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

The accompanying Notes toConsolidated Condensed Financial Statements are an integral part of these financial statements.

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

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

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

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

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

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

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

1.  Organization and Business

Vail Resorts, Inc. (“Vail Resorts”) is organized as a holding company and operates through various subsidiaries.  Vail Resorts and its subsidiaries (collectively, the “Company”) currently operate in three business segments: Mountain, Lodging and Real Estate.  The Company owns and operates five world-class ski resorts and related amenities at Vail, Breckenridge, Keystone and Beaver Creek mountains in Colorado and the Heavenly Ski Resort (“Heavenly”) in the Lake Tahoe area of California and Nevada.   The Company also owns several hotel properties situated in proximity to its ski resorts.  Additionally, the Company owns the Grand Teton Lodge Company (“GTLC”), which operates three resorts within Grand Teton National Park (under a National Park Service concessionaire contract), and the Jackson Hole Golf & Tennis Club in Wyoming.  The Company also owns a 51% interest in the Snake River Lodge & Spa (“SRL&S”) located near Jackson, Wyoming and owns 100% of the Lodge at Rancho Mirage (“Rancho Mirage”) near Palm Springs, California.  The Company holds a majority interest in RockResorts International LLC (“RockResorts”), a luxury hotel management company.  The Company also holds a 61.7% interest in SSI Venture, LLC (“SSV”), a retail/rental company.  Vail Resorts Development Company (“VRDC”), a wholly-owned subsidiary of the Company, conducts the operations of the Company’s Real Estate segment.  The Company’s mountain and lodging businesses are seasonal in nature with peak operating seasons generally from mid-November through mid-April.  The Company’s operations at GTLC generally run from mid-May through mid-October.  The Company also has non-majority owned investments in various other entities, some of which are consolidated (see Note 6, Variable Interest Entities). 

In the opinion of the Company, the accompanying Consolidated Condensed Financial Statements reflect all adjustments necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  Results for interim periods are not indicative of the results for the entire year.  The accompanying Consolidated Condensed Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.  Certain information and footnote disclosures, including significant accounting policies, normally included in fiscal year financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  The July 31, 2004 consolidated condensed Balance Sheet was derived from audited financial statements.

2.  Summary of Significant Accounting Policies

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

Reclassifications--Certain reclassifications have been made to the accompanying Consolidated Condensed Financial Statements as of and for the three and six months ended January 31, 2004 to conform to the current period presentation.

Stock Compensation-- At January 31, 2005, the Company had four stock-based compensation plans.  The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for stock-based compensation to employees, as such, the Company applies the intrinsic value method to value outstanding stock options.  The Company recorded compensation expense related to restricted stock grants of $85,000 and $58,000 for the three months ended January 31, 2005 and 2004, respectively.  The Company recorded compensation expense related to restricted stock grants of $177,000 and $79,000 for the six months ended January 31, 2005 and 2004, respectively.  Had compensation cost for the Company’s four stock-based compensation plans been determined consistent with SFAS No. 123, “Accounting for Stock Based Compensation”, the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):

As a result of changes to the calculation of forfeitures and the period over which pro forma expense would be taken if the fair value method was applied, the presentation of pro forma net loss and basic and diluted net loss per common share for fiscal 2004 has been changed, resulting in an increase for the three and six months ended January 31, 2004 of $0.02 and $0.03 to basic and diluted net loss per share, respectively, as compared to the presentation in the Company’s previously filed Quarterly Reports on Form 10-Q for those periods.

New Accounting Pronouncements -- In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”.  SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations.  The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005.  The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition.  The Company expects to adopt SFAS 123R on August 1, 2005, the commencement of its first quarter of fiscal 2006. 

SFAS 123R permits public companies to adopt its requirements using one of two methods.  Under the “modified prospective” method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date.  The “modified retrospective” method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption.  The Company has yet to determine which method it will use in adopting SFAS 123R.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options.  Accordingly, the adoption of SFAS 123R’s fair value method will impact the Company’s results of operations, although it will have no impact on the Company’s overall financial position.  The Company is currently evaluating option valuation methodologies and assumptions in light of SFAS 123R pronouncement guidelines related to employee stock options.  Current estimates of option values used by the Company in its pro forma disclosure by applying the Black-Scholes method may not be indicative of results from the final methodology the Company elects to adopt for reporting under SFAS 123R guidelines.  The Company is evaluating SFAS 123R and has not yet determined the amount of stock option expense which will be recorded upon the adoption of SFAS 123R.

