JV

 

50%

Slifer, Smith, and Frampton/Vail Associates Real Estate, LLC ("SSF/VARE")

 

50%

Bachelor Gulch Resort, LLC

 

49%

FFT Investment Partners

 

45%

Eclipse Television & Sports Marketing, LLC

 

25%

Eagle Park Reservoir Company

 

46%

Tenderfoot Seasonal Housing, LLC

 

50%

The Tarnes at BC, LLC

 

31%

BC Housing, LLC

 

49%

Breckenridge Terrace, LLC

 

50%

Avon Partners II, LLC

 

50%

Condensed financial data for investments in significant equity method subsidiaries are summarized below (in thousands). The results of operations for SSF/VARE are included for the twelve months ended July 31, 2002, 2001, and 2000. The Keystone JV is presented for the twelve months ended June 30, 2002, 2001, and 2000.

 

 

Keystone JV

 

SSF/VARE

Financial data for 2002:

 

 

 

 

Current assets

$          4,510

 

$         3,173

 

Other assets

        85,537

 

         3,287

 

Total assets

$        90,047

 

$         6,460

 

 

 

 

 

 

Current liabilities

$          8,477

 

$         1,212

 

Other liabilities

18,526

 

811

 

Shareholders' equity

        63,044

 

         4,437

 

Total liabilities and shareholders' equity

$        90,047

 

$         6,460

 

 

 

 

 

 

Net revenue

$        45,715

 

$       32,945

 

Operating income

5,797

 

7,688

 

Net income

6,477

 

5,054

 

 

 

 

 

Financial data for 2001:

 

 

 

 

Current assets

$        26,944

 

$         3,316

 

Other assets

      101,784

 

         3,504

 

Total assets

$      128,728

 

$         6,820

 

 

 

 

 

 

Current liabilities

$        19,530

 

$            947

 

Other liabilities

44,063

 

919

 

Shareholders' equity

        65,135

 

         4,954

 

Total liabilities and shareholders' equity

$      128,728

 

$         6,820

 

 

 

 

 

 

Net revenue

$        81,597

 

$       35,457

 

Operating income

18,174

 

7,645

 

Net income

17,249

 

4,683

 

 

 

 

 

Financial data for 2000:

 

 

 

 

Net revenue

$        61,230

 

$       43,610

 

Operating income

11,422

 

7,672

 

Net income

10,370

 

5,968

16.  Acquisitions and Business Combinations

In October 2000, the Company invested in a newly formed Irish corporation ("Lowther Ltd.") whose purpose is to develop a resort-based reservations system which will enable the shopping, booking and distribution of packaged vacations. In return for an initial investment of $5 million, the Company received a 49% interest in the joint venture. The Company paid $0.8 million at closing and the remainder of the initial investment is due in quarterly installments over the following twelve-month period. The Company sold its investment in Lowther, Ltd. to the majority partner in fiscal 2002 and acquired a license to the reservation software, the first phase of which has been implemented.

Also in October 2000, the Company entered into a joint venture agreement with a venture led by an affiliate of Continental Gencom for the construction of The Ritz-CarltonÒ , Bachelor Gulch ("the Ritz"). The Ritz, scheduled to open in late 2002, is being developed by The Athens Group, of Phoenix, Arizona, and will include a 238-room hotel, a 20,000-square-foot spa and fitness center, ski rental, lesson and retail space, restaurants plus meeting space. In addition, 23 privately owned luxury penthouse residences are being built above the hotel. All 23 of these penthouses are currently under contract. The Company received a 49% interest in the joint venture in return for a cash investment of up to $3.8 million, land contribution with a $3.4 million book value, and an interest-bearing loan to the joint venture of up to $4.5 million. At July 31, 2002, the company had contributed $1.8 million in cash of the $3.8 million commitment. Construction of the entire hotel project is expected to cost approximately $162 million. In order to cover construction costs, the joint venture has obtained $97 million in debt financing from a syndicate of banks. The remainder is being funded by a combination of equity and debt contributed by the partners, mezzanine financing, and the sale of condominiums. Under the terms of the joint venture, the Company will provide golf, spa and club privileges to the Ritz for a fee of $3.7 million. The Company received $1.5 million in December 2000, and will receive $1.5 million when the golf course opens and $0.7 million as penthouse residences close. Separately, the Company will contract with the hotel joint venture to acquire the 20,000-square-foot spa, plus 8,000 square feet of skier services area, at the developer's cost of approximately $13 million. The majority of this expense is expected to be recouped through membership sales in the Bachelor Gulch Club.

In December 2000, the Company acquired a 51% interest in the Renaissance Resort and Spa near Jackson, Wyoming. The Company's initial equity investment was approximately $9.4 million, and the Company also provided a $5.0 million loan at market rates to the new entity. Approximately $2.4 million of the purchase price was allocated to goodwill. The Company concurrently entered into a contract to provide consulting services to the hotel and related facilities, and also has an option to purchase the 49% minority interest in five years. Renaissance Resort and Spa was renamed Snake River Lodge & Spa, and currently consists of 95 deluxe hotel rooms and 72 luxury condominium guest bedrooms. The property also includes a restaurant and lounge, meeting and conference space, a new 8,000 square foot indoor-outdoor pool complex and a new10,000 square foot spa and fitness center.

In March 2001, the Company acquired a 51% interest in RTP, a newly formed joint venture. The Company's investment consisted of $2.5 million cash plus the assets, services and staff groups from VailNet, InterNetWorks, and the Company's internal New Media department. The minority interest partner in RTP contributed its entire business of resort application software and e-commerce to the new entity. RTP has been formed to develop, sell and deliver technology-based products and services to hospitality and resort businesses.

In June 2001, the Company acquired the Inn at Beaver Creek, a 42-room boutique hotel located in the heart of Beaver Creek Village, from IABC, Inc. for a purchase price of $7.5 million. The Company had been the property manager of the Inn at Beaver Creek for over ten years.

In November 2001, the Company acquired a majority interest in RockResorts, a luxury hotel brand, from Olympus for total initial cash consideration of $7.5 million. The Company acquired RockResorts primarily to establish its own luxury hotel brand. Approximately $0.5 million of the purchase price was allocated to goodwill. The Company believes that the RockResorts brand will enhance its ability to implement its overall lodging strategy which, which warrants a purchase price in excess of the fair value of the assets acquired. The acquisition includes the assumption by the Company of the management contracts on RockResorts' five resort hotels across the United States. The Company controls most operational decisions for RockResorts, and will retain 100% of the cash flow resulting from current management contract fee income. Cash flows from new management contracts will be split between the Company and Olympus in accordance with the operating agreement, with fee sharing ranging between 20-25% depending on the financing of the applicable properties. From October 1, 2004 to September 30, 2005, Olympus has the option to sell its remaining interest in RockResorts to the Company for an amount calculated at that time based on the growth of RockResorts. Effective October 1, 2005, the Company has the option to acquire the remaining interest in RockResorts through an additional payment to Olympus, which is to be determined at that time based on growth of RockResorts. The RockResorts brand portfolio at the time of acquisition consisted of five Olympus-owned luxury resort hotels: the Cheeca Lodge in the Florida Keys, The Equinox in Manchester Village, Vermont, La Posada Resort & Spa in Santa Fe, New Mexico, Rosario Resort in the San Juan Islands, Washington, and Casa Madrona in Sausalito, California. Olympus retained ownership of these properties, with RockResorts serving as property manager. Additionally, five of the hotels the Company owns or has a majority interest in have been re-flagged as RockResorts: The Lodge at Vail, The Keystone Lodge, The Pines Lodge in Beaver Creek, the Snake River Lodge & Spa in Jackson Hole, Wyoming and the Lodge at Rancho Mirage, Rancho Mirage, CA.

