August
6,
2007
Mr.
Michael Fay
Securities
and Exchange Commission
Division
of Corporation Finance
Mail
Stop
3561
Washington,
DC 20549
Re:
Vail Resorts, Inc.
File
No. 001-09614
Form
10-K: For the Fiscal Year Ended July 31, 2006
Dear
Mr.
Fay:
Pursuant
to the telephone conversations conducted on June 22, 2007 and July 20, 2007
between the Securities and Exchange Commission (the “Commission”) staff (the
“Staff”), Vail Resorts, Inc. (the “Company”), and the Company’s independent
registered public accounting firm, PricewaterhouseCoopers LLP (including
a
representative of their national office), the Company has re-evaluated its
response provided on June 7, 2007 to the Commission and proposes to revise
its
statement of cash flows to reflect all cash outflows for investments in real
estate as operating activities instead of investing activities. Although
this
change does not provide a perfect answer under generally accepted accounting
principles due to the very unique nature of the Company’s real estate
operations, it does maintain the transparency that the Company believes is
critical to the users of its financial statements and addresses the concerns
raised in comments received from the Staff. The Company proposes to reflect
this
change as a revision as opposed to a restatement in its Annual Report on
Form
10-K for the fiscal year ending July 31, 2007 (expected to be filed on or
before
September 28, 2007) as it believes that the change is not material to the
users
of its financial statements and that its historical presentation is
representationally faithful to the principles of Statement 95.
The
Company’s operations are grouped into three integrated and interdependent
segments: Mountain, Lodging (Mountain and Lodging on a combined basis referred
to as “Resort”) and Real Estate. The Mountain segment is comprised of five of
the largest ski resort properties in North America together with ancillary
businesses including ski school, restaurants, retail and commercial leasing
located at its base villages. The Lodging segment primarily consists of owned
or
managed properties surrounding the Company’s ski resorts. The Real Estate
segment primarily engages in the management of the development of land parcels
that surround the Company’s resort operations and generally such development
efforts include the construction of resort assets that provide additional
benefit to its Resort segment. The Company’s real estate operations are very
unique in comparison to traditional real estate developers as all of the
Company’s real estate holdings are in close proximity to its resort operations.
Due to the proximity of the Company’s real estate holdings to its resort
operations, the Company has the flexibility in discerning the ultimate use
of
these holdings as they are extremely valuable to both the resort and real
estate
operations. Consequently, a large part of the Company’s real estate development
includes mixed-use projects that contain a component of third party real
estate
sales and a component that will result in resort depreciable assets including
hotels, private clubs, commercial space, parking structures and other amenities
that the Company will own and operate. These assets are expected to generate
a
significant amount of incremental direct cash inflows to the Company’s resort
operations. Additionally, once the Company has made a decision to convert
its
real estate holdings into a development project it generally spends a
significant amount of money in these development efforts. Because the components
of these projects are generally all contained in one building, most of the
development costs are common in nature and not specifically identifiable
to
individual components of the overall project. Therefore, an attempt to allocate
cash outflows at the time they are incurred between investments to be sold
to
third parties and investments in resort depreciable assets would be subjective
and arbitrary and potentially misleading to the users of the Company’s financial
statements. Examples of these types of projects include “The Arrabelle at Vail
Square” where the Company currently has a project under development which upon
completion will result in third party condominium sales, a hotel, a private
ski
club, commercial space, a parking structure, and skier services facilities.
The
Company also has other similarly natured development projects currently underway
in Vail Village adjacent to a ski lift, in West Vail where the Company has
plans
for a new portal to the Vail ski mountain, and at its Breckenridge Resort
adjacent to two ski lifts. The Company has recently expanded its development
activities, accordingly the Company currently has under construction projects
that are expected to generate in excess of $800 million in revenues from
real
estate sales over the next two to three years, in addition to creating a
significant amount of new resort depreciable assets to be owned and operated
by
the Company. Additionally, this level of development is expected to continue
as
several new projects are in the design and planning phases.