3.  Net Income (Loss) Per Common Share

SFAS No. 128, “Earnings Per Share” (“EPS”), establishes standards for computing and presenting EPS.  SFAS No. 128 requires the dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of numerators (net income/loss) and denominators (weighted-average shares outstanding) for both basic and diluted EPS in the footnotes.  Basic EPS excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted-average shares outstanding.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of common shares that would then share in the earnings of the Company.  Presented below is basic and diluted EPS for the three months ended January 31, 2005 and 2004.

The number of shares issuable on the exercise of common stock options 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 751,000 and 2.6 million for the three months ended January 31, 2005 and 2004, respectively.  For the three months ended January 31, 2005, the shares were anti-dilutive because their exercise prices were greater than the average share price during the period.  For the three months ended January 31, 2004, the shares were anti-dilutive due to the Company’s net loss position. 

Presented below is basic and diluted EPS for the six months ended January 31, 2005 and 2004.

The number of shares issuable on the exercise of common stock options 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 905,000 and 2.6 million for the six months ended January 31, 2005 and 2004, respectively.  For the six months ended January 31, 2005, the shares were anti-dilutive because their exercise prices were greater than the average share price during the period.  For the six months ended January 31, 2004, the shares were anti-dilutive due to the Company’s net loss position.

4.  Long-Term Debt

Long-term debt as of January 31, 2005, July 31, 2004 and January 31, 2004 is summarized as follows (in thousands):

Aggregate maturities for debt outstanding as of January 31, 2005 are as follows (in thousands):

The Company incurred gross interest expense of $10.8 million and $12.9 million for the three months ended January 31, 2005 and 2004, respectively.  The Company incurred gross interest expense of $21.4 million and $26.3 million for the six months ended January 31, 2005 and 2004, respectively.

5.  Supplementary Balance Sheet Information (in thousands)

The composition of accounts payable and accrued expenses follows:

The composition of property, plant and equipment follows:

6.   Variable Interest Entities 

The Company has determined that it is the primary beneficiary of four entities, Breckenridge Terrace, The Tarnes at BC, LLC (“Tarnes”), BC Housing, LLC (“BC Housing”) and Tenderfoot Seasonal Housing, LLC (“Tenderfoot”), collectively known as the “Employee Housing Entities”, which are Variable Interest Entities (“VIEs”).  As a group, as of January 31, 2005, the Employee Housing Entities had total assets of $46.9 million and total liabilities of $63.3 million.  All of the Employee Housing Entities’ assets serve as collateral for their Tranche B obligations ($14.8 million as of January 31, 2005).  The Company’s exposure to loss as of January 31, 2005 as a result of its involvement with the Employee Housing Entities is limited to the Company’s initial equity investments of $2,000, a $6.7 million note receivable from Breckenridge Terrace, $38.3 million of letters of credit related to the Tranche A interest-only taxable bonds and a $5.1 million letter of credit related to the Breckenridge Terrace Tranche B Housing Bonds.  The Company also guarantees debt service on $5.9 million of Tranche B Housing Bonds which expire June 1, 2005.  The letters of credit would be triggered in the event that one of the entities defaults on required Tranche A debt service payments.  The guarantees on the Tranche B bonds would be triggered in the event that one of the entities defaults on required Tranche B debt service payments.  Neither the letters of credit nor the guarantees have default provisions.  The Employee Housing Entities have been consolidated by the Company since November 1, 2003.

The Company has determined that it 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 for its corporate headquarters.  APII had total assets of $4.4 million and no debt as of January 31, 2005.  The Company’s maximum exposure to loss as a result of its involvement with APII is limited to its initial equity investment of $2.5 million.  APII has been consolidated by the Company since February 1, 2004.