Concurrent with the acquisition of RockResorts, the Company acquired The Ritz-Carlton, Rancho Mirage from Olympus for an initial cash consideration of $20 million and a note payable to Olympus for $25 million due two years from the acquisition date. The purchase price allocation has not yet been completed, pending receipt of a final asset valuation. The Company made the acquisition to grow the Company's luxury RockResorts hotel brand. The note payable represents a non-cash portion of the acquisition cost. The Ritz-Carlton, Rancho Mirage was renamed The Lodge at Rancho Mirage and is being managed as a RockResort property. The four-star hotel is located in the Palm Springs area of California and has 240 guestrooms, including 21 suites. The facility also includes a full service spa, salon and fitness center, an outdoor swimming pool and Jacuzzi, three restaurants and a bar, almost 12,000 square feet of meeting space, and two leased retail spaces. Results of operations for The Lodge at Rancho Mirage are included in the Consolidated Statement of Operations from the purchase date forward.

The Company also acquired the Vail Marriott Mountain Resort ("Vail Marriott") in December 2001 from Host Marriott Corporation as a strategic location to grow visitation at the Company's Vail ski resort. The total purchase price was $49.5 million with certain allocations, making the net purchase price $45.1 million. None of the purchase price was allocated to goodwill. Results for the Vail Marriott are included in the Consolidated Statement of Operations from the purchase date forward. The property is operated by the Company as a Marriott franchisee, subject to various provisions of a franchise agreement with Marriott International. The Vail Marriott, located 150 yards from Vail's gondola, is the largest hotel in the Vail Valley with 349 rooms. The Vail Marriott's amenities also include a restaurant and bar, over 16,000 square feet of meeting space, indoor and outdoor pools, a full service spa, a 3,600 square foot fitness center, four tennis courts and over 4,500 square feet of commercial space.

In May 2002, certain of the Company's wholly-owned subsidiaries acquired 100% of the ownership interests of Heavenly Valley, Limited Partnership from subsidiaries of American Skiing Company. Heavenly Valley, Limited Partnership owns Heavenly Ski Resort ("Heavenly") in the Lake Tahoe area of California and Nevada. Heavenly offers over 4,800 acres of skiing and operates 29 lifts. The Company purchased Heavenly to expand its portfolio of premier ski resorts and geographically diversify its resort portfolio. The transaction closed for consideration of $102 million (including $2.7 million of assumed debt), less a cash adjustment of $2.8 million resulting in net consideration of $99.2 million. The assumed debt represents a non-cash portion of the acquisition cost. The cash adjustment is intended to offset the losses incurred by Heavenly during the period from closing until the end of Vail Resorts' fiscal year on July 31, 2002. The actual loss incurred during that period was approximately $3.5 million. The purchase price allocation has not yet been completed, pending receipt of a final asset valuation. The results of operations for Heavenly are included in the Company's Consolidated Statement of Operations from the acquisition date forward.

The following unaudited pro forma revenue for the year ended July 31, 2002 assumes the acquisition of Heavenly occurred on August 1, 1999. The pro forma revenue is not necessarily indicative of the actual revenue that would have been recognized, nor is it necessarily indicative of future revenue. Pro forma net income and EPS are not presented as the pro forma adjustments are immaterial to the actual net income and EPS of the Company, and, in the opinion of the Company, would not provide additional meaningful information to the reader.

 

Pro-forma Year Ended

July 31,

 

   2002   

 

   2001   

 

   2000   

 

----------(unaudited)----------

Total Revenue

$  666,898

 

$  596,799

 

$  590,907

 

 

17.  Subsequent Events

In connection with the employment of Blaise Carrig as Chief Operating Officer of Heavenly Valley Limited Partnership ("Heavenly LP"), Heavenly LP agreed to invest up to $600,000, but not to exceed 50% of the purchase price, for the purchase of a residence for Mr. Carrig and his family in the greater Lake Tahoe area of California. Based on the actual amount invested by Heavenly LP, Heavenly LP will obtain a proportionate undivided ownership interest in the residence. Upon the resale of the residence, or within six months of the termination of Mr. Carrig's employment with Heavenly LP, whichever is earlier, Heavenly LP shall be entitled to receive its proportionate share of the resale price of the residence, less certain deductions.

On October 29, 2002, the Company announced that, as a counterbalance to the possibility of slower performance in the nationwide leisure travel and lodging market in the coming year, it has implemented a cost reduction plan of approximately $10 million in actual year-over-year cost reductions. The Company is also tightly managing all its planned expenses, attempting to contain the impact of inflation and rigorously managing other discretionary expenditures.

These actual year-over-year cost reductions include the elimination of approximately 100 positions, or less than 1% of the total employee force, across all locations, through a combination of approximately 50 layoffs and the elimination of approximately 50 vacant positions. The cost reduction plan also includes changes designed to improve operational effectiveness, such as optimizing snowmaking expenditures, modifying lift operating times during off-peak periods, converting certain year round positions to seasonal, managing employee housing levels more effectively, reducing back-of-the-house administrative expenses, as well as other measures. The Company estimates that related severance expenses from the workforce reduction will result in a fiscal 2003 pre-tax charge of approximately $2.5 million. The Company also announced a management reorganization, which will streamline operations and contribute further to the cost reduction plan.

As of October 31, 2002, Andy Daly, President of the Company, will no longer be an employee of the Company. As such, both the loan to Mr. Daly and the loan to his spouse become payable within one year of the date of Mr. Daly's termination.

The Company was in compliance with all relevant covenants in its debt instruments as of July 31, 2002. The Credit Facility was amended on October 28, 2002, to increase the funded debt to adjusted EBITDA ratio to be measured for the covenant compliance period ending October 31, 2002. The Company's anticipated ability to comply with the formerly applicable ratio had been adversely impacted by poorer than expected performance for first quarter of fiscal 2003 and by the Company's change in revenue recognition for initiation fee revenue, as disclosed in the recently filed Amendment to Form 10-K for the year ended July 31, 2001. The Company expects it will meet all applicable quarterly financial tests in its debt instruments, including the funded debt ratio contained in the Credit Facility, in fiscal 2003. However, there can be no assurance that the Company will meet its financial covenants. If such covenants are not met, the Company would be required to seek a waiver or amendment from the banks participating in the Credit Facility. While the Company anticipates that it would obtain such waiver or amendment, if any were necessary, there can be no assurance that such waiver would be granted, which could have a material adverse impact on the liquidity of the Company.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

On May 10, 2002, we ended the engagement of Arthur Andersen LLP and retained PricewaterhouseCoopers LLP as our independent accountants. At that time, the Company filed a Current Report on Form 8-K/A dated May 17, 2002. The text of the Form 8-K/A Report that was filed follows:

(a) Previous independent accountants.

 

 

(i)

On May 10, 2002, Vail Resorts, Inc. ("Vail Resorts") dismissed Arthur Andersen LLP, which had previously served as independent accountants for Vail Resorts.

 

 

(ii)

The reports of Arthur Andersen LLP on the Consolidated Financial Statements of Vail Resorts as of and for the fiscal years ended July 31, 2001 and 2000 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

 

(iii)

The change in independent accountants was recommended by Vail Resorts' Audit Committee and approved by Vail Resorts' Board of Directors.

 

 

(iv)

In connection with its audit for the fiscal years ended July 31, 2001 and 2000, and for the interim period from August 1, 2001 through May 10, 2002, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused Arthur Andersen LLP to make reference to such disagreements in its report on the Consolidated Financial Statements for such years.

 

 

(v)

During the fiscal years ended July 31, 2001 and 2000, and for the interim period from August 1, 2001 through May 10, 2002, there were no "reportable events" as that term is defined in Item 304 (a)(1)(v) of Regulation S-K of the Securities and Exchange Commission ("the SEC").

