Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-09614

 

 

Vail Resorts, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   51-0291762

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

390 Interlocken Crescent

Broomfield, Colorado

  80021
(Address of Principal Executive Offices)   (Zip Code)

(303) 404-1800

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of March 3, 2011, 36,006,632 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

Table of Contents

 

PART I     FINANCIAL INFORMATION   
Item 1.    Financial Statements.      F-1   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.      1   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.      16   
Item 4.    Controls and Procedures.      16   
PART II    OTHER INFORMATION   
Item 1.    Legal Proceedings.      17   
Item 1A.      Risk Factors.      17   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.      17   
Item 3.    Defaults Upon Senior Securities.      18   
Item 4.    Removed and Reserved.      18   
Item 5.    Other Information.      18   
Item 6.    Exhibits.      18   


Table of Contents

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements — Unaudited

    

Consolidated Condensed Balance Sheets as of January 31, 2011, July  31, 2010 and January 31, 2010

     F-2   

Consolidated Condensed Statements of Operations for the Three Months Ended January 31, 2011 and 2010

     F-3   

Consolidated Condensed Statements of Operations for the Six Months Ended January 31, 2011 and 2010

     F-4   

Consolidated Condensed Statements of Cash Flows for the Six Months Ended January 31, 2011 and 2010

     F-5   

Notes to Consolidated Condensed Financial Statements

     F-6   

 

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Vail Resorts, Inc.

Consolidated Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

     January 31,     July  31,
2010
    January 31,  
     2011       2010  
     (Unaudited)       (Unaudited)  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 97,251      $ 14,745      $ 58,008   

Restricted cash

     15,900        11,834        15,532   

Trade receivables, net

     55,123        53,622        45,366   

Inventories, net

     54,586        48,295        51,641   

Other current assets

     47,199        42,249        51,684   
                        

Total current assets

     270,059        170,745        222,231   

Property, plant and equipment, net (Note 6)

     1,044,498        1,027,390        1,039,555   

Real estate held for sale and investment

     281,699        422,164        414,501   

Goodwill, net (Note 6)

     271,105        181,085        167,950   

Intangible assets, net

     90,269        89,273        79,167   

Other assets

     44,163        32,152        32,661   
                        

Total assets

   $ 2,001,793      $ 1,922,809      $ 1,956,065   
                        

Liabilities and Stockholders’ Equity

      

Current liabilities:

      

Accounts payable and accrued liabilities (Note 6)

   $ 311,239      $ 255,326      $ 339,256   

Income taxes payable

     23,355        32,729        10,482   

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

     2,708        1,869        1,870   
                        

Total current liabilities

     337,302        289,924        351,608   

Long-term debt (Note 4)

     495,049        524,842        489,865   

Other long-term liabilities (Note 6)

     238,776        197,160        197,759   

Deferred income taxes

     109,963        108,496        113,808   

Commitments and contingencies (Note 9)

      

Redeemable noncontrolling interest (Note 2)

     —          —          21,318   

Stockholders’ equity:

      

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

     —          —          —     

Common stock, $0.01 par value, 100,000,000 shares authorized, 40,270,021 (unaudited), 40,173,891 and 40,125,318 (unaudited) shares issued, respectively

     403        401        401   

Additional paid-in capital

     569,955        563,816        561,103   

Retained earnings

     398,908        387,380        356,512   

Treasury stock, at cost; 4,264,804 (unaudited), 4,264,804 and 3,878,535 (unaudited) shares, respectively (Note 11)

     (162,827     (162,827     (147,828
                        

Total Vail Resorts, Inc. stockholders’ equity

     806,439        788,770        770,188   

Noncontrolling interests

     14,264        13,617        11,519   
                        

Total stockholders’ equity (Note 2)

     820,703        802,387        781,707   
                        

Total liabilities and stockholders’ equity

   $ 2,001,793      $ 1,922,809      $ 1,956,065   
                        

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

 

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Vail Resorts, Inc.

Consolidated Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     Three months ended  
     January 31,  
     2011     2010  

Net revenue:

    

Mountain

   $ 318,277      $ 260,978   

Lodging

     44,720        38,676   

Real estate

     25,147        870   
                

Total net revenue

     388,144        300,524   

Segment operating expense (exclusive of depreciation and amortization shown separately below):

    

Mountain

     191,224        154,018   

Lodging

     43,839        37,788   

Real estate

     25,344        7,417   
                

Total segment operating expense

     260,407        199,223   

Other operating (expense) income:

    

Depreciation and amortization

     (30,276     (27,772

(Loss) gain on disposal of fixed assets, net

     (400     12   
                

Income from operations

     97,061        73,541   

Mountain equity investment income, net

     138        207   

Investment income

     226        192   

Interest expense, net

     (8,659     (4,148
                

Income before provision for income taxes

     88,766        69,792   

Provision for income taxes

     (34,209     (24,713
                

Net income

     54,557        45,079   

Net income attributable to noncontrolling interests

     (6     (4,389
                

Net income attributable to Vail Resorts, Inc.

   $ 54,551      $ 40,690   
                

Per share amounts (Note 3):

    

Basic net income per share attributable to Vail Resorts, Inc.

   $ 1.52      $ 1.12   
                

Diluted net income per share attributable to Vail Resorts, Inc.

   $ 1.48      $ 1.11   
                

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

 

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Vail Resorts, Inc.

Consolidated Condensed Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     Six months ended  
     January 31,  
     2011     2010  

Net revenue:

    

Mountain

   $ 359,056      $ 300,182   

Lodging

     89,098        80,031   

Real estate

     174,408        1,075   
                

Total net revenue

     622,562        381,288   

Segment operating expense (exclusive of depreciation and amortization shown separately below):

    

Mountain

     274,360        230,486   

Lodging

     86,674        80,411   

Real estate

     170,407        12,594   
                

Total segment operating expense

     531,441        323,491   

Other operating (expense) income:

    

Depreciation and amortization

     (58,008     (54,956

Gain on sale of real property

     —          6,087   

Loss on disposal of fixed assets, net

     (308     (101
                

Income from operations

     32,805        8,827   

Mountain equity investment income, net

     918        461   

Investment income

     464        422   

Interest expense, net

     (16,595     (8,983
                

Income before (provision) benefit for income taxes

     17,592        727   

(Provision) benefit for income taxes

     (6,095     841   
                

Net income

     11,497        1,568   

Net loss (income) attributable to noncontrolling interests

     31        (2,051
                

Net income (loss) attributable to Vail Resorts, Inc.

   $ 11,528      $ (483
                

Per share amounts (Note 3):

    

Basic net income (loss) per share attributable to Vail Resorts, Inc.

   $ 0.32      $ (0.01
                

Diluted net income (loss) per share attributable to Vail Resorts, Inc.

   $ 0.31      $ (0.01
                

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

 

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Vail Resorts, Inc.

Consolidated Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Six Months Ended  
     January 31,  
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 11,497      $ 1,568   

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

    

Depreciation and amortization

     58,008        54,956   

Cost of real estate sales

     149,384        —     

Stock-based compensation expense

     6,437        6,368   

Deferred income taxes, net

     6,095        (841

Gain on sale of real property

     —          (6,087

Other non-cash income, net

     (4,112     (3,009

Changes in assets and liabilities:

    

Restricted cash

     (3,886     (4,467

Trade receivables, net

     2,225        12,697   

Inventories, net

     (4,473     (2,694

Investments in real estate

     (11,248     (109,186

Accounts payable and accrued liabilities

     69,984        61,238   

Deferred real estate deposits

     (30,248     139   

Other assets and liabilities, net

     (5,958     3,449   
                

Net cash provided by operating activities

     243,705        14,131   

Cash flows from investing activities:

    

Capital expenditures

     (61,887     (36,245

Acquisition of business

     (60,528     —     

Cash received from sale of real property

     —          8,920   

Other investing activities, net

     (256     (234
                

Net cash used in investing activities

     (122,671     (27,559

Cash flows from financing activities:

    

Proceeds from borrowings under long-term debt

     189,000        85,962   

Payments of long-term debt

     (226,067     (86,188

Other financing activities, net

     (1,461     2,364   
                

Net cash (used in) provided by financing activities

     (38,528     2,138   
                

Net increase (decrease) in cash and cash equivalents

     82,506        (11,290

Cash and cash equivalents:

    

Beginning of period

     14,745        69,298   
                

End of period

   $ 97,251      $ 58,008   
                

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

 

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Vail Resorts, Inc.

Notes to Consolidated Condensed Financial Statements

(Unaudited)

 

1. Organization and Business

Vail Resorts, Inc. (“Vail Resorts” or the “Parent Company”) is organized as a holding company and operates through various subsidiaries. Vail Resorts and its subsidiaries (collectively, the “Company”) currently operate in three business segments: Mountain, Lodging and Real Estate. In the Mountain segment, the Company operates the six world-class ski resort properties of Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado and Heavenly and Northstar-at-Tahoe mountain resorts in the Lake Tahoe area of California and Nevada, as well as ancillary services, primarily including ski school, dining and retail/rental operations. These resorts (with the exception of Northstar-at-Tahoe) operate primarily on Federal land under the terms of Special Use Permits granted by the USDA Forest Service (the “Forest Service”). In the Lodging segment, the Company owns and/or manages a collection of luxury hotels under its RockResorts brand, as well as other strategic lodging properties and a large number of condominiums located in proximity to the Company’s ski resorts, the Grand Teton Lodge Company (“GTLC”), which operates three destination resorts at Grand Teton National Park (under a National Park Service concessionaire contract), Colorado Mountain Express (“CME”), a resort ground transportation company, and golf courses. Vail Resorts Development Company (“VRDC”), a wholly-owned subsidiary, conducts the operations of the Company’s Real Estate segment, which owns and develops real estate in and around the Company’s resort communities. The Company’s mountain business and its lodging properties at or around the Company’s ski resorts are seasonal in nature with peak operating seasons from mid-November through mid-April. The Company’s operations at GTLC and its golf courses generally operate from mid-May through mid-October. The Company also has non-majority owned investments in various other entities, some of which are consolidated (see Note 7, Variable Interest Entities).

 

2. Summary of Significant Accounting Policies

Basis of Presentation

Consolidated Condensed Financial Statements— In the opinion of the Company, the accompanying Consolidated Condensed Financial Statements reflect all adjustments necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Results for interim periods are not indicative of the results for the entire fiscal year. The accompanying Consolidated Condensed Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2010. Certain information and footnote disclosures, including significant accounting policies, normally included in fiscal year financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. The July 31, 2010 Consolidated Condensed Balance Sheet was derived from audited financial statements.

