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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July
30, 2000 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from____________ to ____________.
Commission File Number 1-13507
American Skiing Company
(Exact name of registrant as specified in its charter)
Delaware 04-3373730
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 450
Bethel, Maine 04217
(Address of principal executive office)
(Zip Code)
(207) 824-8100
www.peaks.com
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
(Title of Each Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None None
(Title of Each Class) (Name of exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's outstanding common stock held by
non-affiliates of the registrant on October 24, 2000, determined using the per
share closing price thereof on the New York Stock Exchange Composite tape, was
approximately $29.7 million. As of October 24, 2000, 30,469,163 shares of common
stock were issued and outstanding, of which 14,760,530 shares were Class A
common stock.
American Skiing Company
Form 10-K Annual Report, for the year ended July 30, 2000
American Skiing Company and Consolidated Subsidiaries
Table of Contents
Part I
Page
Item 1 Business .............................................................1
Item 2 Properties ..........................................................13
Item 3 Legal Proceedings....................................................17
Item 4 Submission of Matters to a Vote of Security Holders .................17
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .................................................18
Item 6 Selected Financial Data .............................................19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................21
Item 7A Quantitative and Qualitative Disclosures about
Market Risk .........................................................32
Item 8 Financial Statements and Supplementary Data .........................32
Part III
Item 10 Directors and Executive Officers of the Registrant...................34
Item 11 Executive Compensation...............................................34
Item 12 Security Ownership of Certain Beneficial Owners and
Management...........................................................34
Item 13 Certain Relationships and Related Transactions.......................34
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................................34
Signatures....................................................................39
(i)
PART I
Item 1 Business
American Skiing Company
American Skiing Company is organized as a holding company and operates
through various subsidiaries. We believe that we are the largest operator of
alpine ski and snowboard resorts in the United States. We reinforce and
capitalize on this by developing, owning and operating a range of
hospitality-related businesses, including hotels, golf courses, restaurants and
retail locations. We also develop, market and operate alpine villages,
ski-in/ski-out real estate and townhouses, condominiums and quarter ownership
hotels. We manage our operations in two business segments, ski resort operations
and mountainside real estate development. For a complete breakdown of
information by reportable segment refer to Footnote 14 - "Segment Information"
in the consolidated financial statements included in Item 8 of this report.
On August 9, 1999, we completed the sale of 150,000 shares of our
series B convertible exchangeable preferred stock to Oak Hill Capital Partners,
L.P. We realized gross proceeds of $150 million on the sale. We used $128.6
million of the proceeds to reduce amounts owed under our senior credit facility,
approximately $30 million of which has been reborrowed and invested in our
principal real estate development subsidiary, American Skiing Company Resort
Properties, Inc. The remainder of the proceeds were used to pay approximately
$16 million in fees and expenses in connection with the transaction and acquire
from our principal shareholder certain strategic assets and repay a demand note
issued by one of our subsidiaries to our principal shareholder, in the aggregate
amount of $5.4 million.
We moved our state of incorporation from Maine to Delaware by merging
into a wholly owned Delaware subsidiary on October 12, 1999. Our capital
structure did not change as a result of the merger.
Our revenues, earnings before interest expense, income taxes,
depreciation and amortization, or EBITDA, and net loss available to our common
shareholders for our year ended July 30, 2000 or fiscal 2000, were $424.1
million, $47.0 million, and ($52.5) million, respectively. Resort revenues and
resort EBITDA for fiscal 2000 were $292.1 million and $38.8 million,
respectively. Real estate revenues and real estate EBITDA for fiscal 2000 were
$132.1 million and $8.2 million, respectively.
Resort Operations
Our resort business is derived primarily from our ownership and
operation of nine ski resorts, several of which are among the largest in the
United States. We currently have at least one resort located in each major
skiing market in the United States. During the 1999-00 ski season, our resorts
generated approximately 5.0 million skier visits, representing approximately
9.6% of total skier visits in the United States. The following table summarizes
key statistics of our resorts:
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Skiable Vertical Snowmaking 1999-00
Terrain Drop Total Coverage Ski Skier
Resort, Location (acres) (feet) Trails Lifts (% of acres) Lodges Visits
(high-speed) (000s)
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Killington, VT 1,200 3,150 200 32(8) 70% 8 939
Sunday River , ME 660 2,340 127 18(4) 92% 4 513
Mount Snow, VT 769 1,700 130 23(3) 85% 5 513
Sugarloaf, ME 1,400 2,820 126 15(2) 92% 2 325
Sugarbush, VT 468 2,650 115 18(4) 67% 5 352
Attitash Bear Peak, NH 280 1,750 70 12(2) 97% 2 194
The Canyons, UT 3,625 3,190 135 15(6) 10% 4 248
Steamboat, CO 2,939 3,668 142 20(4) 15% 4 1,025
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
Total 16,135 24,768 1,129 182(41) 41 5,006
----------------------------- ------------- --------- -------- ------------ -------------- --------- ------------
See Item 2 - Properties, of this report for a detailed description of each of
our resorts.
1
Our resort revenues are derived from a wide variety of sources and
include lift ticket sales, food and beverage sales, retail sales including ski
rentals and repairs, skier development, lodging and property management, golf
and other summer activities and miscellaneous other sources. Lift ticket sales
represent the single largest source of resort revenues and produced
approximately 45% of total resort operations revenue for fiscal 2000. See
"Management's Discussion and Analysis of Results of Operations", included in
Item 7 of this report, for a breakdown of the sources of our resort revenues for
the last three fiscal years.
Lift Ticket Sales. We manage our lift ticket programs and products in
order to increase our ticket yields. Lift tickets are sold to customers in
packages together with accommodations in order to maximize occupancy. We offer a
wide variety of incentive-based lift ticket programs designed to maximize skier
visits during non-peak periods and to attract specific market segments. We
manage our ticket yields during peak periods in order to maximize total lift
ticket revenues.
Food and Beverage. We own and operate substantially all of the food and
beverage facilities at our resorts, with the exception of the Sugarloaf resort,
which is under a long-term concession contract with an unrelated third party.
Our food and beverage strategy involves providing a wide variety of restaurants,
bars, cafes, cafeterias and other food and beverage outlets at our resorts. By
controlling the vast majority of our on-mountain and base area food and beverage
facilities, we are able to capture a larger proportion of guest spending as well
as ensure product and service quality. We currently own and operate over 40
different food and beverage outlets.
Retail Sales. We own over 80 retail and ski rental shops operating in
our resorts. The large number of retail locations that we operate allows us to
improve margins through large quantity purchase agreements and sponsorship
relationships. On-mountain shops sell ski equipment and accessories such as
skis, snowboards, boots, goggles, sunglasses, hats, gloves and larger soft goods
such as jackets and snowsuits. In addition, all sales locations offer our own
branded apparel which generally provides higher profit margins than other retail
products. In the non-winter seasons, the shops sell mountain bikes, in-line
skates, tennis equipment and warm weather apparel. In addition, we have expanded
our retail operations through off-site retail facilities in high traffic areas,
such as stores on the Killington Access Road and in downtown South Lake Tahoe.
Lodging and Property Management. Our lodging and property management
departments manage our properties as well as properties owned by third parties.
Currently, our lodging departments manage approximately 2,300 lodging units at
our resorts. The lodging departments perform a full complement of guest
services, which include reservations, property management, housekeeping and
brokerage operations. Most of our resorts have a welcome center to which newly
arriving guests are directed. The center allocates accommodations and provides
guests with information on all of the resort's activities and services. Our
property management operation seeks to maximize the synergies that exist between
lodging and lift ticket promotions.
Skier Development. We have been an industry leader in developing
learn-to-ski programs. Our Guaranteed Learn to Ski Program was one of the first
skier development programs to guaranty that a customer would learn to ski in one
day. The success of this program led to the development of "Perfect Turn," which
we believe was the first combined skier development and marketing program in the
ski industry. Perfect Turn ski professionals receive specialized instruction in
coaching, communication, skiing and are also trained to sell related products
and cross-sell other resort goods and services and real estate. We operate a
hard goods marketing program at each of our resorts designed to allow customers
to test skis and snowboards with ski professionals, purchase their equipment
from those professionals and receive ongoing product and technological support
through Perfect Turn. We have also instituted a unique skier development program
throughout our resort network that focuses on the marketing and sales of the
entire mountain resort experience, rather than simply traditional learn-to-ski
concepts.
Resort Operating Strategy
We believe that the following key operating strategies will allow us to
increase revenues and profitability by capitalizing on our position as a leading
mountain resort operator and real estate developer.
2
Capitalize on Recent Facilities Expansion and Upgrades. We have
invested over $172 million expanding and upgrading our on-mountain facilities
over the past three fiscal years. We have substantially re-tooled the physical
plant at all of our resorts. As a result of this investment, we believe that we
now offer the most modern on-mountain facilities available in each of our
markets. Capitalizing on this investment is a primary focus of our fiscal 2001
strategic plan.
Multi-Resort Network. Our network of resorts provides both geographic
diversity and significant operating benefits. We believe our geographic
diversity: reduces the risks associated with unfavorable weather conditions,
insulates us from economic slowdowns in any one particular region, increases the
accessibility and visibility of our network of resorts to the overall North
American skier population, and allows us to offer a wide range of mountain
vacation alternatives.
We believe that owning multiple resorts also provides us with the
opportunity to:
o create the industry's largest cross-marketing program,
o achieve efficiencies and economies of scale when we purchase
goods and services,
o strengthen our distribution network of travel agents and tour
operators by offering a range of mountain resort alternatives,
consistent service quality, convenient travel booking and
incentive packages,
o establish performance benchmarks for operations across all of
our resorts,
o utilize specialized individuals and cross-resort teams at the
corporate level as resources for our entire business, and
o develop and implement consumer information and technology
systems for application across all of our resorts.
Increase Revenues Per Skier. We intend to increase our revenues per
skier by managing our ticket yields and expanding our revenue sources at each
resort. We intend to increase non-lift ticket revenue sources by increasing
point-of-sale locations and sales volume through retail stores, food and
beverage services, equipment rentals, skier development and lodging and property
management. In addition, we believe that aggressive cross selling of products
and programs, such as our frequent skier and multi-resort programs, to resort
guests will increase our resort revenues and profitability. We believe that we
can increase ticket yields by managing ticket discounts, closely aligning ticket
programs to specific customer market segments, offering multi-resort ticket
products and introducing a variety of programs that offer packages of tickets
with lodging and other services available at our resorts.
Innovative Marketing Programs. Our marketing programs are designed to:
establish a nationally recognized high-quality name and image while promoting
the unique characteristics of our individual resorts, capitalize on
cross-selling opportunities, and enhance our customer loyalty. We have
established joint marketing programs with major corporations such as Sprint,
Mobil, Anheuser-Busch, ESPN, Quaker Oats, Pepsi/Mountain Dew, Rossignol,
Motorola, Vermont Pure, Kodak, and Green Mountain Coffee Roasters. We believe
these joint marketing programs give us a high-quality image and strong market
presence on both a regional and national basis.
We believe that our new mEticket program is the first nation-wide
program targeted at retaining skiers who ski three to twelve days each season,
which our research indicates represents the majority of the ski population. By
giving guests an incentive to purchase their skiing for the year early in the
ski season with the special values offered by mEticket, we believe that we can
encourage guests to ski more often and do the majority of their skiing at our
resorts.
3
We utilize a variety of marketing media, including direct mail, radio,
television and the Internet. Television and radio marketing efforts include both
strategic and tactical messaging. Strategic advertising promotes the sports and
resorts themselves, while tactical messaging provides current information
related to ski conditions as a means of promoting visits to our resorts. In
addition, each resort uses local cable television networks to provide current
information and cross-sell resort products and services. Internet marketing
activities include individual resort websites which provide current snow
conditions, special deals and online reservation booking, a real estate sales
website promoting our Grand Summit Hotels and Resort Villages, a dedicated site
for mEticket, a site promoting summer vacation activities, on-line retail sales
and a special site promoting learning to ski or snowboard. All sites are linked
through our (www.peaks.com) site. Guests are increasingly researching conditions
and purchasing tickets and related resort products online. The mEticket program
is specifically designed to be accessed online advancing the Company's
e-commerce strategy.
Expand Golf and Convention Business. We are one of the largest owners
and operators of resort golf courses in New England. We strive to capitalize on
this status to increase our off-season revenues. Sugarloaf, Killington, Mount
Snow/Haystack and Sugarbush all operate championship resort golf courses. The
Sugarloaf course, designed by Robert Trent Jones, Jr., has been rated as one of
the top 25 upscale courses in the country according to a Golf Digest magazine
survey. We also operate eight golf schools at locations along the East Coast
from Florida to Maine. Our golf program and other recreational activities draw
off-season visitors to our resorts and support our growing off-season convention
business, as well as our real estate development operations.
Seasonality
The ski industry is highly seasonal in nature. Historically, the
majority of our resort revenues are generated in our second and third fiscal
quarters, of which a significant portion is produced in two weeks during the
Christmas and the Presidents' Day vacation weeks. Adverse weather conditions
during the key periods of our ski season could adversely affect our operating
results.
Mountainside Real Estate Development
In addition to operating alpine resorts, we develop mountainside real
estate which complements the expansion of our on-mountain operations. Our real
estate revenues are derived from the sale and leasing of interests in real
estate development projects that we have constructed at our resorts and the sale
to third parties of developmental real estate at our resorts.
Our real estate development strategy is centered on the creation of
"resort villages" at our four largest resorts (The Canyons, Heavenly, Killington
and Sunday River) and enhancement of the existing village at Steamboat.
Development within these resort villages is focused on projects which we believe
will generate the highest returns. Each resort village is expected to consist of
quartershare hotels, whole and fractional ownership condominium hotels,
townhouses and single family homes, and retail operations.
Grand Summit Hotels. The Grand Summit Hotel is a unique interval
ownership product that we originated. Each hotel is a condominium consisting of
fully furnished residential and commercial units with a voluminous atrium lobby,
two or more restaurants, retail space, a grand ballroom, conference space, a
health club with an outdoor heated pool and other recreational amenities.
Residential units in the hotel are sold in quartershare interests, with each
unit consisting of four 13-week ownership interests spread evenly throughout the
year. The balance of the hotel, including restaurants, retail space and
conference facilities, is typically retained by us and managed by the host
resort. The initial sale of quartershare units typically generates a profit for
the real estate segment, and our resort segment derives a continuing revenue
stream from operating the hotel's retail, restaurant and conference facilities
and from renting quartershare interval interests when not in use by their
owners.
Whole Ownership Condominium Hotels. These hotels consist of fully
furnished upscale condominium units operated on a traditional hotel format. The
whole ownership structure satisfies this market segment's desire for traditional
real estate but complements the traditional concept with both hotel-type
4
amenities and easy access to rental income generated through the hotel rental
management program. We retain ownership of the front desk and other common areas
of the condo/hotels with the expectation of operating these hotels over the long
term. By integrating the condo/hotels with our central reservation system, we
are enhancing our revenue opportunities through vertically integrated resort
operations, simplifying guest reservations, and the revenue splits associated
with this type of product. The Sundial Lodge at The Canyons, as in most of the
resort village condominium products, also creates retail space on the ground
floor that supports a pedestrian village, housing 31,800 square feet of retail
and commercial space. This space rests at the heart of the resort's retail
center.
Townhouses and Single Family. There is a component of resort real
estate purchasers that do not prefer core village areas, choosing instead to be
located in an area which is convenient to the resort but removed from the center
of activity. There is also logical reasoning for decreasing densities of
development as one moves away from the core areas. Within each resort master
plan are areas that can accommodate stacked town houses with a site density of
about 20 to 30 units per acre, town houses ranging from 10 to 20 units per acre,
and single family homes structured as both small and large lot product.
Retail. The master plans for each resort village core consist of
approximately 1,200 units of accommodation supported by approximately 140,000
square feet of retail space. A strong component of the retail space is outdoor
recreation-related retail. Each building within a village is expected to consist
of at least one level of underground parking, will generally include ground
floor retail and have three to five stories of residential units. In some cases
(such as the Grand Summit Hotels at The Canyons and Steamboat) the buildings
will be as high as nine stories and utilize steel and concrete construction. As
buildings move to the village periphery, residential, parking and retail density
are reduced.
Local approvals for these resort village plans are at various stages of
completion.
o The Canyons: We secured specially planned area approval from the
appropriate authorities for our master plan at The Canyons on November
15, 1999. Pursuant to this master plan approval, density for the
residential units and commercial development for our 15-year master
plan at The Canyons has been approved. As we seek to develop specific
projects within the master plan at The Canyons, we will need local
approval for specific site plans.
o Heavenly: On October 28, 1999, we entered into a an agreement with the
City of South Lake Tahoe, California, pursuant to which, we received
all necessary local approvals for the development of our Grand Summit
Hotel at Heavenly and an adjacent $25 million gondola. The agreement
included approvals for an additional hotel site on a parcel of land
adjacent to the planned Grand Summit Hotel. We sold the rights to
develop this additional land to a subsidiary of Marriott International
on October 17, 2000.
o Killington: The master plan for the Killington Resort Village was
approved by local authorities in November 1999 and state authorities in
July 2000. Killington received partial and conceptual approval for the
ten criteria which are part of the State of Vermont land use review and
approval process. Final approval of each of the criteria will be
rendered upon submittal of actual construction plans for specific
projects.
o Sunday River: The resort village master plan for Jordan Bowl is
complete. Individual permits for projects are all that is required for
development.
o Steamboat: The permitting process for elements of the Steamboat master
plan is currently being pursued on a case-by-case basis in consultation
with local authorities.
Real Estate Development Program
While our business plan contemplates the completion of projects at
several of our resorts across the United States, there is a clear focus on The
Canyons and, to a slightly lesser extent, Heavenly. The strength of the existing
market in the Park City, Utah area, combined with the impact of the 2002 Winter
Olympic Games, makes The Canyons a unique development opportunity. The Salt Lake
City area has been one of the fastest growing regions in the United States over
5
the last several years. The Park City area is growing even more rapidly, at
twice the State average according to Utah authorities. This area is also hosting
the 2002 Winter Olympic Games, which dramatically compounds the effect of this
rapid expansion on the real estate market. We believe that this combination
provides a unique real estate development opportunity.
Our five-year real estate business plan consists of developing up to 17
projects at our various resorts. Our model anticipates continuing sell-out and
development of our eight existing projects. Seven projects (Grand Summit Hotels
at Attitash, Jordan Bowl at Sunday River, Killington, Mount Snow, The Canyons
and Steamboat and the Sundial Lodge at The Canyons) are fully constructed and
operational. The eighth project, the final phase of the Locke Mountain Townhomes
at Sunday River, is currently under construction. Two additional projects are
expected to commence construction during our current fiscal year: a Grand Summit
Hotel at Heavenly and Phase 1 of the Whisper Ridge Townhomes at The Canyons.
Both of these projects are dependent on achieving adequate pre-sales contracts,
establishing completed designs, budgets and guaranteed maximum price
construction contracts. In addition, adequate financing must be obtained for
both projects before they commence.
Alpine Resort Industry
There are approximately 750 ski areas in North America. In the United
States, approximately 503 ski areas generated approximately 52.2 million skier
visits during the 1999-00 ski season. Since 1985, the ski resort industry has
undergone a period of consolidation and attrition, resulting in a significant
decline in the total number of ski areas in North America. The number of ski
resorts in the United States has declined from approximately 735 in 1983 to
approximately 503 in 2000, although the number of skier visits has remained
relatively flat. Despite the recent consolidation trend overall, ownership of
the smaller regional ski resorts remains highly fragmented. We believe that
technological advances and rising infrastructure costs are the primary reasons
for the ski resort industry consolidation, and that further consolidation is
likely as smaller regional resorts are acquired by larger resort operators with
more sophisticated management capabilities and increased availability of
capital. In addition, the ski resort industry is characterized by significant
barriers to entry because the number of attractive sites is limited, the costs
of resort development are high, and environmental regulations impose significant
restrictions on new development.
The following chart shows a comparison of the industry-wide skier
visits compared to our skier visits in the U.S. regional ski markets during the
1999-00 ski season:
- --------------------- ------------- ------------ ------------ ------------ -------------------------------------------
Skier
1999-00 Visits at
Total Skier Percentage Company Company
Visits* of Total Resorts Regional
(in Skier (in Market
Geographic Region millions) Visits millions) Share Company Resorts
- --------------------- ------------- ------------ ------------ ------------ -------------------------------------------
Northeast 12.0 23.0% 2.8 23.6% Killington, Sugarbush, Mount Snow, Sunday
River, Sugarloaf USA, Attitash Bear Peak
Southeast 5.2 10.0% - -
Midwest 6.4 12.3% - -
Rocky Mountain 18.1 34.7% 1.3 7.0% Steamboat, The Canyons
Pacific West 10.5 20.0% 0.9 8.6% Heavenly
- --------------------- ------------- ------------ ------------ ------------ -------------------------------------------
U.S. Overall 52.2 100.0% 5.0 9.6%
- --------------------- ------------- ------------ ------------ ------------ -------------------------------------------
(*) Source: Kottke National End of Season Survey 1999/00 Final Report
United States ski resorts range from small operations which cater
primarily to day skiers from nearby population centers to larger resorts which
attract both day skiers and destination resort guests. We believe that day
skiers focus primarily on the quality of the skiing and travel time, while
destination travelers are attracted to the total ski and riding experience,
including the non-skiing amenities and activities available at the resort, as
well as the perceived overall quality of the vacation experience. Destination
guests generate significantly higher resort operating revenue per skier day than
day skiers because of their additional spending on lodging, food and other
retail items over a multiple-day period.