The Company has determined that it is the primary beneficiary of FFT Investment Partners (“FFT”), which is a VIE.  FFT owns a private residence in Eagle County, Colorado.  The entity had total assets of $5.6 million and no debt as of January 31, 2005.  The Company’s maximum exposure to loss as a result of its involvement with the entity is limited to its initial equity investment of $2.5 million.  FFT has been consolidated by the Company since February 1, 2004.

The Company, through RockResorts, manages the operations of several entities that own hotels in which the Company has no ownership interest.  The Company also has extended a $1.5 million note receivable to one of these entities.  These entities were formed to acquire, own, operate and realize the value primarily in resort hotel properties.  RockResorts has managed the day-to-day operations of the hotel properties since November 2001.  The Company has determined that the entities that own the hotel properties are VIEs, and the management contracts and the note receivable are significant variable interests in these VIEs.  The Company has also determined that it is not the primary beneficiary of these entities and, accordingly, is not required to consolidate any of these entities.  These VIEs had total assets of approximately $147.7 million and total liabilities of approximately $114.6 million as of January 31, 2005.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is limited to the note receivable of $1.5 million and the recorded value of the management agreements in the net amount of $1.7 million at January 31, 2005.

7.  Sale of Investment in Bachelor Gulch Resort, LLC

On December 8, 2004, the Company sold its 49% minority equity interest in Bachelor Gulch Resort, LLC (“BG Resort”), the entity that owns The Ritz-Carlton, Bachelor Gulch, for $13.0 million, with net cash proceeds to the Company of $12.7 million.  This transaction resulted in a $5.7 million gain on disposal of the investment.  In addition, the Company recognized $2.5 million of deferred Real Estate revenue associated with the recognition of the basis difference in land originally contributed to the entity and $369,000 of deferred interest income related to advances previously made to the entity.  In conjunction with the sale, the Company has guaranteed payment, if any, of certain contingencies of BG Resort which have reduced the amount of the gain recognized.  The Company’s interest was acquired by GHR, LLC, a new joint venture between Gencom BG, LLC and Lehman BG, LLC. 

Condensed financial data for BG Resort is presented below for the period from November 1, 2004 to December 8, 2004, the period from August 1, 2004 to December 8, 2004, and for the three and six months ended January 31, 2004:

The Company recorded equity investment losses associated with its 49% ownership interest in BG Resort in the accompanying statement of operations of $761,000 and $1.2 million for the three months ended January 31, 2005 and 2004, respectively, and losses of $2.7 million and $2.8 million for the six months ended January 31, 2005 and 2004, respectively.

8.  Put and Call Options

In November 2004, GSSI LLC (“GSSI”), the minority shareholder in SSV, notified the Company of its intent to exercise its put (the “2004 Put”) for 20% of its ownership interest in SSV; in January 2005, the 2004 Put was exercised and settled for a price of $5.8 million.  As a result, the Company now holds an approximate 61.7% ownership interest in SSV.  The Company and GSSI have the remaining put and call rights with respect to SSV: a) beginning August 1, 2007 and each year thereafter, each of the Company and GSSI shall have the right to call or put 100% of GSSI’s ownership interest in SSV during certain periods each year; b) GSSI has the right to put to the Company 100% of its ownership interest in SSV at any time after GSSI has been removed as manager of SSV or an involuntary transfer of the Company’s ownership interest in SSV has occurred.  The put and call pricing is generally based on the trailing twelve month EBITDA of SSV for the fiscal period ended prior to the commencement of the put period, as EBITDA is defined in the operating agreement. 

The Company had determined that the 2004 Put should be marked to fair value through earnings.  During the three and six months ended January 31, 2005, the Company recorded a gain of $612,000 related to the decrease in estimated fair value of the liability associated with the 2004 Put.  The Company recorded a loss of $1.5 million and $1.4 million for the three and six months ended January 31, 2004, respectively, representing the increase in estimated fair value of the 2004 Put during those periods.

In November 2001, the Company entered into a written put option in conjunction with its purchase of an interest in RockResorts.  The minority shareholder in RockResorts (“Olympus”) had the option to put to the Company its equity interest in RockResorts at a price based on management fees generated by certain properties under RockResorts management on a trailing twelve month basis.  The put option was exercisable between October 1, 2004 and September 30, 2005.  Olympus exercised the put option for 100% of its interest in RockResorts in October 2004; settlement of the put is pending.  The Company has marked the put option to fair value through earnings each period.  There was no impact on earnings related to this put option for the three and six months ended January 31, 2005 as the estimated fair market value of the put option did not exceed the book value of the minority shareholder’s interest.  The Company recorded a gain of $675,000 representing a decrease in estimated fair value of the RockResorts put option during the three months ended January 31, 2004; there was no net change in estimated fair value of the option during the six months ended January 31, 2004. 