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

Noncontrolling Interests in Consolidated Financial Statements—Net income (loss) attributable to noncontrolling interests along with net income (loss) attributable to the stockholders of the Company are reported separately in the Consolidated Condensed Statement of Operations. Additionally, noncontrolling interests in the consolidated subsidiaries of the Company are reported as a separate component of equity in the Consolidated Condensed Balance Sheet, apart from the Company’s equity. However, prior to April 30, 2010, GSSI LLC (“GSSI”) held a noncontrolling interest in SSI Venture, LLC (“SSV”) (the Company’s retail/rental operations) of which GSSI held a redemption feature, as a result of a put option, and as such the Company recorded the redeemable noncontrolling interest in SSV in the mezzanine section of the Consolidated Condensed Balance Sheet, outside of stockholders’ equity. The Company had recorded the redeemable noncontrolling interest at the redemption value as prescribed in the operating agreement between GSSI and the Company at the end of each reporting period. At the end of each

 

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reporting period if the redemption value was below the carrying value of the noncontrolling interest, the difference was recorded in noncontrolling interests as a component of stockholders’ equity; however, if the redemption value exceeded the carrying value of the noncontrolling interest the difference was recorded to retained earnings. On April 23, 2010, the Company entered into a transfer agreement with GSSI to acquire all of GSSI’s remaining 30.7% ownership interest in SSV for a negotiated price of $31.0 million. The purchase of GSSI’s interest in SSV was completed on April 30, 2010, resulting in the Company holding 100% interest in SSV. As a result of this purchase, equity-noncontrolling interest and redeemable noncontrolling interest related to SSV were eliminated. The following table summarizes the changes in total stockholders’ equity (in thousands):

 

    For the Six Months Ended January 31,  
    2011     2010  
    Vail Resorts
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
    Vail Resorts
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 

Balance, beginning of period

  $ 788,770      $ 13,617      $ 802,387      $ 765,295      $ 15,411      $ 780,706   

Net income (loss)

    11,528        (31     11,497        (483     2,051        1,568   

Stock-based compensation expense

    6,437        —          6,437        6,368        —          6,368   

Issuance of shares under share award plans

    (358     —          (358     (672     —          (672

Tax benefit (expense) from share award plans

    62        —          62        (320     —          (320

Adjustment to redemption value of redeemable noncontrolling interest

    —          —          —          —          (5,903     (5,903

Contributions (Distributions) from/to noncontrolling interests, net

    —          678        678        —          (40     (40
                                               

Balance, end of period

  $ 806,439      $ 14,264      $ 820,703      $ 770,188      $ 11,519      $ 781,707   
                                               

Fair Value Instruments— The recorded amounts for cash and cash equivalents, receivables, other current assets, and accounts payable and accrued liabilities approximate fair value due to their short-term nature. The fair value of amounts outstanding under the Employee Housing Bonds (Note 4, Long-Term Debt) approximate book value due to the variable nature of the interest rate associated with that debt. The fair value of the 6.75% Senior Subordinated Notes (“6.75% Notes”) (Note 4, Long-Term Debt) is based on quoted market price. The fair value of the Company’s Industrial Development Bonds (Note 4, Long-Term Debt) and other long-term debt have been estimated using discounted cash flow analyses based on current borrowing rates for debt with similar remaining maturities and ratings. The estimated fair value of the 6.75% Notes, Industrial Development Bonds and other long-term debt as of January 31, 2011 is presented below (in thousands):

 

     January 31, 2011  
     Carrying      Fair  
     Value      Value  

6.75% Notes

   $ 390,000       $ 394,875   

Industrial Development Bonds

   $ 41,200       $ 44,872   

Other long-term debt

   $ 13,982       $ 14,096   

New Accounting Standards

Amendments to FASB Interpretation, Consolidation of Variable Interest Entities— In June 2009, the Financial Accounting Standards Board (the “FASB”) issued guidance which is included in Accounting Standards Codification (“ASC”) 810, “Consolidation” which amends the consolidation guidance for variable interest entities. Under this new standard, entities must perform a qualitative assessment in determining the primary beneficiary of a variable interest entity which includes, among other things, consideration as to whether a variable interest holder has the power to direct the activities that most significantly impact the economic performance of the variable interest entity and the obligation to absorb losses or the right to receive benefits of the variable interest entity that could potentially be significant to the variable interest entity. This standard was effective for the Company beginning August 1, 2010 (the Company’s fiscal year ending July 31, 2011). The adoption of this accounting standard did not have a material impact on the Company’s financial position or results of operations.

 

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Revenue Recognition Guidance for Arrangements with Multiple Deliverables— In September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverables Revenue Arrangements” (amendments to ASC Topic 605, “Revenue Recognition,” and the Emerging Issues Task Force Issue No. 08-01 “Revenue Arrangements with Multiple Deliverables”) which amends the revenue recognition guidance for arrangements with multiple deliverables. This new standard requires entities to allocate revenue in arrangements with multiple deliverables using estimated selling prices and eliminates the use of the residual method. The provisions of this new standard was effective for the Company beginning August 1, 2010 (the Company’s fiscal year ending July 31, 2011). The adoption of this accounting standard did not have a material impact on the Company’s financial position or results of operations.

 

3. Net Income (Loss) Per Common Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to Vail Resorts stockholders by the weighted-average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then share in the earnings of Vail Resorts. Presented below is basic and diluted EPS for the three months ended January 31, 2011 and 2010 (in thousands, except per share amounts):

 

     Three Months Ended January 31,  
     2011      2010  
     Basic      Diluted      Basic      Diluted  

Net income per share:

           

Net income attributable to Vail Resorts

   $ 54,551       $ 54,551       $ 40,690       $ 40,690   

Weighted-average shares outstanding

     35,991         35,991         36,245         36,245   

Effect of dilutive securities

     —           807         —           509   
                                   

Total shares

     35,991         36,798         36,245         36,754   
                                   

Net income per share attributable to Vail Resorts

   $ 1.52       $ 1.48       $ 1.12       $ 1.11   
                                   

The number of shares issuable on the exercise of share based awards that were excluded from the calculation of diluted net income per share because the effect of their inclusion would have been anti-dilutive totaled 87,000 and 31,000 for the three months ended January 31, 2011 and 2010, respectively.

Presented below is basic and diluted EPS for the six months ended January 31, 2011 and 2010 (in thousands, except per share amounts):

 

     Six Months Ended January 31,  
     2011      2010  
     Basic      Diluted      Basic     Diluted  

Net income (loss) per share:

          

Net income (loss) attributable to Vail Resorts

   $ 11,528       $ 11,528       $ (483   $ (483

Weighted-average shares outstanding

     35,964         35,964         36,223        36,223   

Effect of dilutive securities

     —           673         —          —     
                                  

Total shares

     35,964         36,637         36,223        36,223   
                                  

Net income (loss) per share attributable to Vail Resorts

   $ 0.32       $ 0.31       $ (0.01   $ (0.01
                                  

 

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The number of shares issuable on the exercise of share based awards that were excluded from the calculation of diluted net income (loss) per share because the effect of their inclusion would have been anti-dilutive totaled 36,000 and 1.2 million for the six months ended January 31, 2011 and 2010, respectively.

 

4. Long-Term Debt

Long-term debt as of January 31, 2011, July 31, 2010 and January 31, 2010 is summarized as follows (in thousands):

 

          January 31,      July 31,      January 31,  
     Maturity (a)    2011      2010      2010  

Credit Facility Revolver (b)

   2016    $ —         $ 35,000       $ —     

Industrial Development Bonds

   2020      41,200         42,700         42,700   

Employee Housing Bonds

   2027-2039      52,575         52,575         52,575   

6.75% Senior Subordinated Notes

   2014      390,000         390,000         390,000   

Other

   2011-2029      13,982         6,436         6,460   
                               

Total debt

        497,757         526,711         491,735   

Less: Current maturities (c)

        2,708         1,869         1,870   
                             

Long-term debt

      $ 495,049       $ 524,842       $ 489,865   
                             

 

(a) Maturities shown in this column are based on the Company’s July 31 fiscal year end.
(b) On January 25, 2011 The Vail Corporation, a wholly-owned subsidiary of the Company, amended and restated its senior credit facility (the “Credit Facility”). Key modifications to the Credit Facility included, among other things, the extension of the maturity on the revolving credit facility from February 2012 to January 2016 (subject to the repayment or refinancing of the Company’s 6.75% Notes by November 15, 2013); increased grid pricing for interest rate margins (currently, under the Credit Facility, at LIBOR plus 1.75%) and commitment fees (currently, under the Credit Facility, at 0.35%); the expansion of baskets for improved flexibility in the Company’s ability to incur debt and make acquisitions, investments and distributions; and the elimination of certain financial covenants.

The Credit Facility is now referred to as the Fifth Amended and Restated Credit Agreement (“Credit Agreement”) between the Vail Corporation, Bank of America, N.A., as administrative agent, U.S. Bank National Association and Wells Fargo Bank, National Association as co-syndication agents, JPMorgan Chase Bank, N.A. and Deutsche Bank Securities Inc. as Co-Documentation Agents and the Lenders party thereto, and consists of a $400 million revolving credit facility. The Company’s obligations under the Credit Agreement are guaranteed by the Company and certain of its subsidiaries and are collateralized by a pledge of all of the capital stock of the Company and substantially all of its subsidiaries (with certain additional exceptions for the pledge of the capital stock of foreign subsidiaries). The proceeds of loans made under the Credit Agreement may be used to fund the Company’s working capital needs, capital expenditures, acquisitions, investments and other general corporate purposes, including the issuance of letters of credit. The Credit Agreement matures January 2016 (unless repayment or refinancing of the 6.75% Notes is not completed by November 15, 2013 then such date becomes the maturity date). Borrowings under the Credit Agreement bear interest annually at a rate of (i) LIBOR plus a margin or (ii) the Agent’s prime lending rate. Interest rate margins may fluctuate based upon the ratio of the Company’s Net Funded Debt to Adjusted EBITDA (as such terms are defined in the Credit Agreement) on a trailing four-quarter basis. The Credit Agreement also includes a quarterly unused commitment fee, which is equal to a percentage determined by the Net Funded Debt to Adjusted EBITDA ratio, as each such term is defined in the Credit Agreement, times the daily amount by which the Credit Agreement commitment exceeds the total of outstanding loans and outstanding letters of credit. The unused amounts are accessible to the extent that the Net Funded Debt to Adjusted EBITDA ratio does not exceed the maximum ratio allowed at quarter-ends and the Adjusted EBITDA to interest on Funded Debt (as defined in the Credit Agreement) ratio does not fall below the minimum ratio allowed at quarter-ends. The Credit Agreement provides for affirmative and negative covenants that restrict, among other things, the Company’s ability to incur indebtedness, dispose of assets, make capital expenditures, make distributions and make investments. In addition, the Credit Agreement includes the following restrictive financial covenants: Net Funded Debt to Adjusted EBITDA ratio and Adjusted EBITDA to interest on Funded Debt ratio.