Since 1985, the total number of skier visits in the United States has
been relatively flat. However, according to the National Ski Area Association,
the number of skier visits represented by snowboarders in the United States has
increased from approximately 9.9 million in the 1996-97 ski season to
6
approximately 13.8 million in the 1999-00 ski season, a compounded annual growth
rate of approximately 11.8%. We believe that snowboarding will continue to be an
important source of lift ticket, skier development, retail and rental revenue
growth for us.
We believe that we are well positioned to capitalize on certain
favorable trends and developments affecting the alpine resort industry in the
United States. These trends and developments include:
o the existence of 66.7 million members of the "baby boom" generation
that are now approaching the 40 to 59 year age group where
discretionary income, personal wealth and pursuit of leisure activities
are maximized (this group is estimated to grow by 16.7% over the next
23 years)
o the emergence of the "echo boom" generation (children of baby boomers)
as a significant economic force which is just beginning to enter the
prime entry age for skiing, snowboarding and other "on-snow" sports,
o advances in ski equipment technology, such as the development of
parabolic skis which make skiing easier to learn and enjoy,
o the continued growth of snowboarding as a significant and enduring
segment of the industry which in turn increases youth participation in
alpine sports, and
o a greater focus on leisure and fitness in general.
There can be no assurance, however, that these trends and developments
will have a favorable impact on the ski industry.
Competition
The ski industry is highly competitive. We compete with mountain resort
areas in the United States, Canada and Europe. We also compete with other
recreation resorts, including warm weather resorts, for vacationers. In order to
cover the high fixed costs of our ski operations, we need to maintain each of
our regional, national and international skier bases. Our prices are directly
impacted by the number and variety of alternatives presented to skiers in these
markets. Our most significant competitors are resorts that are well capitalized,
well managed and have significant capital improvement and resort real estate
development programs.
Our resorts also face strong competition on a regional basis. With
approximately three million skier visits generated by our northeastern resorts,
competition in that region is an important consideration. Our northeastern
markets are located in the major population centers in the northeast,
particularly eastern Massachusetts, northern Connecticut, New York and northern
New Jersey. For example, skier origin data collected at Sunday River indicates
that approximately 43% of its weekend skiers reside in Massachusetts. Similar
data collected at Killington and Mount Snow indicate that approximately 23% and
35%, respectively, of their weekend skiers reside in New York, with high
concentrations from Massachusetts, Connecticut, New Jersey and Vermont. The
Colorado, Utah and California/Nevada ski markets are also highly competitive.
Employees and Labor Relations
We employ approximately 11,700 employees at peak season and
approximately 1,600 persons full time. Less than 1% of our employees are
unionized, all of which are seasonal ski patrol employees at The Canyons and
Steamboat resorts. We believe that we enjoy good relations with our employees.
Government Regulation
Our resorts are subject to a wide variety of federal, state, regional
and local laws and regulations relating to land use, environmental/health and
safety, water resources, air and water emissions, sewage disposal, and the use,
7
storage, discharge, emission and disposal of hazardous materials and hazardous
and nonhazardous wastes, and other environmental matters. While we believe that
our resorts are currently in material compliance with all land use and
environmental laws, any failure to comply with these laws could result in costs
to satisfy environmental compliance, remediation requirements or the imposition
of severe penalties or restrictions on operations by government agencies or
courts that could adversely affect our operations. Phase I environmental
assessments have been completed on substantially all of the real estate that we
own or control. The reports identified areas of potential environmental concern
including the need to upgrade existing underground storage tanks at several
facilities and the potential need to remediate petroleum releases. The reports
did not, however, identify any environmental conditions or non-compliance at any
of our properties, the remediation or correction of which we feel would have a
material adverse impact on our business, financial condition, results of
operations or cash flows.
We believe that we possess all the permits, licenses and approvals from
governmental authorities material to our operations as they currently exist. We
have not received any notice of material non-compliance with permits, licenses
or approvals necessary for the operation of any of our properties.
Our resort and real estate capital programs require permits and
approvals from certain federal, state, regional and local authorities. Our
operations are heavily dependent upon our continued ability, under applicable
laws, regulations, policies, permits, licenses or contractual arrangements, to
have access to adequate supplies of water with which to make snow and service
the other needs of our facilities, and otherwise to conduct our operations.
There can be no assurance that new applications of existing laws, regulations
and policies, or changes in these laws, regulations and policies will not occur
in a manner that would have a material adverse effect on our business, or that
important permits, licenses or agreements will not be canceled, not renewed, or
renewed on terms no less favorable to us. Major expansions of any one or more
resorts could require the filing of an environmental impact statement under
environmental laws and applicable regulations if it is determined that the
expansion has a significant impact upon the environment and could require
numerous other federal, state and local approvals. Although we have consistently
been successful in implementing our capital expansion plans, no assurance can be
given that necessary permits and approvals will be obtained.
Systems and Technology
Information Systems. Our information systems are designed to improve
the ski experience by developing more efficient guest service products and
programs. We are pursuing implementation of a comprehensive system and
technology plan which will include an integrated customer database tracking
guest preference information and product purchasing patterns , an extensive data
communications network linking most point-of-sale locations through a central
database, a central reservations system for use in the resort's rental
management business and a skier development reservation and instructor
scheduling system that will simplify the booking process and allow for the best
possible use of our instructors.
Snowmaking Systems and Technology. We believe that we operate the
largest consolidated snowmaking operation in existence, with approximately 3,900
acres of snowmaking coverage. Our proprietary snowmaking software program allows
us to produce what we believe is the highest quality man-made snow in the
industry. We refer to this ideal quality product as "Retail Snow," a high
quality, durable skiing surface with top to bottom consistency. All of our
snowmaking systems are operated through computer-based control using industrial
automation software and a variety of state of the art hardware and
instrumentation. We use efficient ground based, tower based and fully automated
snowgun nozzle technology and have developed software for determining the
optimal snowmaking nozzle setting at multiple locations on any particular
mountain. This system monitors the weather conditions and system capacities and
determines the proper operating water pressure for each nozzle, eliminating
guesswork and ensuring that ideal snow quality is provided. All of our
snowmaking systems are networked to allow the viewing of information from
multiple locations within our resort network. Another unique feature of our
system is the current display of trail status, lift status, weather conditions
and other various on-mountain information at locations throughout each resort.
Much of this information is available on the Internet at our various web sites.
8
RISK FACTORS
In addition to the other information contained in this Form 10-K, you
should carefully consider the following risk factors in evaluating our business.
This Form 10-K contains forward looking statements and our actual results could
differ materially from those anticipated by any forward-looking statements as a
result of numerous factors, including those set forth in the following
description of risk factors and elsewhere in this Form 10-K.
Our business is substantially leveraged and we face a number of financial risks.
We are highly leveraged. As of October 1, 2000, we had outstanding
$458.1 million of total indebtedness, including $331.2 million of secured
indebtedness, representing 55.0% of our total capital.
Our high level of debt affects our future operations in several
important ways. First of all, we will have significant cash requirements to
service our debt which will in turn reduce the funds available for our
operations, capital expenditures and acquisitions. A decrease in the
availability of funds will make us more vulnerable to adverse general economic
and industry conditions. Secondly, the financial covenants and other
restrictions contained in our debt agreements require us to meet certain
financial tests and restrict our ability to borrow additional funds, make
capital expenditures or sell our assets.
Our ability to make scheduled payments or refinance our debt
obligations will depend on our future financial and operating performance, which
will be affected by prevailing economic conditions, financial, business and
other factors. Some of these factors are beyond our control. There can be no
assurance that our operating results, cash flow and capital resources will be
sufficient to pay our indebtedness. If our operating results, cash flow or
capital resources prove inadequate we could face substantial liquidity problems
and might be required to dispose of material assets or operations to meet our
debt and other obligations. If we are unable to service our debt, we could be
forced to reduce or delay planned expansions and capital expenditures, sell
assets, restructure or refinance our debt or seek additional equity capital.
There can be no assurance that any of these actions could be effected on terms
satisfactory to our business, if at all.
Although we believe that capital expenditures above maintenance levels
can be deferred to address cash flow or other constraints, these activities can
not be deferred for extended periods without adversely affecting the competitive
position and financial performance of the Company.
Our continued growth depends, in part, on our ability to maintain and
expand our facilities and to engage in successful real estate development. To
the extent that we are unable to do so with cash generated from operations, or
through borrowed funds or additional equity investments the growth and financial
health of our business could be impaired.
We also have significant future capital requirements with respect to
the retirement of debt and other securities, including the senior credit
facility, and redemption of preferred stock such as the 10 1/2% Preferred Stock
in November 2002 and the 8.5% Preferred Stock. There can be no assurance that we
will be able to retire, redeem, or refinance these items at their maturities.
Failure to do so could have a material adverse effect on our business.
If we fail to manage our growth, our business, financial condition and prospects
could be seriously harmed.
We have experienced rapid and substantial growth since 1994. This
growth has placed, and could continue to place, a significant strain on our
management, employees and operations. Our growth has increased our operating
complexities and the level of responsibility for our management. Our ability to
compete effectively and to manage recent and future growth effectively will
depend on our ability to implement and improve financial and management
information systems on a timely basis and to affect changes in our business,
such as implementing internal controls to handle the increased size of our
operations and hiring, as well as training, developing and managing an
increasing number of experienced management-level and line employees. Unexpected
9
difficulties during expansion, the failure to attract and retain qualified
employees, or an inability to respond effectively to recent growth or planned
future expansion, could adversely effect our business, financial condition and
results of operations.
Our continued growth may depend in part on making the right acquisitions,
obtaining the financing necessary to complete these acquisitions and integrating
into our operations the resorts that we do acquire.
We continually evaluate potential acquisition opportunities. Any future
acquisitions will be financed through a combination of internally generated
funds, additional bank borrowings from existing and new credit facilities and
public offerings or private placements of equity or debt securities. The nature
of the financing will depend on factors such as the size of the particular
acquisition and our capital structure at the time an acquisition is made. There
can be no assurance, however, that attractive acquisition candidates will be
identified, that we will be able to make acquisitions on favorable terms, that
necessary financing will be available on suitable terms, if at all, or that any
acquisitions will be permitted under applicable antitrust laws. Our ability to
make acquisitions is limited by antitrust law, and we are effectively prohibited
from acquiring additional resorts in New England. If we are unable to continue
making acquisitions our continued growth could be impaired.
We face risks in connection with the integration of the resorts that we
have acquired. Significant management resources and time will be required to
integrate any acquired resorts and unanticipated problems or liabilities with
respect to these new resorts could divert management's attention from our
business, which may have a material adverse effect on our operations and
financial performance. Furthermore, there can be no assurance we will be able to
realize any additional skier visits, revenues or cost savings by integrating
acquired resorts. The failure to properly integrate new resorts could adversely
affect our business, financial conditions and results of operations.
Our revenues from real estate development are vulnerable to particular risks.
Our ability to generate revenues from real estate development
activities could be adversely affected by a number of factors, such as our
ability to successfully market our resorts, the national and regional economic
climate, local real estate conditions (such as an oversupply of space or a
reduction in demand for real estate), costs to satisfy environmental compliance
and remediation requirements associated with new development/renovation and
ongoing operations, the attractiveness of the properties to prospective
purchasers and tenants, competition from other available property or space, our
ability to obtain all necessary zoning, land use, building, occupancy and other
required governmental permits and authorizations and changes in real estate,
zoning, land use, environmental or tax laws. Many of these factors are beyond
our control. In addition, real estate development will depend on receiving
adequate financing on suitable terms. There can be no assurance as to whether,
when or on what terms such financing may be obtained. Our real estate
subsidiaries do not have the financing available to complete all of their
planned real estate development. In addition, these efforts entail risks
associated with development and construction activities, including cost
overruns, shortages of materials or skilled labor, labor disputes, unforeseen
environmental or engineering problems, work stoppages, and natural disasters,
any of which could delay construction and result in a substantial increase in
our costs.
In addition, a material portion of our real estate development business
is conducted within the interval ownership industry. As a result, any changes
which already affect the interval ownership industry, such as an oversupply of
interval ownership units, a reduction in demand for interval ownership units,
changes in travel and vacation patterns, changes in governmental regulations
relating to the interval ownership industry, increases in construction costs or
taxes and tightening of financing availability, could have a material adverse
effect on our real estate development business.
Investments in on-mountain improvements are capital intensive and do not
guarantee additional revenue.
Historically, a key element of our strategy has been attracting
additional skiers through investment in on-mountain capital improvements. These
improvements are capital intensive and, to the extent that we are unable to
finance them from internally generated cash or otherwise, our results of
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operations could be adversely affected. In addition, there can be no assurance
that our investment in on-mountain capital improvements will attract additional
skiers or generate additional revenues.
Our business is highly seasonal and unfavorable weather conditions can adversely
affect our business.
Ski resort operations are highly seasonal. Over the last five fiscal
years, we have realized an average of approximately 88% of our resort revenues
and over 100% of resort EBITDA and net income during the period from November
through April, and a significant portion of Resort revenue and approximately 20%
of annual skier visits were generated during the Christmas and Presidents Day
vacation weeks. In addition, our resorts typically experience operating losses
and negative cash flows for the period from May to October. During the six-month
period from May to October 1999, for example, we had operating losses
aggregating $48.4 million and negative cash flow from operations aggregating
$159.2 million. The negative cash flow from operations includes $107.0 million
spent developing real estate for resale. There can be no assurance that we will
be able to finance our capital requirements from external sources during this
period.
A high degree of seasonality in our revenues increases the impact of
certain events on our operating results. Adverse weather conditions, access
route closures, equipment failures, and other developments of even moderate or
limited duration occurring during our peak business periods could reduce our
revenues. Adverse weather conditions can also increase power and other operating
costs associated with snowmaking or could render snowmaking wholly or partially
ineffective in maintaining quality skiing conditions. Furthermore, unfavorable
weather conditions, regardless of actual skiing conditions, can result in
decreased skier visits.
We operate in a highly competitive industry which makes maintaining our customer
base a difficult task.
The skiing industry is highly competitive and capital intensive. Our
competitors include major ski resorts throughout the United States, Canada, and
Europe as well as other worldwide recreation resorts, including warm weather
resorts and various alternative leisure activities. Our competitive position
depends on a number of factors, such as our proximity to population centers, the
availability and cost of transportation to and within a resort, natural
snowfall, the quality and coverage of snowmaking operations, resort size, the
attractiveness of terrain, lift ticket prices, prevailing weather conditions,
the appeal of related services, the quality and the availability of lodging
facilities, and resort reputation. In addition, some of our competitors have
greater competitive position and relative ability to withstand adverse
developments. There can be no assurance that our competitors will not be
successful in capturing a portion of our present or potential customer base.
Changes in regional and national economic conditions could adversely affect our
results of operations.
The skiing and real estate development industries are cyclical in
nature and are particularly vulnerable to shifts in regional and national
economic conditions. Skiing and vacation unit ownership are discretionary
recreational activities entailing relatively high costs of participation, and
any decline in the regional or national economies where we operate could
adversely impact our skier visits, real estate sales and revenues. Accordingly,
our financial condition, particularly in light of our highly leveraged
condition, could be adversely affected by any weakening in the regional or
national economy.
Our business is subject to heavy environmental and land use regulation.
We are subject to a wide variety of federal, state and local laws and
regulations relating to land use and development and to environmental compliance
and permitting obligations, including those related to the use, storage,
discharge, emission and disposal of hazardous materials. Any failure to comply
with these laws could result in capital or operating expenditures or the
imposition of severe penalties or restrictions on our operations that could
adversely affect our present and future resort operations and real estate
development. In addition, these laws and regulations could change in a manner
that materially and adversely affects our ability to conduct our business or to
implement desired expansions and improvements to our facilities.
A significant portion of our ski resorts are operated under leases or forest
service permits.
11
We lease a significant portion of the land underlying our ski resorts
or use them pursuant to renewable permits or licenses. If any of these
arrangements were terminated or not renewed on expiration, or renewed on terms
materially less favorable to us, our ability to possess and use the land would
be impaired. A substantial portion of the skiable terrain at our Attitash Bear
Peak, Sugarbush, Mount Snow/Haystack, Steamboat and Heavenly ski resorts is
federal land that is used under the terms of permits with the United States
Forest Service. The permits give the Forest Service the right to review and
comment on the location, design and construction of improvements in the permit
area and on certain other operational matters. The permits can also be
terminated or modified by the Forest Service to serve the public interest or in
the event we fail to perform any of our obligations under the permits. A
termination or modification of any of our permits could have a material adverse
affect on our results of operations.
A disruption in our water supply would impact our snowmaking capabilities and
impact our operations.
Our current operations and anticipated growth are heavily dependent
upon our ability, under applicable federal, state and local laws, regulations,
permits, and licenses or contractual arrangements, to have access to adequate
supplies of water with which to make snow and otherwise conduct our operations.
There can be no assurance that applicable laws and regulations will not change
in a manner that could have an adverse effect, or that important permits,
licenses or agreements will be renewed, not cancelled, or, if renewed on terms
no less favorable to us. Any failure to have access to adequate water supplies
to support our current operations and anticipated expansion would have a
material adverse effect on our business and operating results.
The loss of any of our executive officers or key personnel would harm our
business.
Our success depends to a significant extent upon the performance and
continued service of Mr. Otten, as well as several other key management and
operational personnel. The loss of the services of Mr. Otten or other key
personnel could have a material adverse effect on our business and operations.
We are structured as a holding company and have no assets other than the common
stock of our subsidiaries.
We are a holding company and our ability to pay principal and interest
on debt will be dependent upon the receipt of dividends and other distributions,
or the payment of principal and interest on intercompany borrowings, from our
subsidiaries. We do not have, and we do not expect in the future to have, any
material assets other than the common stock of our direct and indirect
subsidiaries. The breach of any of the conditions or provisions under the
documents governing the indebtedness of subsidiaries could result in a default
which in turn could accelerate the maturity of a debt. If the maturity of debt
were accelerated, the indebtedness would be required to be paid in full before
the subsidiary would be permitted to distribute any assets to the parent
company. There can be no assurance that our assets or those of our subsidiaries
would be sufficient to repay all of our outstanding debt. In addition, state law
further restricts the payment of dividends or other distributions to us by its
subsidiaries.
Our business requires significant capital expenditures. These expenditures do
not, however, guarantee improved results.
The development of ski resorts is capital intensive. A lack of
available funds for capital expenditures could have a material adverse effect on
our ability to implement our operating strategy. We conduct, and intend to
continue to conduct, real estate development through special purpose
subsidiaries and to finance such activities through non-recourse debt. We intend
to finance capital improvements through internally generated funds, non-recourse
financing and proceeds from the offering of debt and equity. There can be no
assurance that sufficient funds will be available to fund these capital
improvements or real estate development or that these capital improvements will
attract additional skiers or generate additional revenues.
Control of our company by principal stockholders
As a result of a stockholder's agreement, Mr. Otten and Oak Hill
Capital Partners control a majority of our board of directors. Mr. Otten and Oak
Hill Capital Partners may have interests different from those that hold our
common stock.
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Item 2
Properties
Our resorts include several of the top resorts in the United States
based on skier visits, such as Steamboat, the fourth largest ski resort in the
United States with over 1.0 million skier visits in the 1999-00 ski season,
Killington, the fifth largest resort in the United States with over 940,000
skier visits in the 1999-00 ski season, Sunday River and Mount Snow, which
together with Killington comprised three of the four largest resorts in the
Northeast during the 1999-00 ski season, and Heavenly, which ranked as the
largest resort in the Pacific West region for the 1999-00 season with
approximately 900,000 skier visits.
The Canyons. When we acquired The Canyons, located in the Wasatch Range
of the Rocky Mountains adjacent to Park City, Utah, in July, 1997, it was
primarily an undeveloped ski resort with significant potential for future
operational and real estate development. The Canyons is one of the most
accessible destination resorts in the world, with the Salt Lake International
Airport only 32 miles away, and has direct access from a major state highway. We
believe that The Canyons has significant growth potential due to its proximity
to Salt Lake City and Park City, its undeveloped ski terrain and its real estate
development opportunities. The Utah Winter Sports Park, which is located
immediately adjacent to the resort, is scheduled to serve as the venue for the
ski jumping, bobsled and luge events in the 2002 Winter Olympic Games.
Since acquiring The Canyons we have invested significant capital and
created a substantial on-mountain skiing infrastructure which we believe is
capable of supporting substantial skier visit growth. During the 1997-98 season,
its first under our management, the resort generated over 167,000 skier visits.