 

 

(vi)

Vail Resorts has requested that Arthur Andersen LLP furnish it with a letter addressed to the SEC stating whether or not Arthur Andersen LLP agrees with the above statements. A copy of this letter, dated May 17, 2002, is filed as Exhibit 16 to this Form 8-K/A.

 

 

 

(b) New independent accountants.

 

 

Effective May 10, 2002, Vail Resorts appointed PricewaterhouseCoopers LLP as its new independent accountants. The appointment of PricewaterhouseCoopers LLP was recommended by Vail Resorts' Audit Committee and approved by Vail Resorts' Board of Directors. During the fiscal years ended July 31, 2001 and 2000, and in the interim period from August 1, 2001 through May 10, 2002, Vail Resorts has not consulted with PricewaterhouseCoopers LLP regarding either:

 

 

(i)

The application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Vail Resorts' financial statements, and neither a written report was provided to Vail Resorts nor oral advice was provided that PricewaterhouseCoopers LLP concluded was an important factor considered by Vail Resorts in reaching a decision as to the accounting, auditing or financial reporting issue; or

 

 

(ii)

Any matter that was either the subject of a disagreement, as that term is defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a "reportable event", as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.

 

 

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item is incorporated herein by reference from the Company's proxy statement for the annual meeting of shareholders to be held December 9, 2002.

ITEM 11.  EXECUTIVE COMPENSATION.

The information required by this item is incorporated herein by reference from the Company's proxy statement for the annual meeting of shareholders to be held December 9, 2002.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated herein by reference from the Company's proxy statement for the annual meeting of shareholders to be held December 9, 2002.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated herein by reference from the Company's proxy statement for the annual meeting of shareholders to be held December 9, 2002.

PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

a)

Index to Financial Statements and Financial Statement Schedules.

 

i)

See "Item 8. Financial Statements and Supplementary Data" for the index to the Financial Statements.

 

ii)

All other schedules have been omitted because the required information is not applicable or because the information required has been included in the financial statements or notes thereto.

 

iii)

Index to Exhibits

The following exhibits are either filed herewith or, if so indicated, incorporated by reference to the documents indicated in parentheses, which have previously been filed with the Securities and Exchange Commission.

Exhibit Number

Description

Sequentially Numbered Page

3.1

Amended and Restated Certificate of Incorporation filed with the Secretary of State of the State of Delaware on the Effective Date. (Incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-4 of Gillett Holdings, Inc. (Registration No 333-05341) including all amendments thereto.)

 

3.2

Amended and Restated By-Laws adopted on the Effective Date. (Incorporated by reference to Exhibit 3.2 on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 2002, including all amendments thereto.)

 

4.2(a)

Purchase Agreement, dated as of May 6, 1999 among Vail Resorts, Inc., the guarantors named on Schedule I thereto, Bear Sterns & Co. Inc., NationsBanc Montgomery Securities LLC, BT Alex. Brown Incorporated, Lehman Brothers Inc. and Salomon Smith Barney Inc. (Incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-80621) including all amendments thereto.)

 

4.2(b)

Purchase Agreement, dated as of November 16, 2001 among Vail Resorts, Inc., the guarantors names on Schedule I thereto, Deutsche Banc Alex. Brown Inc., Banc of America Securities LLC, Bear, Stearns & Co. Inc., CIBC World Markets Corp. and Fleet Securities, Inc. (Incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-76956-01) including all amendments thereto.)

 

4.3(a)

Indenture, dated as of May 11, 1999, among Vail Resorts, Inc., the guarantors named therein and the United States Trust Company of New York, as trustee. (Incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-80621) including all amendments thereto.)

 

4.3(b)

Indenture, dated as of November 21, 2001, among Vail Resorts, Inc., the guarantors named therein and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.2 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-76956-01) including all amendments thereto.)

 

4.4(a)

Form of Global Note (Included in Exhibit 4.4(a) incorporated by reference to Exhibit 4.3 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-80621) including all amendments thereto.)

 

4.4(b)

Form of Global Note (Included in Exhibit 4.4(b) by reference to Exhibit 4.2 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-76956-01) including all amendments thereto.)

 

4.5(a)

Registration Rights Agreement, dated as of May 11, 1999 among Vail Resorts, Inc., the guarantors signatory thereto, Bear Stearns & Co. Inc., NationsBanc Montgomery Securities LLC, BT Alex. Brown Incorporated, Lehman Brothers Inc. and Salomon Smith Barney Inc. (Incorporated by reference to Exhibit 4.5 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-80621) including all amendments thereto.)

 

4.5(b)

Registration Rights Agreement dated as of November 21, 2001 among Vail Resorts, Inc., the guarantors signatory thereto, Deutsche Banc Alex. Brown Inc., Banc of America Securities LLC, Bear Stearns & Co. Inc., CIBC World Markets Corp. and Fleet Securities, Inc. (Incorporated by reference to Exhibit 4.5 of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-76956-01) including all amendments thereto.)

 

4.6(a)

First Supplemental Indenture, dated as of August 22, 1999, among the Company, the guarantors named therein and the United States Trust Company of New York, as trustee. (Incorporated by reference to Exhibit 4.6(a) of the Registration Statement on Form S-4 of Vail Resorts, Inc. (Registration No. 333-80621) including all amendments thereto.)

 

4.6(b)

Second Supplemental Indenture, dated as of November 16, 2001 to the Indenture dated May 11, 1999, among Vail Resorts, Inc., the guarantors therein and The Bank of New York, as successor trustee to United States Trust Company of New York. (Incorporated by reference to Exhibit 4.6(b) on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 2002, including all amendments thereto.)

 

4.6(c)

Third Supplemental Indenture, dated as of January 16, 2001, to the Indenture dated May 11, 1999, among Vail Resorts, Inc., the guarantors therein and the Bank of New York, as successor trustee to the United States Trust Company of New York. (Incorporated by reference to Exhibit 4.6(c) on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 2002, including all amendments thereto.)

 

4.6(d)

First Supplemental Indenture, dated as of January 16, 2001, to the Indenture dated November 21, 2001, among Vail Resorts Inc., the guarantors therein and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.3 of the registration statement on Form S-4 of Gillett Holdings, Inc. (Registration No. 33-52854) including all amendments thereto.)

 

10.1

Management Agreement by and between Beaver Creek Resort Company of Colorado and Vail Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Registration Statement on Form S-4 of Gillett Holdings, Inc. (Registration No. 33-52854) including all amendments thereto.)

 

10.2

Forest Service Term Special Use Permit for Beaver Creek ski area. (Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-4 of Gillett Holdings, Inc. (Registration No. 33-52854) including all amendments thereto.)

 

10.3

Forest Service Special Use Permit for Beaver Creek ski area. (Incorporated by reference to Exhibit 10.3 of the Registration Statement on Form S-4 of Gillett Holdings, Inc. (Registration No. 33-52854) including all amendments thereto.)

 

10.4

Forest Service Unified Permit for Vail ski area. (Incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-4 of Gillett Holdings, Inc. (Registration No. 33-52854) including all amendments thereto.)

 

10.11

1993 Stock Option Plan of Gillett Holdings, Inc. (Incorporated by reference to Exhibit 10.20 of the report on Form 10-K of Gillett Holdings, Inc. for the period from October 9, 1992 through September 30, 1993.)

 

10.12(a)

Employment Agreement dated October 30, 2001 by and between RockResorts International, LLC and Edward Mace.

152

10.12(b)

Addendum to the Employment Agreement dated October 30, 2001 by and between RockResorts International, LLC and Edward Mace.

166

10.13

Employment Agreement dated October 1, 2000 by and between Vail Resorts, Inc., Vail Associates, Inc. and Andrew P. Daly. (Incorporated by reference to Exhibit 10.13 of the report on Form 10-K of Vail Resorts, Inc. for the year ended July 31, 2001.)