In March 2001, in connection with the Company’s acquisition of a 51% ownership interest in RTP, LLC (“RTP”), the Company and RTP’s minority shareholder entered into a put agreement whereby the minority shareholder can put up to 33% of its interest in RTP to the Company during the period August 1 through October 31 annually.  The put price is determined primarily by the trailing twelve month EBITDA (as defined in the underlying agreement) for the period ending prior to the beginning of each put period.  The Company has determined that this put option should be marked to fair value through earnings.  For the three and six months ended January 31, 2005, the Company recorded a gain of $362,000 and $576,000, respectively, representing the decrease in estimated fair value of the put option during those periods.  For the three and six months ended January 31, 2004, the Company recorded a gain of $136,000 representing the decrease in estimated fair value of the put option during those periods.  As of July 31, 2004, the Company had a 52.1% ownership interest in RTP.  In October 2004, the minority shareholder in RTP exercised a portion of its put option for approximately 5.1% of the minority shareholder’s remaining ownership interest for a put price of approximately $324,000.  As a result, the Company now holds an approximate 54.5% ownership interest in RTP.

Between January 1, 2005 and December 31, 2010, the Company has the right to require the minority shareholder (“SLM”) in SRL&S to sell all of its ownership interest in SRL&S for a purchase price equal to the greater of (a) $30 million or (b) nine times Adjusted EBITDA (as defined in the Operating Agreement) for the average of the prior completed 24 calendar months results prior to the delivery of the call notice less the sum of SRL&S’s Normalized Debt (as defined in the Operating Agreement) multiplied by SLM’s ownership interest in SRL&S.  In addition, between January 1, 2005 and December 31, 2010, SLM shall have the right to require the Company to acquire all of SLM’s ownership interest in SRL&S for a purchase price equal to nine times Adjusted EBITDA for the average of the prior completed 24 calendar months results less SRL&S’s Normalized Debt multiplied by SLM’s ownership interest in SRL&S.

9.  Related Party Transactions

Historically, the Company has paid a fee to Apollo Advisors for management services and expenses related thereto.  In fiscal 2004, this fee was $500,000.  In connection with the conversion by Apollo Ski Partners, L.P. (“Apollo”) of its Class A Common Stock into shares of Common Stock, this arrangement was terminated effective October 1, 2004.  See Note 11, Class A Common Stock Conversion, for more information regarding this matter.

In August 2004, BG Resort repaid the $4.9 million principal balance note receivable which was outstanding to the Company as of July 31, 2004 from funds obtained by BG Resort in a debt refinancing.

In September 2004, James P. Thompson, President of VRDC, repaid the $350,000 principal balance note receivable and associated accrued interest which was outstanding to the Company as of July 31, 2004 under a note originally extended to Mr. Thompson and his wife in 1995.

As of January 31, 2005, the Company had outstanding a $1.5 million note receivable from Keystone/Intrawest, LLC (“KRED”), a real estate development venture in which the Company has an equity-method investment.  This note is related to the fair market value of the land originally contributed to the partnership, and is repaid as the underlying land is sold to third parties.  KRED repaid $412,000 and $1.0 million under this note during the three and six months ended January 31, 2005.  In addition, as of January 31, 2005, the Company had a receivable of approximately $373,000, including accrued interest, from KRED related to advances used for development project funding as necessary.  The advances do not have specific repayment terms and are dependent upon the underlying development projects becoming cash flow positive.  KRED repaid $50,000 and $245,000 of this receivable, including $12,000 for interest, during the three and six months ended January 31, 2005, respectively.