This number increased to over 220,000 in 1998-99 and over 248,000 in 1999-00. We
intend to gradually invest additional capital to improve and expand on-mountain
facilities and skiable terrain as skier visits grow. We recently completed two
significant real estate projects at The Canyons, a Grand Summit Hotel and the
Sundial Lodge, both of which opened during the 1999-00 ski season. In November,
1999, we obtained final approval of a master development plan for The Canyons
which includes entitlements for approximately 5 million square feet of
development. Additional real estate projects at The Canyons are expected to be
launched and begin construction during the 2001 and 2002 fiscal years. Several
third party real estate developments are also planned including a Westgate
Resorts time share project which broke ground in August 2000 and is expected to
begin delivering units in late 2002.
Steamboat. The Steamboat ski area is located in the Medicine Bow/Routt
National Forest, Routt County, Colorado on the westerly slopes of Mt. Werner,
approximately 2.5 miles southeast of downtown Steamboat Springs, Colorado. The
area consists of 2,694 acres of land licensed under a Special Use Permit issued
by the Forest Service and 245 acres of private land owned by Steamboat located
at the base of the ski area. Steamboat receives a high level of natural dry
snow, averaging 330 inches annually the past 10 ski seasons. Steamboat has
recorded more than 1 million skier visits in each of the past ten seasons. We
have recently completed a 300-room Grand Summit Hotel at Steamboat, which will
bring both additional beds and enhanced amenities to the Steamboat base area.
Heavenly. Located on the south shore of Lake Tahoe with three base area
complexes, one in South Lake Tahoe, California and two in Stateline, Nevada,
Heavenly consists of two peaks with a maximum elevation of approximately 10,060
feet. Heavenly ranks as the largest resort in the Pacific West Region with
approximately 900,000 skier visits for the 1999-00 ski season. Access to the
resort is primarily through the Reno Tahoe International Airport and by
automobile via Route 50 from San Francisco and Sacramento, California. Heavenly
has a well-developed bed base in the greater South Lake Tahoe/Stateline area.
Our strategy at Heavenly is to add new accommodations and a gondola
lift system in the South Lake Tahoe commercial area through our existing
development rights in the Park Avenue Redevelopment area. We have commenced
construction on the gondola and we anticipate that it will be operational in
December 2000. The new gondola will provide lift service to the resort from the
13
center of South Lake Tahoe and will precede the construction of two large hotel
projects over the next three to five years. Pre-sales have commenced for the
first of the two projects, a 194 room Grant Summit Hotel. We sold the
entitlements to the land underlying the second project to Marriott Ownership
Resorts, Inc. on October 17, 2000.
Killington. Killington, located in central Vermont, is the largest ski
resort in the northeast and the fifth largest in the United States. Killington
generated over 900,000 skier visits in 1999-00. Killington is a seven-mountain
resort consisting of approximately 1,200 acres of skiable terrain. We believe
the size and diversity of skiable terrain at Killington make it attractive to
all levels of skiers and one of the most widely recognized of our resorts with
regional, national and international clientele. We have nearly completed
construction of a $4 million snowmaking expansion project which is expected to
provide the resort with 30% more snowmaking capacity during certain periods
which should lead to higher early season trail counts and enhanced market
confidence in the quality and reliability of the snow surface. We expect this
expansion project to be complete prior to the start of the 2000-01 ski season.
Killington is a year-round resort offering complete golf amenities
including an 18-hole championship golf course, a golf school, a driving range
and a tennis school. Our real estate strategy at Killington is to expand the
existing Grand Summit Hotel, begin the first phases of a new destination resort
village and expand the bed base surrounding the company-owned golf course in an
area approved for development. The current master plan for the proposed
Killington resort village development includes over 4,450 units in over 5.3
million square feet of total development.
Sunday River. Sunday River, located in the western mountains of Maine
and approximately a three-hour drive from Boston, is New England's third largest
ski resort with over 500,000 skier visits during the 1999-00 season. Extending
across eight interconnected mountains, its facilities consist of approximately
660 acres of skiable terrain and an additional 7,000 acres of undeveloped
terrain. We have plans to develop a resort village at the Jordan Bowl Area (the
most westerly peak), which could include over 1,350 units, a golf course and 1.1
million square feet of total development.
Mount Snow. Mount Snow, located in West Dover, Vermont, is the fourth
largest ski resort in the northeast United States with over 500,000 skier visits
in 1999-00. Mount Snow is the southernmost of our eastern resorts. A large
percentage of the skier base for Mount Snow derives from Massachusetts,
Connecticut and New York. Mount Snow also owns and operates an 18-hole
championship golf course and is the headquarters of our "Original Golf School",
which consists of eight golf schools located throughout the east coast.
Sugarloaf. Sugarloaf is located in the Carrabassett Valley of Maine.
Sugarloaf is a single mountain with a 4,237-foot summit and a 2,820-foot
vertical drop. Sugarloaf offers one of the largest ski-in/ski-out base villages
in the Eastern United States, containing numerous restaurants, retail shops and
an abundance of lodging. Sugarloaf is widely recognized for its challenging
terrain and snowfields which represent the only lift-serviced above-tree line
skiing in the Northeast. As a destination resort, Sugarloaf has a broad market,
including areas as distant as New York, New Jersey, Pennsylvania, Washington
D.C. and Canada. Sugarloaf also leases and operates an 18-hole championship golf
course, designed by Robert Trent Jones Jr. and consistently rated as one of the
top 25 public golf courses in the country.
Sugarbush. Sugarbush, located in Vermont's Mad River Valley, features
the three highest mountain peaks of any single resort in the Eastern United
States and extends over six mountain peaks in total. The Slide Brook Express
Quad connects the Lincoln Peak and Mount Ellen base areas via a 9-minute scenic
ride through the Green Mountains. The on-mountain accommodations at Sugarbush
consist of approximately 2,200 beds. There is also an ample off-mountain bed
base within the Mad River Valley. The resort operates ski shops, full-service
and cafeteria-style restaurants. We also own and operate the Sugarbush Inn, a
championship golf course, a sports center and a conference center, in addition
to managing 185 condominium units in the area.
Attitash Bear Peak. Attitash Bear Peak is one of New Hampshire's
premier family vacation resorts. Its 12 lifts (including three quad chairs)
constitute one of New Hampshire's largest lift networks. Attitash Bear Peak is
located in the heart of the Mount Washington Valley which boasts over 200
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factory outlet stores, hundreds of bars and restaurants and a large variety of
lodging options, including a 143-room slopeside Grand Summit Resort Hotel and
Conference Center.
Real Estate Properties. We retain ownership of the front desk, retail
space, restaurants and conference facilities, or "commercial core", of hotels
developed by our real estate subsidiaries. We currently own and operate the
commercial core of seven Grand Summit Hotels (two at Sunday River and one each
at Killington, Attitash Bear Peak, Mount Snow, The Canyons and Steamboat) and
one whole-ownership condo/hotel at The Canyons (the Sundial Lodge).
Leased Properties
Our operations are wholly dependent upon our ownership or control over
the real estate underlying each resort. The following summarizes certain
non-owned real estate critical to operations at each of our resorts. We believe
each of the following leases, permits or agreements is in full force and effect
and that we are entitled to their benefit.
The Sunday River resort leases approximately 1,500 acres, constituting
a substantial portion of its skiable terrain, under a 50-year lease terminating
on October 14, 2030. The lease renews automatically thereafter on a year-to-year
basis unless terminated by either the lessor or lessee. This lease was amended
on January 23, 1998 to allow Sunday River to purchase portions of the leased
property for real estate development at a predetermined amount per acre. In
January 1998, we acquired an undivided one-half interest in the fee title to the
leased parcel.
The Sugarbush resort uses approximately 1,655 acres pursuant to a
special use permit issued by the United States Forest Service. The permit has a
40-year term expiring April 30, 2035. The special use permit has a renewal
option which provides that it may be renewed if the use of the property remains
compatible with the special use permit, the site is being used for the purposes
previously authorized, and the ski area has been continually operated and
maintained in accordance with all the provisions of the permit.
The Mount Snow resort leases approximately 1,315 acres constituting a
substantial portion of its skiable terrain. Of this total, 893 acres are
occupied by Mount Snow pursuant to a special use permit granted by the United
States Forest Service. The permit has a 40-year term expiring December 31, 2029
and is subject to renewal at the option of Mount Snow if certain conditions are
satisfied. Mount Snow also leases 252 acres of skiable terrain from the Town of
Wilmington, Vermont. The lease expires November 15, 2030 and there are no
renewal options. In addition, Mount Snow leases approximately 169 acres from
Sargent Inc. under two separate leases expiring September 30, 2018, and March
31, 2025, respectively. Each lease can be renewed for an additional 30-year
term. Mount Snow also has the option to purchase the leased property and a right
of first refusal in the event the lessor receives an offer for the leased
properties.
Attitash Bear Peak uses approximately 281 acres of its skiable terrain
pursuant to a special use permit issued by the United States Forest Service. The
permit has a 40-year term expiring July 18, 2034 and is renewable subject to
certain conditions. In addition, Attitash Bear Peak leases a portion of its
parking facilities under a lease expiring December 31, 2003. Attitash Bear Peak
has the option to purchase this leased property at any time during the lease
term.
Killington leases approximately 2,500 acres from the State of Vermont.
A substantial portion of that property constitutes skiable terrain. The initial
lease was for a 10-year term which commenced in 1960 but contains nine 10-year
renewal options. Killington exercised the renewal option in 1970, 1980, 1990 and
2000. Assuming continued exercise of the renewal options, the lease will
ultimately expires in the year 2060. The lease is subject to a buy-out option
retained by the State of Vermont, as landlord. At the conclusion of each 10-year
term, or extended term, the State has the option to buy out the lease for an
amount equal to Killington's adjusted capital outlay plus 10% of the gross
receipts from the operation for the preceding three years. Adjusted capital
outlay means total capital expenditures extending back to the date of origin of
the lease depreciated at 1% per annum, except that non-operable assets
15
depreciate at 2% per annum. This buy-out option will next become exercisable in
the year 2010. Although we have not had confirmation from Vermont State
officials, we have no reason to believe that the State intends to exercise the
buy-out option at that time.
The Sugarloaf resort leases the Sugarloaf Golf Course from the Town of
Carrabassett Valley, Maine pursuant to a lease dated June 3, 1987. The lease
term expires December 2003. Sugarloaf has an option to renew the lease for an
additional 20-year term.
The Canyons leases approximately 2,100 acres, including most of the
base area and a substantial portion of its skiable terrain, under a lease from
Wolf Mountain Resorts, LC. The initial term of this lease is 50 years expiring
July 2047, with an option to extend for three additional terms of 50 years each.
The lease provides an option to purchase those portions of the leased property
that are intended for residential or commercial development, subject to certain
reconveyance rights, at a cost of 5.5% of the full capitalized cost of the
development in the case of property that we retain, or 11% of that cost in the
case of property intended for resale. The Canyons also leases approximately 807
acres, which constitutes the area for a planned mid-mountain village and a
substantial portion of its skiable terrain, from the State of Utah School and
Institutional Trust Land Administration. Our lease term ends in 2078 and
provides an option to purchase those portions of the mid-mountain village area
that are intended for real estate development at a cost of 25% of their fair
market value on an undeveloped basis. Our lease with Wolf Mountain Resorts also
includes a sublease of certain skiable terrain owned by the Osguthorpe family.
We have established certain additional ski development rights under a direct
agreement with the Osguthorpe family. The ski development rights for
approximately 3,000 acres of skiable terrain that we have targeted for
development are contained in a development agreement with Iron Mountain
Associates, LLC, which agreement includes a lease of all skiable terrain for a
term ending September 13, 2094. The Canyons is currently negotiating an
amendment to this lease which, if finalized, is expected to provide that these
ski development rights will be acquired in fee by The Canyons in 2002.
Heavenly uses approximately 1,543 acres of its skiable terrain located
in California and Nevada under a special use permit issued by the United States
Forest Service. The permit expires on August 5, 2029. Heavenly uses
approximately 2,000 acres of additional skiable terrain in Nevada pursuant to a
special use permit which expires on August 5, 2029.
Steamboat uses approximately 2,644 acres, a substantial portion of
which is skiable terrain, pursuant to a special use permit issued by the United
States Forest Service which expires on August 31, 2029. Under Steamboat's
existing master plan, an additional 958 acres of contiguous National Forest
lands is expected to be added to the permitted area.
The Forest Service can terminate most of the foregoing special use
permits if it determines that termination is required in the public interest.
However, to our knowledge, no recreational Special Use Permit or Term Special
Use Permit for any major ski resort then in operation has ever been terminated
by the Forest Service over the opposition of the permit holder.
16
Item 3
Legal Proceedings
We currently and from time to time are involved in litigation arising
in the ordinary course of our business. We do not believe that we are involved
in any litigation that will, individually or in the aggregate, have a material
adverse effect on our financial condition or results of operations or cash
flows.
Each of our subsidiaries which operate resorts has claims pending and
is regularly subject to personal injury claims related principally to skiing
activities at such resort. Each of our operating companies maintains liability
insurance that we consider adequate in order to insure against claims related to
the usual and customary risks associated with the operation of a ski resort. We
operate a captive insurance company authorized under the laws of the State of
Vermont, which, until early fiscal 1999, provided liability and workers'
compensation coverage for our Vermont resorts. We do not currently use this
insurance subsidiary to provide liability and workers' compensation insurance
coverage, but it is still responsible for future claims arising from insurable
events which may have occurred while it provided this coverage. Our insurance
subsidiary maintains cash reserves in amounts recommended by an independent
actuarial firm and which we believe to be adequate to cover any such claims.
The Killington resort has been identified by the U.S. Environmental
Protection Agency as a potentially responsible party at two sites pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act.
Killington has entered into a settlement agreement with the Environmental
Protection Agency at one of the sites, the Solvents Recovery Service of New
England Superfund site in Southington, Connecticut. Killington rejected an offer
to enter into a de minimis settlement with the Environmental Protection Agency
for the other site, the PSC Resources Superfund site in Palmer, Massachusetts,
because it disputes its designation as a potentially responsible party. In
addition, our Heavenly resort was designated as a potentially responsible party
at a Superfund site in Patterson, CA. We entered into a cash-out settlement
agreement which has been accepted by the Environmental Protection Agency and
funded as part of an overall settlement of the site. We believe that our
liability for these Superfund sites, individually and in the aggregate, will not
have a material adverse effect on our business or financial condition or results
of operations or cash flows.
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
17
PART II
Item 5
Market for the Registrant's Common Equity and Related Security Holder Matters.
Our common stock is traded on the New York Stock Exchange under the
symbol "SKI". Our class A common stock is not listed on any exchange and is not
publicly traded, but is convertible into our common stock. As of October 20,
2000, 30,469,163 shares of our common stock were issued and outstanding, of
which 14,760,530 shares were class A common stock held by one holder and
15,708,633 shares of common stock held by approximately 9,000 holders.
The following table lists, for the fiscal quarters indicated, the range
of high and low intra-day sale prices of our common stock as reported on the
NYSE Composite Tape.
American Skiing Company Common Stock (SKI)
Fiscal 2000 Fiscal 1999
----------- -----------
High Low High Low
1st Quarter $ 4.69 $ 3.63 $12.50 $ 5.19
2nd Quarter $ 5.06 $ 2.31 $10.25 $ 4.75
3rd Quarter $ 2.88 $ 1.75 $ 5.75 $ 3.06
4th Quarter $ 2.94 $ 1.63 $ 5.81 $ 2.38
Market Information
We have not declared or paid any cash dividends on our capital stock.
We intend to retain earnings, to the extent that there are any, to support our
capital improvement and growth strategies and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of our board of directors after
they take into account various factors, such as our financial condition,
operating results, current and anticipated cash needs and plans for capital
improvements and expansion. Each of the indenture governing our 12% senior
subordinated notes due 2006, our $165 million senior credit facility with
FleetBoston, N.A., our 10.5% mandatorily redeemable preferred stock, and our
series B preferred stock contain certain restrictive covenants that, among other
things, limit the payment of dividends or the making of distributions on our
equity interests. See Part II, Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
18
Item 6
Selected Financial Data
The following selected historical financial data has been derived from
our financial statements as audited by Arthur Andersen LLP, independent
accountants as of and for the fiscal year ended July 25, 1999 and July 30, 2000,
and for the years ended July 28, 1996, July 27, 1997 and July 26, 1998 has been
derived from our financial statements as audited by PricewaterhouseCoopers LLP,
independent accountants.
Historical Year Ended (1)
July 28, 1996 July 27, 1997 July 26, 1998 July 25, 1999 July 30, 2000
(in thousands, except per share, real estate units, and per skier
visit amounts)
Consolidated Statement of Operations
Data:
Net revenues:
Resort (2) $63,489 $163,310 $277,574 $292,558 $292,077
Real estate 9,933 10,721 60,992 24,492 132,063
------------ ------------ ----------- ----------- -----------
Total net revenues 73,422 174,031 338,566 317,050 424,140
Operating expenses:
Resort 41,799 107,230 171,246 198,231 203,902
Real estate 5,844 8,950 43,554 26,808 123,837
Marketing, general and administrative 11,289 25,173 40,058 51,434 49,405
Stock compensation charge (3) - - 14,254 - -
Depreciation and amortization 6,783 18,293 37,965 44,202 47,028
------------ ------------ ----------- ----------- -----------
Total operating expenses 65,715 159,646 307,077 320,675 424,172
------------ ------------ ----------- ----------- -----------
Loss from continuing operations (2,237) (5,482) (1,867) (27,950) (30,133)
Accretion of discount and dividends
accrued on mandatorily redeemable preferred
stock - 444 5,346 4,372 20,994
------------ ------------ ----------- ----------- -----------
Net loss from continuing operations
available to common shareholders ($2,237) ($5,926) ($7,213) ($32,322) ($51,127)
============ ============ =========== =========== ===========
Fully diluted net loss from continuing
operations per share available to common
shareholders ($2.37) ($6.06) ($0.28) ($1.07) ($1.69)
============ ============ =========== =========== ===========
Balance Sheet Data:
Total assets $298,732 $337,340 $780,899 $907,502 $926,778
Long term debt and redeemable preferred
stock, including current maturities 210,720 253,151 422,684 546,297 636,700
Common shareholders' equity 21,903 15,101 268,204 236,655 185,497
Other Data:
Resort:
Skier visits (000's)(4) 1,290 3,025 5,319 5,089 5,006
Season pass holders (000's) 13.2 30.9 44.1 44.2 47.3
Resort revenues per skier visit $49.22 $53.99 $52.19 $57.48 $58.34
Resort EBITDA(5)(6) $10,401 $30,907 $66,270 $42,893 $38,770
Real estate:
Number of units sold 177 123 1,009 1,290 2,285
Number of units pre-sold(7) 109 605 861 1,151 932
Real estate EBITDA(6)(8) $4,089 $1,771 $17,438 ($2,316) $8,226
(1) The historical results of the Company reflect the results of operations of
the Attitash Bear Peak ski resort since its acquisition in July 1994, the
results of operations of the Sugarbush ski resort since October 1994, the
results of operations of the Mount Cranmore ski resort from its acquisition in
June 1995 through its divestiture in November 1996, the results of operation of
S-K-I Ltd. since its acquisition in June 1996, the results of operation of Pico
Mountain since its acquisition in November 1996, the results of operations of
The Canyons resort since its acquisition in July 1997 and the results of
operations of the Steamboat and Heavenly resorts since their acquisition in
November 1997.
19
(2) Resort revenues represents all revenues excluding revenues generated by the
sale of real estate interests.
(3) In the first quarter of fiscal 1998, the Company granted to certain
executive officers and other employees fully vested options to purchase 511,530
shares of Common Stock at an exercise price of $2.00 per share. The Company also
agreed to pay certain tax liabilities which the recipients of the options expect
to incur upon exercise of the options. Because the $2.00 per share exercise
price was below the fair market value of a share of Common Stock on the date of
grant, the Company recognized a one-time compensation charge of $14.3 million in
fiscal 1998.
(4) For the purposes of estimating skier visits, the Company assumes that a
season pass holder visits the Company's resorts a number of times that
approximates the average cost of a season pass divided by the average daily lift
ticket price.
(5) Resort EBITDA represents resort revenues less cost of resort operations and
marketing, general and administrative expense.
(6) Resort and Real Estate EBITDA are not measurements calculated in accordance
with GAAP and should not be considered as alternatives to operating or net
income as an indicator of operating performance, cash flows as a measure of
liquidity or any other GAAP determined measurement. Certain items excluded from
Resort and/or Real Estate EBITDA, such as depreciation, amortization and
non-cash charges for stock compensation awards and asset impairments are
significant components in understanding and assessing the Company's financial
performance. Other companies may define Resort and Real Estate EBITDA
differently, and as a result, such measures may not be comparable to the
Company's Resort and Real Estate EBITDA. The Company has included information
concerning Resort and Real Estate EBITDA because management believes they are
indicative measures of the Company's liquidity and financial position, and are
generally used by investors to evaluate companies in the resort industry.
(7) Pre-sold units represent quartershare and other residential units for which
the Company has a binding sales contract, subject to certain closing conditions,
and has received a 5% down payment on the unit from the purchaser. Recognition
of the revenue from such pre-sales is deferred until the period in which such
sales are closed.
(8) Real Estate EBITDA represents revenues from real estate sales less cost of
real estate sold, including selling costs, holding costs, the allocated
capitalized cost of land, construction costs and other costs relating to
property sold.
