Vail Resorts 2004 Annual Report Just another day in paradise... Vail Resorts is the premier mountain resort company in North America, with six distinctive mountain resorts: Vail® Breckenridge™ Keystone® Heavenly® Beaver Creek® Vail Resorts is committed to providing world-class facilities and service for our customers, an attractive workplace for our employees, sensitivity to our surroundings and profitable growth for our shareholders. ማሜምሞ Grand Teton ® In addition, RockResorts, a luxury hotel operator, has been part of the Vail Resorts portfolio since fiscal 2002. Cover Photo: The majesty of Vail Mountain radiates under the night sky as the moonlight cascades down upon the ski slopes. While the charm and grace of Vail Village and Lionshead have long been icons of the Vail Valley, with the start of Vail’s New Dawn, the magic will be intensified. The beauty of this land can be attributed to the dedicated and tireless work of the United States Forest Service. Vail Resorts’ companies operate in and around the White River National Forest in Colorado, under the management of the Lake Tahoe Basin Management Unit in the Eldorado National Forest in California and the Humboldt- Toiyabe National Forest in Nevada, and on lands managed by the National Park Service in the Grand Teton National Park in Wyoming. To Our Shareholders: Fiscal 2004 was truly an outstanding year for Vail Resorts, as we enjoyed a robust and healthy rebound from the difficult operating environment post 9/11. Although still fresh in all of our minds, this year the threat of terrorism and ongoing military conflict abroad did not put a chill in visitation at our mountain resorts and luxury hotels. In fiscal 2004, Vail Resorts enjoyed record Resort revenue, record segment operating results and record income from operations. Resort Reported EBITDA and Real Estate Reported EBITDA soared, increasing by 35% year-over-year in our Mountain segment, 139% in our Lodging segment, and 75% in our Real Estate segment. Revenues were healthy this year in large part because of the continued appeal of our world-class properties. The accolades continue to pour in for our ski resorts, hotels, restaurants, stores, golf courses and real estate developments. It has become commonplace for Vail Resorts to be praised by prestigious third parties as being the undisputed quality leader at just about whatever we do. The cause for that recognition is undoubtedly the result of the efforts of our some 16,000 employees, who create and produce the impressive guest experience that puts so many smiles on the faces of so many visitors. While our commitment to quality is what ensures consumer loyalty to our premium vacation experiences, it is especially meaningful that we were able to put forward such a well-received product offering at the same time as we have been seriously reducing costs. Since 9/11, we have structurally taken approximately $45 million out of our cost structure, $25 million of this total coming in fiscal 2004. First and foremost, we looked to save back-of-house, overhead and shoulder-season costs wherever we could, rather than compromising the experience our guests enjoy. And, on this front, we were quite successful. Measured guest satisfaction on a wide variety of attributes remained at a very high standard throughout fiscal 2004, but costs were indeed contained. As a result of the incremental revenues achieved year-over-year, fully 94% dropped to the bottom Reported EBITDA line in the Mountain division and 66% did so in the Lodging division. Fiscal 2004 was also a year of great progress for our real estate efforts. New projects were conceived or launched at all four of our Colorado resorts, as well as in Jackson Hole, Wyoming. Vail’s New Dawn is particularly exciting. After a decade of planning, we are now on the verge of transforming the base village experience at our flagship mountain resort. Thanks to great work from highly talented land planners, architects and designers, not to mention our own staff, we have announced we will be remaking our land holdings in Vail, and not un-importantly, in a manner that we expect will be quite lucrative for us in the near term. We are especially appreciative that the Town of Vail has enthusiastically signed on to this effort, and there is widespread community support for our proceeding as soon as possible. Despite these operating results of which we are immensely proud, Vail Resorts posted a net loss for the year. Odd as this may sound at first blush, this is yet again a harbinger of superb news, because of what took us from what would have been a net profit to a net loss instead. During the fiscal year, we made significant improvements to the Company’s capital structure by refinancing the majority of our long-term debt, at much lower rates and for a much