9.           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 Credit Facility.  HCMD's bonds were issued and used to build infrastructure associated with the Company's Red Sky Ranch residential development.  The Company has agreed to pay capital improvement fees to Red Sky Ranch Metropolitan District ("RSRMD") until RSRMD's revenue streams from property taxes are sufficient to meet debt service requirements under HCMD's bonds, and the Company has recorded a liability of $1.3 million, $1.1 million and $1.1 million, primarily within "other long-term liabilities" in the accompanying Consolidated Condensed Balance Sheets, as of January 31, 2008, July 31, 2007 and January 31, 2007, respectively, with respect to the estimated present value of future RSRMD capital improvement fees.  The Company estimates that it will make capital improvement fee payments under this arrangement through the year ending July 31, 2018.

Guarantees

As of January 31, 2008, the Company had various other guarantees, primarily in the form of letters of credit in the amount of $96.0 million, consisting primarily of $51.0 million in support of the Employee Housing Bonds, $36.2 million of construction performance guarantees and $7.4 million for workers' compensation and general liability deductibles related to construction activities.

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

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

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

As noted above, the Company makes certain indemnifications to licensees in connection with their use of the Company's trademarks and logos.  The Company does not record any 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 whether to complete a development project is entirely at the Company's discretion, and is generally contingent upon, among other considerations, receipt of satisfactory zoning and other approvals and the current status of the Company's analysis of the economic viability of the project, including the costs associated with the contingent commitments.  The Company currently has obligations, recorded as liabilities in the accompanying Consolidated Condensed Balance Sheet, to complete or fund certain improvements with respect to real estate developments; the Company has estimated such costs to be approximately $8.1 million as of January 31, 2008 and anticipates completion of the majority of these commitments within the next two years.

Self Insurance

The Company is self-insured for claims under its health benefit plans and for workers’ compensation claims, subject to a stop loss policy.  The self-insurance liability related to workers' compensation is determined actuarially based on claims filed.  The self-insurance liability related to claims under the Company’s health benefit plans is determined based on 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, including Resort (Mountain and Lodging) related cases and contractual and commercial litigation that arises from time to time in connection with the Company's real estate operations.  Management believes the Company has adequate insurance coverage or has accrued for loss contingencies for all known matters that are deemed to be probable losses and estimable.

Cheeca Lodge & Spa Contract Dispute

In March 2006, RockResorts was notified by the ownership of Cheeca Lodge & Spa, formerly a RockResorts managed property, that its management agreement was being terminated effective immediately.  RockResorts believed that the termination was in violation of the management agreement and sought monetary damages, and recovery of attorney’s fees and costs.  Pursuant to the dispute resolution provisions of the management agreement, the disputed matter went before a single judge arbitrator at the JAMS Arbitration Tribunal in Chicago, Illinois.  On February 28, 2007, the arbitrator rendered a decision, awarding $8.5 million in damages in favor of RockResorts and against Cheeca Holdings, LLC (“Cheeca Holdings”) and recovery of costs and attorney’s fees to be determined in the last stage of the proceedings.  Prior to the ruling by the arbitrator in the last stage of the proceeding, the Company reached a comprehensive settlement with Cheeca Holdings which included damages, attorney’s fees and expenses.  On October 19, 2007, RockResorts received payment of the final settlement from Cheeca Holdings in the amount of $13.5 million, of which $11.9 million (net of final attorney fees) is recorded in “contract dispute credit (charges), net” in the Consolidated Condensed Statement of Operations for the six months ended January 31, 2008.