 

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

 

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Aggregate maturities for debt outstanding as of January 31, 2011 reflected by fiscal year are as follows (in thousands):

 

2011

   $ 2,202   

2012

     2,450   

2013

     2,194   

2014

     391,096   

2015

     1,107   

Thereafter

     98,708   
        

Total debt

   $         497,757   
        

The Company incurred gross interest expense of $8.7 million and $8.5 million for the three months ended January 31, 2011 and 2010, respectively, of which $0.4 million in each period was amortization of deferred financing costs. The Company had no capitalized interest during the three months ended January 31, 2011. The Company capitalized $4.4 million of interest (of which $4.0 million was related to real estate under development) during the three months ended January 31, 2010. The Company incurred gross interest expense of $17.1 million and $16.9 million for the six months ended January 31, 2011 and 2010, respectively, of which $0.8 million in each period was amortization of deferred financing costs. The Company capitalized $0.5 million of interest (related to real estate under development) and $7.9 million of interest (of which $7.1 million was related to real estate development) during the six months ended January 31, 2011 and 2010, respectively.

 

5. Acquisition

On October 25, 2010, the Company acquired for cash 100% of the capital stock of BCRP Inc. and the membership interest of Northstar Group Commercial Properties LLC (together, with their subsidiaries “Northstar-at-Tahoe”) that operate the Northstar-at-Tahoe mountain resort in North Lake Tahoe, California from Booth Creek Resort Properties LLC and other sellers for a total consideration of $60.5 million, net of cash acquired. Northstar-at-Tahoe is a year round mountain resort providing a comprehensive offering of recreational activities including both snow sports and summer activities. Additionally, Northstar-at-Tahoe operates a base area village at the resort, including the subleasing of commercial retail space.

 

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The following summarizes the preliminary estimated fair values of the identifiable assets acquired and liabilities assumed at the acquisition date (in thousands). The preliminary estimate of fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below.

 

     Preliminary
Estimates  of
Acquisition Date
Fair Value
 

Accounts receivable, net

   $ 3,007   

Inventory, net

     1,799   

Other assets

     1,488   

Property, plant and equipment

     9,469   

Deferred income tax assets

     16,936   

Intangible assets

     1,200   

Goodwill

     90,020   
        

Total identifiable assets acquired

   $ 123,919   

Accounts payable and accrued liabilities

   $ 6,599   

Deferred revenue

     5,281   

Capital lease obligations

     8,111   

Unfavorable lease obligations, net

     43,400   
        

Total liabilities assumed

   $ 63,391   

Total purchase price

   $ 60,528   
        

The operations of Northstar-at-Tahoe are conducted on land and with operating assets owned by CNL Lifestyle Properties, Inc. under long-term lease agreements which were assumed by the Company. Under the terms of the leases, the Company estimates that it will be required to pay above market rates in the aggregate through the remainder of the initial lease term expiring in fiscal 2027. The Company has recorded a net unfavorable lease obligation for these leases that will be amortized as an adjustment to lease expense over the remaining initial lease term. Future minimum lease payments under the remaining initial term of these leases reflected by fiscal year as of January 31, 2011 are as follows (in thousands):

 

2011

   $ 8,326   

2012

     9,568   

2013

     9,979   

2014

     11,514   

2015

     11,831   

Thereafter

     152,036   
        

Total

   $         203,254   
        

The excess of the purchase price over the aggregate fair values of assumed assets and liabilities was recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies, the assembled workforce of Northstar-at-Tahoe and other factors. None of the goodwill is expected to be deductible for income tax purposes. The operating results of Northstar-at-Tahoe have contributed $31.3 million of net revenue for the three months ended January 31, 2011. Additionally, the Company has recognized $3.8 million of acquisition related expenses in the Consolidated Condensed Statement of Operations during the six months ended January 31, 2011.

The following presents the unaudited pro forma consolidated financial information as if the acquisition of Northstar-at-Tahoe was completed on August 1, 2009. The following pro forma financial information includes adjustments for (i) depreciation and interest expense for capital leases on acquired property, plant and equipment recorded at the date of acquisition; (ii) straight-line expense recognition of minimum future lease payments from the date of acquisition, including the amortization of the net unfavorable lease obligations; and (iii) acquisition related costs. This pro forma financial information is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the acquisition taken place on August 1, 2009 (in thousands, except per share amounts).

 

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     Three Months Ended  
     January 31,  
     2010  

Pro forma net revenue

   $ 325,353   

Pro forma net income attributable to Vail Resorts, Inc.

   $ 44,307   

Pro forma basic net income per share attributable to Vail Resorts, Inc.

   $ 1.22   

Pro forma diluted net income per share attributable to Vail Resorts, Inc.

   $ 1.21   

 

     Six Months Ended  
     January 31,  
     2011      2010  

Pro forma net revenue

   $     626,975       $ 410,384   

Pro forma net income (loss) attributable to Vail Resorts, Inc.

   $ 10,072       $ (78

Pro forma basic net income per share attributable to Vail Resorts, Inc.

   $ 0.28       $ —     

Pro forma diluted net income per share attributable to Vail Resorts, Inc.

   $ 0.27       $ —     

 

6. Supplementary Balance Sheet Information

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

 

     January 31,     July 31,     January 31,  
     2011     2010     2010  

Land and land improvements

   $ 270,629      $ 270,382      $ 269,248   

Buildings and building improvements

     788,378        769,382        738,165   

Machinery and equipment

     541,512        512,144        513,874   

Furniture and fixtures

     210,626        198,566        189,742   

Software

     61,173        56,498        52,942   

Vehicles

     41,623        35,447        35,208   

Construction in progress

     29,574        31,197        36,970   
                        

Gross property, plant and equipment

     1,943,515        1,873,616        1,836,149   

Accumulated depreciation

     (899,017     (846,226     (796,594
                        

Property, plant and equipment, net

   $ 1,044,498      $ 1,027,390      $ 1,039,555   
                        

The changes in the net carrying amount of goodwill allocated between the Company’s segments as of July 31, 2010 and January 31, 2011 are as follows (in thousands):

 

     Mountain      Lodging      Goodwill, net  

Balance at July 31, 2010

   $ 120,615       $ 60,470       $ 181,085   

Northstar-at-Tahoe acquisition

     90,020         —           90,020   
                          

Balance at January 31, 2011

   $ 210,635       $ 60,470       $ 271,105   
                          

 

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

 

     January 31,      July 31,      January 31,  
     2011      2010      2010  

Trade payables

   $ 71,289       $ 47,554       $ 55,677   

Real estate development payables

     9,702         31,203         42,635   

Deferred revenue

     100,614         53,298         83,363   

Deferred real estate and other deposits

     23,850         42,891         64,279   

Accrued salaries, wages and deferred compensation

     26,871         21,425         21,404   

Accrued benefits

     25,356         23,547         24,974   

Accrued interest

     13,828         13,939         13,788   

Other accruals

     39,729         21,469         33,136   
                          

Total accounts payable and accrued liabilities

   $ 311,239       $ 255,326       $ 339,256   
                          

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

 

     January 31,      July 31,      January 31,  
     2011      2010      2010  

Private club deferred initiation fee revenue and deposits

   $ 147,196       $ 148,184       $ 150,980   

Unfavorable lease obligation, net

     40,073         —           —     

Other long-term liabilities

     51,507         48,976         46,779   
                          

Total other long-term liabilities

   $ 238,776       $ 197,160       $ 197,759   
                          

 

7. Variable Interest Entities

The Company is the primary beneficiary of four employee housing entities (collectively, the “Employee Housing Entities”), Breckenridge Terrace, LLC, The Tarnes at BC, LLC, BC Housing, LLC and Tenderfoot Seasonal Housing, LLC, which are Variable Interest Entities (“VIEs”), and has consolidated them in its Consolidated Condensed Financial Statements. As a group, as of January 31, 2011 the Employee Housing Entities had total assets of $34.0 million (primarily recorded in property, plant and equipment, net) and total liabilities of $62.0 million (primarily recorded in long-term debt as “Employee Housing Bonds”). The Company’s lenders have issued letters of credit totaling $53.4 million under the Credit Agreement related to Employee Housing Bonds. Payments under the letters of credit would be triggered in the event that one of the entities defaults on required payments. The letters of credit have no default provisions.

The Company is the primary beneficiary of Avon Partners II, LLC (“APII”), which is a VIE. APII owns commercial space and the Company currently leases substantially all of that space. APII had total assets of $5.3 million (primarily recorded in property, plant and equipment, net) and no debt as of January 31, 2011.

The Company, through various lodging subsidiaries, manages hotels in which the Company has no ownership interest in the entities that own such hotels. The Company has extended a $2.0 million note receivable to one of these entities. This entity was formed by unrelated third parties to acquire, own, operate and realize the value in resort hotel properties. The Company managed the day-to-day operations of this hotel property as of January 31, 2011. The Company has determined that this entity is a VIE, and the management contract along with the note receivable are significant variable interests in this VIE. The Company has also determined that it is not the primary beneficiary of this entity and, accordingly, is not required to consolidate this entity. Based upon the latest information provided by this third party entity, this VIE had estimated total assets of approximately $62.7 million and total liabilities of approximately $71.9 million. The Company’s maximum exposure to loss as a result of its involvement with this VIE is limited to a $2.6 million note receivable, including accrued interest from the third party and the net book value of the intangible asset associated with a management agreement in the amount of $0.5 million as of January 31, 2011.

 

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8. Fair Value Measurements

The FASB issued fair value guidance that establishes how reporting entities should measure fair value for measurement and disclosure purposes. The guidance establishes a common definition of fair value applicable to all assets and liabilities measured at fair value and prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:

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

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

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

The table below summarizes the Company’s cash equivalents measured at fair value (all other assets and liabilities measured at fair value are immaterial) (in thousands):

 

     Fair Value Measurement as of January 31, 2011  

Description

   Balance at
January  31,
2011
     Level 1      Level 2      Level 3  

Money Market

   $ 402       $ 402       $ —         $ —     

US Treasury

   $ 8,297       $ 8,297       $ —         $ —     

Certification of Deposit

   $ 300       $ —         $ 300       $ —     
     Fair Value Measurement as of July 31, 2010  

Description

   Balance at
July 31,
2010
     Level 1      Level 2      Level 3  

Money Market

   $ 399       $ 399       $ —         $ —     

US Treasury

   $ 8,297       $ 8,297       $ —         $ —     

Certification of Deposit

   $ 300       $ —         $ 300       $ —     
     Fair Value Measurement as of January 31, 2010  

Description

   Balance at
January 31,
2010
     Level 1      Level 2      Level 3  

Money Market

   $ 8,698       $ 8,698       $ —         $ —     

US Treasury

   $ —         $ —         $ —         $ —     

Certification of Deposit

   $ 300       $ —         $ 300       $ —     

 

9. Commitments and Contingencies

Metropolitan Districts

The Company credit-enhances $8.0 million of bonds issued by Holland Creek Metropolitan District (“HCMD”) through an $8.1 million letter of credit issued under the Credit Agreement. HCMD’s bonds were issued and used to build infrastructure associated with the Company’s Red Sky Ranch residential development. The Company has agreed to pay capital improvement fees to Red Sky Ranch Metropolitan District (“RSRMD”) until RSRMD’s revenue streams from property taxes are sufficient to meet debt service requirements under HCMD’s bonds, and the

 

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Company has recorded a liability of $1.8 million, $1.9 million and $1.8 million, primarily within “other long-term liabilities” in the accompanying Consolidated Condensed Balance Sheets, as of January 31, 2011, July 31, 2010 and January 31, 2010, respectively, with respect to the estimated present value of future RSRMD capital improvement fees. The Company estimates that it will make capital improvement fee payments under this arrangement through the year ending July 31, 2028.