20
Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following is management's discussion and analysis of financial
condition and results of operations for the twelve months ended July 30, 2000.
As you read the material below, we urge you to carefully consider our
Consolidated Financial Statements and related notes contained elsewhere in this
report.
When used in this discussion, the words "expect(s)", "feel(s)",
"believe(s)", "will", "may", "anticipate(s)" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We are under no obligation to replenish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The Oak Hill Transaction. On August 9, 1999, we completed the sale of
150,000 shares of our series B convertible exchangeable preferred stock to Oak
Hill Capital Partners, L.P. and certain related entities, realizing gross
proceeds of $150 million. We used $128.6 million of the proceeds to reduce
indebtedness under our senior credit facility (this credit facility is described
in Footnote 6 to the accompanying financial statements), approximately $30
million of which has been reborrowed and invested in our principal real estate
development subsidiary, American Skiing Company Resort Properties, Inc. The
remainder of the proceeds were used to pay approximately $16 million in fees and
expenses in connection with the series B preferred stock sale (approximately $13
million) and related transactions (approximately $3 million), and acquire from
our principal shareholder certain strategic assets and repay a demand note
issued by one of our subsidiaries to our principal shareholder, in the aggregate
amount of $5.4 million.
Liquidity and Capital Resources
Short-Term. Our primary short-term liquidity needs involve funding
seasonal working capital requirements, continuing and completing real estate
development projects presently under construction, funding our fiscal 2001
capital improvement program and servicing our debt. Our cash requirements for
ski-related and real estate development activities are provided from separate
sources. Our primary source of liquidity for ski-related working capital and
ski-related capital improvements are cash flow from operations of our non-real
estate subsidiaries and borrowings under our senior credit facility. Real estate
development and real estate working capital is funded primarily through
construction financing facilities established for major real estate development
projects, a real estate term facility, and net proceeds from the sale of real
estate developed for sale after required construction loan repayments. These
facilities are without recourse to us and our resort operating subsidiaries and
are collateralized by significant real estate assets of American Skiing Company
Resort Properties and its subsidiaries, including the assets and stock of Grand
Summit Resort Properties, Inc., our primary hotel development subsidiary. As of
July 30, 2000, the book value of the total assets that collateralized these
facilities and which are included in the accompanying consolidated balance sheet
was approximately $291.8 million.
Resort Liquidity. We have established a $165 million senior credit
facility agreement with Fleet National Bank, as agent, and certain other
lenders, consisting of a $100 million revolving portion and a $65 million term
portion. The revolving portion of the senior credit facility matures on May 30,
2004, and the term portion matures on May 31, 2006.
The maximum availability under the revolving portion of the senior
credit facility reduces over its term by certain prescribed amounts. As of
October 24, 2000, total borrowings under the revolving credit were $75.9
million, and $5.9 million of availability was allocated to cover outstanding
letters of credit. The term portion of the senior credit facility amortizes in
five annual installments of $650,000 payable on May 31 of each year, with the
21
remaining portion of the principal due in two substantially equal installments
on May 31, 2005 and May 31, 2006. As of October 20, 2000, the outstanding
balance of the term portion has been reduced by $650,000 to $64.4 million. In
addition, the senior credit facility requires mandatory prepayment of the term
portion and a reduction in the availability under the revolving portion of an
amount equal to 50% of the consolidated excess cash flows during any period in
which excess cash flow leverage ratio exceeds 3.50 to 1. In no event, however,
will such mandatory prepayments reduce the revolving portion of the facility
below $74.8 million. We do not presently expect to generate consolidated excess
cash flows during fiscal 2001 and there were none generated in fiscal 2000.
The senior credit facility contains affirmative, negative and financial
covenants customary for this type of credit facility, which includes maintaining
certain financial ratios. The senior credit facility is secured by substantially
all of our assets and subsidiaries except those of our real estate development
subsidiaries. The revolving portion of the facility is subject to an annual
30-day clean-down requirement, which period must include April 30 of each year,
during which the sum of the outstanding principal balance and letter of credit
exposure shall not exceed $25 million for fiscal 2000 and $35 million for each
fiscal year thereafter. We successfully completed the 30-day clean-down
requirement for fiscal 2000 on April 30, 2000.
The senior credit facility restricts our ability to pay dividends on our
common stock. We are prohibited from paying dividends in excess of 50% of the
consolidated net income of the non-real estate development subsidiaries after
April 25, 1999, and further prohibited from paying dividends under any
circumstances when the effect of such payment would cause the debt to EBITDA
ratio of the non-real estate development subsidiaries to exceed 4.0 to 1. Based
upon these and other restrictions, we do not expect to be able to pay cash
dividends on our common stock, mandatorily redeemable 10.5% preferred stock or
series B preferred stock during fiscal 2001 or fiscal 2002.
Due to the adverse weather conditions in the eastern United States, Utah
and the Sierra Nevadas during our second fiscal quarter of 2000, and their
effect on our second quarter revenue, EBITDA and net income, we amended the
senior credit facility on March 6, 2000 in order to (i) suspend our second
quarter financial covenant requirements, (ii) significantly modify the financial
covenant requirements of the senior credit facility for our second and third
fiscal quarters and on a prospective basis, (iii) establish minimum quarterly
EBITDA levels starting with our third quarter of fiscal 2000 through the second
quarter of fiscal 2002, and (iv) establish monthly restrictions on the maximum
amount outstanding under the revolving portion of the senior credit facility for
the period from May 1 through December 3, 2000. We exceeded our required minimum
EBITDA levels under the amended senior credit facility for the third and fourth
fiscal quarters of 2000 and we successfully fulfilled the maximum usage
requirement for each monthly period through October 1, 2000. Based on historical
operations, we presently anticipate that we will be able to meet the financial
covenants of the amended senior credit facility. Failure to meet one or more of
these covenants could result in an event of default under the senior credit
facility. In the event that such default were not waived by the lenders holding
a majority of the debt under the senior credit facility, this default would also
constitute defaults under one or more of our other major credit facilities, the
consequences of which would likely be material and adverse to our business.
The amended senior credit facility also places a maximum level of
non-real estate capital expenditures of $20 million for fiscal 2000 and $13
million for fiscal 2001, exclusive of certain capital expenditures in connection
with the sale of series B preferred stock during the first quarter of fiscal
2000. Following fiscal 2001, annual resort capital expenditures, exclusive of
real estate capital expenditures, are limited to the lesser of $35 million, or
the total of the non-real estate development subsidiaries' consolidated EBITDA
for the four fiscal quarters ended in April of the previous fiscal year less the
consolidated debt service for the same period. In addition to the foregoing
amounts, we are permitted to and expect to make capital expenditures of up to
$30 million for the purchase and construction of a new gondola at our Heavenly
resort in Lake Tahoe, Nevada, on which construction is currently underway and
$13.4 million has been expended as of October 1, 2000.
Our liquidity is significantly affected by our high leverage. As a
result of our leveraged position, we will have significant cash requirements to
service interest and principal payments on our debt. Consequently, cash
availability for working capital needs, capital expenditures and acquisitions is
limited, outside of any availability under the senior credit facility.
22
Furthermore, the senior credit facility and the indenture governing our 12%
Senior Subordinated Notes, due 2006, each contain significant restrictions on
our ability to obtain additional sources of capital and may affect our
liquidity. These restrictions include restrictions on the sale of assets,
restrictions on the incurrence of additional indebtedness and restrictions on
the issuance of preferred stock.
As of October 24, 2000, we have drawn or committed for letters of credit
approximately $81.8 million of the total $100 million revolving portion of our
senior credit facility. We expect to maximize borrowings under the senior credit
facility sometime between November and December of 2000, consistent with our
historical experience when we have had little, if any, borrowing availability
under the senior credit facility.
Under the indenture for our 12% Senior Subordinated Notes, due 2006, we
are prohibited from paying cash dividends or making other distributions to our
shareholders.
Real Estate Liquidity. Funding of working capital for American Skiing
Company Resort Properties and its fiscal 2001 real estate development program is
provided by a real estate term facility and the net proceeds from the sale of
real estate developed for sale after required construction loan repayments.
On July 31, 2000, we entered into a second amended real estate facility
agreement between American Skiing Company Resort Properties and Fleet National
Bank. This fully syndicated $73 million facility replaced the previous
un-syndicated $58 million real estate development term loan facility. As of
October 24, 2000 the amount drawn under the facility was $59.4 million, leaving
availability of $13.6 million, of which $5 million is set aside as a liquidity
reserve. The second amended real estate facility is collateralized by security
interests in, and mortgages on, substantially all of American Skiing Company
Resort Properties' assets, which primarily consist of undeveloped real property
and the stock of its real estate development subsidiaries (including Grand
Summit Resort Properties). As of July 30, 2000, the book value of the total
assets that collateralized the real estate facilities, and are included in the
accompanying consolidated balance sheet, was approximately $291.8 million.
The second amended real estate facility is comprised of three tranches,
each with separate interest rates and maturity dates. Tranche A has a maximum
principal amount of $35 million, bears interest at a variable rate equal to the
Fleet National Bank Base Rate plus 8.25%, or a current rate of 17.8%, (payable
monthly in arrears) and matures on December 31, 2002. Mandatory principal
payments on Tranche A of $5.0 million each are payable on April 30, 2002, July
31, 2002 and October 31, 2002. Tranche B has a maximum principal amount of $25
million, bears interest at a fixed rate of 25% per annum and matures on December
31, 2003. Interest calculated at 18% per annum for Tranche B is payable monthly
in arrears. The remaining 7% per annum will accrue, be added to the principal
balance of Tranche B and will bear interest at 25% per annum, compounded
annually. Tranche C has a maximum principal amount of $13 million, bears
interest at a fixed rate of 18% per annum and matures on December 31, 2005.
Interest will accrue, be added to the principal balance of Tranche C and will
bear interest at 18% per annum, compounded semi-annually. As of October 24,
2000, the principal balances outstanding, including accrued and unpaid interest,
under Tranches A, B & C of the second amended real estate facility were $28.9
million, $25.0 million, and $5.5 million, respectively.
Tranche C of the second amended real estate facility was purchased by
Oak Hill Capital Partners, L.P. In connection with this $13 million investment,
we entered a securities purchase agreement with Oak Hill, dated as of July 31,
2000, pursuant to which we agreed to either issue warrants to Oak Hill for
6,000,000 shares of our common stock with an exercise price of $2.50 per share,
or issue to Oak Hill common stock in American Skiing Company Resort Properties,
representing approximately 15% of the voting interest in that entity. The
purchase price of the warrants (or American Skiing Company Resort Properties
common stock, as applicable) was $2 million. We expect to issue the warrants
following receipt of necessary lender consents.
We conduct substantially all of our real estate development through
single purpose subsidiaries, each of which is a wholly owned subsidiary of
American Skiing Company Resort Properties. Grand Summit Hotel projects are
constructed through Grand Summit Resort Properties and are primarily financed
through a $110 million construction loan facility among Grand Summit Resort
Properties and various lenders, including TFC Textron Financial, the syndication
agent and administrative agent, which closed on September 25, 1998.
23
As of October 20, 2000, the amount outstanding under the construction
loan facility was $84.8 million. This facility matures on March 31, 2002 and
bears interest at the rate of prime plus 2.5% per annum, or a current rate of
12.0%. The principal is payable incrementally as quartershare sales are closed
based on a predetermined per unit amount, which approximates between 65% and 80%
of the net proceeds of each closing. The facility is collateralized by mortgages
against the project sites (including the completed Grand Summit Hotels at
Killington, Mt. Snow, Sunday River, Attitash Bear Peak and The Canyons, as well
as the recently completed Steamboat Grand Hotel), and is subject to covenants,
representations and warranties customary for this type of construction facility.
The facility is non-recourse to us and our resort operating subsidiaries
(although it is collateralized by substantial assets of Grand Summit Resort
Properties, having a total book value of $209.6 million as of July 30, 2000,
which in turn comprise substantial assets of our business).
Due to construction delays and cost increases at the Steamboat Grand
Summit Hotel project, Grand Summit Resort Properties entered into a $10 million
subordinated loan tranche with TFC Textron Financial on July 25, 2000. This
facility is to be used solely for the purpose of providing advances to fund the
completion of the Steamboat Grand Hotel. The facility bears interest at a fixed
rate of 20% per annum, payable monthly in arrears, provided that only 50% of the
amount of such interest shall be due and payable in cash and the other 50% of
such interest shall, if no events of default exist under the subordinated loan
tranche facility or the construction loan Textron facility, automatically be
deferred until the final payment date. As of October 20, 2000, the amount
outstanding under the subordinated loan tranche facility was $9.2 million.
On July 28, 2000 Westgate Resorts, a division of privately-held Central
Florida Investment firm, purchased land and timeshare development rights at The
Canyons near Park City, UT. The land is expected to be used for the construction
of the "Westgate at The Canyons" timeshare project in the resort's village core.
Westgate purchased the land and development rights for $7.4 million. In
addition, Westgate separately contracted with us to purchase 150,000 lift
tickets at The Canyons over the next five years to support its sales efforts.
The ticket contract is expected to yield revenue of approximately $6 million.
The planned facilities at the project are expected include nearly 23,000 square
feet of retail space, a health spa, a restaurant, a heated pool, outdoor hot
tubs and a private club for Westgate owners. The project is expected to be sold
in one-and two-week intervals.
On October 17, 2000, we sold our option rights to certain real estate
in the South Lake Tahoe Redevelopment District to Marriott Ownership Resorts,
Inc., a wholly owned subsidiary of Marriott International, for $8.5 million.
Pursuant to the terms of the option sale, American Skiing Company Resort
Properties received $4.09 million in cash proceeds on October 17, applied a $0.3
million previously received deposit and will receive an additional $4.09 million
from Marriott on January 15, 2001. Simultaneously with the closing of the sale
of its option rights, our July 28, 1998 development agreement with Marriott was
terminated. Management believes that the termination of this agreement will
allow American Skiing Company Resort Properties to more aggressively market
certain developmental real estate at its Killington and Steamboat resorts to
other potential timeshare investors. In addition, we continue to discuss with
Marriott a possible development at Killington, but have not and may not reach an
acceptable agreement regarding this parcel.
Our fiscal 2001 business plan anticipates starting two real estate
projects in the spring and summer of 2001; a Grand Summit Hotel at Heavenly and
townhomes at The Canyons. Commencement of these projects is subject to
satisfying the requisite pre-sale hurdles, our cash flow requirements and
arranging appropriate financing for these projects.
Long-Term. Our primary long-term liquidity needs are to fund
skiing-related capital improvements at certain of our resorts, development of
our slope side real estate and the mandatory redemption of our Series A
Preferred Stock on November 15, 2002. With respect to capital needs, we have
invested over $172 million in skiing related facilities since the beginning of
fiscal 1998. As a result, and in keeping with restrictions imposed under the
senior credit facility, we expect our resort capital programs for the next
several fiscal years will be more limited in size. Our fiscal 2001 resort
capital program is estimated at approximately $13 million (of which $6.0 had
been expended as of October 1, 2000), plus an additional estimated $18 million
to be expended on the Heavenly Gondola project (of which $6.0 had been expended
as of October 1, 2000).
24
For our 2001 and 2002 fiscal years, we anticipate our annual
maintenance capital needs to be approximately $10 million. There is a
considerable degree of flexibility in the timing and, to a lesser degree, scope
of our growth capital program. Although specific capital expenditures can be
deferred for extended periods, continued growth of skier visits, revenues and
profitability will require continued capital investment in on-mountain
improvements.
Our practice is to finance on-mountain capital improvements through
resort cash flow, capital leases and our senior credit facility. The size and
scope of the capital improvement program will generally be determined annually
depending upon the strategic importance and expected financial return of certain
projects, future availability of cash flow from each season's resort operations
and future borrowing availability and covenant restrictions under the senior
credit facility. The senior credit facility places a maximum level of non-real
estate capital expenditures for fiscal 2002 and beyond at the lesser of $35
million, or the total of the non-real estate development subsidiaries'
consolidated EBITDA for the four fiscal quarters ended in April of the previous
fiscal year less consolidated debt service for the same period. In addition, we
are permitted to and expect to make capital expenditures of up to $30 million
for the purchase and construction of a new gondola at our Heavenly resort in
Lake Tahoe, Nevada. Construction on the Heavenly gondola began in June, 2000 and
as of October 1, 2000, we had expended $13.4 million on this project. Our
management believes that these capital expenditure amounts will be sufficient to
meet our non-real estate capital improvement needs for the near future.
Our business plan anticipates the development of Grand Summit hotels,
condominium hotels and townhouses at our resort villages at The Canyons,
Heavenly, Killington, Steamboat and Sunday River. The timing and extent of these
projects are subject to local and state permitting requirements which may be
beyond our control, as well as our cash flow requirements and the availability
of external capital. Our real estate development is undertaken through our real
estate development subsidiary, American Skiing Company Resort Properties.
Recourse on debt incurred to finance this real estate development is limited to
American Skiing Company Resort Properties and its subsidiaries, which include
Grand Summit Resort Properties. This debt is usually collateralized by the
projects that it finances, which, in some cases, constitute a significant
portion of our assets. As of July 30, 2000, the total assets collateralizing the
real estate facilities, and included in the accompanying consolidated balance
sheet, totaled approximately $291.8 million. American Skiing Company Resort
Properties' eight existing development projects are currently being funded by
the second amended real estate facility, the construction loan facility and a
separate construction loan facility for the final phase of the Locke Mountain
Townhomes at Sunday River. The Locke Mountain project is currently 100% sold and
proceeds from closings are expected to be received and used to repay the debt
during the 2nd quarter of fiscal 2001.
We expect to undertake future real estate development projects through
special purpose subsidiaries with financing provided principally on a
non-recourse basis to us and our resort operating subsidiaries. Although this
financing is expected to be non-recourse to us and our resort subsidiaries, it
will likely be collateralized by our existing and future real estate projects
that may constitute significant assets to us. Required equity contributions for
these projects must be generated before they can be undertaken, and the projects
are subject to mandatory pre-sale requirements under the second amended real
estate facility. Potential sources of equity contributions include sales
proceeds from existing real estate projects and assets, (to the extent not
applied to the repayment of indebtedness) and the possible sale of equity or
debt interests in American Skiing Company Resort Properties or its real estate
development subsidiaries. Financing commitments for future real estate
development do not currently exist, and we can offer no assurance that they will
be available on satisfactory terms. We will be required to establish both equity
sources and construction facilities or other financing arrangements for our
projects before undertaking them.
We have outstanding $36 million of mandatorily redeemable 10 1/2%
preferred stock, with an accreted value of $49.6 million as of October 31,
2000.. The mandatorily redeemable 10 1/2% preferred stock is exchangeable at the
option of the holder into our common stock at a conversion price of $17.10 for
each common share. We expect to hold the mandatorily redeemable 10 1/2%
preferred stock until its maturity date of November 15, 2002, at which time we
will be required to redeem the mandatorily redeemable 10 1/2% preferred stock at
a redemption price of approximately $62 million. We can give no assurance that
the necessary liquidity will be available to effect the redemption on a timely
basis.
25
Results of Operations of the Company
Fiscal Year Ended July 30, 2000 ("Fiscal 2000")
Versus Fiscal Year Ended July 25, 1999 ("Fiscal 1999")
Resort Operations:
The components of resort operations for the fiscal years ended July 30,
2000 and July 25, 1999 are as follows:
------------------------------------------------------------------------------------
Actual Year Actual
Ended Year Ended Increase/(Decrease)
July 30, 2000 July 25, 1999 Dollar Percent
------------------------------------------------------------------------------------
Revenue category:
Lift Tickets $ 131.3 $ 134.5 $ (3.2) (2.4%)
Food and beverage 40.0 38.3 1.7 4.4%
Retail sales 38.3 41.5 (3.2) (7.7%)
Lodging and property 32.7 31.6 1.1 3.5%
Skier development 24.8 24.2 0.6 2.5%
Golf, summer activities and other 25.0 22.5 2.5 11.1%
------------- ----------- ---------- --------
Total resort revenues $ 292.1 $ 292.6 $ (0.5) 0.1%
------------- ----------- ---------- --------
Total Skier Visits 5,006 5,090 (84) (1.7%)
Cost of resort operations $ 203.9 $ 198.2 $ 5.7 2.9%
Marketing, general and administrative 49.4 51.4 (2.0) (3.9%)
Depreciation and amortization 47.0 44.2 2.8 6.3%
------------------------------------------------------------------------------------
Warm weather patterns in early November, a rainy Thanksgiving weekend
in the East and a warm, dry December nationwide all contributed to weak early
season paid skier day levels. The December holiday week was also negatively
impacted by the overall softness in the travel industry due to Y2K concerns and
the lack of natural snowfall in key market areas. Substantial natural snowfall
at all resorts and in key market areas late in our second fiscal quarter revived
sluggish early season skier traffic heading into the third quarter. This
momentum continued into February, during which fresh snowfall and good weather
for the Presidents Holiday weekend produced three-day attendance records at
almost all of our resorts. Skier traffic (and operating results) continued to be
strong into March, but warm weather nation-wide and sustained rainfall in the
East brought an early end to the ski season and as a result April resort
revenues and operating profits fell short of the prior year.