Given
the
fact that the vast majority of the Company’s real estate sales are a culmination
of an “earnings process” in which the Company makes significant investments that
improves the value of the real estate holdings prior to their sale (even
though
the real estate was purchased many years prior to determining its ultimate
use),
it has concluded to revise its statements of cash flows to reflect all
real
estate investments cash outflows as an operating activity. This revision
is
punitive to the Company’s operating cash flow as a component of its real estate
investment cash outflows will ultimately result in resort depreciable assets
which, absent the allocation issue discussed above, could be reflected as
investing activities. The Company will also maintain an ongoing accounting
policy that will require that investments made in real estate solely for
third
party sales or for mixed-use development projects for which the Company cannot
specifically identify the components of project costs at the time of incurring
such cash outflows to be reflected in “operating activities”, and real estate
investments with the intent of not making significant improvements to the
investment to be reflected in “investing activities”. Historically, the Company
has made an insignificant amount of real estate investments without making
significant improvements prior to sale. With that said, the Company believes
that its historical presentation of real estate investment cash outflows
is
representationally faithful to generally accepted accounting principles given
that the Company’s unique facts and circumstances preclude a traditional
application of Statement 95 because at the time the Company invests in real
property it does not know its ultimate use and allocating outflows related
to
mixed use projects between operating and investing is not practical nor
consistent with the principles of Concept Statement No. 5 paragraph 54. Although
the Company believes that the proposed revision is not an error, we did address
the guidance provided in Staff Accounting Bulletin No. 99 in determining
whether
this proposed revision would be deemed material. From a quantitative standpoint,
the Company does not believe that the proposed revision is material as it
solely
consists of reclassifying a previously disclosed single-line item amount
from
“investing activities” to “operating activities” and is not providing the users
of the Company’s financial statements with any new or additional information.
From a qualitative standpoint, the Company does not believe the proposed
revision to be material for the following reasons:
| · |
Cash
outflows for real estate investments to be sold to third parties
(e.g.
“operating activities”) or retained for the benefit of resort operations
as resort depreciable assets (e.g. “investing activities”) are not items
capable of precise measurement or reasonably estimated at the time
of
incurring such cash outflows.
|
| · |
The
proposed revision does not mask a change in earnings or other trends
such
as net cash flow generated from its real estate activities. The Company
believes that analysts, investors and other readers of its financial
statements are most interested in the ultimate net cash flows (real
estate
sales less real estate cost of sales) generated and therefore their
judgment or conclusions are not impacted by the subtotals within
the
Company’s statements of cash flows.
|
| · |
The
proposed revision does not hide a failure to meet analysts’ consensus
expectations for the Company as the Company believes analysts do
not use
cash flows from operating activities or investing activities as a
measure
of performance or liquidity. Additionally, the subtotal of cash flows
from
operating activities or investing activities is not a financial measure
that the Company uses to market its business to investors or potential
investors and is not used in any of its investor relations
presentations.
|
| · |
The
proposed revision does not affect the Company’s compliance with regulatory
requirements.
|
| · |
The
proposed revision does not impact the Company’s compliance with loan
covenants or other contractual
requirements.
|
| · |
The
proposed revision does not effect management’s
compensation.
|
| · |
The
proposed revision does not conceal an unlawful
transaction.
|
In
addition to the above, the Company has received no inquiries regarding its
disclosure made in its third quarter Form 10-Q for the period ending April
30,
2007 describing that the Company is in discussion with the Staff regarding
the
Company’s classification of its Real Estate segment cash inflows and outflows
within the operating and investing sections of its statements of cash flows,
which as a result of these discussions, could result in an alternative
presentation that would impact the operating and investing subtotals within
the
statements of cash flows. Consequently, the Company does not believe that
this
proposed revision would be viewed by a reasonable investor as having
significantly altered the “total mix” of information made
available.
In
conclusion, due to the very unique nature of the Company’s real estate
operations and the dual purpose and benefit of its real estate investments
(we
have found no other public company that has a similar situation) there is
no
clear answer as to the presentation of the Company’s real estate investment cash
outflows within its statements of cash flows provided for in the accounting
literature. Either presentation of the real estate investment cash outflows
has
conceptual flaws while both presentations supply the same information to
the
users of the Company’s financial statements. Also the subtotals within the
Company’s statements of cash flows are not information that the Company’s
investors view as critical information. Accordingly, the Company believes
that
it is appropriate to reflect the above proposed change as a revision, along
with
the appropriate disclosures, in its Annual Report on Form 10-K for the year
ending July 31, 2007.
Please
find enclosed as Attachment I the “As Presented” and the “Proposed Revision”
Statements of Cash Flows for the three years ended July 31, 2006.
PricewaterhouseCoopers
LLP, including members of their national office, has reviewed this letter
and
agrees with management’s conclusions as stated in this letter with regards to
the appropriateness of the Company’s proposal and treatment of the revision to
its statements of cash flows as set forth by the Company to be reflected
in its
Annual Report on Form 10-K for the fiscal year ending July 31, 2007; as well
as,
the Company’s historical presentation of its real estate investment cash
outflows within its statements of cash flows.
As
requested by the Staff, we are providing the following
acknowledgements:
| · |
the
Company is responsible for the adequacy and accuracy of the disclosures
in
its filings; and
|
| · |
Staff
comments or changes to disclosures in response to Staff comments
do not
foreclose the Commission from taking any action with respect to the
filing; and
|
| · |
the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
If
you
have any further questions or require additional information, please do not
hesitate to contact me at 303-404-1802.