Guarantees/ Indemnifications

As of January 31, 2011, the Company had various other letters of credit in the amount of $73.3 million, consisting primarily of $53.4 million in support of the Employee Housing Bonds, $13.4 million of construction and development related guarantees and $5.4 million for workers’ compensation and general liability deductibles related to construction and development activities.

In addition to the guarantees noted above, the Company has entered into contracts in the normal course of business which include certain indemnifications under which it could be required to make payments to third parties upon the occurrence or non-occurrence of certain future events. These indemnities include indemnities to licensees in connection with the licensees’ use of the Company’s trademarks and logos, indemnities for liabilities associated with the infringement of other parties’ technology and software products, indemnities related to liabilities associated with the use of easements, indemnities related to employment of contract workers, the Company’s use of trustees, indemnities related to the Company’s use of public lands and environmental indemnifications. The duration of these indemnities generally is indefinite and generally do not limit the future payments the Company could be obligated to make.

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

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

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

Self Insurance

The Company is self-insured for claims under its health benefit plans and for the majority of workers’ compensation claims, subject to a stop loss policy. The self-insurance liability related to workers’ compensation is determined actuarially based on claims filed. The self-insurance liability related to claims under the Company’s health benefit plans is determined based on analysis of actual claims. The amounts related to these claims are included as a component of accrued benefits in accounts payable and accrued liabilities (see Note 6, Supplementary Balance Sheet Information).

 

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Legal

The Company is a party to various lawsuits arising in the ordinary course of business. Management believes the Company has adequate insurance coverage or has accrued for loss contingencies for all known matters that are deemed to be probable losses and estimable. As of January 31, 2011, July 31, 2010 and January 31, 2010 the accrual for the loss contingencies related to these matters was not material individually and in the aggregate.

 

10. Segment Information

The Company has three reportable segments: Mountain, Lodging and Real Estate. The Mountain segment includes the operations of the Company’s ski resorts and related ancillary services. The Lodging segment includes the operations of all of the Company’s owned hotels, RockResorts, GTLC, condominium management, CME and golf operations. The Real Estate segment owns and develops real estate in and around the Company’s resort communities. The Company’s reportable segments, although integral to the success of the others, offer distinctly different products and services and require different types of management focus. As such, these segments are managed separately.

The Company reports its segment results using Reported EBITDA (defined as segment net revenue less segment operating expenses, plus or minus segment equity investment income or loss and for the Real Estate segment plus gain on sale of real property), which is a non-GAAP financial measure. The Company reports segment results in a manner consistent with management’s internal reporting of operating results to the chief operating decision maker (Chief Executive Officer) for purposes of evaluating segment performance.

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

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

 

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

 

     Three Months Ended     Six Months Ended  
     January 31,     January 31,  
     2011     2010     2011     2010  

Net revenue:

        

Lift tickets

   $ 155,173      $ 129,517      $ 155,173      $ 129,517   

Ski school

     37,296        30,069        37,296        30,069   

Dining

     26,405        19,789        30,512        23,257   

Retail/rental

     74,320        61,026        96,373        82,564   

Other

     25,083        20,577        39,702        34,775   
                                

Total Mountain net revenue

     318,277        260,978        359,056        300,182   

Lodging

     44,720        38,676        89,098        80,031   
                                

Total Resort net revenue

     362,997        299,654        448,154        380,213   

Real Estate

     25,147        870        174,408        1,075   
                                

Total net revenue

   $ 388,144      $ 300,524      $ 622,562      $ 381,288   
                                

Operating expense:

        

Mountain

   $ 191,224      $ 154,018      $ 274,360      $ 230,486   

Lodging

     43,839        37,788        86,674        80,411   
                                

Total Resort operating expense

     235,063        191,806        361,034        310,897   

Real estate

     25,344        7,417        170,407        12,594   
                                

Total segment operating expense

   $ 260,407      $ 199,223      $ 531,441      $ 323,491   
                                

Gain on sale of real property

   $ —        $ —        $ —        $ 6,087   

Mountain equity investment income, net

   $ 138      $ 207      $ 918      $ 461   

Reported EBITDA:

        

Mountain

   $ 127,191      $ 107,167      $ 85,614      $ 70,157   

Lodging

     881        888        2,424        (380
                                

Resort

     128,072        108,055        88,038        69,777   

Real Estate

     (197     (6,547     4,001        (5,432
                                

Total Reported EBITDA

   $ 127,875      $ 101,508      $ 92,039      $ 64,345   
                                

Real estate held for sale and investment

   $ 281,699      $ 414,501      $ 281,699      $ 414,501   

Reconciliation to net income (loss) attributable to Vail Resorts, Inc:

        

Total Reported EBITDA

   $ 127,875      $ 101,508      $ 92,039      $ 64,345   

Depreciation and amortization

     (30,276     (27,772     (58,008     (54,956

(Loss) gain on disposal of fixed assets, net

     (400     12        (308     (101

Investment income

     226        192        464        422   

Interest expense, net

     (8,659     (4,148     (16,595     (8,983
                                

Income before (provision) benefit for income taxes

     88,766        69,792        17,592        727   

(Provision) benefit for income taxes

     (34,209     (24,713     (6,095     841   
                                

Net income

   $ 54,557      $ 45,079      $ 11,497      $ 1,568   

Net (income) loss attributable to noncontrolling interests

     (6     (4,389     31        (2,051
                                

Net income (loss) attributable to Vail Resorts, Inc.

   $ 54,551      $ 40,690      $ 11,528      $ (483
                                

 

11. Stock Repurchase Plan

On March 9, 2006, the Company’s Board of Directors approved the repurchase of up to 3,000,000 shares of common stock and on July 16, 2008 approved an increase of the Company’s common stock repurchase authorization by an additional 3,000,000 shares. Since inception of its stock repurchase plan through January 31, 2011, the Company has repurchased 4,264,804 shares at a cost of approximately $162.8 million. As of January 31, 2011, 1,735,196 shares remained available under the existing repurchase authorization. Shares of common stock purchased pursuant to the repurchase program will be held as treasury shares and may be used for the issuance of shares under the Company’s employee share award plans.

 

12. Guarantor Subsidiaries and Non-Guarantor Subsidiaries

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

 

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Presented below is the consolidated financial information of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Financial information for the Non-Guarantor Subsidiaries is presented in the column titled “Other Subsidiaries.” On April 30, 2010, the Company acquired GSSI’s remaining noncontrolling interest in SSV (see Note 2, Summary of Significant Accounting Policies). Subsequent to this transaction, SSV became a Guarantor Subsidiary under the 6.75% Notes. As such, the Company has included SSV under Guarantor Subsidiaries in the accompanying supplemental condensed financial statements. Reclassifications for SSV have been made to the financial information as of and for the three and six months ended January 31, 2010 to conform to the current year presentation. Balance sheets are presented as of January 31, 2011, July 31, 2010 and January 31, 2010. Statements of operations are presented for the three and six months ended January 31, 2011 and 2010. Statement of cash flows are presented for the six months ended January 31, 2011 and 2010.

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

 

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Supplemental Condensed Consolidating Balance Sheet

As of January 31, 2011

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Current assets:

         

Cash and cash equivalents

  $ —        $ 90,186      $ 7,065      $ —        $ 97,251   

Restricted cash

    —          15,142        758        —          15,900   

Trade receivables, net

    450        49,320        5,353        —          55,123   

Inventories, net

    —          52,780        1,806        —          54,586   

Other current assets

    25,759        19,669        1,771        —          47,199   
                                       

Total current assets

    26,209        227,097        16,753        —          270,059   

Property, plant and equipment, net

    —          987,254        57,244        —          1,044,498   

Real estate held for sale and investment

    —          281,699        —          —          281,699   

Goodwill, net

    —          181,085        90,020        —          271,105   

Intangible assets, net

    —          71,000        19,269        —          90,269   

Other assets

    2,160        34,194        7,809        —          44,163   

Investments in subsidiaries

    1,663,467        65,894        —          (1,729,361     —     

Advances

    (320,369     297,678        22,691        —          —     
                                       

Total assets

  $ 1,371,467      $ 2,145,901      $ 213,786      $ (1,729,361   $ 2,001,793   
                                       

Current liabilities:

         

Accounts payable and accrued liabilities

  $ 12,507      $ 273,923      $ 24,809      $ —        $ 311,239   

Income taxes payable

    23,355        —          —          —          23,355   

Long-term debt due within one year

    —          133        2,575        —          2,708   
                                       

Total current liabilities

    35,862        274,056        27,384        —          337,302   

Long-term debt

    390,000        41,405        63,644        —          495,049   

Other long-term liabilities

    29,203        166,973        42,600        —          238,776   

Deferred income taxes

    109,963        —          —          —          109,963   

Total Vail Resorts, Inc. stockholders’ equity

    806,439        1,663,467        65,894        (1,729,361     806,439   

Noncontrolling interests

    —          —          14,264        —          14,264   
                                       

Total stockholders’ equity

    806,439        1,663,467        80,158        (1,729,361     820,703   
                                       

Total liabilities and stockholders’ equity

  $ 1,371,467      $ 2,145,901      $ 213,786      $ (1,729,361   $ 2,001,793   
                                       

 

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Supplemental Condensed Consolidating Balance Sheet

As of July 31, 2010

(in thousands)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Current assets:

         

Cash and cash equivalents

  $ —        $ 11,315      $ 3,430      $ —        $ 14,745   

Restricted cash

    —          11,443        391        —          11,834   

Trade receivables, net

    —          53,013        609        —          53,622   

Inventories, net

    —          48,081        214        —          48,295   

Other current assets

    21,448        20,570        231        —          42,249   
                                       

Total current assets

    21,448        144,422        4,875        —          170,745   

Property, plant and equipment, net

    —          990,904        36,486        —          1,027,390   

Real estate held for sale and investment

    —          422,164        —          —          422,164   

Goodwill, net

    —          181,085        —          —          181,085   

Intangible assets, net

    —          71,118        18,155        —          89,273   

Other assets

    2,515        24,776        4,861        —          32,152   

Investments in subsidiaries

    1,631,824        (16,258     —          (1,615,566     —     

Advances

    (294,189     298,798        (4,609     —          —     
                                       

Total assets

  $ 1,361,598      $ 2,117,009      $ 59,768      $ (1,615,566   $ 1,922,809   
                                       

Current liabilities:

         

Accounts payable and accrued liabilities

  $ 12,400      $ 240,823      $ 2,103      $ —        $ 255,326   

Income taxes payable

    32,729        —          —          —          32,729   

Long-term debt due within one year

    —          1,682        187        —          1,869   
                                       

Total current liabilities

    45,129        242,505        2,290        —          289,924   

Long-term debt

    390,000        76,479        58,363        —          524,842   

Other long-term liabilities

    29,203        166,201        1,756        —          197,160   

Deferred income taxes

    108,496        —          —          —          108,496   

Total Vail Resorts, Inc. stockholders’ equity (deficit)