In December 2004, Adam Aron, the Chairman of the Board and Chief Executive Officer of the Company, and Ronald Baron, a significant shareholder in the Company, reserved the purchase of condominium units at the planned “Arrabelle” project located in the core of LionsHead.  Each of Messrs. Aron and Baron paid a refundable $100,000 deposit for the reservation of the condominium units.  Construction of the Arrabelle project is scheduled to start in late spring 2005.  No binding contracts have yet been signed, and the sale of the condominiums is subject to the approval of the Board of Directors of the Company, in accordance with the Company’s related party transactions policy.

10.  Commitments and Contingencies

Metropolitan Districts

The Company credit-enhances $8.5 million of bonds issued by Holland Creek Metropolitan District (“HCMD”) through an $8.6 million letter of credit issued against the Company’s bank credit facility.  HCMD’s bonds were issued and used to build infrastructure associated with the Company’s Red Sky Ranch residential development, and are to be repaid by revenues generated by Red Sky Ranch Metropolitan District (“RSRMD”) through property taxes.  The Company has agreed to pay capital improvement fees to RSRMD until RSRMD’s revenue streams from property taxes are sufficient to meet debt service requirements under HCMD’s bonds, and the Company has recorded a liability of$1.9 million, primarily within “Other Long-term Liabilities”, at January 31, 2005, July 31, 2004 and January 31, 2004 with respect to the estimated present value of future RSRMD capital improvement fees.

Guarantees

As of January 31, 2005, the Company had various other letters of credit outstanding in the amount of $60.3 million, consisting primarily of $43.4 million in support of the Employee Housing Bonds, $4.7 million related to workers’ compensation for Heavenly, a $4.2 million letter of credit issued in support of SSV’s credit facility and $7.3 million of construction performance guarantees.

In addition to the guarantees noted above, the Company has entered into contracts in the normal course of business which include certain indemnifications within the scope of FASB Interpretation (“FIN”) 45 under which it could be required to make payments to third parties upon the occurrence or non-occurrence of certain future events.  These indemnities include indemnities to licensees in connection with the licensees’ use of the Company’s trademarks and logos, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s software products, indemnities related to liabilities associated with the use of easements, indemnities related to employment of contract workers and indemnities related to the Company’s use of public lands.  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 Delaware law, the Company indemnifies its directors and officers over their lifetimes for certain events or occurrences while the officer or director is, or was, serving the Company 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 limits exposure and should enable the Company to recover a portion of any future amounts paid.  The Company has not recorded a liability associated with this indemnification as of January 31, 2005 because the Company has assessed the fair market value associated with potential payment obligations under the indemnification to be immaterial.

The Company guarantees the revenue streams associated with selected routes flown by certain airlines into Eagle County Regional Airport; these guarantees are generally capped at certain levels.  As of January 31, 2005, the Company has recorded a liability related to the airline guarantees of $1.9 million. 

In conjunction with the Company’s sale of its ownership interest in BG Resort (See Note 7, Sale of Investment in Bachelor Gulch Resort, LLC), the Company has guaranteed payment, if any, of certain contingencies of BG Resort upon settlement.  As of January 31, 2005, the Company has recorded a liability related to these contingencies in the amount of $130,000.  The maximum amount that the Company would be required to pay under this agreement is approximately $424,000.

Unless otherwise noted, the Company has not recorded a liability 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 balance sheet the underlying liability associated with the guarantee, the guarantee or indemnification existed prior to January 1, 2003 and is therefore not subject to the measurement requirements of FIN 45, or because the Company has calculated the fair value of the indemnification or guarantee to be de minimus based upon the current facts and circumstances that would trigger a payment under the indemnification clause.

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 product warranty liability with respect to these indemnifications.

Commitments

In the ordinary course of obtaining necessary zoning and other approvals for the Company’s potential real estate development projects, the Company may contingently commit to the completion of certain infrastructure, improvements and other costs related to the projects.  Fulfillment of such commitments is required only if the Company moves forward with the development project.  The determination of whether the Company ultimately completes a development project is entirely at the Company’s discretion, and is generally contingent upon, among other considerations, receipt of satisfactory zoning and other approvals and the current status of the Company’s analysis of the economic viability of the project, including the costs associated with the contingent commitments.  The Company currently has obligations, recorded as liabilities in the accompanying consolidated condensed balance sheets, to complete or fund certain improvements with respect to real estate developments; the Company has estimated such costs to be approximately $8.4 million, and anticipates completion within the next two years.