Sincerely,
/s/
Jeffrey W. Jones
Jeffrey
W. Jones
Senior
Executive Vice President and
Chief
Financial Officer
Attachment
I
Vail
Resorts, Inc.
(In
thousands)
|
Year
Ended July 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
As
Presented
|
Proposed
Revision
|
As
Presented
|
Proposed
Revision
|
As
Presented
|
Proposed
Revision
|
||||||||||||||
|
Cash
flows from operating activities:
|
|||||||||||||||||||
|
Net
income (loss)
|
$
|
45,756
|
$
|
45,756
|
$
|
23,138
|
$
|
23,138
|
$
|
(5,959
|
)
|
$
|
(5,959
|
)
|
|||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|||||||||||||||||||
|
Depreciation
and amortization
|
86,098
|
86,098
|
89,968
|
89,968
|
86,377
|
86,377
|
|||||||||||||
|
Non-cash
cost of real estate sales
|
35,121
|
35,121
|
38,425
|
38,425
|
(1,654
|
)
|
(1,654
|
)
|
|||||||||||
|
Non-cash
gain on transfer of property, net
|
--
|
--
|
--
|
--
|
(2,147
|
)
|
(2,147
|
)
|
|||||||||||
|
Non-cash
stock-based compensation expense
|
6,523
|
6,523
|
437
|
437
|
248
|
248
|
|||||||||||||
|
Asset
impairment charges
|
210
|
210
|
2,550
|
2,550
|
1,108
|
1,108
|
|||||||||||||
|
Non-cash
mold remediation (credit) charge
|
(559
|
)
|
(559
|
)
|
--
|
--
|
5,500
|
5,500
|
|||||||||||
|
(Gain)
loss on sale of businesses, net
|
(4,625
|
)
|
(4,625
|
)
|
7,353
|
7,353
|
--
|
--
|
|||||||||||
|
Loss
on extinguishment of debt
|
--
|
--
|
612
|
612
|
37,084
|
37,084
|
|||||||||||||
|
Deferred
income taxes, net
|
1,322
|
1,322
|
(7,514
|
)
|
(7,514
|
)
|
(1,018
|
)
|
(1,018
|
)
|
|||||||||
|
Minority
interest in net income of consolidated subsidiaries
|
6,694
|
6,694
|
5,239
|
5,239
|
4,000
|
4,000
|
|||||||||||||
|
Other
non-cash (income) expense, net
|
(6,291
|
)
|
(6,291
|
)
|
(3,433
|
)
|
(3,433
|
)
|
5,708
|
5,708
|
|||||||||
|
Changes
in assets and liabilities:
|
|||||||||||||||||||
|
Restricted
cash
|
(2,069
|
)
|
(2,069
|
)
|
(2,222
|
)
|
(2,222
|
)
|
(4,965
|
)
|
(4,965
|
)
|
|||||||
|
Accounts
receivable, net
|
(2,644
|
)
|
(2,644
|
)
|
(3,665
|
)
|
(3,665
|
)
|
7,254
|
7,254
|
|||||||||
|
Notes
receivable
|
(1,925
|
)
|
(1,925
|
)
|
4,052
|
4,052
|
1,685
|
1,685
|
|||||||||||
|
Inventories,
net
|
(4,811
|
)
|
(4,811
|
)
|
(5,074
|
)
|
(5,074
|
)
|
605
|
605
|
|||||||||
|
Investments
in real estate
|
--
|
(129,728
|
)
|
--
|
(72,164
|
)
|
--
|
(27,802
|
)
|
||||||||||
|
Accounts
payable and accrued expenses
|
26,213
|
26,213
|
26,443
|
26,443
|
20,512
|
20,512
|
|||||||||||||
|
Income
taxes receivable/payable
|
4,538
|
4,538
|
21,960
|
21,960
|
6,940
|
6,940
|
|||||||||||||
|
Deferred
real estate credits
|
14,539
|
14,539
|
29,755
|
29,755
|
11,453
|
11,453
|
|||||||||||||
|
Private
club deferred initiation fees
|
7,126
|
7,126
|
8,324
|
8,324
|
8,358
|
8,358
|
|||||||||||||
|
Other
assets and liabilities, net
|
(17,812
|
)
|
(17,812
|
)
|
(16,007
|
)
|
(16,007
|
)
|
(152
|
)
|
(152
|
)
|
|||||||
|
Net
cash provided by operating activities
|
$
|
193,404
|
$
|
63,676
|
$
|
220,341
|
$
|
148,177
|
$
|
180,937
|
$
|
153,135
|
|||||||
|
Cash
flows from investing activities:
|
|||||||||||||||||||
|
Capital
expenditures
|
$
|
(88,901
|
)
|
$
|
(88,901