Revenues from lift tickets and retail sales were down a combined $6.4
million, or 3.6%, from the prior year due mainly to the decrease in paid skier
days for the year. Food and beverage and lodging services revenues increased in
Fiscal 2000, as revenues generated from the two new hotels at The Canyons offset
the effect of the decrease in skier days at our eastern resorts. Skier
development revenues actually increased by $0.6 million, or 2.5%, in Fiscal
2000, as we continued to realize the benefits of its new skier development
programs instituted in fiscal 1999 in conjunction with the opening of new Sprint
Perfect Turn Discovery Centers at four of our Eastern resorts. We also realized
$1.6 million in net gains from the sale of non-strategic assets during the first
quarter of fiscal 2000, which contributed most of the $2.5 million increase in
golf, summer activities and other revenues in Fiscal 2000.
Our Resort segment generated a $31.4 million loss before income taxes
in Fiscal 2000, compared to a $33.4 million pre-tax loss in Fiscal 1999. This
$2.0 million decrease in the year-to-date pre-tax loss is derived primarily from
an $8.6 million decrease in interest expense, offset by a $4.1 million decrease
in resort earnings before interest, taxes and depreciation, or EBITDA, and a
$2.5 million increase in depreciation expense. The reduction in interest expense
in fiscal 2000 is due primarily to the reduced level of debt outstanding under
our senior credit facility as a result of the paydown on that facility from the
proceeds of the series B preferred stock issuance. The decrease in resort
earnings before interest, taxes and depreciation is derived from the net effect
26
of (i) the $0.5 million decrease in resort revenues described above, (ii) a $5.7
million increase in resort operating expenses due mainly to pre-opening and
start-up costs associated with the two new hotels at The Canyons and the
Steamboat Grand Hotel, increased snowmaking and maintenance costs, food and
beverage and lodging costs and retail costs of goods sold, and (iii) a $2.0
million reduction in marketing, general and administrative expenses. The
increase in resort depreciation expense is due to the approximately $30 million
in ski-related capital assets placed in service at our resorts since the end of
the 1998-99 ski season.
Real Estate Operations:
Real estate revenues increased by $107.6 million in Fiscal 2000
compared to Fiscal 1999, from $24.5 million to $132.1 million. The delivery of
units in the Sundial whole-ownership condominium hotel and the new Grand Summit
Hotel at The Canyons accounted for $41.0 million and $59.4 million,
respectively, of real estate revenues in Fiscal 2000. Additional increases in
real estate revenues during Fiscal 2000 resulted from sales of undeveloped land
at Steamboat and The Canyons (combined $9.3 million in Fiscal 2000 versus $2.9
million in Fiscal 1999) and a $2.5 million increase in quartershare unit sales
at the existing Grand Summit Hotels at our Eastern resorts ($20.9 million in
Fiscal 2000 compared to $18.4 million in Fiscal 1999). An offsetting $2.3
million decrease was due to revenues recognized in Fiscal 1999 from the sale of
townhouses at Sunday River, which did not recur in Fiscal 2000.
Our Real Estate segment generated a loss before income taxes of $4.5
million in Fiscal 2000, a $5.1 million improvement over the $9.6 million pre-tax
real estate loss generated in Fiscal 1999. This $5.1 million decrease in the
pre-tax loss in fiscal 2000 is primarily derived from the net effect of a $10.6
million increase in real estate EBITDA offset by a $5.1 million increase in real
estate interest expense and a $0.3 million increase in real estate depreciation.
The sale of units at The Canyons Grand Summit Hotel contributed $12.7
in real estate EBITDA in fiscal 2000, there were no sales for this project in
fiscal 1999. Offsetting this increase in real estate EBITDA was a decrease of
$1.9 million from the sales of quarter shares at the Eastern Grand Summit
hotels. The Sundial project contributed a negative $.8 million EBITDA to the
fiscal 2000 results, the first year this project recorded sales. All other
activities contributed a net positive $.6 million to real estate EBITDA compared
to the prior year's results.
The $5.1 million increase in real estate interest expense was primarily
due to an increase in real estate debt outstanding in fiscal 2000 and lower
capitalized interest due to completion of the two hotels at the Canyons.
Benefit from income taxes decreased $9.3 million, from $15.1 million in
fiscal 1999 to $5.8 million in fiscal 2000. The decrease in the benefit is due
primarily to $7.4 million in valuation allowances established in fiscal 2000
relating to certain deferred tax assets for prior net operating losses. As a
result of the sale of our series B preferred stock, the realization of the tax
benefit of certain of our net operating losses and other tax attributes is
dependent upon the occurrence of certain future events. It is our judgment that
a valuation allowance of $3.0 million against our deferred tax assets for net
operating losses and other tax attributes is appropriate because it is more
likely than not that the benefit of such losses and attributes will not be
realized. Based on facts known at this time, we expect to substantially realize
the benefit of the remainder of our net operating losses and other tax
attributes affected by the sale of our series B preferred stock. The remaining
$4.4 million valuation allowance relates to excess net operating losses that may
not be realizable in the State of Vermont.
Extraordinary loss of $0.6 million (net of $0.4 million of tax
benefits) in Fiscal 2000 resulted from the pro-rata write-off of certain
existing deferred financing costs related to our senior credit facility. This
write-off was due to the restructuring of the senior credit facility in
connection with the permanent reduction in the availability of the revolving
portion and the pay down of the term portion of the facility from the proceeds
of the series B preferred stock issuance.
Cumulative effect of a change in accounting principle of $0.7 million
(net of $0.4 million tax benefit) in Fiscal 2000 resulted from the write-off of
certain capitalized start-up costs relating to our hotel and retail operations
27
and the opening of the Canyons resort in fiscal 1998. The accounting change was
due to our adoption of AICPA Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities". SOP 98-5 requires the expensing of all start-up costs
as incurred, rather than capitalizing and subsequently amortizing such costs.
Initial adoption of this SOP should be reported as a cumulative effective of a
change in accounting principles. Current start-up costs are being expensed as
incurred and are reflected in their appropriate expense classifications
Accretion of discount and dividends accrued on mandatorily redeemable
preferred stock increased $16.6 million from $4.4 million in Fiscal 1999 to
$21.0 million in the current fiscal year. This increase is primarily
attributable to the additional accrual of dividends on 150,000 shares of series
B preferred stock issued to Oak Hill in the first quarter of Fiscal 2000. We are
currently accruing dividends on the series B preferred stock at an effective
rate of 9.7%, with the assumption that dividends will not be paid in cash until
the fifth anniversary of the issuance.
Fiscal 1999 Versus Fiscal Year Ended July 26, 1998 ("Fiscal 1998")
The actual results of Fiscal 1999 versus the actual results of Fiscal
1998 discussed below are not comparable due to the acquisition of the Steamboat
and Heavenly resorts on November 12, 1997. Accordingly, the usefulness of the
comparisons presented below is limited, as the Fiscal 1998 results include the
results of Steamboat and Heavenly since November 12, 1997, while the Fiscal 1999
results include all twelve months of results of Steamboat and Heavenly. The
following table illustrates the pro forma effect of the results of Steamboat and
Heavenly as if the purchase had occurred at the beginning of Fiscal 1998:
- -----------------------------------------------------------------------------------------------------------------
Pro Forma
Actual Year Effect on Pro Forma Actual Pro Forma Increase/
Ended Year Ended Year Ended Year Ended (Decrease)
July 26, 1998 July 26, 1998 July 26, 1998 July 25, 1999 Dollar Percent
- -----------------------------------------------------------------------------------------------------------------
Revenue category:
Lift Tickets $ 135.9 $ 0.0 $ 135.9 $ 134.5 $ (1.4) (1.0%)
Food and beverage 34.0 0.5 34.5 38.3 3.8 10.9%
Retail sales 37.4 1.6 39.0 41.5 2.5 6.4%
Lodging and property 27.5 0.1 27.6 31.6 4.0 14.4%
Skier development 22.4 0.0 22.4 24.2 1.8 8.0%
Golf, summer activities and other 20.4 1.4 21.8 22.5 0.7 3.3%
------------- ----------- ------------- ------------ ---------- ---------
Total resort revenues $ 277.6 $ 3.6 $ 281.2 $ 292.6 $ 11.4 4.0%
------------- ----------- ------------- ------------ ---------- ---------
Cost of resort operations $ 171.2 $ 8.6 $ 179.8 $ 198.2 $ 18.4 10.2%
Marketing, general and administrative 40.1 5.0 45.1 51.4 6.3 14.0%
Depreciation and amortization 38.0 1.6 39.6 44.2 4.6 11.6%
- -----------------------------------------------------------------------------------------------------------------
Resort revenues increased $15.0 million or 5.4% from $277.6 million for
Fiscal 1998 to $292.6 million for Fiscal 1999. The pro forma effect of the
inclusion of the results from Steamboat and Heavenly resorts for the first
fiscal quarter of 1999 accounts for $3.6 million of the increase. The remaining
$11.4 million increase in resort revenues is broken out by revenue category in
the above table. The decrease in lift ticket revenues is derived from (i) a 4.3%
decrease in skier visits, due to unfavorable weather conditions in New England
and Colorado, resulted in an approximately $6.1 million decrease in lift ticket
revenues, and (ii) a 3.5% increase in lift ticket yield, due mainly to price
increases at Steamboat and Heavenly, offset this decrease by approximately $4.7
million. Increases in food and beverage and retail sales revenues are primarily
attributable to additional food and beverage and retail outlets. The increase in
skier development revenues is mainly associated with a new skier development
program instituted in Fiscal 1999, which corresponded with the opening of new
Sprint Discovery Centers at four of our eastern resorts. The increase in lodging
revenue is primarily due to the full year of operations in Fiscal 1999 of three
Grand Summit Hotels which opened during Fiscal 1998 (one each at Killington,
Mount Snow and Sunday River).
Real estate revenues decreased $36.5 million for Fiscal 1999 as
compared to Fiscal 1998. The decrease is attributable to the substantial
revenues recognized in Fiscal 1998 from closings on pre-sold quartershare units
28
at our Grand Summit Hotels at Killington and Mt. Snow, and the Jordan Grand
Hotel at Sunday River. These projects were completed during the second and third
fiscal quarters of Fiscal 1998, and we realized $55.4 million in sales revenue
from these projects in Fiscal 1998. For Fiscal 1999 we realized $18.4 million in
on-going sales of quartershare units.
Cost of resort operations increased $27.0 million or 15.8% from $171.2
million to $198.2 million. The pro forma effect of the inclusion of the results
of Steamboat and Heavenly resorts for the first fiscal quarter of 1999 accounts
for $8.6 million of the increase. The majority of the remaining increase is
attributable to (i) $4.8 million in lodging costs associated with a full year of
operation of three new hotels, (ii) $1.2 million increase associated with a new
skier development program which included the operation of four new Sprint
Discovery Centers, (iii) $3.6 million in food and beverage and retail costs
associated with additional outlets and higher sales volume and the liquidation
of excess inventory during the fourth quarter of fiscal 1999; (iv) $1.1 million
increase in snowmaking due to the lack of natural snow at our eastern resorts,
(v) $1.5 million increase in property taxes due to increased tax rates in
Vermont and an increased asset base at The Canyons, and (vi) $1.0 million
increase in event costs associated with marketing sponsorship.
Cost of real estate sold decreased $16.7 million in Fiscal 1999
compared to Fiscal 1998. The decrease is attributable to the substantial cost
recognized in the third quarter of Fiscal 1998 from closings of pre-sold
quartershare units at our Grand Summit Hotels at Killington and Mt. Snow and the
Jordan Grand Hotel at Sunday River. The cost associated with the revenue
realized for Fiscal Year 1998 totaled $32.0 million. The cost associated with
the on-going sales of these units in Fiscal 1999 totaled $10.9 million. The
$21.0 million decrease related to sales of quartershare units was offset by
other increases, due mainly to (i) $3.5 million of cost recognized relating to
the sale of land which was not of strategic importance to our real estate
development plan or resort operations; (ii) the write-off of $0.7 million in
prepaid advertising and commission charges incurred in generating pre-sale
contracts, some of which have subsequently expired, for a Grand Summit Hotel at
our Sugarbush resort (the timing of development for the Sugarbush project is
expected to be re-evaluated by the Company during next year's skiing season) and
(iii) $0.8 million of expenses were incurred during the second quarter of Fiscal
1999 relating to our unsuccessful $300 million bond offering which was
undertaken to provide additional financing for our real estate projects.
Marketing, general and administrative expenses increased $11.3 million
or 28.2% from $40.1 million to $51.4 million. The inclusion of the results of
Steamboat and Heavenly resorts for the first fiscal quarter of 1999 accounts for
$5.0 million of the increase. The majority of the remaining increase is
attributable to (i) a planned increase in marketing expense at all the resorts
of $2.9 million (ii) a stock compensation charge of $0.8 million relating to the
vesting of additional management stock options, (iii) $0.6 million of additional
expenses resulting from the expansion of management information services, (iv)
$2.0 million of severance payments and restructuring of management compensation
and (v) additional costs associated with being a public company.
Depreciation and amortization increased $6.2 million for Fiscal 1999
compared to Fiscal 1998. The inclusion of the Steamboat and Heavenly resorts for
the first fiscal quarter of 1999 accounts for $1.6 million of the increase. The
remaining increase is primarily due to additional depreciation on capital
improvements of approximately $53 million made this year. These increases are
slightly offset by the change in the estimated useful lives of certain of our
ski-related assets, which decreased depreciation expense by $0.7 million.
Interest expense increased from $34.6 million for Fiscal 1998 to $39.4
million for Fiscal 1999. The increase is principally attributable to increased
debt levels associated with financing our recent capital improvements and real
estate projects.
The benefit for income taxes increased from $0.8 million for Fiscal
1998 to $15.1 million for Fiscal 1999 due to the increase in the loss before
income taxes. The effective income tax rate increased from 25.1% in Fiscal 1998
to 35.0% in Fiscal 1999 due to the non-recurring stock option compensation
charge of $14.3 million in Fiscal 1998, not all of which was deductible for
income tax purposes.
Accretion of discount and dividends accrued on mandatorily redeemable
preferred stock decreased $0.9 million, or 17.0%, from $5.3 million for Fiscal
29
1998 to $4.4 million for Fiscal 1999. The decrease is primarily attributable to
$0.9 million in additional accretion recognized during Fiscal 1998 relating to a
conversion feature on our series A 14% exchangeable preferred stock that allowed
holders of these securities to convert to shares of our common stock at a 5%
discount to our initial public offering price. An additional $0.9 million of the
decrease is due to amortization of issuance costs recognized in Fiscal 1998
related to our series A 14% exchangeable preferred stock upon its conversion
into mandatorily redeemable 10 1/2% preferred stock. These decreases were offset
by an increase resulting from the full twelve months accretion for Fiscal 1999
related to the mandatorily redeemable 10 1/2% preferred stock (as compared to
only nine months in Fiscal 1998), and the compounding effect of the dividend
accrual.
Recently Issued Accounting Standards
Effective July 31, 2000, we will adopt SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, SFAS No. 137 Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an Amendment of FASB Statement No. 133 and SFAS No.
138 Accounting for Certain Derivative Instruments and Certain Hedging Activities
- - an Amendment of FASB Statement No. 133 (collectively SFAS 133 as amended or
the Statement). We are required to adopt SFAS 133 as amended no later than the
beginning of our fiscal reporting period beginning July 31, 2000. These
standards will be adopted as a change in accounting principle and cannot be
applied retroactively to financial statements of prior periods.
SFAS 133 as amended requires that we record derivatives on the balance
sheet as an asset or liability at fair value. The statement also requires that
we must record derivatives that are not hedges at fair value through earnings,
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows us to offset a derivative instrument's gains and losses
against related results on the hedged item in the income statement, to the
extent effective, and requires that we must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS 133
as amended, in part, allows special hedge accounting for fair value and cash
flow hedges. The statement provides that the gain or loss on a derivative
instrument designated and qualifying as a fair value hedging instrument, as well
as the offsetting loss or gain on the hedged item attributable to the hedged
risk, be recognized currently in earnings in the same accounting period. SFAS
133 as amended provides that the effective portion of the gain or loss on a
derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of other comprehensive income and be
reclassified into earnings in the same period or periods during which the hedged
forecasted transaction affects earnings. The ineffective portion of a
derivative's change in fair value is recognized currently through earnings
regardless of whether the instrument is designated as a hedge.
We have five interest rate swap contracts outstanding as of July 30,
2000, two of which we have designated as cash flow hedges.
Cash flow hedges
We have entered into two interest rate swap agreements, with a total
notional amount of $75 million. Under these arrangements, which may be
terminated on November 17, 2000 by the floating rate payer, we receive the
30-day LIBOR rate and pay a fixed rate of 5.68%. Prior to adoption of FAS 133 as
amended, we have treated these swaps as hedges and accounted for them as such.
We have not recorded any amounts on the Consolidated Balance Sheet as of July
30, 2000 in connection with these instruments and the net effect of the hedges
was to record interest expense at the fixed rate of 5.68% on the first $75
million of debt. We have designated these swaps as cash flow hedges of variable
future cash flows associated with the interest on our senior credit facility
through November 17, 2000. Upon adoption, we will record the fair value of these
swaps as an asset on the balance sheet with a corresponding credit to other
comprehensive income. We will record subsequent changes in fair value of the
swaps through other comprehensive income, except for changes related to
30
ineffectiveness, during the period these instruments are designated as hedges.
We do not currently anticipate ineffectiveness under these hedges through
November 17, 2000. The net effect of the cash flow hedges will be for us to
record interest expense at the fixed rate of 5.68% plus 3.5% (based on our
current leverage)on the first $75 million of debt. If the swap agreements are
not terminated on November 17, 2000 all subsequent changes in the fair value
will be accounted for through earnings.
Other derivatives
We entered into three interest rate swap agreements that do not qualify
for hedge accounting under SFAS 133 as amended. The net effect of these swaps
will result in a $2.1 million interest savings for us over the life of the
Senior Subordinated Notes, due 2006. As of July 30, 2000, we have recorded
$8,592,185 in Other Long Term Liabilities in the accompanying Consolidated
Balance Sheet and we have been recording the net effect of the interest savings
through the income statement on a straight-line basis over the life of the
agreements. Upon adoption, we will record the fair value of these swaps as an
asset and a liability with a corresponding entry to cumulative effect of the
change in accounting principle in earnings; and we will recognize the amount
recorded in Other Long Term Liabilities through a cumulative effect of the
change in accounting principle in earnings. We will record subsequent changes in
fair value of these swaps through the income statement.
Net effect of the Change in Accounting Principle
------------------------- ------------- --------------- -------------- --------------- -----------------
Cumulative
effect of
change in
Other Long Other accounting
Liability- Term Comprehensive principle in
Debit/(Credit) Asset - Swap Swap Liabilities Income earnings
------------------------- ------------- --------------- -------------- --------------- -----------------
Cash flow hedges $ 258,862 $ - $ - $ 258,862) $ -
Other Derivatives 6,519,980 (11,065,538) 8,592,185 (4,046,627)
------------- --------------- -------------- --------------- -----------------
Total Derivatives $ 6,778,842 $(11,065,538) $ 8,592,185 $ (258,862) $ (4,046,627)
------------------------- ------------- --------------- -------------- --------------- -----------------
We have no embedded derivatives under SFAS 133 as amended and we are
not aware of the potential impact of any other significant matter that may
result from the adoption of these standards.
31
Forward-Looking Statements -
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act Of 1995
Certain information contained in this report includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. This report
contains forward looking statements that are subject to risks and uncertainties,
including, but not limited to: uncertainty as to future financial results; our
substantial leverage; the capital intensive nature of development of our ski
resorts; rapid and substantial growth that could place a significant strain on
our management, employees and operations; uncertainties associated with
obtaining additional financing for future real estate projects and to undertake
future capital improvements; demand for and costs associated with real estate
development; changes in market conditions affecting the interval ownership
industry; regulation of marketing and sales of our quartershare interests;
seasonality of resort revenues; fluctuations in operating results; dependence on
favorable weather conditions; the discretionary nature of consumers' spending
for skiing, destination vacations and resort real estate; regional and national
economic conditions; laws and regulations relating to our land use, development,
environmental compliance and permitting obligations; termination, renewal or
extension terms of our leases and United States Forest Service permits; industry
competition; the adequacy of water supply at our properties; and other risks
detailed from time to time in our filings with the Securities and Exchange
Commission. These risks could cause our actual results for fiscal year 2001 and
beyond to differ materially from those expressed in any forward looking
statements made by, or on behalf of, us. The foregoing list of factors should
not be construed as exhaustive or as any admission regarding the adequacy of
disclosure that we have made prior to the date of this report or the
effectiveness of the Private Securities Litigation Reform Act.
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Our market risk sensitive instruments do not subject us to material
market risk exposures, except for risks related to interest rate fluctuations.
As of July 30, 2000, we had $264.0 million in floating rate long-term debt
outstanding, including current portion. We have entered into a $75 million
notional value interest rate swap agreement in connection with our senior credit
facility, which effectively swaps a portion of the variable rate borrowings to
fixed rate borrowings. Under this agreement, which may be terminated by the
floating rate payer on November 17, 2000, we pay a fixed rate of 5.68% and
receive the 30-day LIBOR rate. As of July 30, 2000, total borrowings under the
senior credit facility were $118 million, leaving $43 million at a variable rate
for which the current interest rate is LIBOR plus 3.5%.