    788,770        1,631,824        (16,258     (1,615,566     788,770   

Noncontrolling interests

    —          —          13,617        —          13,617   
                                       

Total stockholders’ equity (deficit)

    788,770        1,631,824        (2,641     (1,615,566     802,387   
                                       

Total liabilities and stockholders’ equity

  $ 1,361,598      $ 2,117,009      $ 59,768      $ (1,615,566   $ 1,922,809   
                                       

 

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Supplemental Condensed Consolidating Balance Sheet

As of January 31, 2010

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Current assets:

         

Cash and cash equivalents

  $ —        $ 54,891      $ 3,117      $ —        $ 58,008   

Restricted cash

    —          14,916        616        —          15,532   

Trade receivables, net

    —          44,762        604        —          45,366   

Inventories, net

    —          51,430        211        —          51,641   

Other current assets

    23,754        27,691        239        —          51,684   
                                       

Total current assets

    23,754        193,690        4,787        —          222,231   

Property, plant and equipment, net

    —          1,002,641        36,914        —          1,039,555   

Real estate held for sale and investment

    —          414,501        —          —          414,501   

Goodwill, net

    —          167,950        —          —          167,950   

Intangible assets, net

    —          68,613        10,554        —          79,167   

Other assets

    2,871        24,894        4,896        —          32,661   

Investments in subsidiaries

    1,571,356        (17,253     —          (1,554,103     —     

Advances

    (271,409     276,194        (4,785     —          —     
                                       

Total assets

  $ 1,326,572      $ 2,131,230      $ 52,366      $ (1,554,103   $ 1,956,065   
                                       

Current liabilities:

         

Accounts payable and accrued liabilities

  $ 12,404      $ 324,710      $ 2,142      $ —        $ 339,256   

Income taxes payable

    10,482        —          —          —          10,482   

Long-term debt due within one year

    —          1,683        187        —          1,870   
                                       

Total current liabilities

    22,886        326,393        2,329        —          351,608   

Long-term debt

    390,000        41,502        58,363        —          489,865   

Other long-term liabilities

    29,690        167,851        218        —          197,759   

Deferred income taxes

    113,808        —          —          —          113,808   

Redeemable noncontrolling interest

    —          21,318        —          —          21,318   

Total Vail Resorts, Inc. stockholders’ equity (deficit)

    770,188        1,571,356        (17,253     (1,554,103     770,188   

Noncontrolling interests

    —          2,810        8,709        —          11,519   
                                       

Total stockholders’ equity (deficit)

    770,188        1,574,166        (8,544     (1,554,103     781,707   
                                       

Total liabilities and stockholders’ equity

  $ 1,326,572      $ 2,131,230      $ 52,366      $ (1,554,103   $ 1,956,065   
                                       

 

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Supplemental Condensed Consolidating Statement of Operations

For the three months ended January 31, 2011

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Total net revenue

  $ —        $ 356,716      $ 34,857      $ (3,429   $ 388,144   

Total operating expense

    161        269,684        24,629        (3,391     291,083   
                                       

(Loss) income from operations

    (161     87,032        10,228        (38     97,061   

Other (expense) income, net

    (6,759     (1,192     (520     38        (8,433

Equity investment income, net

    —          138        —          —          138   
                                       

(Loss) income before benefit (provision) for income taxes

    (6,920     85,978        9,708        —          88,766   

Benefit (provision) for income taxes

    2,682        (33,266     (3,625     —          (34,209
                                       

Net (loss) income before equity in income (loss) of consolidated subsidiaries

    (4,238     52,712        6,083        —          54,557   

Equity in income of consolidated subsidiaries

    58,789        6,077        —          (64,866     —     
                                       

Net income

    54,551        58,789        6,083        (64,866     54,557   

Net income attributable to noncontrolling interests

    —          —          (6     —          (6
                                       

Net income attributable to Vail Resorts, Inc.

  $ 54,551      $ 58,789      $ 6,077      $ (64,866   $ 54,551   
                                       

 

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Supplemental Condensed Consolidating Statement of Operations

For the three months ended January 31, 2010

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Total net revenue

  $ —        $ 299,784      $ 3,300      $ (2,560   $ 300,524   

Total operating expense

    158        226,089        3,258        (2,522     226,983   
                                       

(Loss) income from operations

    (158     73,695        42        (38     73,541   

Other (expense) income, net

    (6,760     2,857        (91     38        (3,956

Equity investment income, net

    —          207        —          —          207   
                                       

(Loss) income before benefit (provision) for income taxes

    (6,918     76,759        (49     —          69,792   

Benefit (provision) for income taxes

    3,033        (27,746     —          —          (24,713
                                       

Net (loss) income before equity in income (loss) of consolidated subsidiaries

    (3,885     49,013        (49     —          45,079   

Equity in income (loss) of consolidated subsidiaries, net

    44,575        (37     —          (44,538     —     
                                       

Net income (loss)

    40,690        48,976        (49     (44,538     45,079   

Net (income) loss attributable to noncontrolling interests

    —          (4,401     12        —          (4,389
                                       

Net income (loss) attributable to Vail Resorts, Inc.

  $ 40,690      $ 44,575      $ (37   $ (44,538   $ 40,690   
                                       

 

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Supplemental Condensed Consolidating Statement of Operations

For the six months ended January 31, 2011

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Total net revenue

  $ —        $ 591,572      $ 36,916      $ (5,926   $ 622,562   

Total operating expense

    325        567,286        27,996        (5,850     589,757   
                                       

(Loss) income from operations

    (325     24,286        8,920        (76     32,805   

Other expense, net

    (13,518     (1,880     (809     76        (16,131

Equity investment income, net

    —          918        —          —          918   
                                       

(Loss) income before benefit (provision) for income taxes

    (13,843     23,324        8,111        —          17,592   

Benefit (provision) for income taxes

    6,006        (8,476     (3,625     —          (6,095
                                       

Net (loss) income before equity in income of consolidated subsidiaries

    (7,837     14,848        4,486        —          11,497   

Equity in income of consolidated subsidiaries

    19,365        4,517        —          (23,882     —     
                                       

Net income

    11,528        19,365        4,486        (23,882     11,497   

Net loss attributable to noncontrolling interests

    —          —          31        —          31   
                                       

Net income attributable to Vail Resorts, Inc.

  $ 11,528      $ 19,365      $ 4,517      $ (23,882   $ 11,528   
                                       

 

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Supplemental Condensed Consolidating Statement of Operations

For the six months ended January 31, 2010

(in thousands)

(Unaudited)

 

          100% Owned                    
    Parent     Guarantor     Other     Eliminating        
    Company     Subsidiaries     Subsidiaries     Entries     Consolidated  

Total net revenue

  $ —        $ 381,141      $ 4,738      $ (4,591   $ 381,288   

Total operating expense

    320        370,891        5,765        (4,515     372,461   
                                       

(Loss) income from operations

    (320     10,250        (1,027     (76     8,827   

Other (expense) income, net

    (13,518     5,349        (468     76        (8,561

Equity investment income, net

    —          461        —          —          461   
                                       

(Loss) income before benefit (provision) for income taxes

    (13,838     16,060        (1,495     —          727   

Benefit (provision) for income taxes

    5,594        (4,753     —          —          841   
                                       

Net (loss) income before equity in income (loss) of consolidated subsidiaries

    (8,244     11,307        (1,495     —          1,568   

Equity in income (loss) of consolidated subsidiaries, net

    7,761        (1,464     —          (6,297     —     
                                       

Net income (loss)

    (483     9,843        (1,495     (6,297     1,568   

Net (income) loss attributable to noncontrolling interests

    —          (2,082     31        —          (2,051
                                       

Net (loss) income attributable to Vail Resorts, Inc.

  $ (483   $ 7,761      $ (1,464   $ (6,297   $ (483
                                       

 

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Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended January 31, 2011

(in thousands)

(Unaudited)

 

          100% Owned              
    Parent     Guarantor     Other        
    Company     Subsidiaries     Subsidiaries     Consolidated  

Net cash provided by operating activities

  $ 35,263      $ 206,708      $ 1,734      $ 243,705   

Cash flows from investing activities:

       

Capital expenditures

    —          (60,119     (1,768     (61,887

Acquisition of a business

    —          (60,528     —          (60,528

Other investing activities, net

    —          (194     (62     (256
                               

Net cash used in investing activities

    —          (120,841     (1,830     (122,671

Cash flows from financing activities:

       

Proceeds from borrowings under long-term debt

    —          189,000        —          189,000   

Payments of long-term debt

    —          (225,625     (442     (226,067

Other financing activities, net

    687        (3,022     874        (1,461

Advances

    (35,950     32,651        3,299        —     
                               

Net cash (used in) provided by financing activities

    (35,263     (6,996     3,731        (38,528
                               

Net increase in cash and cash equivalents

    —          78,871        3,635        82,506   

Cash and cash equivalents:

       

Beginning of period

    —          11,315        3,430        14,745   
                               

End of period

  $ —        $ 90,186      $ 7,065      $ 97,251   
                               

 

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Supplemental Condensed Consolidating Statement of Cash Flows

For the six months ended January 31, 2010

(in thousands)

(Unaudited)

 

          100% Owned              
    Parent     Guarantor     Other        
    Company     Subsidiaries     Subsidiaries     Consolidated  

Net cash (used in) provided by operating activities

  $ (4,108   $ 18,475      $ (236   $ 14,131   

Cash flows from investing activities:

       

Capital expenditures

    —          (36,031     (214     (36,245

Cash received from sale of real property

    —          8,920        —          8,920   

Other investing activities, net

    —          (234     —          (234
                               

Net cash used in investing activities

    —          (27,345     (214     (27,559

Cash flows from financing activities:

       

Proceeds from borrowings under long-term debt

    —          85,962        —          85,962   

Payments of long-term debt

    —          (86,011     (177     (86,188

Other financing activities, net

    294        940        1,130        2,364   

Advances

    3,814        (3,814     —          —     
                               

Net cash provided by (used in) financing activities

    4,108        (2,923     953        2,138   
                               

Net (decrease) increase in cash and cash equivalents

    —          (11,793     503        (11,290

Cash and cash equivalents:

       

Beginning of period

    —          66,684        2,614        69,298   
                               

End of period

  $ —        $ 54,891      $ 3,117      $ 58,008   
                               

 

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended July 31, 2010 (“Form 10-K”) and the Consolidated Condensed Financial Statements as of January 31, 2011 and 2010 and for the three and six months then ended, included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which provide additional information regarding the financial position, results of operations and cash flows. 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 those discussed in this Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”), including the risks described in Item 1A “Risk Factors” of Part I of the Form 10-K. See also “Forward-Looking Statements” below for more information on these risks and other important factors that could cause actual results to differ materially from our forward looking statements.