|
)
|
$
|
(79,975
|
)
|
$
|
(79,975
|
)
|
$
|
(62,960
|
)
|
$
|
(62,960
|
)
|
|
|
Investments
in real estate
|
(129,728
|
)
|
--
|
(72,164
|
)
|
--
|
(27,802
|
)
|
--
|
||||||||||
|
Distributions
from joint ventures
|
522
|
522
|
6,588
|
6,588
|
4,849
|
4,849
|
|||||||||||||
|
Cash
received from disposal of fixed assets
|
823
|
823
|
2,019
|
2,019
|
2,658
|
2,658
|
|||||||||||||
|
Cash
received from sale of businesses
|
30,712
|
30,712
|
108,399
|
108,399
|
--
|
--
|
|||||||||||||
|
Purchase
of minority interests
|
--
|
--
|
(9,748
|
)
|
(9,748
|
)
|
--
|
--
|
|||||||||||
|
Other
investing
|
(5,149
|
)
|
(5,149
|
)
|
--
|
--
|
(110
|
)
|
(110
|
)
|
|||||||||
|
Net
cash (used in) provided by investing activities
|
$
|
(191,721
|
)
|
$
|
(61,993
|
)
|
$
|
(44,881
|
)
|
$
|
27,283
|
$
|
(83,365
|
)
|
$
|
(55,563
|
)
|
||
|
Cash
flows from financing activities:
|
|||||||||||||||||||
|
Proceeds
from borrowings under 6.75% Notes
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
390,000
|
$
|
390,000
|
|||||||
|
Payment
of tender and call of 8.75% Notes
|
--
|
--
|
--
|
--
|
(360,000
|
)
|
(360,000
|
)
|
|||||||||||
|
Payment
of tender premium
|
--
|
--
|
--
|
--
|
(23,825
|
)
|
(23,825
|
)
|
|||||||||||
|
Repurchases
of common stock
|
(10,839
|
)
|
(10,839
|
)
|
--
|
--
|
--
|
--
|
|||||||||||
|
Payment
of financing costs
|
(1,584
|
)
|
(1,584
|
)
|
(1,774
|
)
|
(1,774
|
)
|
(6,828
|
)
|
(6,828
|
)
|
|||||||
|
Payment
of Credit Facility Term Loan
|
--
|
--
|
(98,750
|
)
|
(98,750
|
)
|
(1,000
|
)
|
(1,000
|
)
|
|||||||||
|
Proceeds
from borrowings under other long-term debt
|
63,660
|
63,660
|
176,423
|
176,423
|
173,253
|
173,253
|
|||||||||||||
|
Payments
of other long-term debt
|
(54,439
|
)
|
(54,439
|
)
|
(181,239
|
)
|
(181,239
|
)
|
(234,234
|
)
|
(234,234
|
)
|
|||||||
|
Distributions
from joint ventures to minority shareholders
|
(4,239
|
)
|
(4,239
|
)
|
(1,807
|
)
|
(1,807
|
)
|
(1,474
|
)
|
(1,474
|
)
|
|||||||
|
Proceeds
from exercise of stock options
|
46,649
|
46,649
|
21,939
|
21,939
|
562
|
562
|
|||||||||||||
|
Tax
benefit from exercise of stock options
|
14,323
|
14,323
|
--
|
--
|
--
|
--
|
|||||||||||||
|
Net
cash provided by (used in) financing activities
|
$
|
53,531
|
$
|
53,531
|
$
|
(85,208
|
)
|
$
|
(85,208
|
)
|
$
|
(63,546
|
)
|
$
|
(63,546
|
)
|
|||
|
Net
increase in cash and cash equivalents
|
55,214
|
55,214
|
90,252
|
90,252
|
34,026
|
34,026
|
|||||||||||||
|
Net
increase in cash due to adoption of FIN 46R
|
--
|
--
|
--
|
--
|
4,428
|
4,428
|
|||||||||||||
|
Cash
and cash equivalents:
|
|||||||||||||||||||
|
Beginning
of period
|
136,580
|
136,580
|
46,328
|
46,328
|
7,874
|
7,874
|
|||||||||||||
|
End
of period
|
$
|
191,794
|
$
|
191,794
|
$
|
136,580
|
$
|
136,580
|
$
|
46,328
|
$
|
46,328
|
|||||||
|
Cash
paid for interest, net of amounts capitalized
|
$
|
33,550
|
$
|
33,550
|
$
|
38,158
|
$
|
38,158
|
$
|
38,578
|
$
|
38,578
|
|||||||
|
Taxes
paid (refunds received), net
|
8,617
|
8,617
|
--
|
--
|
(8,827
|
)
|
(8,827
|
)
|
|||||||||||
Note:
Line items affected due to the proposed revision are reflected in
bold.