 

10.14(a)

Employment Agreement dated July 29, 1996 between Vail Resorts, Inc. and Adam M. Aron. (Incorporated by reference to Exhibit 10.21 of the report on Form S-2/A of Vail Resorts, Inc. (Registration # 333-5341) including all amendments thereto.)

 

10.14(b)

Amendment to the Employment Agreement dated May 1, 2001 between Vail Resorts, Inc. and Adam M. Aron. (Incorporated by reference to Exhibit 10.14(b) of the report on form 10-K of Vail Resorts, Inc. for the year ended July 31, 2001.)

 

10.15(a)

Shareholder Agreement among Vail Resorts, Inc., Ralston Foods, Inc., and Apollo Ski Partners, L.P. dated January 3, 1997. (Incorporated by reference to Exhibit 2.4 of the report on Form 8-K of Vail Resorts, Inc. dated January 8, 1997.)

 

10.15(b)

First Amendment to the Shareholder Agreement dated as of November 1, 1999, among Vail Resorts, Inc., Ralcorp Holdings, Inc. (f/k/a Ralston Foods, Inc.) and Apollo Ski Partners, L.P. (Incorporated by reference to Exhibit 10.17(b) of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 2000.)

 

10.16

1996 Stock Option Plan (Incorporated by reference from the Company's Registration Statement on Form S-3, File No. 333-5341).

 

10.18(a)

Sports and Housing Facilities Financing Agreement between the Vail Corporation (d/b/a "Vail Associates, Inc.") and Eagle County, Colorado, dated April 1, 1998. (Incorporated by reference to Exhibit 10 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended April 30, 1998.)

 

10.18(b)

Trust Indenture dated as of April 1, 1998 securing Sports and Housing Facilities Revenue Refunding Bonds by and between Eagle County, Colorado and U.S. Bank, N.A., as Trustee. (Incorporated by reference to Exhibit 10.1 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended April 30, 1998.)

 

10.19

Credit agreement dated December 30, 1998 between SSI Venture LLC and NationsBank of Texas, N.A., (Incorporated by reference to Exhibit 10.24 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 1999.)

 

10.20

Second Amendment to Amended and Restated Credit Agreement among The Vail Corporation (d/b/a "Vail Associates, Inc."), Borrower, Bank of America, N.A., Agent, and the other lenders party thereto dated as of November 13, 2001. (Incorporated by reference to Exhibit 10.20 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended January 31, 2002.)

 

10.21

First Amendment to Second Amended and Restated Credit Agreement among the Vail Corporation (d/b/a "Vail Associates, Inc."), Borrower, Bank or America, N.A., Agent, and the other lenders party thereto dated as of October 28, 2002.

169

10.22

Employment Agreement dated October 28, 1996 by and between Vail Resorts, Inc. and James P. Donohue. (Incorporated by reference to Exhibit 10.24 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended October 31, 1999.)

 

10.23

Vail Resorts, Inc. 1999 Long Term Incentive and Share Award Plan. (Incorporated by reference to the Company's registration statement on Form S-8, File No. 333-32320.)

 

10.24

Vail Resorts Deferred Compensation Plan effective as of October 1, 2000. (Incorporated by reference to Exhibit 10.23 of the report on Form 10-K of Vail Resorts, Inc. for the fiscal year ended July 31, 2000.)

 

21

Subsidiaries of Vail Resorts, Inc. (Incorporated by reference to Exhibit 21 of the report on Form 10-K of Vail Resorts, Inc. for the fiscal year ended July 31, 2001.)

 

23.1

Consent of Independent Accountants.

189

23.2

Consent of Independent Accountants.

190

23.3

Consent of Independent Accountants.

191

23.4

Consent of Independent Accountants.

192

99.1

Forest Service Unified Permit for Heavenly ski area. (Incorporated by reference to Exhibit 99.1 of the report on Form 10-Q of Vail Resorts, Inc. for the quarter ended April 30, 2002.)

 

b)

Reports on Form 8-K

The Company filed a Current Report on Form 8-K, dated March 26, 2002, regarding The Company's purchase agreement in conjunction with the acquisition of Heavenly Ski Resort in the Lake Tahoe area of California and Nevada from American Skiing Company.

 

The Company filed a Current Report on Form 8-K, dated May 10, 2002, regarding The Company's change in independent accountants from Arthur Andersen LLP to PricewaterhouseCoopers LLP.

 

The Company filed a Current Report on Form 8-K/A dated May 17, 2002, regarding The Company's change in independent accountants from Arthur Andersen LLP to PricewaterhouseCoopers LLP.

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Vail Resorts, Inc.

 

 

By:

        /s/ James P. Donohue        

 

James P. Donohue

 

Senior Vice President and

 

Chief Financial Officer

 

 

Dated:

October 29, 2002

 

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints James P. Donohue, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Form 10-K and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Form 10-K and any amendments or supplements hereto, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on October 29, 2002.

Signature

Title

     /s/ Adam M. Aron     

Chairman of the Board and Chief Executive Officer

Adam M. Aron

(Principal Chief Executive Officer)

  /s/ James P. Donohue  

Senior Vice President and Chief Financial Officer

James P. Donohue

 

     /s/ Frank J. Biondi     

Director

Frank J. Biondi

 

     /s/ Leon D. Black      

Director

Leon D. Black

 

     /s/ Craig M. Cogut    

Director

Craig M. Cogut

 

 /s/ Stephen C. Hilbert 

Director

Stephen C. Hilbert

 

    /s/ Robert A. Katz     

Director

Robert A. Katz

 

     /s/ Thomas H. Lee      

Director

Thomas H. Lee

 

    /s/ William L. Mack   

Director

William L. Mack

 

  /s/ Joe R. Micheletto 

Director

Joe R. Micheletto

 

  /s/ Antony P. Ressler  

Director

Antony P. Ressler

 

     /s/ Marc J. Rowan     

Director

Marc J. Rowan

 

     /s/ John J. Ryan III     

Director

John J. Ryan III

 

       /S/ John F. Sorte      

Director

John F. Sorte

 

   /s/ Bruce H. Spector   

Director

Bruce H. Spector

 

  /s/ William P. Stiritz  

Director

William P. Stiritz

 

      /s/ James S. Tisch      

Director

James S. Tisch

 

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, Adam M. Aron, certify that:

  1. I have reviewed this Annual Report on Form 10-K of Vail Resorts, Inc.;
  2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; and
  3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.

Date: October 29, 2002

        /s/ ADAM M. ARON        

Adam M. Aron

Chairman of the Board and

Chief Executive Officer

 

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

 

I, James P. Donohue, certify that:

  1. I have reviewed this Annual Report on Form 10-K of Vail Resorts, Inc.;
  2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; and
  3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report.

Date: October 29, 2002

        /s/ JAMES P. DONOHUE        

James P. Donohue

Senior Vice President and

Chief Financial Officer

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

AND THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of Vail Resorts, Inc. (the "Company") that the Annual Report of the Company on Form 10-K for the fiscal year ended July 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and the results of operations of the Company at the end of and for the periods covered by such Report.

 

Date: October 29, 2002

        /s/ ADAM M. ARON        

Adam M. Aron

Chairman of the Board and

Chief Executive Officer

 

Date: October 29, 2002

        /s/ JAMES P. DONOHUE        

James P. Donohue

Senior Vice President and

Chief Financial Officer

 

This certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, is not a part of the Form 10-K to which it refers, and is, to the extent permitted by law, provided by each of the above signatories to the extent of his respective knowledge.