Management’s Discussion and Analysis includes discussion of financial performance within each of our segments. We have chosen to specifically include Reported EBITDA (defined as segment net revenue less segment operating expense, plus or minus segment equity investment income or loss and for the Real Estate segment plus gain on sale of real property) and Net Debt (defined as long-term debt plus long-term debt due within one year less cash and cash equivalents), in the following discussion because we consider these measurements to be significant indications of our financial performance and available capital resources. Reported EBITDA and Net Debt are not measures of financial performance or liquidity under accounting principles generally accepted in the United States of America (“GAAP”). We utilize Reported EBITDA in evaluating our performance and in allocating resources to our segments. Refer to the end of the Results of Operations section below for a reconciliation of Reported EBITDA to net income or loss attributable to Vail Resorts, Inc. We also believe that Net Debt is an important measurement as it is an indicator of our ability to obtain additional capital resources for our future cash needs. Refer to the end of the Results of Operations section for a reconciliation of Net Debt.

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

Overview

Our operations are grouped into three integrated and interdependent segments: Mountain, Lodging and Real Estate. Resort is the combination of the Mountain and Lodging segments.

Mountain Segment

The Mountain segment is comprised of the operations of six ski resort properties as well as ancillary services, primarily including ski school, dining and retail/rental operations. Our six ski resorts are typically open for business from mid-November through mid-April, which is the peak operating season for the Mountain segment. Our single largest source of Mountain segment revenue is the sale of lift tickets (including season passes), which represented approximately 49% and 50% of Mountain segment net revenue for the three months ended January 31, 2011 and 2010, respectively.

Lift ticket revenue is driven by volume and pricing. Pricing is impacted by both absolute pricing as well as the demographic mix of guests, which impacts the price points at which various products are purchased. The demographic mix of guests is divided into two primary categories: (i) Destination guests and (ii) In-State guests. For the three months ended January 31, 2011, Destination guests comprised approximately 53% of our skier visits, while In-State guests comprised approximately 47% of our skier visits, which compares to approximately 54% and 46%, respectively, for the three months ended January 31, 2010.

 

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Destination guests generally purchase our higher-priced lift ticket products and utilize more ancillary services such as ski school, dining and retail/rental, as well as the lodging at or around our resorts. Destination guest visitation is less likely to be impacted by changes in the weather, but can be more impacted by adverse economic conditions or the global geopolitical climate. In-State guests tend to be more value-oriented and weather sensitive. We market season passes to both Destination and In-State guests in an effort to offer a value option in turn for a commitment predominately prior to the beginning of the ski season by guests to ski at our resorts. This in turn has developed a loyal customer base that generally skis multiple days each season at our resorts and provides a more stabilized stream of lift revenue to us. Season pass revenue, although primarily collected prior to the ski season, is recognized in the Consolidated Condensed Statement of Operations ratably over the ski season. For the three months ended January 31, 2011 and 2010, approximately 39.3% and 40.0%, respectively, of the total lift revenue recognized was comprised of season pass revenue (of which revenue recognized represents approximately 51% and 52% of total season pass sales for the 2010/2011 and 2009/2010 ski seasons, respectively, with the remaining season pass sales recognized as lift ticket revenue in our third fiscal quarter).

The cost structure of our ski resort operations has a significant fixed component with variable expenses including, but not limited to, USDA Forest Service (“Forest Service”) fees, credit card fees, retail/rental cost of sales and labor, ski school labor and dining operations; as such, profit margins can fluctuate greatly based on the level of revenues.

Lodging Segment

Operations within the Lodging segment include (i) ownership/management of a group of luxury hotels through the RockResorts brand, including several proximate to our ski resorts; (ii) ownership/management of non-RockResorts branded hotels and condominiums proximate to our ski resorts; (iii) Grand Teton Lodge Company (“GTLC”) which operates three destination resorts at Grand Teton National Park; (iv) Colorado Mountain Express (“CME”), a resort ground transportation company; and (v) golf courses.

Lodging properties (including managed condominium rooms) at or around our ski resorts, and CME, are closely aligned with the performance of the Mountain segment and experience similar seasonal trends as the Mountain segment, particularly with respect to visitation by Destination guests. Lodging revenue from properties (including managed condominium rooms) at or around our ski resorts, and CME, represented approximately 90% and 92% of Lodging segment revenue for the three months ended January 31, 2011 and 2010, respectively. Lodging segment revenue during our first and fourth fiscal quarters is generated primarily by the operations of GTLC (as GTLC’s operating season generally occurs from mid-May to mid-October), golf operations and seasonally low operations from our other owned and managed properties.

Real Estate Segment

The Real Estate segment owns and develops real estate in and around our resort communities and primarily engages in the vertical development of projects, as well as, occasionally the sale of land to third-party developers. Revenue from vertical development projects is not recognized until the closing of individual units within a project which occurs after substantial completion of the project. Contingent future profits from land sales, if any, are recognized only when received. We attempt to mitigate the risk of vertical development by often utilizing guaranteed maximum price construction contracts (although certain construction costs may not be covered by contractual limitations), pre-selling a portion of the project, requiring significant non-refundable deposits, and potentially obtaining non-recourse financing for certain projects. Our real estate development projects also may result in the creation of certain resort assets that provide additional benefit to the Mountain and Lodging segments. Our revenue from the Real Estate segment, and associated expense, fluctuate based upon the timing of closings and the type of real estate being sold, causing volatility in the Real Estate segment’s operating results from period to period.

Recent Trends, Risks and Uncertainties

Together with those risk factors identified in our Form 10-K, our management has identified the following important factors (as well as risks and uncertainties associated with such factors) that could impact our future financial performance or condition:

 

   

Our season pass products provide a value option to our guests, which in turn creates a guest commitment predominantly prior to the start of the ski season resulting in a more stabilized stream of lift revenue. For the 2009/2010 ski season pass revenue represented 35% of total lift revenue for the entire season. Total season pass sales (excluding Northstar-at-Tahoe) increased by $9.1 million, or approximately 9.1%, as of January 31, 2011 for the 2010/2011 ski season over total season pass sales for the entire 2009/2010 ski season. Including Northstar-at-Tahoe (which was acquired on October 25, 2010) season pass sales, our season pass sales have increased by $19.0 million, or approximately 18.9%. Deferred revenue related to season pass sales (including Northstar-at-Tahoe pass sales) was $58.7 million as of January 31, 2011 (compared to $48.4 million as of January 31, 2010) which will be recognized as lift revenue during our third fiscal quarter ending April 30, 2011.

 

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In response to the economic downturn in 2008 and 2009, we implemented cost reduction initiatives in fiscal 2009, including a company-wide wage reduction and suspension of our 401(k) plan matching contributions. We reinstated some of the prior year’s wage and benefit reduction with a 2% interim wage increase for year round employees effective April 1, 2010 and seasonal employees for the 2010/2011 ski season along with a partial reinstatement of our matching component of the 401(k) plan. We currently plan to fully reinstate the previous level of 401(k) matching ratably over a three year period. We also have returned to a more normal level of wage increases for fiscal 2011; however, we cannot predict whether any increases in labor costs and other employee benefit costs coupled with other increases in operating costs will continue to be offset by increased revenues.

 

   

On October 25, 2010, we acquired Northstar-at-Tahoe, a destination mountain resort in North Lake Tahoe, California for total consideration of $63.0 million, less cash assumed. We cannot predict whether we will realize all of the synergies estimated to arise subsequent to the acquisition of Northstar-at-Tahoe nor can we predict the amount of effort it will take to integrate its operations and the ultimate impact it will have on our future results of operations.

 

   

Real estate Reported EBITDA is highly dependent on, among other things, the timing of closings on real estate under contract, which determines when revenue and associated cost of sales is recognized. Changes to the anticipated timing or mix of closing on one or more real estate projects, or unit closings within a real estate project, could materially impact Real Estate Reported EBITDA for a particular quarter or fiscal year. During the first quarter of fiscal 2011, we received a certificate of occupancy for The Ritz-Carlton Residences, Vail and we have closed on 63 units through January 31, 2011 (with an additional two units having closed subsequent to January 31, 2011). Additionally, we have closed on one unit at One Ski Hill Place (which was completed in the fourth quarter of fiscal 2010) in fiscal 2011 through January 31, 2011 (with one additional unit having closed subsequent to January 31, 2011). We currently have on a combined basis 104 units available for sale at The Ritz-Carlton Residences, Vail, One Ski Hill Place in Breckenridge and Crystal Peak Lodge at Breckenridge. We have increased risk associated with selling and closing units in these projects as a result of the continued instability in the credit markets and a slowdown in the overall real estate market. Buyers have been or may be unable to close on units in part due to a reduction in funds available to buyers and/or decreases in mortgage availability. We cannot predict the ultimate number of units that we will sell, the ultimate price we will receive, or when the units will sell, although we currently believe the selling process will take multiple years. Additionally, if a prolonged weakness in the real estate market or general economic conditions were to occur we may have to adjust our selling prices more than currently anticipated in an effort to sell and close on units available for sale.

 

   

Over the past several years our Real Estate segment results have reflected the completion of several real estate projects, including The Ritz-Carlton Residences, Vail, One Ski Hill Place in Breckenridge, the Arrabelle at Vail Square, Vail’s Front Door, Crystal Peak Lodge at Breckenridge, Gore Creek Place in Vail’s Lionshead Village and Mountain Thunder in Breckenridge. Although we continue to undertake planning and design work on future projects, we currently do not plan to undertake significant development activities on new projects until the current economic environment for real estate improves. We believe that, due to our low carrying cost of real estate land investments combined with the absence of third party debt associated with our real estate investments, we are well situated to time the launch of future projects with a more favorable economic environment.

 

   

In addition to our $97.3 million of cash and cash equivalents at January 31, 2011, we have $319.4 million available under our senior credit facility (“Credit Facility”) (which represents the total commitment of $400.0 million less certain letters of credit outstanding of $80.6 million), which was amended and restated on January 25, 2011. Key modifications to the Credit Facility included, among other things, the extension of the maturity on the revolving credit facility from February 2012 to January 2016 (subject to the repayment or refinancing of the 6.75% Senior Subordinated Notes (“6.75% Notes”) by November 15, 2013); increased grid pricing for interest rate margins (currently, under the Credit Facility, at LIBOR plus 1.75%) and commitment fees (currently, under the Credit Facility, at 0.35%); the expansion of baskets for improved flexibility in our ability to incur debt and make acquisitions, investments and distributions; and the elimination of certain financial covenants. Additionally, we have reached an inflection point on our real estate projects where the proceeds from future real estate closings on The Ritz-Carlton Residences, Vail, One Ski Hill Place in Breckenridge and Crystal Peak Lodge at Breckenridge are expected to significantly exceed remaining completion costs or carrying costs.

 

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We currently carry a $2.6 million note receivable from the owner of one of our managed hotel properties. The owner has defaulted on third party debt related to this property in which the creditor may proceed with foreclosure on the property. If the owner is unable to reach an agreement to restructure the debt with its creditor, or the creditor proceeds with foreclosure, or if we are unable to reach acceptable terms with the owner or the creditor for the repayment of our note receivable, we may be required to impair or write-off the balance of the note receivable.