The following sensitivity analysis expresses the potential impact on
annual interest expense resulting from a hypothetical 100 basis point increase
in the interest rate indices that our floating rate debt instruments are based
on:
Average Notional Average
Balance Variable to Exposure Hypothetical Effect on
Variable Rate Debt Outstanding Fixed Interest to Interest Change in Annual
Interest Index in FY 2000 Rate Swaps Rate Risk Rate Index Interest
------------------------------------------------------------------------------------------------------
30-day LIBOR Rate $ 92,838 $ 75,000 $ 17,838 100 bps $ 178
US Prime Rate 151,903 - 151,903 100 bps 1,519
------------ -------------- ------------ ------------ ----------
Total variable rate $ 244,740 $ 75,000 $169,740 100 bps $ 1,697
debt
============ ============== ============ ============ ==========
We believe that the potential effects of a 100-basis point increase in
its floating rate debt instruments are not significant to our earnings and cash
flow.
32
We have also entered into a series of (non-cancelable) interest rate
swap agreements in connection with our Senior Subordinated Notes, which are
intended to defer a portion of the cash interest payments on the Notes into
later years. The following table illustrates the key factors of each of these
agreements:
February 9, 1998 - July 15, 2001 July 16, 2001 - July 15, 2006
----------------------------------------------- ------------------------------------------------
Notional Company Company Notional Company Company
Amount Pays Receives Amount Pays Receives
--------------- -------------- -------------- --------------- -------------- ---------------
Agreement 1 $120,000,000 9.01% 6-month LIBOR $127,500,000 9.01% 6-month LIBOR
Agreement 2 $120,000,000 6-month LIBOR 12.00% $127,500,000 6-month LIBOR 7.40%
As a result of entering into this interest rate swap arrangement, we
have fixed the cash-pay rate on the notes until their maturity in July 2006. The
net effect of the swap agreements will result in a $2.1 million interest saving
over the life of the agreements. This amount is currently being realized against
interest expense on a straight-line basis. This treatment will change with our
adoption of a new accounting pronouncement in the first quarter of fiscal 2001
(see "Recently Issued Accounting Standards" included in Item 7 of this report).
Item 8
Financial Statements and Supplementary Data
Selected Quarterly Operating Results
The following table presents certain unaudited quarterly financial
information for the eight quarters ended July 30, 2000. In the opinion of our
management, this information has been prepared on the same basis as the
Consolidated Financial Statements appearing elsewhere in this Form 10-K and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarters are not necessarily indicative of results
for any future period.
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------
Oct. 25, 1998 Jan. 24, 1999 Apr. 25, 1999 Jul. 25, 1999 Oct. 24, 1999 Jan. 30, 2000 Apr. 30, 2000 Jul. 30, 2000
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
(in thousands)
Net revenues:
Resort $ 20,311 $103,205 $154,317 $ 14,725 $ 20,806 $104,480 $149,942 $16,849
Real estate 4,485 6,300 10,324 3,383 2,549 22,147 73,153 34,214
----------- ----------- ----------- ------------ ----------- ---------- ---------- ----------
Total net revenues
24,796 109,505 164,641 18,108 23,355 126,627 223,095 51,063
----------- ----------- ----------- ------------ ----------- --------- ---------- ----------
Operating expenses:
Resort 28,073 69,251 74,573 26,334 29,015 73,523 74,865 26,499
Real estate 4,040 7,865 8,554 6,349 3,284 22,486 63,450 34,617
Marketing, general and
Administrative 10,826 17,922 14,519 8,167 10,753 16,283 13,063 9,306
Depreciation and
Amortization 2,709 19,010 19,731 2,752 3,202 20,924 19,076 3,826
----------- ----------- ----------- ------------ ----------- --------- ---------- ----------
Total operating
expenses 45,648 114,048 117,377 43,602 46,254 133,216 170,454 74,248
----------- ----------- ----------- ------------ ----------- --------- ---------- ----------
Income(loss) from
Operations $(20,852) $ (4,543) $ 47,264 $(25,494) $(22,899) $(6,589) $ 52,641 $(23,185)
=========== =========== =========== ============ =========== ========= ========== ==========
33
PART III
Pursuant to General Instruction G of Form 10-K, the information
contained in Part III of this report (Items 10, 11, 12 and 13) is incorporated
by reference from our Definitive Proxy Statement, which is expected to be filed
with the Securities and Exchange Commission on or before November 15, 2000.
PART IV
Item 14
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report: Page
1. Index to financial statements, financial statement schedules, and
supplementary data, filed as part of this report:
Report of Independent Accountants...................................................F-1
Consolidated Balance Sheet..........................................................F-2
Consolidated Statement of Operations................................................F-3
Consolidated Statement of Changes in Shareholders' Equity ..........................F-4
Consolidated Statement of Cash Flows................................................F-5
Notes to Consolidated Financial Statements..........................................F-7
2. Financial Statement Schedules: All other schedules are omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits filed as part of this report:
Exhibit
No. Description
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Form 10K for the report date of October
22, 1999).
3.2 By-laws of the Company
3.3 Articles of Merger ASC East, Inc. and ASC West, Inc. into American
Skiing Company dated October 5, 1999 with Plan of Merger (incorporated
by reference to Exhibit 4.3 to the Company's Form 8K for the report
date of October 6, 1999).
3.4 Articles of Merger American Skiing Company into ASC Delaware, Inc.
dated October 12, 1999 with Agreement and Plan of Merger (incorporated
by reference to Exhibit 4.3 to the Company's Form 8K for the report
date of October 6, 1999).
4.1. Specimen Certificate for shares of Common Stock, $.01 par value, of the
Company (incorporated by reference to Exhibit 4.1 to the Company's Form
10K for the report date of October 22, 1999).
34
4.2 Form of Indenture relating to 10 1/2% Repriced Convertible Subordinated
Debentures (incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.1 Preferred Stock Subscription Agreement dated July 9, 1999 between the
Registrant and the Purchasers listed on Annex A thereto, including a
form of Stockholders' Agreement, Voting Agreement and Certificate of
Designation relating to the preferred stock to be issued (incorporated
by reference to Exhibit 2.1 to the Company's Form 8K for the report
date of July 9, 1999).
10.2 Stockholders' Agreement dated as of August 6, 1999 among Oak Hill
Capital Partners, L.P., and the other entities identified in Annex A
attached thereto, Leslie B. Otten and the Registrant (incorporated by
reference to Exhibit 10.2 to the Company's Form 10K for the report date
of October 22, 1999).
10.3 Stock Purchase Agreement dated as of August 1, 1997, among Kamori
International Corporation, ASC West and the Company (incorporated by
reference to Exhibit 2.1 of the Company's Registration Statement on
Form S-1, Registration No. 333-33483).
10.4 Purchase Agreement dated as of April 13, 1994, among Mt. Attitash Lift
Corporation, certain of its shareholders and L.B.O. Holding, Inc.
(incorporated by reference to Exhibit 10.35 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.5 Stock Purchase Agreement dated August 17, 1994, between Sugarloaf
Mountain Corporation and S-K-I Ltd. (incorporated by reference to
Exhibit 10.36 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.6 Acquisition Agreement dated May 16, 1995, among Sugarbush Resort
Holdings, Inc., Sugarbush Resort Corporation, Snowridge, Inc., Sugar
Ridge, Inc., Sugarbush Inn Corporation and Bev Ridge, Inc.,
(incorporated by reference to Exhibit 10.38 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.7 Purchase and Sale Agreement dated as of August 30, 1996, among
Waterville Valley Ski Area, Ltd., Cranmore, Inc., ASC East and Booth
Creek Ski Acquisition Corp. (incorporated by reference to Exhibit 10.61
to ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.8 Purchase and Sale Agreement dated as of October 16, 1996, among
Sherburne Pass Mountain Properties, LLC, Pico Mountain Sports Center,
LLC, Pico Mountain Operating Company, LLC, Harold L. and Edith Herbert,
and Pico Ski Area Management Company (incorporated by reference to
Exhibit 10.62 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.9 Purchase and Sale Agreement dated July 3, 1997, between Wolf Mountain
Resorts, L.C., and ASC Utah (incorporated by reference to Exhibit 10.74
to the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.10 Letter of Agreement dated August 27, 1996, among SKI Ltd and certain
shareholders of Sugarloaf Mountain Corporation (incorporated by
reference to Exhibit 10.63 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.11 Amended, Restated and Consolidated Credit Agreement dated as October
12, 1999, among the Company, certain Subsidiaries as Borrowers, the
Lenders party thereto, and Fleet National Bank as Agent for the Lenders
(incorporated by reference to Exhibit 10.11 to the Company's Form 10K
for the report date of October 22, 1999).
35
10.12 Indenture dated as of June 28, 1996 among ASC East, certain of its
subsidiaries and United States Trust Company of New York, relating to
Series A and Series B 12% Senior Subordinated Notes Due 2006
(incorporated by reference to Exhibit 4.1 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.13 First Supplemental Indenture dated as of November 12, 1997 among ASC
East, Inc., its subsidiaries party thereto, and United States Trust
Company of New York as Trustee (incorporated by reference to Exhibit
10.3 to the Company's quarterly report on Form 10-Q for the quarter
ended October 25, 1998).
10.14 Second Supplemental Indenture dated as of September 4, 1998 among ASC
East, Inc., its subsidiaries party thereto, and United States Trust
Company of New York as Trustee (incorporated by reference to Exhibit
4.3 to the Company's Form 8K for the Report date of October 6, 1999).
10.15 Third Supplemental Indenture dated as of August 6, 1999 among ASC East,
Inc., its subsidiaries party thereto, and United States Trust Company
of New York as Trustee (incorporated by reference to Exhibit 4.3 to the
Company's Form 8K for the report date of October 6, 1999).
10.16 Fourth Supplemental Indenture dated as of October 6, 1999 among
Supplemental Indenture dated as of November 12, 1997 among ASC East,
Inc., its subsidiaries party thereto, and United States Trust Company
of New York as Trustee (incorporated by reference to Exhibit 4.3 to the
Company's Form 8K for the report date of October 6, 1999).
10.17 Loan and Security Agreement among Grand Summit Resort Properties, Inc.,
Textron Financial Corporation and certain lenders dated as of September
1, 1998 (incorporated by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended October 25, 1998).
10.18 First Amendment Agreement Re: Loan and Security Agreement Among Grand
Summit Resort Properties, Inc., as Borrower and Textron Financial
Corporation, as Administrative Agent dated as of April 5, 1999
(incorporated by reference to Exhibit 10.1 to the Company's quarterly
report on Form 10-Q for the quarter ended April 25, 1999)
10.19 Accession, Loan Sale and Second Amendment Agreement Re: Loan and
Security Agreement among Grand Summit Resort Properties, Inc. and
Textron Financial Corp. and The Lenders Listed therein dated June 24,
1999.
10.20 ISDA Master Agreement between BankBoston, N.A. and the Company dated as
of May 12, 1998 (incorporated by reference to Exhibit 10.38 to the
Company's annual report on Form 10-K for the year ended July 26, 1998).
10.21 Credit Support Annex to ISDA Master Agreement between BankBoston, N.A.
and the Company dated as of May 12, 1998 (incorporated by reference to
Exhibit 10.39 to the Company's annual report on Form 10-K for the year
ended July 26, 1998).
10.22 Form of Master Lease Agreement dated as of various dates among
BancBoston Leasing, Inc. as Lessor and Heavenly Valley Limited
Partnership, Killington, Ltd., Mount Snow, Ltd., ASC Leasing, Inc.,
Steamboat Ski & Resort Corporation, and Sunday River Skiway Corp. as
Lessees (incorporated by reference to Exhibit 10.41 to the Company's
annual report on Form 10-K for the year ended July 26, 1998).
10.23 Unlimited Guaranty by the Company in favor of BancBoston Leasing, Inc.,
dated as of July 20, 1998 (incorporated by reference to Exhibit 10.40
to the Company's annual report on Form 10-K for the year ended July 26,
1998).
10.24 $2,750,000 Subordinated Promissory Note dated November, 1996 by Booth
Creek Ski Acquisition Corp., Waterville Valley Ski Resort, Inc. and
Mount Cranmore Ski Resort, Inc., to ASC East (incorporated by reference
to Exhibit 10.72 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
36
10.25 Assignment dated May 30, 1997, between Wolf Mountain Resorts, L.C. and
ASC Utah (incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 Registration No. 333-33483).
10.26 Indenture dated October 24, 1990, between Killington Ltd. and The
Howard Bank, as trustee (representative of indentures with respect to
similar indebtedness aggregating approximately $2,995,000 in original
principal amount and maturing at various times from 2015 to 2016)
(incorporated by reference to Exhibit 10.19 to ASC East's Registration
Statement on Form S-4, Registration No. 333-9763).
10.27 Form of Subordinated Debenture Due 2002 from L.B.O. Holding, Inc. to
former shareholders of Mt. Attitash Lift Corporation (incorporated by
reference to Exhibit 10.34 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.28 Lease dated October 15, 1980, among H. Donald Penley, Joseph Penley,
Albert Penley and Sunday River Skiway Corporation (incorporated by
reference to Exhibit 10.40 to ASC East's Registration Statement on Form
S-4, Registration No. 333-9763).
10.29 Lease/Option dated July 19, 1984, between John Blake and L.B.O.
Holding, Inc. (incorporated by reference to Exhibit 10.41 to ASC East's
Registration Statement on Form S-4, Registration No. 333-9763).
10.30 Lease Agreement dated as of July 1, 1993, between Snowridge, Inc. and
Mountain Water Company (incorporated by reference to Exhibit 10.42 to
ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.31 Lease Agreement dated as of March 1, 1988, between Snowridge, Inc. and
Mountain Wastewater Treatment, Inc., (incorporated by reference to
Exhibit 10.43 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.32 Lease dated November 10, 1960, between the State of Vermont and
Sherburne Corporation (predecessor to Killington, Ltd.) (incorporated
by reference to Exhibit 10.44 to ASC East's Registration Statement on
Form S-4, Registration No. 333-9763).
10.33 Lease Agreement dated as of June 21, 1994, between the Town of
Wilmington, Vermont and Mount Snow, Ltd. (incorporated by reference to
Exhibit 10.46 to ASC East's Registration Statement on Form S-4,
Registration No. 333-9763).
10.34 Lease Agreement dated April 24, 1995, between Sargent, Inc. and Mount
Snow, Ltd. (incorporated by reference to Exhibit 10.47 to ASC East's
Registration Statement on Form S-4, Registration No. 333-9763).
10.35 Agreement between Sugarloaf Mountain Corporation and the Inhabitants of
the Town of Carrabassett Valley, Maine, concerning the Sugarloaf Golf
Course dated June 3, 1987 (incorporated by reference to Exhibit 10.52
to ASC East's Registration Statement on Form S-4, Registration No.
333-9763).
10.36 Ground Lease Agreement dated July 3, 1997, between ASC Utah and Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.64 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.37 Ground Lease Guaranty dated July 3, 1997, from the Company to Wolf
Mountain Resorts, L.C. (incorporated by reference to Exhibit 10.65 to
the Company's Registration Statement on Form S-1, Registration No.
333-33483).
10.38 Stock Option Plan (incorporated by reference to Exhibit 10.89 to the
Company's Registration Statement on Form S-1, Registration No.
333-33483).
37
10.39 Form of Non-Qualified Stock Option Agreement (Five-Year Vesting
Schedule) (incorporated by reference to Exhibit 10.90 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.40 Form of Non-Qualified Stock Option Agreement (Fully-Vested)
(incorporated by reference to Exhibit 10.91 to the Company's
Registration Statement on Form S-1, Registration No. 333-33483).
10.41 Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.92 to the Company's Registration Statement on Form S-1,
Registration No. 333-33483).
10.42 Registration Rights Agreement dated November 10, 1997 by and between
American Skiing Company and ING (U.S.) Capital Corporation
(incorporated by reference to Exhibit 3 to the Company's quarterly
report on Form 10-Q for the quarter ended October 26, 1997).
10.43 Employment Agreement between the Company and Leslie B. Otten dated
August 1, 2000.
10.44 Terms of Employment between the Registrant and Christopher E. Howard
dated October, 2000
10.45 Terms of Employment between the Registrant and Mark J. Miller dated
October 7, 1999
10.46 Employment Agreement between the Registrant and William J. Fair dated
May 17, 2000
10.47 Terms of Employment between the Registrant and Hernan Martinez dated
April 28, 2000
10.48 Master Disposition and Development Agreement by and between South Tahoe
Redevelopment Agency, The City of South Lake Tahoe and American Skiing
Company Resort Properties, Inc., Heavenly Resort Properties, LLC,
Heavenly Valley Limited Partnership, Trans-Sierra Investments, Inc. and
Cecil's Market, Inc. dated as of October 29, 1999. (Incorporated by
reference from the Registrant's Form 10-Q for the quarter ended October
24, 1999)
10.49 The Canyons Resort Village Management Agreement dated as of November
15, 1999. (Incorporated by reference from the Registrant's Form 10-Q
for the quarter ended October 24, 1999)
10.50 Amended and Restated Development Agreement for The Canyons Specially
Planned Area Snyderville Basin, Summit County, Utah dated as of
November 15, 1999 (Incorporated by reference from the Registrant's Form
10-Q for the quarter ended October 24, 1999)
10.51 Securities Purchase Agreement dated August 1, 2000 among the
Registrant, American Skiing Company Resort Properties, Inc. and Oak
Hill Capital Partners, L.P. (Incorporated by reference from the
Registrant's Form 8-K for the report date July 31, 1999)
10.52 Second Amended and Restated Credit Agreement dated July 31, 2000 among
American Skiing Company Resort Properties, Inc., Fleet National Bank,
as Agent, and the other Lenders party thereto. (Incorporated by
reference from the Registrant's Form 8-K for the report date July 31,
1999)
10.53 Amendment to Stockholders' Agreement dated August 1, 2000 among the
Registrant, Oak Hill Capital Partners, L.P. and Leslie B. Otten
(Incorporated by reference from the Registrant's Form 8-K for the
report date July 31, 1999).
10.54 First Amendment to Amended Restated and Consolidated Credit Agreement
among Registrant, Fleet National Bank, as Agent, and certain other
lenders party thereto, dated March 6, 2000 (Incorporated by reference
from the Registrant's Form 10-Q for the report date March 14, 2000)
38
10.55 First Amendment to the Master Disposition and Development Agreement
dated April 18, 2000 among the South Tahoe Redevelopment Agency, the
City of South Lake Tahoe and the ASCRP, Inc., Heavenly Resort
Properties, LLC, Heavenly Valley L.P., Trans-Sierra Investments, and
Cecil's Market, Inc.
10.56 Second Amendment to the Master Disposition and Development Agreement,
dated September 3, 2000, by and among the South Tahoe Redevelopment
Agency, the City of South Lake Tahoe, American Skiing Company Resort
Properties, Inc., Heavenly Valley Resort Properties LLC, Heavenly
Valley, Limited Partnership, Trans-Sierra Investments and Cecil's
Market, Inc.
10.57 Statement of Intention and Special Additional Financing Agreement dated
July 25, 2000 between Grand Summit Resort Properties, Inc. and Textron
Financial Corporation.
22.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of Arthur Anderson LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
(b) Reports filed on Form 8-K.
None
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this instrument to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Bethel, State of
Maine, on this 26th day of October, 2000.