 

 

 

 

 

 

 

 

 

 

 

 

LARKSPUR RESTAURANT & BAR, LLC

Financial Statements

July 31, 2002, 2001 and 2000

 

 

Larkspur Restaurant & Bar, LLC

July 31, 2002, 2001 and 2000

 

 

Table of Contents

Page

INDEPENDENT AUDITOR'S REPORT 1

Balance Sheet 2

Statement of Capital 4

Statement of Income 3

Statement of Cash Flows 5

Notes to the Financial Statements 6 - 10

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

 

To the Members

Larkspur Restaurant & Bar, LLC

Vail, Colorado

 

We have audited the accompanying balance sheet of Larkspur Restaurant & Bar, LLC as of July 31, 2002, 2001 and 2000, and the related statements of income, capital, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with U.S. generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Larkspur Restaurant & Bar, LLC as of July 31, 2002, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

/s/

McMahan and Associates, L.L.C.

Avon, Colorado

October 14, 2002

 

Larkspur Restaurant & Bar, LLC

Balance Sheet

July 31, 2002, 2001 and 2000

 

The accompanying notes are an integral part of these financial statements.

2002

2001

2000

Assets:

Current assets:

Cash and cash equivalents

$ 51,270

$ 47,719

$ 45,417

Accounts receivable

86,845

42,831

57,128

Accounts receivable - Member

29,319

34,160

520,443

Prepaid expenses

7,400

42,058

-

Inventories

128,980

140,397

111,783

Total current assets

303,814

307,165

734,771

Fixed assets:

Property and equipment, net of accumulated

1,123,901

depreciation

852,179

975,209

Net fixed assets

852,179

975,209

1,123,901

Total Assets

$1,155,993

$1,282,374

$1,858,672

Liabilities and Capital:

Liabilities:

Current liabilities:

Accounts payable and accrued liabilities

$ 177,619

$ 178,937

$ 229,773

Long-term liabilities:

Line of credit - Member

126,198

128,229

505,000

Total Liabilities

303,817

307,166

734,773

Members' Capital

852,176

975,208

1,123,899

Total Liabilities and Capital

$1,155,993

$1,282,374

$1,858,672

Larkspur Restaurant & Bar, LLC

Statement of Capital

For the Years Ended July 31, 2002, 2001 and 2000

 

 

The accompanying notes are an integral part of these financial statements.

Thomas

Vail Associates,

Salamunovich

Inc.

Total

Members' Capital - August 1, 1999

$ -

$ -

$ -

Capital contributions

100,000

1,125,263

1,225,263

Net (loss) for the year ended July 31, 2000

-

(607,505)

(607,505)

Additional required capital contributions

-

506,141

506,141

Members' Capital - July 31, 2000

100,000

1,023,899

1,123,899

Capital contributions

-

6,287

6,287

Net (loss) for the year ended July 31, 2001

-

(299,980)

(299,980)

Additional required capital contributions

-

145,002

145,002

Members' Capital - July 31, 2001

100,000

875,208

975,208

Capital contributions

-

34,234

34,234

Net (loss) for the year ended July 31, 2002

-

(325,965)

(325,965)

Additional required capital contributions

-

168,699

168,699

Members' Capital - July 31, 2002

$ 100,000

$ 752,176

$ 852,176

Larkspur Restaurant & Bar, LLC

Statement of Income

For the Years Ended July 31, 2002, 2001 and 2000

 

 

The accompanying notes are an integral part of these financial statements.

2002

2001

2000

Restaurant revenues

$ 2,689,042

$ 2,912,937

$ 2,062,224

Operating expenses:

Restaurant operating expenses

2,856,451

3,041,537

2,550,699

Depreciation

157,264

154,979

101,363

Total operating expenses

3,013,715

3,196,516

2,652,062

(Loss) from Operations

(324,673)

(283,579)

(589,838)

Other Income (Expense):

Interest expense

(20,652)

(20,212)

(29,257)

Other income

19,360

3,811

11,590

Total Other Income (Expense)

(1,292)

(16,401)

(17,667)

Net (Loss) for the Year

$ (325,965)

$ (299,980)

$ (607,505)

 

The accompanying notes are an integral part of these financial statements.

Larkspur Restaurant & Bar, LLC

Statement of Cash Flows

For the Years Ended July 31, 2002, 2001 and 2000

 

 

2002

2001

2000

Cash Flows From Operating Activities:

Cash received from restaurant sales

$ 2,644,253

$ 2,927,486

$ 2,027,706

Other cash receipts

19,360

3,811

11,590

Cash paid for payroll and employee benefits

(1,246,502)

(1,295,106)

(1,076,507)

Cash paid to vendors for goods and services

(1,571,902)

(1,876,693)

(1,389,427)

Cash paid for interest

(19,715)

(29,540)

(19,929)

Net Cash (Used) by Operating Activities

(174,506)

(270,042)

(446,567)

Cash Flows From Investing Activities:

Acquisition of property and equipment

(34,235)

(6,287)

(1,225,263)

Net Cash (Used) by Investing Activities

(34,235)

(6,287)

(1,225,263)

Cash Flows From Financing Activities:

Cash drawn on line of credit - Member

650,000

620,000

680,000

Cash repaid on line of credit - Member

(478,229)

(354,385)

(175,000)

Cash drawn on line of credit - Other

-

35,569

-

Cash repaid on line of credit - Other

-

(35,569)

-

Capital contributions by Members

40,521

13,016

1,212,247

Net Cash Provided by Financing Activities

212,292

278,631

1,717,247

Net Increase in Cash and Cash Equivalents

3,551

2,302

45,417

Cash and Cash Equivalents - Beginning of Year

47,719

45,417

-

Cash and Cash Equivalents - End of Year

$ 51,270

$ 47,719

$ 45,417

Reconciliation of Net (Loss) to Net Cash

(Used) by Operating Activities:

Net (loss) for the year

$ (325,965)

$ (299,980)

$ (607,505)

Adjustments to reconcile:

Depreciation

157,264

154,979

101,363

(Increase) decrease - Accounts receivable

(44,014)

14,297

(57,128)

(Increase) decrease - Accounts receivable - Member

(6,549)

(17,831)

(1,286)

(Increase) decrease - Prepaid expenses

34,658

(42,058)

-

(Increase) decrease - Inventories

11,417

(28,614)

(111,783)

Increase (decrease) - Accounts payable and accruals

(1,317)

(50,835)

229,772

Total Adjustments

151,459

29,938

160,938

Net Cash (Used) by Operating Activities

$ (174,506)

$ (270,042)

$ (446,567)

Larkspur Restaurant & Bar, LLC

Notes to the Financial Statements

July 31, 2002, 2001 and 2000

 

 

1. Organization

Larkspur Restaurant & Bar, LLC (the "Company") was organized in the State of Colorado as a limited liability company pursuant to Articles of Organization dated July 22, 1999, and amended August 5, 1999. The members of the Company are Thomas Salamunovich and The Vail Corporation, d/b/a Vail Associates, Inc. ("Vail"). The Company operates a fine dining establishment located in Vail, Colorado.

Under generally accepted accounting principles, a company which indirectly or directly controls the majority voting interest (i.e., more than 50%) of a subsidiary is required to consolidate or combine the financial statements of that subsidiary with its own financial statements. Vail is a wholly-owned, indirect subsidiary of Vail Resorts, Inc. ("VRI", a publicly-traded company. Separate audited, consolidated financial statements include the financial position, results of operations and cash flows of the Company with those of Vail and VRI. These financial statements present only the financial position, results of operations, and cash flows of the Company.

2. Summary of Significant Accounting Policies

A. Basis of Accounting

These financial statements have been prepared on the accrual basis of accounting which recognizes revenues when earned and expenses when incurred.

B. Cash and Cash Equivalents

The Company considers all checking and savings accounts to be cash equivalents for the purpose of the Statement of Cash Flows, since all such funds are highly liquid.

C. Allowance for Uncollectible Amounts

The Company utilizes the allowance method of recognizing the future potential uncollectibility of trade accounts receivable. No allowance for bad debts was recorded at July 31, 2002, 2001 and 2000, since all receivables were considered collectible.