 

   

Under GAAP, we are required to test goodwill for impairment annually, which we do during the fourth quarter of each fiscal year. We evaluate the recoverability of our goodwill by estimating the future discounted cash flows of our reporting units and terminal values of the businesses using projected future levels of income as well as business trends, prospects and market and economic conditions. We evaluate the recoverability of indefinite-lived intangible assets using the income approach based upon estimated future revenue streams. Our fiscal 2010 annual impairment test did not result in a goodwill or indefinite-lived intangible asset impairment. However, if a more severe prolonged weakness in general economic conditions were to occur it could cause less than expected growth and/or reduction in terminal values of our reporting units which may result in a goodwill and/or indefinite-lived intangible assets impairment charge attributable to certain goodwill and/or indefinite-lived intangible assets, particularly related to certain of our lodging operations.

RESULTS OF OPERATIONS

Summary

Shown below is a summary of operating results for both the three and six months ended January 31, 2011, compared to the three and six months ended January 31, 2010 (in thousands):

 

     Three Months Ended     Six Months Ended  
     January 31,     January 31,  
     2011     2010     2011      2010  

Mountain Reported EBITDA

   $ 127,191      $ 107,167      $ 85,614       $ 70,157   

Lodging Reported EBITDA

     881        888        2,424         (380
                                 

Resort Reported EBITDA

     128,072        108,055        88,038         69,777   

Real Estate Reported EBITDA

     (197     (6,547     4,001         (5,432

Income before (provision) benefit for income taxes

     88,766        69,792        17,592         727   

Net income (loss) attributable to Vail Resorts, Inc.

   $ 54,551      $ 40,690      $ 11,528       $ (483

A discussion of the segment results and other items can be found below.

Mountain Segment

Three months ended January 31, 2011 compared to the three months ended January 31, 2010

Mountain segment operating results for the three months ended January 31, 2011 and 2010 are presented by category as follows (in thousands, except effective ticket price (“ETP”)):

 

     Three Months Ended      Percentage  
     January 31,      Increase  
     2011      2010      (Decrease)  

Net Mountain revenue:

        

Lift tickets

   $ 155,173       $ 129,517         19.8

Ski school

     37,296         30,069         24.0

Dining

     26,405         19,789         33.4

Retail/rental

     74,320         61,026         21.8

Other

     25,083         20,577         21.9
                          

Total Mountain net revenue

   $ 318,277       $ 260,978         22.0
                          

Mountain operating expense:

        

Labor and labor-related benefits

   $ 72,438       $ 57,859         25.2

Retail cost of sales

     28,983         23,731         22.1

Resort related fees

     16,812         14,381         16.9

General and administrative

     31,657         26,043         21.6

Other

     41,334         32,004         29.2
                          

Total Mountain operating expense

   $ 191,224       $ 154,018         24.2
                          

Mountain equity investment income, net

     138         207         (33.3 )% 
                          

Total Mountain Reported EBITDA

   $ 127,191       $ 107,167         18.7
                          

Total skier visits

     3,395         2,782         22.0

ETP

   $ 45.71       $ 46.56         (1.8 )% 

 

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Total Mountain Reported EBITDA includes $1.8 million and $1.3 million of stock-based compensation expense for the three months ended January 31, 2011 and 2010, respectively.

Total Mountain net revenue increased $57.3 million, or 22.0%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010, which increase includes $30.1 million of revenue from Northstar-at-Tahoe, acquired in October 2010, in the current fiscal year. Lift revenue increased $25.7 million, or 19.8%, for the three months ended January 31, 2011 compared to the same period in the prior year, due to a $16.9 million, or 21.9%, increase in paid lift revenue and a $8.7 million, or 16.7%, increase in season pass revenue. A large portion of this increase is attributable to the acquisition of Northstar-at-Tahoe since comparable results for Northstar-at-Tahoe are not included in the same period for the prior year. Excluding Northstar-at-Tahoe, lift revenue increased $10.7 million, or 8.2%, compared to the same period in the prior year, due to a $6.9 million, or 8.9%, increase in paid lift revenue and a $3.8 million, or 7.3%, increase in season pass revenue. Total skier visitation was up 22.0% and excluding Northstar-at-Tahoe, skier visitation was up 8.7% as both the Colorado resorts and the Heavenly resort benefited from significantly above average early season snowfall, which in particular caused increased pass visits. ETP, excluding season pass holders and Northstar-at-Tahoe, increased $4.56, or 7.3%, due primarily to price increases implemented during the current fiscal year. Total ETP, excluding Northstar-at-Tahoe, declined slightly as the average visitation per season pass holder increased by approximately 11.0% or approximately one half day per season pass holder.

Ski school revenue increased $7.2 million, or 24.0%, for the three months ended January 31, 2011 compared to the same period in the prior year with the current year benefiting from the acquisition of Northstar-at-Tahoe. Excluding Northstar-at-Tahoe, ski school revenue increased $3.5 million, or 11.7%, which benefited from the 8.7% increase in skier visitation and a 2.7% increase in yield per skier visit due to higher guest spend. Dining revenue increased $6.6 million, or 33.4%, which also benefited from the acquisition of Northstar-at-Tahoe in the current fiscal year. Excluding Northstar-at-Tahoe, dining revenues increased $2.9 million, or 14.4%, driven by increased skier visitation and a 5.3% increase in yield per skier visit, as well as, the addition of two new on-mountain dining venues.

Retail/rental revenue increased $13.3 million, or 21.8%, for the three months ended January 31, 2011 compared to the same period in the prior year which includes $4.5 million of incremental revenue from Northstar-at-Tahoe in the current fiscal year. Excluding Northstar-at-Tahoe, retail/rental increased $8.8 million, or 14.4%, which was driven primarily by retail sales which were up $8.5 million, or 19.3%. Included in the overall retail/rental increase were higher revenue at our Colorado front range stores and Any Mountain stores (in the San Francisco bay area) which combined increased by 21.0% as compared to the prior year. Additionally, our mountain resort stores experienced increased revenues across all resorts due primarily to increased retail sales driven by higher skier visitation.

Other revenue mainly consists of private club revenue (which includes both club dues and amortization of initiation fees), summer visitation and other mountain activities revenue, marketing and internet advertising revenue, commercial leasing revenue, employee housing revenue, municipal services revenue and other recreation activity revenue. For the three months ended January 31, 2011, other revenue increased $4.5 million, or 21.9%, compared to the three months ended January 31, 2010, which includes $3.2 million of incremental revenue from Northstar-at-Tahoe. Excluding Northstar-at-Tahoe, other revenue increased $1.3 million, or 6.5%, primarily due to an increase in internet advertising and marketing revenue due to the acquisition of Mountain News Corporation in May 2010, partially offset by a decrease in municipal services revenue (primarily transportation services provided on behalf of certain municipalities).

 

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Operating expense increased $37.2 million, or 24.2%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010, which includes $20.0 million of expenses in the current fiscal quarter associated with Northstar-at-Tahoe. Excluding Northstar-at-Tahoe, operating expense increased $17.2 million, or 11.2%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010 due in part to higher labor and labor-related benefits which increased $7.5 million, or 13.0%, during the three months ended January 31, 2011 compared to the three months ended January 31, 2010. Labor and labor-related benefits in the current year were impacted by the partial reinstatement of the prior year’s wage reduction and our matching component of the 401(k) plan and a more normal level of wage increases, as well as higher employee medical and wellness costs. Additionally, labor costs were impacted by an increase in staffing levels driven by opening ski terrain earlier due to above average early season snowfall, as well as an increase in demand for ancillary services primarily in ski school, dining and retail/rental operations. Retail cost of sales increased $3.7 million, or 15.4%, excluding Northstar-at-Tahoe, mostly due to an increase in sales volume partially offset by improved gross margins. Additionally, resort related fees (including Forest Service fees, other resort-related fees, credit card fees and commissions) increased $1.8 million, or 12.3%, excluding Northstar-at-Tahoe, compared to the three months ended January 31, 2010, due to overall increases in revenue upon which those fees are based on and general and administrative expenses increased $2.5 million, or 9.7%, excluding Northstar-at-Tahoe, primarily due to expenses associated with the operations of Mountain News Corporation acquired in May 2010. Other expense increased $1.8 million, or 5.5%, excluding Northstar-at-Tahoe, primarily due to increased food and beverage cost of sales due to an increase in dining revenue and higher fuel and supplies expense.

Six months ended January 31, 2011 compared to the six months ended January 31, 2010

Mountain segment operating results for the six months ended January 31, 2011 and 2010 are presented by category as follows (in thousands, except ETP):

 

     Six Months Ended      Percentage  
     January 31,      Increase  
     2011      2010      (Decrease)  

Net Mountain revenue:

        

Lift tickets

   $ 155,173       $ 129,517         19.8

Ski school

     37,296         30,069         24.0

Dining

     30,512         23,257         31.2

Retail/rental

     96,373         82,564         16.7

Other

     39,702         34,775         14.2
                          

Total Mountain net revenue

   $ 359,056       $ 300,182         19.6
                          

Mountain operating expense:

        

Labor and labor-related benefits

   $ 97,120       $ 81,243         19.5

Retail cost of sales

     41,641         36,294         14.7

Resort related fees

     17,636         15,106         16.7

General and administrative

     55,846         46,570         19.9

Other

     62,117         51,273         21.1
                          

Total Mountain operating expense

   $ 274,360       $ 230,486         19.0
                          

Mountain equity investment income, net

     918         461         99.1
                          

Total Mountain Reported EBITDA

   $ 85,614       $ 70,157         22.0
                          

Total skier visits

     3,395         2,782         22.0

ETP

   $ 45.71       $ 46.56         (1.8 )% 

Total Mountain Reported EBITDA includes $3.8 million and $2.9 million of stock-based compensation expense for the six months ended January 31, 2011 and 2010, respectively.

As our six ski resorts opened during our second fiscal quarter, the results of the six months ended January 31, 2011 and 2010 for lift ticket revenue and ski school revenue are the same as the three months ended January 31, 2011 and 2010.

Dining revenue for the six months ended January 31, 2011 compared to the six months ended January 31, 2010, increased $7.3 million, or 31.2%, which benefited from the acquisition of Northstar-at-Tahoe in the current fiscal year. Excluding Northstar-at-Tahoe, dining revenues increased $3.5 million, or 14.9%, which benefited from the 8.7% increase in skier visitation and a 5.3% increase in yield per skier visit, as well as the addition of two new on- mountain dining venues. Additionally, dining revenue increased for the three months ended October 31, 2010 compared to the same period in the prior year due to an increase in group and wedding business at our mountain resorts.

 

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Retail/rental revenue increased $13.8 million, or 16.7%, in the six months ended January 31, 2011 compared to the same period in the prior year which includes $4.5 million of incremental revenue from Northstar-at-Tahoe in the current fiscal year. Excluding Northstar-at-Tahoe, retail/rental increased $9.3 million, or 11.3%, which was driven primarily by retail sales which were up $9.0 million, or 14.1%. Included in the overall retail/rental increase were higher revenues at our Colorado front range stores and Any Mountain stores (in the San Francisco bay area) which increased by 14.2% as compared to the prior year. Additionally, our mountain resort stores experienced increased revenues across all resorts due primarily to increases retail sales driven by higher skier visitation.