The Canyons Ski Resort Litigation

During the fourth quarter of the fiscal year ended July 31, 2007, the Company entered into an agreement with Peninsula Advisors, LLC (“Peninsula”) for the negotiation and mutual acquisition of The Canyons ski resort (“The Canyons”) and the land underlying The Canyons.  On July 15, 2007, American Skiing Company (“ASC”) entered into an agreement to sell The Canyons to Talisker Corporation and Talisker Canyons Finance Company, LLC (together “Talisker”).  On July 27, 2007, the Company filed a complaint in the District Court in Colorado against Peninsula and Talisker claiming, among other things, breach of contract by Peninsula and intentional interference with contractual relations and prospective business relations by Talisker and seeking damages, specific performance and injunctive relief.  On October 19, 2007, the Company’s request for a preliminary injunction to prevent the closing of the acquisition by Talisker of The Canyons from ASC was denied.  On November 8, 2007, Talisker filed an answer to the Company's complaint along with three counterclaims.  On November 12, 2007, Peninsula filed a motion to dismiss and for partial summary judgment.  The Company believes that these counter claims and motions are without merit.  The Company is unable to predict the ultimate outcome of the above described actions.

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 activities.  The Lodging segment includes the operations of all of the Company's owned hotels, RockResorts, GTLC, condominium management and golf operations.  The Resort segment is the combination of the Mountain and Lodging segments.  The Real Estate segment holds 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.  SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires the Company to report segment results in a manner consistent with management's internal reporting of operating results to the chief operating decision maker (Chief Executive Officer) for purposes of evaluating segment performance.  Therefore, since the Company uses Reported EBITDA to measure performance of segments for internal reporting purposes, the Company will continue to use Reported EBITDA to report segment results.

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, net change in cash and cash equivalents or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity.  Because Reported EBITDA is not a measurement determined in accordance with GAAP and thus is susceptible to varying calculations, Reported EBITDA as presented may not be comparable to other similarly titled measures of other companies.

The Company utilizes Reported EBITDA in evaluating performance of the Company and in allocating resources to its segments.  Mountain Reported EBITDA consists of Mountain net revenue less Mountain operating expense plus Mountain equity investment income.  Lodging Reported EBITDA consists of Lodging net revenue less Lodging operating expense.  Real Estate Reported EBITDA consists of Real Estate net revenue less Real Estate operating expense 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.

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,
				2008				2007				2008				2007
Net revenue
Lift tickets				$	133,998			$	128,617			$	133,998			$	128,617
Ski school					35,155				34,198				35,155				34,198
Dining					22,895				22,468				27,658				26,354
Retail/rental					66,771				63,291				90,311				87,809
Other					20,903				23,452				35,136				41,211
Total Mountain net revenue					279,722				272,026				322,258				318,189
Lodging					34,827				32,796				78,144				73,204
Resort					314,549				304,822				400,402				391,393
Real Estate					45,471				56,216				57,504				83,138
Total net revenue				$	360,020			$	361,038			$	457,906			$	474,531
Operating expense:
Mountain				$	163,188			$	159,871			$	244,136			$	239,358
Lodging					36,782				30,757				78,018				67,106
Resort					199,970				190,628				322,154				306,464
Real estate					44,409				50,391				51,322				76,509
Total segment operating expense				$	244,379			$	241,019			$	373,476			$	382,973
Gain on sale of real property				$	709			$	--			$	709			$	--
Mountain equity investment income, net				$	926			$	1,496			$	2,895			$	2,331
Reported EBITDA:
Mountain				$	117,460			$	113,651			$	81,017			$	81,162
Lodging					(1,955	)			2,039				126				6,098
Resort					115,505				115,690				81,143				87,260
Real Estate					1,771				5,825				6,891				6,629
Total Reported EBITDA				$	117,276			$	121,515			$	88,034			$	93,889
Real estate held for sale and investment				$	381,379			$	293,219			$	381,379			$	293,219
Reconciliation to net income:
Total Reported EBITDA				$	117,276			$	121,515			$	88,034			$	93,889
Depreciation and amortization					(23,621	)			(21,759	)			(44,383	)			(43,344	)
Relocation and separation charges					--				(500	)			--				(1,235	)
Loss on disposal of fixed assets, net					(157	)			(10	)			(391	)			(91	)
Investment income					2,019				2,417				5,237				4,481
Interest expense, net					(7,535	)			(7,911	)			(15,179	)			(16,847	)
Contract dispute (charges) credit, net					--				(672	)			11,920				(4,276	)
Minority interest in income of consolidated subsidiaries, net					(4,910	)			(6,152	)			(2,847	)			(4,363	)
Income before provision for income taxes					83,072				86,928				42,391				28,214
	Provision for income taxes				(31,753	)			(33,902	)			(15,685	)			(11,004	)
Net income				$	51,319			$	53,026			$	26,706			$	17,210