The Company agreed to install two new chairlifts and related infrastructure at Beaver Creek for the 2004/05 ski season and one chairlift and related infrastructure by the 2005/06 ski season pursuant to agreements with Bachelor Gulch Village Association (“BGVA”), Beaver Creek Resort Company (“BCRC”) and Beaver Creek Property Owner Association.  In connection with these agreements, BGVA had deposited $5 million, BCRC had deposited $4 million and the Company had deposited $1 million into an escrow account to be used by the Company to fund the construction of the chairlifts.  As of January 31, 2005, the Company has received funds of $7.3 million from the escrow account as reimbursement for construction costs of two of the chairlifts and related infrastructure.  The Company completed the chairlifts and related infrastructure as required for the 2004/05 ski season.  The estimated net cost to the Company to complete the remaining lift and related infrastructure is $5.5 million.  As of January 31, 2005, the Company has recorded a liability of $1.3 million related to its commitment to build the remaining lift and ancillary improvements. 

Self Insurance

The Company is self-insured for medical and worker’s compensation under a stop loss arrangement.  The self-insurance liability related to worker’s compensation is determined actuarially based on claims filed.  The self-insurance liability related to medical claims is determined based on internal and external analysis of actual claims.  The amounts related to these claims are included as a component of accrued benefits in accounts payable and accrued expenses (see Note 5, Supplementary Balance Sheet Information).

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.

Gilman Litigation Appeal

As previously disclosed, the Company is appealing an adverse decision by the Eagle County District Court of Colorado, rendered on September 24, 2003, relating to the Company’s interest in real property in Eagle County, Colorado commonly known as the “Gilman” property.  The Court found, among other things, that the Company was not entitled to any interest in the property.  The Company is appealing the decision primarily on the basis that the Court applied the wrong legal standard in deciding the issue.  The Company believes, based on the advice of counsel, that it has strong legal grounds to challenge the decision although there can be no guarantee of any particular outcome.

Breckenridge Terrace Employee Housing Construction Defect/Water Intrusion Claims

During fiscal 2004, the Company became aware of mold damage due to water intrusion and condensation problems in the 17 building employee housing facility owned by Breckenridge Terrace, LLC (“Breckenridge Terrace”), an employee housing entity in which the Company is a member, manager and the primary beneficiary and, as such, consolidates the accounts of Breckenridge Terrace.  As a result of the mold damage, the facility was not available for occupancy during the 2003/04 ski season.  All buildings at the facility required mold remediation and reconstruction (the “reconstruction”) and this work began in the third quarter of fiscal 2004.  Breckenridge Terrace recorded a $7.0 million liability in the second quarter of fiscal 2004 for the estimated cost of reconstruction efforts.  These reconstruction costs were funded by a loan to Breckenridge Terrace from the Company member of the LLC.  As of January 31, 2005, Breckenridge Terrace had a remaining liability of approximately $1.0 million for future remaining reconstruction costs.   With the exception of one building which has been kept in its original design and construction for evidentiary purposes (see discussion below), the remaining 16 buildings became available for occupancy in the second quarter of fiscal 2005.  The Company anticipates it will incur the remaining amount of remediation costs by late calendar 2005.

Forensic construction experts retained by Breckenridge Terrace have determined that the water intrusion and condensation problems are the result of construction and design defects.  In accordance with Colorado law, Breckenridge Terrace served separate notices of claims on the general contractor, architect and developer, all of whom denied the claims.  In June 2004, Breckenridge Terrace filed a demand for binding arbitration.  An arbitration hearing has been scheduled for August 2005.  Also, Breckenridge Terrace filed claims with the relevant insurance carriers but these claims have been initially denied.  Recovery, if any, of a portion of the remediation and reconstruction liability from potentially responsible parties, including recovery from insurance claims, will be recognized as an asset if and when receipt is deemed probable.

Revision of Forest Plan

As previously disclosed, the Record of Decision (the “ROD”) approving the new White River National Forest Land Resource Management Plan (the “Forest Plan”) was issued by the Forest Service in April of 2002.  The Forest Plan regulates recreational, operational and development activities on White River National Forest lands which include the Company’s four Colorado ski resorts.  The ROD was appealed to the Chief of the Forest Service (the “Chief”) by the Company and several other interested parties, including environmental groups holding positions opposite to those of the Company (the “appeals”).