Other revenue mainly consists of private club revenue (which includes both club dues and amortization of initiation fees), summer visitation and other mountain activities revenue, marketing and internet advertising revenue, commercial leasing revenue, employee housing revenue, municipal services revenue and other recreation activity revenue. For the six months ended January 31, 2011, other revenue increased $4.9 million, or 14.2%, compared to the six months ended January 31, 2010, which includes $3.2 million of incremental revenue from Northstar-at-Tahoe. Excluding Northstar-at-Tahoe, other revenue increased $1.7 million, or 4.8%, primarily due to an increase in internet advertising and marketing revenue due to the acquisition of Mountain News Corporation in May 2010, partially offset by a decrease in municipal services revenue (primarily transportation services provided on behalf of certain municipalities).

Operating expense increased $43.9 million, or 19.0%, during the six months ended January 31, 2011 compared to the six months ended January 31, 2010, which includes $23.5 million of expenses (including $3.8 million of acquisition related costs included in other expense) in the current fiscal year associated with Northstar-at-Tahoe and $0.9 million (included in other expense) in assessments for extensive renovations to a commercial property in Breckenridge in which we are a tenant. Excluding these expenses, operating expense increased $19.4 million, or 8.4%, for the six months ended January 31, 2011 compared to the six months ended January 31, 2010. Labor and labor-related benefits increased $8.6 million, or 10.6%, excluding Northstar-at-Tahoe, in the current fiscal year and were impacted by the partial reinstatement of the prior year’s wage reduction and our matching component of the 401(k) plan and a more normal level of wage increases, as well as higher employee medical and wellness costs. Additionally, labor costs were impacted by an increase in staffing levels driven by opening ski terrain earlier due to above average early season snowfall, as well as an increase in demand for ancillary services primarily in ski school, dining and retail/rental operations. Retail cost of sales increased $3.7 million, or 10.3%, excluding Northstar-at-Tahoe, mostly due to an increase in sales volume, partially offset by improved gross margins. Additionally, resort related fees (including Forest Service fees, other resort-related fees, credit card fees and commissions) increased $1.9 million, or 12.4%, excluding Northstar-at-Tahoe, compared to the six months ended January 31, 2010, due to overall increases in revenue upon which those fees are based on and general and administrative expenses increased $3.1 million, or 6.6%, excluding Northstar-at-Tahoe, primarily due to expenses associated with the operations of Mountain News Corporation acquired in May 2010. Other expense increased $2.2 million, or 4.2%, excluding the above mentioned expenses, primarily due to increased food and beverage cost of sales due to an increase in dining revenue and higher fuel and supplies expense.

Mountain equity investment income, net which primarily represents our share of income from our real estate brokerage joint venture, was favorably impacted for the six months ended January 31, 2011 compared to the six months ended January 31, 2010 by an overall increase in real estate closing primarily from multi-unit projects.

 

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Lodging Segment

Three months ended January 31, 2011 compared to the three months ended January 31, 2010

Lodging segment operating results for the three months ended January 31, 2011 and 2010 are presented by category as follows (in thousands, except average daily rates (“ADR”) and revenue per available room (“RevPAR”)):

 

     Three months ended      Percentage  
     January 31,      Increase  
     2011      2010      (Decrease)  

Lodging net revenue:

        

Owned hotel rooms

   $ 9,188       $ 8,286         10.9

Managed condominium rooms

     13,421         10,819         24.1

Dining

     5,560         4,522         23.0

Transportation

     7,570         7,341         3.1

Other

     8,981         7,708         16.5
                          

Total Lodging net revenue

   $ 44,720       $ 38,676         15.6
                          

Lodging operating expense:

        

Labor and labor-related benefits

   $ 21,745       $ 18,449         17.9

General and administrative

     8,158         7,653         6.6

Other

     13,936         11,686         19.3
                          

Total Lodging operating expense

   $ 43,839       $ 37,788         16.0
                          

Total Lodging Reported EBITDA

   $ 881       $ 888         (0.8 )% 
                          

Owned hotel statistics:

        

ADR

   $ 201.96       $ 205.85         (1.9 )% 

RevPar

   $ 119.75       $ 103.50         15.7

Managed condominium statistics:

        

ADR

   $ 333.07       $ 336.13         (0.9 )% 

RevPar

   $ 129.22       $ 113.13         14.2

Owned hotel and managed condominium statistics (combined):

        

ADR

   $ 277.75       $ 280.84         (1.1 )% 

RevPar

   $ 126.16       $ 109.95         14.7

Total Lodging Reported EBITDA includes $0.5 million of stock-based compensation expense for both the three months ended January 31, 2011 and 2010.

Revenue from owned hotel rooms increased $0.9 million, or 10.9%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010, which was driven by an increase in occupancy of 9.0 percentage points primarily due an increase in transient guest visitation as our Colorado lodging resort properties benefited from an increase in skier visitation at our Colorado ski resorts as discussed in the Mountain segment above. Revenue from managed condominium rooms increased $2.6 million, or 24.1%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010, primarily due to the addition of managed condominium rooms in the Lake Tahoe region which generated $1.5 million in revenue and an increase in occupancy from our other managed condominiums of 5.1 percentage points due to higher transient and group guest visitation in conjunction with increased skier visitation.

Dining revenue for the three months ended January 31, 2011 increased $1.0 million, or 23.0%, as compared to the three months ended January 31, 2010, mainly due to increased occupancy and a restaurant that was closed for renovation in the prior year. Transportation revenue for the three months ended January 31, 2011 increased $0.2 million, or 3.1%, as compared to the three months ended January 31, 2010 primarily due to an increase in passengers driven by higher skier visitation. Other revenue increased $1.3 million, or 16.5% during the three months ended January 31, 2011 compared to the same period in the prior year primarily due to an increase in revenue from managed hotel properties, higher commissions earned from reservations booked through our central reservation system and conference services for our group business.

Operating expense increased $6.1 million, or 16.0%, for the three months ended January 31, 2011 compared to the three months ended January 31, 2010, primarily due to an increase in labor and labor-related benefits of $3.3 million, or 17.9%, primarily due to higher staffing levels associated with increased occupancy and the partial reinstatement of the prior year’s wage reduction and our matching component of the 401(k) plan and a more normal level of wage increases for fiscal 2011. Other expense increased $2.3 million, or 19.3%, primarily due to increased variable operating costs associated with increased occupancy and revenue including higher food and beverage cost of sales and other operating expense and an increase in reimbursable costs associated with managed hotel properties.

 

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Table of Contents

Six months ended January 31, 2011 compared to the six months ended January 31, 2010

Lodging segment operating results for the six months ended January 31, 2011 and 2010 are presented by category as follows (in thousands, except ADR and RevPAR):

 

     Six months ended     Percentage  
     January 31,     Increase  
     2011      2010     (Decrease)  

Lodging net revenue:

       

Owned hotel rooms

   $ 20,940       $ 19,282        8.6

Managed condominium rooms

     18,177         15,229        19.4

Dining

     15,516         13,468        15.2

Transportation

     9,213         8,974        2.7

Golf

     7,090         6,823        3.9

Other

     18,162         16,255        11.7
                         

Total Lodging net revenue

   $ 89,098       $ 80,031        11.3
                         

Lodging operating expense:

       

Labor and labor-related benefits

   $ 43,611       $ 38,824        12.3

General and administrative

     15,230         14,631        4.1

Other

     27,833         26,956        3.2
                         

Total Lodging operating expense

   $ 86,674       $ 80,411        7.8
                         

Total Lodging Reported EBITDA

   $ 2,424       $ (380     737.9
                         

Owned hotel statistics:

       

ADR

   $ 188.85       $ 187.90        0.5

RevPar

   $ 112.62       $ 94.98        18.6

Managed condominium statistics:

       

ADR

   $ 284.49       $ 286.90        (0.8 )% 

RevPar

   $ 83.08       $ 69.91        18.8

Owned hotel and managed condominium statistics (combined):

       

ADR

   $ 232.10       $ 231.42        0.3

RevPar

   $ 94.08       $ 79.45        18.4

Total Lodging Reported EBITDA includes $1.1 million and $1.0 million of stock-based compensation expense for the six months ended January 31, 2011 and 2010, respectively.

Revenue from owned hotel rooms and managed condominium rooms increased $4.6 million, or 13.4%, for the six months ended January 31, 2011 compared to the six months ended January 31, 2010, which was driven by a increase in occupancy of 6.2 percentage points due to higher group business and transient guest visitation primarily as a result of increased skier visitation as discussed in the Mountain segment above. Managed condominium room revenue was also favorably impacted by $1.5 million related to the addition of managed condominium rooms in the Lake Tahoe region.

Dining revenue for the six months ended January 31, 2011 increased $2.0 million, or 15.2%, as compared to the six months ended January 31, 2010, due to an increase in occupancy, including an increase in group visitation primarily at our Keystone lodging properties ($0.8 million increase in revenue), an increase in transient visitation at GTLC ($0.4 million increase in revenue) and a restaurant that was closed for renovation in the prior year. Other revenue increased $1.9 million, or 11.7%, during the six months ended January 31, 2011 compared to the same period in the prior year primarily due to an increase in revenue from managed hotel properties, higher commissions earned from reservations booked through our central reservation system and an increase in conference services provided to our group business.

 

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Operating expense increased $6.3 million, or 7.8%, for the six months ended January 31, 2011 compared to the six months ended January 31, 2010. Operating expense in the current year benefitted from the receipt of $2.9 million, net of legal expenses, (included as a credit in other expense) for the settlement of alleged damages related to the CME acquisition partially offset by $0.4 million (included in other expense) in assessments for extensive renovations to a commercial property in Breckenridge in which we are a tenant. Excluding the impact of these items, operating expense increased $8.8 million, or 10.9%, during the six months ended January 31, 2011, compared to the same period in the prior year. Labor and labor-related benefits increased $4.8 million, or 12.3%, primarily due to higher staffing levels associated with increased occupancy and the partial reinstatement of the prior year’s wage reduction and our matching component of the 401(k) plan and a more normal level of wage increases for fiscal 2011. Other expense increased $3.4 million, or 12.5%, primarily due to increased variable operating costs associated with increased occupancy and revenue including higher food and beverage cost of sales and other operating expense and an increase in reimbursable costs associated with managed hotel properties.

Real Estate Segment

Three months ended January 31, 2011 compared to the three months ended January 31, 2010

Real Estate segment operating results for the three months ended January 31, 2011 and 2010 are presented by category as follows (in thousands):

 

     Three Months Ended     Percentage  
     January 31,     Increase  
     2011     2010     (Decrease)  

Total Real Estate net revenue

   $ 25,147      $ 870        2,790.5

Real Estate operating expense:

      

Cost of sales (including sales commission)

     18,515        —