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.  During the three and six months ended January 31, 2008, the Company repurchased 279,079 and 511,583 shares of common stock at a cost of $14.2 million and $25.9 million, respectively.  Since inception of this stock repurchase plan, the Company has repurchased 1,185,083 shares at a cost of approximately $51.7 million, as of January 31, 2008.  As of January 31, 2008, 1,814,917 shares remained available to repurchase under the existing repurchase authorization.  Shares of common stock purchased pursuant to the repurchase program will be held as treasury shares and may be used for the issuance of shares under the Company's employee share award plans.

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 Colter Bay Corporation, Eagle Park Reservoir Company, Gros Ventre Utility Company, Jackson Lake Lodge Corporation, Jenny Lake Lodge, Inc., Mountain Thunder, Inc., SSV, Larkspur Restaurant & Bar, LLC, Vail Associates Investments, Inc., Arrabelle, Gore Creek Place, LLC, Chalets, RCR Vail, LLC, Crystal Peak Lodge of Breckenridge, Inc., Timber Trail, Inc., VR Holdings, Inc. 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 indentures governing the 6.75% Notes.

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

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

 

---

 

Supplemental Condensed Consolidating Balance Sheet
As of January 31, 2008
(in thousands)
(Unaudited)
							100% Owned
				Parent			Guarantor			Other			Eliminating
				Company			Subsidiaries			Subsidiaries			Entries			Consolidated
Current assets:
	Cash and cash equivalents		$	--		$	268,224		$	6,209		$	--		$	274,433
	Restricted cash			--			16,818			39,468			--			56,286
	Trade receivables, net			--			34,825			9,931			--			44,756
	Inventories, net			--			10,169			41,344			--			51,513
	Other current assets			16,585			25,267			10,751			--			52,603
		Total current assets		16,585			355,303			107,703			--			479,591
Property, plant and equipment, net				--			886,695			97,163			--			983,858
Real estate held for sale and investment				--			90,456			290,923			--			381,379
Goodwill, net				--			123,034			18,977			--			142,011
Intangible assets, net				--			56,779			15,879			--			72,658
Other assets				4,291			27,110			10,917			--			42,318
Investments in subsidiaries and advances to (from) parent				1,221,672			282,398			(5,755	)		(1,498,315	)		--
	Total assets		$	1,242,548		$	1,821,775		$	535,807		$	(1,498,315	)	$	2,101,815
Current liabilities:
	Accounts payable and accrued expenses		$	12,462		$	237,602		$	162,808		$	--		$	412,872
	Income taxes payable			30,810			--			--			--			30,810
	Long-term debt due within one year			--			15,039			85,671			--			100,710
		Total current liabilities		43,272			252,641			248,479			--			544,392
Long-term debt				390,000			42,710			121,701			--			554,411
Other long-term liabilities				2,089			104,143			60,788			--			167,020
Deferred income taxes				86,303			--			--			--			86,303
Minority interest in net assets of consolidated subsidiaries				--			--			--			28,805			28,805
Total stockholders' equity				720,884			1,422,281			104,839			(1,527,120	)		720,884
		Total liabilities and stockholders' equity	$	1,242,548		$	1,821,775		$	535,807		$	(1,498,315	)	$	2,101,815

---

 