D. Inventories

The Company maintains inventories of food, liquor, wine, and beer. All inventories are valued at the lower of cost and market, using the first-in, first-out method.

E. Property and Equipment - Depreciation

Property and equipment are recorded at cost and are depreciated using the straight-line method over the following estimated useful lives:

2002

2001

2000

Furniture, fixtures and equipment

$ 442,846

$ 408,612

$ 402,325

Point-of-sale computer system

58,592

58,592

58,592

Leasehold improvements

764,347

764,347

764,347

Fixed assets, at cost

1,265,785

1,231,551

1,225,264

Less: Accumulated depreciation

(413,606)

(256,342)

(101,363)

Net fixed assets

$ 852,179

$ 975,209

$1,123,901

 

F. Income Taxes

The Company is taxed as a partnership whereby all taxable consequences flow directly to the partners. For income tax purposes, the Company utilizes the accrual method of accounting and has adopted a December 31st fiscal year-end.

G. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 period. Actual results could differ from those estimates.

  1. Inventories

2002

2001

2000

Food and bar supplies

$ 18,326

$ 15,656

$ 14,652

Beer, wine and liquor

110,654

124,741

97,131

Total

$ 128,980

$ 140,397

$ 111,783

 

4. Property and Equipment

2002

2001

2000

Furniture, fixtures and equipment

$ 442,846

$ 408,612

$ 402,325

Point-of-sale computer system

58,592

58,592

58,592

Leasehold improvements

764,347

764,347

764,347

Fixed assets, at cost

1,265,785

1,231,551

1,225,264

Less: Accumulated depreciation

(413,606)

(256,342)

(101,363)

Net fixed assets

$ 852,179

$ 975,209

$ 1,123,901

 

5. Credit Facilities

A. FirstBank of Vail

Effective August 13, 1999, the Company entered into an unsecured Commercial Cash Reserve agreement (the "Cash Reserve Agreement") with FirstBank of Vail. The Cash Reserve Agreement provides for a revolving line of credit not to exceed $50,000, with amounts drawn on the line of credit bearing interest at 2% above the bank's prime lending rate. The initial Cash Reserve Agreement expired August 13, 2001 and was subsequently renewed with a maturity date of September 13, 2002.

During the fiscal years ended July 31, 2002, 2001 and 2000, the Company drew funds totaling $0, $35,569, and $0, respectively under the terms of the Cash Reserve Agreement. No principal balance was outstanding under the Cash Reserve Agreement at July 31, 2002, 2001 and 2000.

B. Vail Associates, Inc.

The Company executed a Loan Agreement (the "Loan Agreement") with Vail Associates, Inc. ("Vail") on September 15, 1999, under which the Company was granted a revolving credit facility of up to $750,000, with interest payable on outstanding amounts at the rate of 8% per annum. The Loan Agreement expired December 31, 2000, and was subsequently renewed under an Amended, Restated and Extended Loan Agreement (the "Extended Loan Agreement") entered into with Vail as of December 31, 2000.

 

The term of the Extended Loan Agreement expires December 31, 2001, but automatically renews for successive one-year terms, unless otherwise terminated. The Extended Loan Agreement also provides for a revolving credit facility of up to $750,000, with interest payable on outstanding amounts at the rate of 8% per annum.

During the fiscal years ended July 31, 2002, 2001 and 2000, the Company drew funds totaling $650,000, $620,000, and $680,000, respectively under the terms of the Loan Agreement and the Extended Loan Agreement. As of July 31, 2002, 2001 and 2000, the principal balances outstanding under the Loan Agreement and the Extended Loan Agreement were $126,198, $128,229, and $505,000, respectively. During the fiscal years ended July 31, 2002, 2001, and 2000, the Company incurred interest expense of $20,652, $20,212, and $29,257, respectively, on amounts drawn under the terms of the Loan Agreement and the Extended Loan Agreement.

  1. Related Party Transactions

A. Operating Lease

Effective August 1, 1999 and running for a period of ten years, the Company entered into an operating lease agreement (the "Lease") with Vail for use of a condominium unit for the Company's operations. The Lease calls for graduated rentals based on the Company's annual gross sales, and allocates utility costs to the Company. The Company may extend the Lease for an additional term of five years.

During the fiscal years ended July 31, 2002, 2001 and 2000, the Company incurred rent expense of $338,904, $362,169, and $276,222, respectively, under the terms of the Lease. Utilities expenses allocated under the Lease were $33,000, $33,330, and $22,441 during the fiscal years ended July 31, 2002, 2001 and 2000, respectively.

B. Operating Agreement

The Company's Operating Agreement, as amended, requires that Vail annually contribute capital to the Company in the amount of any net loss incurred by the Company, after first reducing the loss by the amount of depreciation expense incurred for that year. Pursuant to this section of the Operating Agreement, as amended, Vail contributed capital in the amounts of $168,699, $145,002, and $506,141 during the years ended July 31, 2002, 2001, and 2000, respectively.

The Operating Agreement, as amended, requires that all losses of the Company are to be allocated to Vail, and all profits of the Company are to be allocated to the Members in accordance with stated priorities.

C. Guarantees

Vail entered into a credit agreement (the "Credit Agreement") in May 1999 with NationsBank, N.A. and other parties which provided for extensions of credit to Vail up to an aggregate principal amount of $450 million. The Credit Agreement was subsequently amended and restated to name Bank of America, N.A. ("Bank of America") as the primary lender, and to establish the maximum credit at an aggregate principal amount of $421 million. In connection with the Credit Agreement, as amended and restated, certain entities affiliated with Vail, including the Company, executed a guaranty whereby Vail's obligation under the Credit Agreement is guaranteed by, among others, the Company.

 

Vail is a wholly-owned, indirect subsidiary of Vail Resorts, Inc. ("VRI"), a publicly-traded company. In May 1999, VRI issued Senior Subordinated Notes in an aggregate principal amount of $200 million, bearing interest at the rate of 8-3/4% per annum, and maturing in 2009. As part of VRI's issuance of the Senior Subordinated Notes, certain entities affiliated with VRI, including the Company, executed a guaranty whereby VRI's obligations with respect to the Senior Subordinated Notes is guaranteed by, among others, the Company.

In January 1998, Vail entered into an ISDA Multi-Currency - Cross Border Master Agreement (the "Interest Rate Swap") with The Bank of Nova Scotia. In connection with the Interest Rate Swap, the Company, together with other affiliates of Vail, executed a guarantee of Vail's obligations under the Interest Rate Swap. The Interest Rate Swap was terminated in October 2000, and the Company was released from its guaranty with respect to the Interest Rate Swap.

In November 2001, VRI issued additional Senior Subordinated Notes in an aggregate principal amount of $160 million, bearing interest at the rate of 8-3/4% per annum, and maturing in 2009. As part of VRI's issuance of these additional Senior Subordinated Notes, certain entities affiliated with VRI, including the Company, executed a guaranty whereby VRI's obligations with respect to the additional Senior Subordinated Notes is guaranteed by, among others, the Company.

D. Commitments and Contingencies

The Company's future minimum lease payments under the terms of the operating lease described in Note 6.A., above, are as follows:

2002

$ 270,000

2003

270,000

2004

270,000

2005

270,000

2006

270,000

Thereafter

   540,000

Total

$ 1,890,000

 

E. Other

Under the terms of the Company's Operating Agreement, as amended, a Member of the Company is paid an annual salary of $125,000 for his services, with annual increases equal to the greater of 3% and any increase in the Consumer Price Index for the preceding 12-month period.

Included in the line item Accounts Payable and Accrued Liabilities are amounts payable to Vail. For the years ended July 31, 2002, 2001, and 2000, such balances totaled $1,902, $0, and $74,840, respectively.