The Chief’s decision on the appeals was issued on September 22, 2004, and was subsequently modified by the Secretary of the Department of Agriculture in a final decision dated December 2, 2004.  In this final decision, the Company prevailed on many issues which are important to the current and future operation of its four Colorado ski resorts.

Any appellant may file an action for judicial review of the final decision in Federal Court.  A court would review the final decision based on the administrative record and the agency’s conclusions would receive deference.  It is impossible at this time to predict whether an action for judicial review will be filed, and if so, whether its resolution would have a material adverse impact on the Company.

SEC Investigation

In February 2003, the SEC informed the Company that it had issued a formal order of investigation with respect to the Company.  Since the inception of the SEC’s investigation, the SEC has issued several subpoenas to the Company and made, and continues to make, voluntary requests to the Company to provide documents and information related to several matters previously restated by the Company in its publicly filed restatements of certain prior years, as well as other items.  Certain current and former directors, officers and employees of the Company have appeared and are expected to appear for testimony before the SEC pursuant to subpoena.  The Company is fully cooperating with the SEC in its investigation.  The Company is unable to predict the outcome of the investigation or any action that the SEC might take, including the imposition of fines and penalties, or other available remedies.  Any adverse development in connection with the investigation, including any expansion of the scope of the investigation, could have a material adverse effect on the Company, including diverting the efforts and attention of management from the business operations and increasing legal expenses associated with the matter.

 

11.  Class A Common Stock Conversion

In September 2004, the Company and Apollo entered into a Conversion and Registration Rights Agreement (the “Agreement”).  Pursuant to the Agreement, Apollo converted all of its Class A common stock into shares of the Company’s Common Stock.  Apollo distributed the shares to its partners in proportion to each partner’s interest in the partnership.  Apollo did not dissolve after this distribution and continues to exist as a partnership.  The Company, pursuant to the Agreement, filed a shelf registration statement in November 2004, covering certain of the shares owned by the limited partners of Apollo.  Before the conversion, Apollo owned 6.1 million Class A Common shares or 99.9% of the Company’s Class A Common Stock.

As a result of the above Agreement, the Company no longer has any Class A Common Stock outstanding and therefore only has one class of directors.  Previously, the Class A Common Stock elected the Class 1 directors and the Common Stock elected the Class 2 directors.  Additionally, as a result of the above Agreement, as of the date of the agreement, the Company’s Balance Sheet no longer presents any Class A Common Stock and the full balance of the Company’s common shares outstanding is presented under “Common stock”.

12.  Guarantor Subsidiaries and Non-Guarantor Subsidiaries

The Company’s payment obligations under the 6.75% Senior Subordinated Notes due 2014 (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 Boulder/Beaver LLC, Colter Bay Corporation, Eagle Park Reservoir Company, Forest Ridge Holdings, Inc., Gros Ventre Utility Company, Jackson Lake Lodge Corporation, Jenny Lake Lodge, Inc., Mountain Thunder, Inc., RTP, LLC, RT Partners, Inc., SSV, Larkspur Restaurant & Bar, LLC, Timber Trail, Inc., Vail Associates Investments, Inc., and VR Holdings, Inc. (together, the “Non-Guarantor Subsidiaries”).  APII, FFT and the Employee Housing Entities are included with the Non-Guarantor Subsidiaries for purposes of the consolidated financial information, but are not considered subsidiaries under the indenture governing the 6.75% Notes.

Presented below is the consolidated financial information of Vail Resorts, Inc. (the “Parent Company”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries.  Financial information for Larkspur Restaurant & Bar, LLC (“Larkspur”), RockResorts and JHL&S, LLC (“JHL&S”) are presented separately as the Company owns less than 100% of these Guarantor Subsidiaries.  Financial information for the Non-Guarantor subsidiaries is presented in the column titled “Other Subsidiaries”.  Balance sheet data is presented as of January 31, 2005, July 31, 2004 and January 31, 2004.  Statement of operations and statement of cash flows data are presented for the six months ended January 31, 2005 and 2004.

 

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