longer term. Such a refinancing did not come cheap, as we recorded a pretax charge of $37.1 million in fiscal 2004 to do so. Still, we reduced our annual cash interest expense in excess of $5 million annually for years to come. More importantly, we locked in a historically low interest rate of 6.75% all the way through the year 2014, on some $390 million of our debt. Thus, the refinancing was in our opinion a considerable success, and we believe sophisticated observers have and will continue to look past the one-time charge associated with this outcome. Another sign of our progress in fiscal 2004 is the Company’s improved liquidity and credit position. Both saw a significant change for the better in fiscal 2004, due to the markedly improved segment operating results. Indeed, our fiscal year ended with $62 million of cash-on-hand and a zero balance in our revolving credit facility. Similarly, our credit statistics showed considerable improvement over last year. The Mountain Segment The Company’s Mountain segment got off to a strong start this year as we enjoyed, for the sixth year in a row, record season pass sales. So-called destination visitors from out-of-state also returned to Colorado in increasing numbers in fiscal 2004, these being our higher paying and more profitable guests. As a result, the Christmas/New Year’s holiday period was the strongest ever in the Company’s history. January and February visitation was also quite strong, the latter helped by that once-every-four-year occurrence of having an added operating day in mid-season, namely February 29. But in the month of March, typically the busiest month of the ski season, we saw unseasonably warmer than average temperatures and below average snowfall. Cancellations and diminished skiing were sizeable. There is, however, a silver lining in most clouds. For us in this instance, we enjoyed healthy financial results in fiscal 2004 despite the unusually low March results. With any luck, March 2004 should be an easy comparison for what we hope will be a big March 2005 in the ski season just now starting. All in all, the Company’s skier visits dropped 1.6% in fiscal 2004, almost all of which was due to the early and late season decrease in visitation by local and Front Range Colorado season pass holders. However, this did not represent a problem for the Company as overall season pass dollars were up, despite the lesser visitation. The increase in season pass revenue, coupled with the increase in visits from the higher spending destination skiers combined with actual price increases at the window resulted in an impressive 10% year-over-year increase in our average realized lift ticket price or ETP. In total, this translated to an approximate 9% year-over-year increase in lift ticket revenue for the fiscal year. Non-lift ticket Mountain revenues also grew a respectable 7% year-over-year. Looking at our ski resorts individually, Beaver Creek and Heavenly each completed the year with record skier visits and record financial results for the second year in a row. In dollar terms, Vail, Breckenridge, Heavenly and Beaver Creek all enjoyed their best revenue years ever. While revenue growth in the Mountain segment was substantial, the lack of expense growth, which was the result of our cost cutting efforts, was almost astonishing. Mountain expense increased just 0.7% over fiscal 2003 expense levels. This in turn led to Reported EBITDA growth year-over-year of 35%. Our management team tightly controlled our spending, all the while maintaining the high level of guest satisfaction and employee morale for which our resorts are renowned. As evidence of their continued appeal, Ski Magazine, in its October 2004 issue, again heaped high praise on our 5 ski resorts in its prestigious and influential annual ski resort rankings. For the 13th time in 17 years, Vail was ranked as the number one ski resort in North America, out of some 800 ski resorts vying for that honor. Beaver Creek had its highest ranking ever at number four, and Breckenridge came in at number six. Keystone and Heavenly finished 15th and 16th, respectively. This represents a quite tight banding of quality at the very top of the North American ski industry. The Lodging Segment In fiscal 2004, our Lodging properties generated operating results that more than doubled Lodging Reported EBITDA from the prior year. A number of favorable factors converged. The economy recovered somewhat in fiscal 2004, as did the U.S. travel industry as a whole. The increase in destination skier visits to our ski resorts benefited those hotel and condominium properties that are located in and around our ski resorts. Our marketing focus on generating increased revenues and our careful management of expenses resulted in significant year-over-year improvement.