 

 

7. Selected Quarterly Financial Data - Unaudited

Fiscal Year 2002

Year

Quarter

Quarter

Quarter

Quarter

Ended

Ended

Ended

Ended

Ended

July 31,

July 31,

April 30,

January 31,

October 31,

2002

2002

2002

2002

2001

Restaurant Revenue

2,689,042

309,580

1,201,407

834,252

343,803

Income (Loss) from Operations

(324,673)

(232,228)

198,172

(56,253)

(234,364)

Net Income (Loss)

(325,965)

(229,560)

205,928

(63,947)

(238,386)

Fiscal Year 2001

Year

Quarter

Quarter

Quarter

Quarter

Ended

Ended

Ended

Ended

Ended

July 31,

July 31,

April 30,

January 31,

October 31,

2001

2001

2001

2001

2000

Restaurant Revenue

2,912,937

283,441

1,248,581

963,835

417,080

Income (Loss) from Operations

(283,579)

(248,520)

175,909

(43,261)

(167,707)

Net Income (Loss)

(299,980)

(256,763)

176,253

(48,527)

(170,943)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Keystone/Intrawest, L.L.C.

Consolidated Financial Statements

June 30, 2002 and 2001

 

 

 

 

 

 

 

 

 

 

 

 

R eport of Independent Accountants

 

 

To the Partners of

Keystone/Intrawest L.L.C.

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, partners' capital and cash flows present fairly, in all material respects, the financial position of Keystone/Intrawest L.L.C. and its subsidiaries (the "Partnership") at June 30, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

        /s/ PricewaterhouseCoopers LLP        

 

Denver, Colorado

July 26, 2002

Keystone/Intrawest L.L.C.

Consolidated Balance Sheets

June 30, 2002 and 2001

 

 

 

2002

 

 

 

2001

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash

$

1,649,291

 

 

$

19,763,993

 

Restricted cash

 

1,509,517

 

 

 

5,805,424

 

Projects under development

 

57,443,819

 

 

 

70,851,325

 

Land held for development

 

9,210,161

 

 

 

11,837,094

 

Income producing property, net of accumulated depreciation

 

17,673,881

 

 

 

18,408,585

 

Fixed assets, net of accumulated depreciation

 

1,132,734

 

 

 

603,485

 

Receivable from related party

 

63,982

 

 

 

--

 

Goodwill, net of accumulated amortization

 

76,917

 

 

 

83,416

 

Other assets

 

1,286,767

 

 

 

1,375,055

 

 

 

 

 

 

 

 

 

Total assets

$

90,047,069

 

 

$

128,728,377

 

 

 

 

 

 

 

 

 

Liabilities and Partners' Capital

 

 

 

 

 

 

 

Accounts payable

$

948,445

 

 

$

5,015,811

 

Customer deposits

 

1,393,269

 

 

 

5,699,566

 

Payable to related parties

 

4,829,565

 

 

 

6,849,074

 

Loans payable to related parties

 

3,522,986

 

 

 

7,525,197

 

Notes payable

 

15,003,214

 

 

 

36,538,058

 

Other liabilities

 

1,305,915

 

 

 

1,965,652

 

 

 

 

 

 

 

 

 

Total liabilities

 

27,003,394

 

 

 

63,593,358

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners' capital:

 

 

 

 

 

 

 

Intrawest Resorts, Inc.

 

30,617,454

 

 

 

31,311,888

 

Vail Summit Resorts, Inc.

 

32,426,221

 

 

 

33,823,131

 

 

 

 

 

 

 

 

 

Total partners' capital

 

63,043,675

 

 

 

65,135,019

 

 

 

 

 

 

 

 

 

Total liabilities and partners' capital

$

90,047,069

 

 

$

128,728,377

 

 

 

 

 

 

 

 

 

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

 

Keystone/Intrawest L.L.C.

Consolidated Statements of Income

for the years ended June 30, 2002 and 2001

 

 

 

2002

 

 

 

2001

 

 

 

 

 

 

 

 

 

Sales

$

43,330,976

 

 

$

78,259,193

 

Commission revenue

 

677,669

 

 

 

1,772,198

 

Other income

 

1,706,750

 

 

 

1,565,603

 

 

 

 

 

 

 

 

 

Total revenue

 

45,715,395

 

 

 

81,596,994

 

 

 

 

 

 

 

 

 

Cost of sales

 

(35,468,297

)

 

 

(56,009,262

)

Commission expense

 

(375,309

)

 

 

(974,134

)

 

 

 

 

 

 

 

 

Gross margin

 

9,871,789

 

 

 

24,613,598

 

 

 

 

 

 

 

 

 

Operating expense

 

(3,217,793

)

 

 

(5,603,241

)

Depreciation and amortization expense

 

(856,572

)

 

 

(836,070

)

Interest expense

 

(351,915

)

 

 

(1,179,134

)

Interest income

 

36,709

 

 

 

253,395

 

Partner reimbursement (Note 3)

 

994,407

 

 

 

--

 

 

 

 

 

 

 

 

 

Net income

$

6,476,625

 

 

$

17,248,548

 

 

 

 

 

 

 

 

 

 

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

Keystone/Intrawest L.L.C.

Consolidated Statements of Partners' Capital

 

 

 

 

 

 

 

Vail Summit Resorts, Inc.

 

 

 

 

 

 

 

Intrawest Resorts, Inc.

 

 

 

Cash

 

 

 

Land

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2000

$

20,839,918

 

 

$

18,097,661

 

 

$

10,837,094

 

 

$

49,774,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

--

 

 

 

--

 

 

 

(1,888,202

)

 

 

(1,888,202

)

Net income

 

10,471,970

 

 

 

6,776,578

 

 

 

--

 

 

 

17,248,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2001

 

31,311,888

 

 

 

24,874,239

 

 

 

8,948,892

 

 

 

65,135,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

 

--

 

 

 

--

 

 

 

426,080

 

 

 

426,080

 

Distributions

 

(4,233,386

)

 

 

(4,233,386

)

 

 

(527,277

)

 

 

(8,994,049

)

Net income

 

3,538,952

 

 

 

2,937,673

 

 

 

--

 

 

 

6,476,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2002

$

30,617,454

 

 

$

23,578,526

 

 

$

8,847,695

 

 

$

63,043,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Keystone/Intrawest L.L.C.

Consolidated Statements of Cash Flows

for the years ended June 30, 2002 and 2001

 

 

 

2002

 

 

 

2001

 

 

 

 

 

 

 

 

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net income

$

6,476,625

 

 

$

17,248,548

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

856,572

 

 

 

836,070

 

Decrease (increase) in:

 

 

 

 

 

 

 

Receivable from related party

 

(63,982

)

 

 

750,950

 

Projects under development and land held for development

 

16,034,439

 

 

 

(1,931,000

)

Restricted cash

 

4,295,907

 

 

 

3,843,710

 

Other assets

 

88,288

 

 

 

1,557,697

 

Increase (decrease) in:

 

 

 

 

 

 

 

Accounts payable

 

(4,067,366

)

 

 

(5,635,932

)

Customer deposits

 

(4,306,297

)

 

 

(3,958,567

)

Other liabilities

 

(659,737

)

 

 

1,017,490

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

18,654,449

 

 

 

13,728,966

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Income producing property disposals (additions)

 

62,669

 

 

 

(41,651

)

Fixed asset additions

 

(707,289

)

 

 

(77,171

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(644,620

)

 

 

(118,822

)

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

17,907,625

 

 

 

56,029,007

 

Repayment of borrowings

 

(39,442,469

)

 

 

(37,846,063

)

Payable to related parties, net

 

(3,893,194

)

 

 

(13,587,712

)

Capital distributions

 

(8,466,772

)

 

 

--

 

Repayments of land contributed

 

(2,229,721

)

 

 

(3,072,430

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(36,124,531

)

 

 

1,522,802

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

 

(18,114,702

)

 

 

15,132,946

 

 

 

 

 

 

 

 

 

Cash, beginning of year

 

19,763,993

 

 

 

4,631,047

 

 

 

 

 

 

 

 

 

Cash, end of year

$

1,649,291

 

 

$

19,763,993

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Decrease in land capital distributions due to related party

$

1,702,444

 

 

$

1,184,228

 

Non-cash equity contribution

 

426,080

 

 

 

--

 

Interest paid

 

7,111,594

 

 

 

5,228,363

 

 

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

Keystone/Intrawest L.L.C.