American Skiing Company
By: /s/ Leslie B. Otten
--------------------------------
Leslie B. Otten
Director, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Christopher E. Howard
--------------------------------
Christopher E. Howard
Director, Executive Vice President
By: /s/ Mark J.Miller
--------------------------------
Mark J. Miller
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Christopher D. Livak
--------------------------------
Christopher D. Livak
Vice President-Accounting
(Principal Accounting Officer)
By: /s/ Paul Whetsell
--------------------------------
Paul Whetsell, Director
By: /s/ Gordon M. Gillies
--------------------------------
Gordon M. Gillies, Director
By: /s/
--------------------------------
.. Daniel Duquette, Director
By: /s/ David Hawkes
--------------------------------
David Hawkes, Director
40
By: /s/ Bradford E. Bernstein
--------------------------------
Bradford E. Bernstein, Director
By: /s/ Steven Gruber
--------------------------------
Steven Gruber, Director
By: /s/ J. Taylor Crandall
--------------------------------
J. Taylor Crandall, Director
By: /s/ William Janes
--------------------------------
William Janes, Director
By: /s/
--------------------------------
Paul Wachter, Director
41
Report of Independent Public Accountants
To the Board of Directors and
Shareholders of American Skiing Company:
We have audited the accompanying consolidated balance sheets of
American Skiing Company and its subsidiaries as of July 30, 2000 and July 25,
1999, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of American Skiing Company and its
subsidiaries as of July 26, 1998, were audited by other auditors whose report
dated October 14, 1998, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Skiing Company and
subsidiaries as of July 30, 2000 and July 25, 1999 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
//Arthur Andersen LLP//
Boston, MA
October 3, 2000
F-1
American Skiing Company
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
July 25, 1999 July 30, 2000
Assets
Current assets
Cash and cash equivalents $ 9,003 $ 10,085
Restricted cash 6,628 7,424
Accounts receivable 6,474 8,176
Inventory 10,837 10,200
Prepaid expenses 5,309 8,092
Deferred income taxes 4,273 1,566
--------------- ----------------
Total current assets 42,524 45,543
Property and equipment, net 529,154 534,078
Real estate developed for sale 207,745 222,660
Goodwill 76,672 75,003
Intangible assets 22,987 22,055
Deferred financing costs 9,279 10,844
Other assets 19,141 16,595
--------------- ----------------
Total assets $ 907,502 $ 926,778
=============== ================
Liabilities, Mandatorily Redeemable Preferred Stock and
Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 60,882 $ 58,508
Current portion of subordinated notes and debentures 673 525
Accounts payable and other current liabilities 77,951 70,957
Deposits and deferred revenue 20,850 15,930
--------------- ----------------
Total current liabilities 160,356 145,920
Long-term debt, excluding current portion 313,844 249,841
Subordinated notes and debentures, excluding current portion 127,062 126,810
Other long-term liabilities 15,687 17,494
Deferred income taxes 10,062 200
--------------- ----------------
Total liabilities 627,011 540,265
Mandatorily Redeemable 10 1/2% Series A Preferred Stock
par value $1,000 per share; 40,000 shares authorized;
36,626 issued and outstanding; including cumulative
dividends in arrears (redemption value of $43,836 at July
25, 1999 and $48,706 at July 30, 2000) 43,836 48,706
Mandatorily Redeemable 8 1/2% Series B Preferred Stock
par value $1,000 per share; 150,000 shares authorized,
issued and outstanding; including cumulative dividends in
arrears (redemption value of $162,865 at July 30, 2000) - 152,310
Shareholders' Equity
Common stock, Class A, par value $.01 per share;
15,000,000 shares authorized; 14,760,530 issued and
outstanding at July 25, 1999 and July 30, 2000, respectively 148 148
Common stock, par value of $.01 per share; 100,000,000
shares authorized; 15,526,243 and 15,708,633 issued and
outstanding at July 25, 1999 and July 30, 2000, respectively 155 157
Additional paid-in capital 268,663 269,955
Accumulated deficit (32,311) (84,763)
--------------- ----------------
Total shareholders' equity 236,655 185,497
--------------- ----------------
Total liabilities, mandatorily redeemable
preferred stock and shareholders' equity $ 907,502 $ 926,778
=============== ================
See accompanying notes to consolidated financial statements
F-2
American Skiing Company
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended
----------------------------------------------
July 26, 1998 July 25, 1999 July 30, 2000
------------ ------------- -------------
Net revenues:
Resort $ 277,574 $ 292,558 $ 292,077
Real estate 60,992 24,492 132,063
------------ ------------- -------------
Total net revenues 338,566 317,050 424,140
------------ ------------- -------------
Operating expenses:
Resort 171,246 198,231 203,902
Real estate 43,554 26,808 123,837
Marketing, general and administrative 40,058 51,434 49,405
Stock compensation charge 14,254 - -
Depreciation and amortization 37,965 44,202 47,028
------------ ------------- -------------
Total operating expenses 307,077 320,675 424,172
------------ ------------- -------------
Income (loss) from operations 31,489 (3,625) (32)
Interest expense 34,575 39,382 35,906
------------ ------------- -------------
Loss before benefit from income taxes
and minority interest in loss of subsidiary (3,086) (43,007) (35,938)
Benefit from income taxes (774) (15,057) (5,805)
Minority interest in loss of subsidiary (445) - -
------------ ------------- -------------
Loss before extraordinary item and cumulative
effect of accounting change (1,867) (27,950) (30,133)
Extraordinary loss, (net of applicable income
taxes $3,248, $0 and $396, respectively)
(See Notes 6 & 7) 5,081 - 621
Cumulative effect of accounting change (net
of applicable taxes of $449) (See Note 2) - - 704
------------ ------------- -------------
Loss before preferred stock dividends (6,948) (27,950) (31,458)
Accretion of discount and dividends accrued on
mandatorily redeemable preferred stock 5,346 4,372 20,994
------------ ------------- -------------
Net loss available to common shareholders $ (12,294) $ (32,322) $ (52,452)
============ ============= =============
Basic and diluted loss per share:
Loss before extraordinary items and
cumulative effect of accounting change $ (0.28) $ (1.07) $ (1.69)
Extraordinary loss, net of taxes (0.20) - (0.02)
Cumulative effect of accounting change, net
of taxes - - (0.02)
------------ ------------- -------------
Net loss available to common shareholders $ (0.48) $ (1.07) $ (1.73)
============ ============= =============
Weighted average shares outstanding 25,809 30,286 30,393
============ ============= =============
See accompanying notes to consolidated financial statements
F-3
American Skiing Company
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share amounts)
Class A Retained
Common stock Common stock paid-in (Accumulated
------------------------- ------------------------ Additional earnings/
paid-in (Accumulated
Shares Amount Shares Amount capital deficit) Total
------------ ----------- ------------- ---------- ------------- ------------- ------------
Balance at July 27, 1997 - $ - 14,760,530 $ 10 $ 2,786 $ 12,305 $ 15,101
Shares issued pursuant to
initial public offering 14,750,000 148 - - 244,181 - 244,329
Issuance of Common Stock
options - - - - 8,538 - 8,538
Conversion of Class A Common
Stock - - - 138 (138) - -
Purchase of minority interest
in subsidiary 615,022 6 - - 8,648 - 8,654
Original issue discount on
Series A 14% Exchangeable
Preferred Stock and 14%
Senior Exchangeable Notes - - - - 1,841 - 1,841
Shares issued to purchase
subsidiary 140,000 1 - - 1,994 - 1,995
Exercise of Common Stock
options 20,000 - - - 40 - 40
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (5,346) (5,346)
Net loss - - - - - (6,948) (6,948)
------------ ----------- ------------- ---------- ------------- ------------- ------------
Balance at July 26, 1998 15,525,022 155 14,760,530 148 267,890 11 268,204
============ =========== ============= ========== ============= ============= ============
Exercise of Common Stock
options 1,221 - - - - - -
Issuance of Common Stock
options - - - - 773 - 773
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (4,372) (4,372)
Net loss - - - - - (27,950) (27,950)
------------ ----------- ------------- ---------- ------------- ------------- ------------
Balance at July 25, 1999 15,526,243 155 14,760,530 148 268,663 (32,311) 236,655
============ =========== ============= ========== ============= ============= ============
Exercise of Common Stock
options 182,390 2 - - 363 - 365
Issuance of Common Stock
options - - - - 929 - 929
Accretion of discount and
issuance costs and
dividends accrued on
mandatorily redeemable
preferred stock - - - - - (20,994) (20,994)
Net loss - - - - - (31,458) (31,458)
------------ ----------- ------------- ---------- ------------- ------------- ------------
Balance at July 30, 2000 15,708,633 $ 157 14,760,530 $ 148 $ 269,955 $ (84,763) $ 185,497
============ =========== ============= ========== ============= ============= ============
See accompanying notes to consolidated financial statements
F-4
American Skiing Company
Consolidated Statements of Cash Flows
(in thousands)
Year Ended
-------------------------------------------------
July 26, July 25, July 30,
1998 1999 2000
------------- ------------- --------------
Cash flows from operating activities
Net loss $ (6,948) $(27,950) $ (31,458)
Adjustments to reconcile net loss to net cash provided by
(used in)
operating activities:
Minority interest in loss of subsidiary (445) - -
Depreciation and amortization 37,966 44,202 47,028
Discount on convertible debt 3,159 333 368
Deferred income taxes (3,910) (15,517) (7,155)
Stock compensation charge 14,254 773 929
Extraordinary loss 8,329 - 1,017
Cumulative effect of accounting change - - 1,153
(Gain) loss from sale of assets (773) 2,426 (1,449)
Decrease (increase) in assets:
Restricted cash (3,448) (368) (796)
Accounts receivable (3,608) 1,090 (1,702)
Inventory (2,088) 2,516 637
Prepaid expenses (1,644) (1,600) (3,098)
Real estate developed for sale (25,950) (125,331) (43,406)
Other assets (10,319) (5,000) 2,318
Increase (decrease) in liabilities:
Accounts payable and other current liabilities 2,413 33,579 (6,994)
Deposits and deferred revenue (866) 10,635 (4,920)
Other long-term liabilities 2,586 2,977 3,637
------------- ------------- --------------
Net cash provided by (used in) operating activities 8,708 (77,235) (43,891)
------------- ------------- --------------
Cash flows from investing activities
Payments for purchases of businesses, net of cash
acquired (291,773) - (345)
Capital expenditures (106,917) (46,007) (27,229)
Long-term investments 1,110 1,222 -
Proceeds from sale of assets 7,227 7,198 10,175
Proceeds from sale of business 5,702 - -
Other, net 348 101 (4)
------------- ------------- --------------
Net cash used in investing activities (384,303) (37,486) (17,403)
------------- ------------- --------------
Cash flows from financing activities
Net borrowings (repayment) under Senior Credit
Facility 194,227 7,308 (82,448)
Repayment of previous credit facility (59,623) - -
Proceeds from long-term debt 1,568 20,145 139
Proceeds from real estate debt 71,462 115,909 139,026
Repayment of long-term debt (15,793) (10,466) (11,105)
Repayment of real estate debt (45,551) (23,088) (113,353)
Deferred financing costs (4,355) (1,438) (4,604)
Net proceeds from initial public offering 244,329 - -
Repayment of subordinated notes (23,223) - -
Net proceeds from issuance of mandatorily redeemable
securities 17,500 - 136,186
Payments on demand note, Mr. Otten (87) (16) (1,830)
Proceeds from exercise of stock options 40 - 365
Cash payment in connection with early retirement of
debt (5,087) - -
------------- ------------- --------------
Net cash provided by financing activities 375,407 108,354 62,376
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (188) (6,367) 1,082
Cash and cash equivalents, beginning of period 15,558 15,370 9,003
------------- ------------- --------------
Cash and cash equivalents, end of period $ 15,370 $ 9,003 $ 10,085
============= ============= ==============
See accompanying notes to consolidated financial statements
F-5
American Skiing Company
Consolidated Statements of Cash Flows (continued)
(in thousands)
Year Ended
-------------- ------------- --------------
July 26, July 25, July 30,
1998 1999 2000
-------------- ------------- --------------
Supplemental disclosures of cash flow information
Cash paid for interest $ 36,583 $ 41,295 $ 48,754
Cash paid (refunded) for income taxes 43 (10) (60)
Supplemental schedule of noncash investing
and financing activities
Property acquired under capital leases $ 9,832 $ 7,425 $ -
Non-cash transfer of real estate developed for sale to
property and equipment - - 27,758
Notes payable issued for purchase of assets 14,232 1,395 -
Liabilities assumed associated with purchased companies 17,205 - -
Deferred tax asset associated with purchased companies 1,650 - -
Purchase price adjustments related to deferred taxes 1,226 - -
Purchase of minority interest 375 - -
Accretion of discount and issuance costs and dividends
accrued on mandatorily redeemable preferred stock 5,346 4,372 20,994
Exchange of mandatorily redeemable securities for 10 1/2%
Repriced Convertible Series A Preferred Stock 36,626 - -
Intangible asset assumed to purchase subsidiary 1,883 - -
See accompanying notes to consolidated financial statements
F-6
American Skiing Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation
American Skiing Company ("ASC") is organized as a holding company and
operates through various subsidiaries. ASC and its subsidiaries (collectively,
the "Company") operate in two business segments, ski resorts and real estate
development. ASC owns and operates the following ski resorts: Sugarloaf/USA and
Sunday River in Maine, Attitash Bear Peak in New Hampshire, Killington, Mount
Snow/Haystack and Sugarbush in Vermont, The Canyons in Utah, Steamboat Ski &
Resort Corporation ("Steamboat") in Colorado, and Heavenly Valley Ski & Resort
Corporation ("Heavenly") in California/Nevada. The Company performs its real
estate development through its wholly-owned subsidiary, American Skiing Company
Resort Properties, Inc. ("Resort Properties"), and Resort Properties'
subsidiaries, including Grand Summit Resort Properties, Inc. ("GSRP") and
Canyons Resort Properties, Inc. The Company owns and operates resort facilities,
real estate development companies, golf courses, ski and golf schools, retail
shops and other related companies.
ASC was formed on June 17, 1997, when Leslie B. Otten ("Mr. Otten")
exchanged his 96% ownership interest in ASC East, Inc. ("ASC East") for 100% of
the Common Stock of ASC. In conjunction with the formation of ASC, the Company
recorded the 4% minority interest in ASC East. On January 23, 1998, the Company
and the holders of the minority interest in ASC East entered into an agreement
whereby the Company issued 615,022 shares of Common Stock in exchange for all
shares of ASC East common stock held by the minority shareholders.
On October 10, 1997, the Company approved an increase in authorized
shares of Common Stock, a new issue of Class A Common Stock, the conversion of
100% of the outstanding Common Stock to Class A Common Stock and a 14.76 for 1
stock split of Class A Common Stock. The stock split was given retroactive
effect in the consolidated financial statements as of July 27, 1997.
The Company consummated an initial public offering (the "Offering") on
November 6, 1997. The Company sold 14.75 million shares of common stock in the
Offering at a price of $18.00 per share. Net proceeds to the Company after
expenses of the Offering totaled $244.3 million. Of the 14.75 million shares
sold in the Offering, 833,333 shares were purchased by Mr. Otten.
The Company acquired Heavenly and Steamboat on November 12, 1997 for
approximately $300.5 million, including closing costs and adjustments. The
acquisition was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements reflect the results of operations
of Steamboat and Heavenly subsequent to November 12, 1997.
On August 9, 1999, the Company sold 150,000 shares of its 8.5% Series B
Convertible Participating Preferred Stock ("Series B Preferred Stock") to Oak
Hill Capital Partners, L.P. and certain related entities ("Oak Hill") for $150
million (collectively, the "Oak Hill Transaction"). As part of the Series B
Agreement, the Company also agreed to move its state of incorporation from Maine
to Delaware by merging the Company (ASC East, ASC West and ASC Utah) into a
wholly owned Delaware subsidiary and amending its articles of incorporation (the
"Delaware Reincorporation"). Under the Delaware Reincorporation, which took
place on October 12, 1999, the Company was merged into a newly formed Delaware
subsidiary (ASC Delaware) that survived the merger and that has a capital
structure identical to the Company's prior to the merger.
2. Summary of Significant Accounting Principles
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of American Skiing Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Fiscal Year
The Company's fiscal year is a fifty-two week or fifty-three week
period ending on the last Sunday of July. The periods for 1998 and 1999
consisted of fifty-two weeks. The period for 2000 consisted of fifty-three
weeks.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a
remaining maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents deposits that relate to pre-sales of real
estate developed for sale held in escrow and guest advance deposits for lodging
reservations. The cash will be available to the Company when the real estate
units are sold or the lodging services are provided.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist primarily of retail goods, food and beverage products and
mountain operating supplies.
Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
assets' estimated useful lives which range from 9 to 40 years for buildings, 3
to 12 years for machinery and equipment, 10 to 50 years for leasehold
improvements and 5 to 30 years for lifts, lift lines and trails. Assets under
capital leases are amortized over the shorter of their useful lives or their
respective lease lives. Due to the seasonality of the Company's business, the
Company records a full year of depreciation relating to its operating assets
over the second and third quarters of its fiscal year.
Real Estate Developed for Sale
The Company capitalizes as real estate developed for sale the original
acquisition cost of land, direct construction and development costs, property
taxes, interest incurred on costs related to real estate under development, and
other related costs (engineering, surveying, landscaping, etc.) until the
property reaches its intended use. The cost of sales for individual parcels of
real estate or quartershare units within a project is determined using the
relative sales value method. Selling costs are charged to expense in the period
in which the related revenue is recognized. Interest capitalized on real estate
development projects during fiscal years 1998, 1999, and 2000 totaled $2.4
million, $6.4 million, and $15.3 respectively.
Goodwill and Other Intangible Assets
Intangible assets consist of goodwill and various other intangibles.
The Company has classified as goodwill the excess of fair value of the net
assets (including tax attributes) of companies acquired in purchase transactions
and also the purchase of a minority interest. Intangible assets are recorded net
of accumulated amortization in the accompanying consolidated balance sheet and
are amortized using the straight-line method over their estimated useful lives
as follows:
Goodwill up to 40 years
Tradenames 40 years
Other intangibles 16 - 20 years
Deferred Financing Costs
Costs incurred in connection with the issuance of debt are included in
deferred financing costs, net of accumulated amortization. Amortization is
calculated using the straight-line method over the respective original lives of
the applicable issues. Amortization calculated using the straight-line method is
not materially different from amortization that would have resulted from using
the effective interest method.
Long-Lived Assets
The Company evaluates potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes procedures for review of recoverability and measurement of
impairment if necessary, of long-lived assets, goodwill and certain identifiable
intangibles held and used by an entity. SFAS 121 requires that those assets be
reviewed for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of their carrying amount or fair value less estimated
selling costs. As of July 30, 2000, management believes that there has not been
any impairment of the Company's long-lived assets, real estate developed for
sale, goodwill or other identifiable intangibles.
Revenue Recognition
Resort revenues include sales of lift tickets, tuition from ski
schools, golf course fees and other recreational activities, sales from
restaurants, bars and retail shops, and real estate rentals. Daily lift ticket
revenue is recognized on the day of purchase. Lift ticket season pass revenue is
recognized in equal amounts over the ski season, which is the Company's second
and third quarters of its fiscal year. The Company's remaining revenue is
generally recognized as the services are performed. Real estate revenues are
recognized under the full accrual method when title has been transferred.
Amounts received from pre-sales of real estate are recorded as deposits and
deferred revenue in the accompanying consolidated balance sheet until the
revenue is recognized.
Interest
Interest is expensed as incurred except when it is capitalized in
connection with major capital additions and real estate developed for sale. The
amounts of interest capitalized are determined by applying current interest
rates to the funds required to finance the construction. During 1998, 1999 and
2000, the Company incurred total interest cost of $37.5 million, $46.4 million
and $51.5 million, respectively, of which $2.9 million, $7.1 million, and $15.6
million, respectively, have been capitalized to property and equipment and real
estate developed for sale.
Employee Benefits
As of July 27, 1997, the Company maintained a number of profit sharing
and savings plans pursuant to Section 401(k) of the Internal Revenue Code. In
August 1997, the Company established the ASC 401(k) Retirement Plan pursuant to
Section 401(k) of the Internal Revenue Code (the "Plan") and subsequently merged
the previously existing plans into the Plan. The Plan allows employees to defer
up to 15% of their income and provides for the matching of participant
contributions at the Company's discretion. The Company made no contributions to
the profit sharing plans for 1998, 1999 and 2000. Contributions to the savings
plans for 1998, 1999 and 2000 totaled $225,000, $395,000 and $439,000, excluding
contributions to the former Steamboat and Heavenly plans. On January 1, 1998,
the Heavenly profit sharing plan was merged into the Plan and the Steamboat
401(k) plan was merged into the Plan on October 1, 1998. Contributions to the
Steamboat and Heavenly plans for Fiscal 1998 were $220,000 and $43,000,
respectively. Contributions to the Steamboat plan for Fiscal 1999 were $7,000.
Advertising Costs
Advertising costs are expensed the first time the advertising takes
place. At July 25, 1999 and July 30, 2000, advertising costs of $244,000 and
$220,000, respectively, were recorded in prepaid expenses in the accompanying
consolidated balance sheet. Advertising expense for the years ended July 26,
1998, July 25, 1999 and July 30, 2000 was $7.6 million, $9.5 million and $7.3
million, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts and disclosures reported in the accompanying
consolidated financial statements.
Actual results could differ from those estimates.
Seasonality
The occurrence of adverse weather conditions during key periods of the
ski season could adversely affect the Company's operating results. In addition,
the Company's revenues are highly seasonal in nature, with the majority of its
revenues historically being generated in the second and third fiscal quarters,
of which a significant portion is produced in two key weeks - the Christmas and
Presidents' Day vacation weeks.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128") requires presentation of "basic" earnings per share (which
excludes dilution as a result of unexercised stock options and the Mandatorily
Redeemable Preferred Stock) and "diluted" earnings per share. The Company
adopted SFAS 128 in fiscal 1998 and all prior periods presented were
retroactively restated. For the years ended July 26, 1998, July 25, 1999 and
July 30, 2000, basic and diluted loss per share are as follows:
Year Ended
------------------------------------------
------------- ------------ -------------
July 26, July 25, July 30,
1998 1999 2000
------------- ------------ -------------
Loss (in thousands, except per share amounts)
Loss before preferred stock dividends and
accretion, extraordinary items and cumulative
effect of accounting change $ (1,867) $ (27,950) $ (30,133)
Accretion of discount and dividends accrued on
mandatorily redeemable preferred stock 5,346 4,372 20,994
------------- ------------ -------------
Loss before extraordinary items and cumulative effect
of accounting change (7,213) (32,322) (51,127)
Extraordinary loss, net of taxes 5,081 - 621
Cumulative effect of accounting change, net of taxes - - 704
------------- ------------ -------------
Net loss available to common shareholders $ (12,294) $ (32,322) $ (52,452)
============= ============ =============
Shares
Total weighted average shares outstanding (basic and
diluted) 25,809 30,286 30,393
============= ============ =============
Basic and diluted loss per common share
Loss before extraordinary items $ (0.28) $ (1.07) $ (1.69)
Extraordinary loss, net of taxes (0.20) - (0.02)
Cumulative effect of accounting change, net of taxes - - (0.02)
------------- ------------ -------------
Net loss available to common shareholders $ (0.48) $ (1.07) $ (1.73)
============= ============ =============
The Company has outstanding 36,626 and 186,626 shares of convertible
preferred stock (represented by two separate classes) at July 26, 1998 and July
25, 1999, and July 30, 2000, respectively. These shares are convertible into
shares of the Company's common stock. The common stock shares into which these
securities are convertible have not been included in the dilutive share
calculation as the impact of their inclusion would be anti-dilutive. The Company
also has 2,567,673, 2,746,048 and 1,359,963 exercisable options outstanding to
purchase shares of its common stock under the Company's stock option plan as of
July 26, 1998, July 25, 1999 and July 30, 2000, respectively. These shares are
also excluded from the dilutive share calculation as the impact of their
inclusion would also be anti-dilutive.