Supplemental Condensed Consolidating Balance Sheet
As of July 31, 2007
(in thousands)
						100% Owned
		Parent				Guarantor				Other				Eliminating
		Company				Subsidiaries				Subsidiaries				Entries				Consolidated
Current assets:
Cash and cash equivalents		$	--			$	225,952			$	4,867			$	--			$	230,819
Restricted cash			--				11,437				43,312				--				54,749
Trade receivables, net			--				41,804				1,753				--				43,557
Inventories, net			--				9,805				38,259				--				48,064
Other current assets			15,056				13,545				5,847				--				34,448
Total current assets			15,056				302,543				94,038				--				411,637
Property, plant and equipment, net			--				784,458				101,468				--				885,926
Real estate held for sale and investment			--				86,837				270,749				--				357,586
Goodwill, net			--				123,033				18,666				--				141,699
Intangible assets, net			--				57,087				16,420				--				73,507
Other assets			4,646				24,225				9,897				--				38,768
Investments in subsidiaries and advances to (from) parent			1,206,709				337,716				(82,219	)			(1,462,206	)			--
Total assets		$	1,226,411			$	1,715,899			$	429,019			$	(1,462,206	)		$	1,909,123
Current liabilities:
Accounts payable and accrued expenses		$	12,718			$	161,456			$	107,605			$	--			$	281,779
Income taxes payable			37,441				--				--				--				37,441
Long-term debt due within one year			--				49				328				--				377
Total current liabilities			50,159				161,505				107,933				--				319,597
Long-term debt			390,000				57,724				146,009				--				593,733
Other long-term liabilities			--				108,582				73,248				--				181,830
Deferred income taxes			72,213				--				--				--				72,213
Minority interest in net assets of consolidated subsidiaries			--				--				--				27,711				27,711
Total stockholders’ equity			714,039				1,388,088				101,829				(1,489,917	)			714,039
Total liabilities and stockholders’ equity		$	1,226,411			$	1,715,899			$	429,019			$	(1,462,206	)		$	1,909,123

 

 

 

---

 

Supplemental Condensed Consolidating Balance Sheet
As of January 31, 2007
(in thousands) (Unaudited)
						100% Owned
		Parent				Guarantor				Other				Eliminating
		Company				Subsidiaries				Subsidiaries				Entries				Consolidated
Current assets:
Cash and cash equivalents		$	--			$	247,083			$	7,783			$	--			$	254,866
Restricted cash			--				25,404				1,388				--				26,792
Trade receivables, net			--				37,578				6,150				--				43,728
Inventories, net			--				9,034				40,791				--				49,825
Other current assets			13,338				23,509				2,071				--				38,918
Total current assets			13,338				342,608				58,183				--				414,129
Property, plant and equipment, net			--				784,486				83,699				--				868,185
Real estate held for sale and investment			--				118,917				174,302				--				293,219
Goodwill, net			--				118,475				17,336				--				135,811
Intangible assets, net			--				57,168				16,547				--				73,715
Other assets			5,001				26,948				15,608				--				47,557
Investments in subsidiaries and advances to (from) parent			1,059,064				(535,123	)			(64,043	)			(459,898	)			--
Total assets		$	1,077,403			$	913,479			$	301,632			$	(459,898	)		$	1,832,616
Current liabilities:
Accounts payable and accrued expenses		$	19,866			$	231,873			$	53,951			$	--			$	305,690
Income taxes payable			9,103				--				--				--				9,103
Long-term debt due within one year			--				35				405				--				440
Total current liabilities			28,969				231,908				54,356				--				315,233
Long-term debt			390,000				57,727				104,139				--				551,866
Other long-term liabilities			13				124,415				61,421				--				185,849
Deferred income taxes			--				83,946				21				--				83,967
Put option liabilities			--				1,245				--				--				1,245
Minority interest in net assets of consolidated subsidiaries			--				--				36,035				--				36,035
Total stockholders’ equity