Notes to Consolidated Financial Statements

1. Organization

Keystone/Intrawest L.L.C. (the "Partnership"), a limited liability company, also doing business as Keystone Real Estate Developments, was formed February 7, 1994. The Partnership was organized to acquire, own, develop, operate and sell real and personal property, consisting mainly of the sale of condominiums, at the base of Keystone Resort in Keystone, Colorado.

Contributions and distributions are made by mutual agreement of the partners. Net income or losses are allocated according to the LLC agreement to the partners.

As real estate development projects are completed, Vail Summit Resorts, Inc. receives capital distributions for land it previously contributed to the Partnership. The Partnership has an option to receive additional land from Vail Summit Resorts as an additional land capital contribution valued at approximately $10,975,000, the fair market value of the land when the Partnership was formed. If the Partnership does not exercise the option, Vail Summit Resorts, Inc. may still contribute the remaining option land under certain circumstances.

 

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership and all related entities over which the Partnership is considered to have control, which includes Keystone/Intrawest Real Estate L.L.C. (a real estate brokerage company). All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

Concentration of Risk

All sales and planned future development of the Partnership is concentrated within the Keystone, Colorado geographic area.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Partnership considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted Cash

The Partnership has restrictions on certain cash balances. Restricted cash consists of purchaser deposits and commercial lease security deposits.

Projects Under Development

Projects under development are stated at the lower of cost or net realizable value. Land acquisition costs and all costs that are directly related to construction are capitalized during the period of active development. Interest is capitalized on development projects during periods of construction through the substantial completion of the site. Additionally, overhead and administrative costs are capitalized and allocated to projects under development.

Land Held for Development

Land held for development is stated at the lower of cost or net realizable value. Costs incurred in the acquisition and development of land are capitalized and allocated to the carrying value of the land.

 

Fixed Assets and Income Producing Property

Fixed assets and income producing property are stated at cost including certain internal costs directly associated with the acquisition and construction of such assets. Depreciation is computed using the straight-line method over estimated useful lives as follows:

Office equipment

3-7 years

Leasehold improvements

5-15 years

Income producing property

30 years

Impairment of Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Whenever events or circumstances indicate that the carrying value of Projects and Land Under Development may not be recoverable, impairment losses are recorded and the related assets are adjusted to their estimated fair market value, less selling costs.

The Company also evaluates the carrying value of Income Producing Property whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. The Company uses an estimate of the future undiscounted cash flows over the estimated remaining life of these assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of these assets, the assets are written down to their estimated fair values.

Goodwill

Goodwill was recognized in connection with the purchase of Keystone/Intrawest Real Estate L.L.C. and is being amortized over 20 years. Accumulated amortization at June 30, 2002 and 2001 was $53,083 and $46,584, respectively. Amortization expense for the years ended June 30, 2002 and 2001 was $6,499 and $6,500, respectively.

Other Assets

Other assets consist primarily of prepaid commissions, other prepaid expenses, receivables from retail tenants, and a note receivable. The Partnership received a portion of the sales price for a lot sale in the form of a note receivable in the current year. The aggregate principal amount of the note receivable at June 30, 2002 was $290,000. The principal and unpaid interest is due in full on June 30, 2004. The note is collateralized by a deed of trust on the lot and is charged interest at U.S. Bank's Reference Rate plus 1%. At June 30, 2002 U.S. Bank's Reference Rate was 4.75 %.

Revenue Recognition

Revenues from real estate sales and brokerage commissions are recognized when consideration has been received, title, possession and other attributes of ownership have been transferred to the buyer, and the Partnership is not obligated to perform significant additional activities after the sale.

The Partnership leases commercial space to tenants under operating leases with various terms. Rental income is recognized as earned and is included in other income.

Brokerage Commissions

Commission revenue and expense on the consolidated statements of income relate to sales of non-Partnership properties by Keystone/Intrawest Real Estate L.L.C. Commissions paid by the Partnership on sales of Partnership properties are included in cost of sales.

Fair Value of Financial Instruments

The fair value of the Company's financial instruments approximate their carrying values at June 30, 2002 and 2001.

 

Income Taxes

No provision has been made in the financial statements for federal or state income taxes since any such taxes are the responsibility of the partners.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, which addresses financial accounting and reporting for business combinations. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for under the purchase method initiated before but completed after June 30, 2001. All business combinations in the scope of this Statement are to be accounted for using one method - the purchase method.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which is effective for fiscal years beginning after December 31, 2001, and applies to all goodwill and other intangibles recognized in the financial statements at that date. Under the provisions of this statement, goodwill and other intangibles will not be amortized, but will be tested for impairment on an annual basis.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires the recognition of an impairment loss if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and measures the impairment loss as the difference between the carrying amount and fair value of the asset.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which updates, clarifies and simplifies existing accounting pronouncements. FASB 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded; as a result, FASB 64, which amended FASB 4, was rescinded as it was no longer necessary. FASB 145 amended FASB 13 to require certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.

The adoption of SFAS No. 141, 142, 144, and 145 is not expected to have a material impact on the Company's financial position, results of operations, or cash flows when adopted by the Company for the year ended June 30, 2003.

 

3. Related Party Transactions

The Partnership has an agreement with one of its partners, Intrawest Resorts, Inc. ("Intrawest"), whereby that partner manages the operations, development and construction activities of the Partnership's properties for a fee as defined in a management agreement. The Partnership incurred $1,038,369 and $2,123,741 in fees and interest under this agreement during the years ended June 30, 2002 and 2001, respectively

In the past Intrawest had a practice of charging a management fee of 5% of new development costs that were incurred during the year. In the current year the Partners agreed that the management fee should be 5% of the first $20,000,000 of development costs that occurred during the year and 4% of any additional development costs on an annual basis. The total amount of fees that were reimbursed by Intrawest to the Partnership as computed on a retroactive basis was $1,538,546 which was received in the current year. Of this reimbursed amount $994,407 relates to property that was sold prior to June 30, 2002 and has been recorded as a component of income on the accompanying consolidated statements of income. The remaining amount will impact future real estate sales and was recorded as a decrease to projects under development.

The payable to related parties on the Partnership's consolidated balance sheets consists primarily of accrued management fees due to Intrawest Resorts, Inc. and land capital distributions due to Vail Summit Resorts, Inc.

 

During 2002 the Partnership excised an option to receive additional land from Vail Summit Resorts as an additional land capital contribution valued at $426,080, the estimated fair market value of the land when the Partnership was formed. This amount has been recorded as a capital contribution in the consolidated statements of partners' capital.

 

4. Income Producing Property

A summary of income producing properties, at cost, as of June 30 is as follows:

 

 

2002

 

 

 

2001

 

 

 

 

 

 

 

 

 

Jackpine/Blackbear rental property - building

$

4,206,096

 

 

$

4,206,096

 

Jackpine/Blackbear rental property - land

 

133,540

 

 

 

133,540

 

Arapahoe rental property - building

 

2,471,312

 

 

 

2,471,312

 

Arapahoe rental property - land

 

90,039

 

 

 

90,039

 

Silver Mill rental property - building

 

7,144,323

 

 

 

7,144,323

 

Silver Mill rental property - land

 

250,186

 

 

 

250,186

 

Buffalo/Dakota rental property - building