Stock Compensation
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" (See Note 12 - Stock Option Plan).
Fair Value of Financial Instruments
The recorded amounts for cash and cash equivalents, restricted cash,
accounts receivable and accounts payable and other current liabilities
approximate fair value due to the short-term nature of these financial
instruments. The fair value of amounts outstanding under the Company's Senior
Credit Facility and certain other debt instruments approximates their recorded
values in all material respects, as determined by discounting future cash flows
at current market interest rates as of July 30, 2000. The fair value of the
Company's Senior Subordinated Notes has been estimated using quoted market
values. The fair value of the Company's other subordinated debentures have been
estimated using discounted cash flow analyses based on current borrowing rates
for debt with similar maturities and ratings.
The estimated fair values of the Senior Subordinated Notes and other
subordinated debentures at July 25, 1999 and July 30, 2000 are presented below
(in thousands):
July 25, 1999 July 30, 2000
------------- -------------
Carrying Fair Carrying Fair
amount value amount value
12% Senior Subordinated Notes $ 117,240 $ 110,400 $ 117,512 $ 102,300
Other subordinated debentures $ 10,495 $ 9,417 $ 9,823 $ 8,616
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement and tax
bases of assets and liabilities, utilizing currently enacted tax rates. The
effect of any future change in tax rates is recognized in the period in which
the change occurs.
Reclassifications
Certain amounts in the prior year financial statements and related
notes have been reclassified to conform to the fiscal 2000 presentation.
Recently Issued Accounting Standards
In fiscal 2000, the Company adopted American Institute of Certified
Public Accountants (AICPA) Statement Of Position 98-5, "Reporting on the Costs
of Start-Up Activities" ("SOP 98-5"). At adoption, SOP 98-5 required the Company
to write-off any unamortized start-up costs as a cumulative effect of change in
accounting principle and, going forward, expense all start-up activity costs as
they are incurred. The initial adoption of SOP 98-5 resulted in the write-off of
$1.2 million of start-up costs that had previously been capitalized as of July
25, 1999. The net effect of the write-off of $704,000 (which is net of income
tax benefits of $449,000) has been expensed and reflected as a cumulative effect
of an accounting change in the accompanying statement of operations for the year
ended July 30, 2000.
In December 1999, the Securities Exchange Commission (SEC) staff
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides interpretive guidance on the
recognition, presentation and disclosure of revenue in the financial statements.
The Company does not believe that the adoption of SAB 101 will have a material
affect on the Company's consolidated financial results.
Effective July 31, 2000, the Company will adopt Statement of Financial
Accounting Standards ("SFAS") No. 133 Accounting for Derivative Instruments and
Hedging Activities, SFAS No. 137 Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an Amendment of FASB Statement No. 133 and SFAS No. 138 Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133 (collectively SFAS 133 as amended). SFAS 133 as amended is
required to be adopted no later than the beginning of the fiscal reporting
period beginning June 15, 2000, which for the Company is July 31, 2000. These
standards are to be adopted as a change in accounting principle and cannot be
applied retroactively to financial statements of prior periods.
SFAS 133 and 138 require that derivatives be recorded on the balance
sheet as an asset or liability at fair value. SFAS 133 as amended require that
derivatives that are not hedges must be recorded at fair value through earnings,
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative instrument's gains and losses to offset
related results on the hedged item in the income statement, to the extent
effective, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS 133
as amended, in part, allows special hedge accounting for fair value and cash
flow hedges. The statement provides that the gain or loss on a derivative
instrument designated and qualifying as a fair value hedging instrument as well
as the offsetting loss or gain on the hedged item attributable to the hedged
risk be recognized currently in earnings in the same accounting period. SFAS 133
as amended provides that the effective portion of the gain or loss on a
derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of other comprehensive income and be
reclassified into earnings in the same period or periods during which the hedged
forecasted transaction affects earnings. The ineffective portion of a
derivative's change in fair value is recognized currently through earnings
regardless of whether the instrument is designated as a hedge.
The Company has five interest rate swap contracts outstanding as of
July 30, 2000. Two of these contracts have been designated as cash flow hedges.
Cash Flow Hedges
The Company has entered into two interest rate swap agreements, with a
total notional amount of $75 million. Under these arrangements, which may be
terminated by the floating rate payer on November 17, 2000, the Company receives
the 30-day LIBOR rate and pays a fixed rate of 5.68%. These swaps have been
treated, prior to adoption, as hedges and accounted for as such. No amounts were
recorded on the Consolidated Balance Sheet as of July 30, 2000 in connection
with these instruments, and the net effect of the hedges was to record interest
expense at the fixed rate of 5.68% plus 3.5% (based on the Company's current
leverage) on the first $75 million of debt. These swaps have been designated as
cash flow hedges of variable future cash flows associated with the interest on
the Senior Credit Facility through November 17, 2000. Upon adoption, the fair
value of these swaps will be recorded as an asset on the balance sheet with a
corresponding credit to other comprehensive income. Subsequent changes in fair
value of the swaps will be recorded through other comprehensive income, except
for changes related to ineffectiveness during the period these instruments are
designated as hedges. The Company does not currently anticipate ineffectiveness
under these hedges through November 17, 2000. The net effect of the cash flow
hedges will be to record interest expense at the fixed rate of 5.68% plus 3.5%
(based on the Company's current leverage) on the first $75 million of debt. If
the swap agreements are not terminated on November 17, 2000 all subsequent
changes in the fair value will be accounted for through earnings.
Other derivatives
The Company entered into three interest rate swap agreements that do
not qualify for hedge accounting under SFAS 133 as amended. The net effect of
these swaps will be interest savings to the Company of $2.1 million over the
life of the Senior Subordinated Notes. As of July 30, 2000, the Company had
$8,592,185 recorded in Other Long Term Liabilities in the accompanying
Consolidated Balance Sheet and had been recording the net effect of the interest
savings on a straight line basis over the life of the agreements through the
income statement. Upon adoption, the fair value of these swaps will be recorded
as an asset and a liability with a corresponding entry to cumulative effect of
the change in accounting principle in earnings; and the amount recorded in Other
Long Term Liabilities will be recognized through a cumulative effect of the
change in accounting principle in earnings.
Subsequent changes in fair value of the swaps will be recorded through the
income statement.
Net effect of the Change in Accounting Principle
------------------------- ------------- --------------- -------------- --------------- -----------------
Cumulative
effect of
change in
Other Long Other accounting
Liability- Term Comprehensive principle in
Debit/(Credit) Asset - Swap Swap Liabilities Income earnings
------------------------- ------------- --------------- ------------- --------------- -----------------
Cash flow hedges $ 258,862 $ - $ - $ 258,862) $ -
Other Derivatives 6,519,980 (11,065,538) 8,592,185 (4,046,627)
------------- --------------- -------------- --------------- -----------------
Total Derivatives $ 6,778,842 $(11,065,538) $ 8,592,185 $ (258,862) $ (4,046,627)
------------------------- ------------- --------------- -------------- --------------- -----------------
The Company has no embedded derivatives under SFAS 133 as amended and
is not aware of the potential impact of any other significant matter that may
result from the adoption of these standards.
3. Business Acquisitions and Divestments
Kamori Combined Enterprises Acquisition
On November 12, 1997, the Company acquired all of the outstanding
shares of common stock of Kamori Combined Entities (the "Kamori Acquisition")
which included the Steamboat Ski & Resort Corporation in Steamboat Springs,
Colorado ("Steamboat"), the Heavenly Valley Ski & Resort Corporation in Lake
Tahoe, California/Nevada ("Heavenly") and the Sabal Point Golf Course in
Orlando, Florida ("Sabal Point") for approximately $300.5 million, including
closing costs and adjustments. Steamboat and Heavenly are major destination ski
resorts while Sabal Point is a golf, tennis and swimming club. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
results of operations subsequent to November 12, 1997 are included in the
accompanying consolidated financial statements. The purchase price was allocated
to the assets acquired and the liabilities assumed based on their fair market
values at the date of acquisition as follows (in thousands):
Fair value
of
net assets
acquired
-------------
Cash $ 8,771
Accounts receivable 129
Inventory 3,983
Prepaid expenses 486
Property and equipment, net 183,922
Asset held for sale 5,780
Real estate developed for sale 25,624
Goodwill 60,177
Intangible assets 22,200
Long-term investments 5,000
Other assets 177
Deferred income taxes 2,443
-------------
Total assets 318,692
-------------
Accounts payable and other current liabilities (10,289)
Deposits and deferred revenue (6,702)
Deferred income taxes (793)
Minority interest (364)
-------------
Total liabilities (18,148)
-------------
Net assets acquired $ 300,544
=============
Amortization of goodwill and intangible assets charged to depreciation
and amortization was $1.3 million and $544,000, respectively, for fiscal 1998,
$1.3 million and $704,000, respectively, for fiscal 1999, and $1.5 million and
$761,000, respectively, for fiscal 2000.
The asset held for sale per above of $5.8 million represents the
carrying value of Sabal Point. Sabal Point was subsequently sold on February 2,
1998 for total proceeds of $5.7 million. As Sabal Point was identified as held
for sale as of the Kamori Acquisition date, the operating results of Sabal Point
from that date through February 2, 1998 were excluded from the Company's
consolidated operating results and were included in the determination of the
carrying value of $5.8 million. No gain or loss was recognized from the sale of
Sabal Point as the difference between the carrying value and the proceeds was
treated as an adjustment to the original purchase price allocation.
4. Property and Equipment
Property and equipment consists of the following (in thousands):
July 25, 1999 July 30, 2000
------------- -------------
Buildings and grounds $ 176,952 $ 195,847
Machinery and equipment 166,475 171,037
Lifts and lift lines 161,102 162,283
Trails 37,130 38,061
Land improvements 19,006 18,708
------------ -------------
560,665 585,936
Less: accumulated depreciation 111,288 146,973
------------ -------------
449,377 438,963
Land 72,249 78,486
Construction-in-process 7,528 16,629
------------ -------------
Property and equipment, net $529,154 $ 534,078
============ =============
Property and equipment includes approximately $52.3 million and $53.3
million of machinery and equipment and lifts held under capital leases at July
25, 1999 and July 30, 2000, respectively. At July 25, 1999 and July 30, 2000,
related accumulated amortization on property and equipment under capital leases
was approximately $9.0 million and $13.1 million, respectively. Amortization
expense for property and equipment under capital leases was approximately $2.2
million, $4.4 million and $4.2 million for 1998, 1999 and 2000, respectively.
Total depreciation and amortization expense relating to all property and
equipment was $34.0 million, $40.4 million and $41.9 million for 1998, 1999 and
2000, respectively.
5. Long-Term Debt
Long-term debt consists of (dollar amounts in thousands):
July 25, July 30,
1999 2000
Senior Credit Facility (See Note 7 - Senior Credit Facility) $200,485 $118,037
Real estate development note payable with a face value of $105,000. The note bears
interest at a variable rate of prime plus 2.5% per annum, which is accrued monthly.
Principal and interest on the note are payable as real estate quartershares are sold. Any
remaining principal and accrued interest is due in March 2002. The note is collateralized
by the real estate developed for sale of GSRP. 55,796 92,083
Real estate development term loan facility with a face value of $58,000 to finance the
working capital of the Company's real estate subsidiaries. The facility bears interest at
a variable rate equal to the lender's base rate plus 8.25% or a current rate of 16%.
Interest is payable monthly in arrears. Any remaining principal is due June 30, 2001. This
facility is underwritten by substantially all the Resort Properties subsidiaries. This
facility was restructured into a new $73 million facility subsequent to fiscal 2000
year-end (See Note 16 - Subsequent Events). 52,654 53,892
Note payable in an aggregate principal amount of $3,530 for forbearance fees for the
amended and restated real estate development term loan facility described above. The note
bears interest at 12% per annum and is payable at maturity. The Balance is due in full at
February 2002. This note was paid off subsequent to fiscal 2000 as part of the
restructuring of the real estate term loan facility (See Note 16 - Subsequent Events). 3,530 3,530
Real estate development note payable with a face value of $10,000 to provide additional
funds for the completion of the Steamboat Grand Hotel. The note bears interest at 20% per
annum, half of which is payable monthly in arrears and the remainder is deferred until
final payment is made. The stated maturity date is August 1, 2003. - 2,588
Note payable with a face value of $2,250. The note bears interest at 9% per annum, which
is payable monthly beginning January 1998 for a 15-year term. The principal is due in full
in December 2012. 2,250 2,250
Note payable with a face value of $2,000. The note bears interest at 10% per annum which
is payable upon the maturity of the note. A principal payment of $1,000 was made in June
1999. The remaining principal and accrued interest was paid in full in June 2000. 1,000 -
Subordinated debentures issued with an original face value of $2,101. The initial coupon
rate is 6% per annum and is adjusted annually in accordance with the agreement. Interest
is payable annually in May beginning in 1995. The debentures mature in April 2002. 1,912 1,800
Note payable with a face value of $1,720. The note bears interest at 12% per annum, which
is payable quarterly, in arrears, beginning October 1998. The principal was paid in full
in July 2000. 1,720 -
Note payable with a face value of $1,600. Interest is payable monthly beginning January
1998 for a 30-year term. The interest rate is 7% per annum for the first 10 years, 8.44%
per annum for the second 10 years and 10.55% per annum for the final 10 years. The
principal is due in full in December 2027. 1,600 1,600
Note payable with a face value of $1,000. The note bears interest at 14% per annum, which
is payable monthly beginning in August 1997. The principal was paid in full in July 2000. 1,000 -
July 25, July 30,
1999 2000
Note payable with a face value of $2,097 and bearing interest at the rate of 8.25% per
annum. The principal and interest were paid in full upon completion of the Sundial Lodge
at the Canyons resort in fiscal 2000. 2,097 -
Note payable with a face value of $6,600. The note bears interest at a rate of 8.5% per
annum, which is paid quarterly, in arrears. Principal payments of $4,720 were made in
fiscal 1999. The remaining balance was paid in full upon completion of the Grand Summit
Hotel at the Canyons resort in fiscal 2000. 1,880 -
Real estate development note payable with a face value of $29,000. The note bears interest
at a variable rate of prime plus1/4% and is payable monthly. The principal was paid in full
upon completion of the Sundial Lodge project at the Company's Canyons resort in fiscal
2000. 6,858 -
Real estate development note payable with a face value of $2,500 for the construction of
employee housing at the Company's Steamboat resort. The note bears interest at a variable
rate of prime plus1/4%. Principal and interest of $17 are payable monthly. The loan will be
converted to a 15-year amortization when the project is completed. 1,831 2,397
Note payable with face value of $2,294. The note bears interest at 7.83% per annum.
Interest and principal payments of $22 are payable monthly beginning March 1998. The
principal was paid in full in fiscal 2000. 2,154 -
Obligations under capital leases 33,642 28,630
Other notes payable 4,317 1,542
----------- ------------
374,726 308,349
----------- ------------
Less: current portion 60,882 58,508
----------- ------------
Long-term debt, excluding current portion $313,844 $249,841
=========== ============
The carrying values of the above debt instruments approximate their
respective fair values in all material respects, determined by discounting
future cash flows at current market interest rates as of July 30, 2000.
At July 30, 2000, the Company had letters of credit outstanding
totaling $5.9 million.
The non-current portion of long-term debt matures as follows (in
thousands):
Subordinated
Long-term notes and Total
debt debentures Debt
------------- ------------ ------------
2002 $ 60,764 $ 549 $ 61,180
2003 50,892 1,074 51,985
2004 73,745 1,466 75,231
2005 33,152 - 33,152
2006 and thereafter 35,600 126,209 161,809
Interest related to capitalized
leases (4,245) - (4,389)
Debt discount (67) (2,488) (2,555)
------------- ------------ ------------
$249,841 $ 126,810 376,651
============= ============ ============
6. Subordinated Notes and Debentures
On June 25, 1996, in connection with the S-K-I Acquisition, ASC East
issued $120.0 million of 12% Senior Subordinated Notes (the "Notes"). Pursuant
to a registration rights agreement, ASC East filed a registration statement with
respect to an offer to exchange the Notes for a new issue of notes of ASC East
registered under the Securities Act of 1933, with identical terms. The
registration statement became effective in November 1996.
Concurrently with the Offering, the Company solicited and received the
required consents from the holders of the Notes to amend the Notes indenture to
permit the consummation of the Offering without requiring the Company to make a
Change of Control Offer (as defined). In connection with the consent
solicitation, the Company paid a customary fee to the consenting holders of the
Notes.
In order to comply with the conditions to closing the Series B
Preferred Stock sale (See Note 9 - Mandatorily Redeemable Securities), certain
amendments were made to the Notes. One of the amendments permitted the
consummation of a merger of two of the Company's wholly owned subsidiaries, ASC
East and ASC West, with and into ASC. This merger was approved by the
noteholders on August 1, 1999 and a payment of approximately $1.5 million was
paid to the holders of the Notes. ASC, ASC East and ASC West were merged on
October 6, 1999. In connection with the merger, ASC assumed all liabilities of
ASC East and ASC West and became the primary obligor under the Notes. In
addition, the then current subsidiaries of ASC and ASC West, as well as ASC
Utah, also became additional guarantors under the Indenture. As a result of the
additional guarantee given by certain subsidiaries of the Company, the
noteholders under the Indenture will have priority over the equity holders of
the Company with respect to any claims made on the assets of those subsidiaries
until the obligations under the Indenture have been satisfied.
The Notes are general unsecured obligations of ASC, subordinated in
right of payment to all existing and future senior debt of ASC, including all
borrowings of the Company under the Senior Credit Facility. The Notes are fully
and unconditionally guaranteed by the Company and all its subsidiaries with the
exception of Ski Insurance, Killington West, Ltd., Mountain Water Company,
Uplands Water Company, Club Sugarbush, Inc., Walton Pond Apartments, Inc. and
Deerfield Operating Company. The guarantor subsidiaries are wholly owned
subsidiaries of the Company and the guarantees are full, unconditional, and
joint and several. The Notes mature July 15, 2006, and will be redeemable at the
option of ASC, in whole or in part, at any time after July 15, 2001. The Notes
were issued with an original issue discount of $3.4 million. Interest on the
Notes is payable semi-annually on January 15 and July 15 of each year. Interest
expense on the Notes amounted to $14.6 million in each of fiscal 1998, 1999, and
2000.
ASC East incurred financing costs of $6.7 million in connection with
the issuance of the Notes and the Company incurred an additional $2.5 million in
costs related to the amendments made in connection with the Series B Preferred
Stock sale. These amounts are recorded as deferred financing costs, net of
accumulated amortization, in the accompanying consolidated balance sheets.
Amortization expense included in the accompanying consolidated statement of
operations for the years ended July 26, 1998, July 25, 1999 and July 30, 2000
amounted to $713,000, $668,600 and $1.0 million, respectively.
The Company has entered into a series of (non-cancelable) interest rate
swap agreements in connection with its Notes, which were intended to defer a
portion of the cash interest payments on the Notes into later years. The
following table illustrates the key factors of each of these agreements:
February 9, 1998 - July 15, 2001 July 16, 2001 - July 15, 2006
----------------------------------------------- ------------------------------------------------
Notional Company Company Notional Company Company
Amount Pays Receives Amount Pays Receives
--------------- -------------- -------------- --------------- -------------- ---------------
Agreement 1 $120,000,000 9.01% 6-month LIBOR $127,500,000 9.01% 6-month LIBOR
Agreement 2 120,000,000 6-month LIBOR 12.00% 127,500,000 6-month LIBOR 7.40%
As a result of entering into this interest rate swap arrangement, the
Company has fixed the cash-pay rate on the Notes until their maturity in July
2006. The net effect of the swap agreements will result in a $2.1 million
interest saving to the Company over the life of the agreements. This amount is
currently being realized against interest expense on a straight-line basis
prospectively from the second fiscal quarter of 2000 until July 2006. The
cumulative net proceeds to the Company received from this arrangement of $5.1
million and $8.6 million as of July 25, 1999 and July 30, 2000, respectively,
are included as other long term liabilities in the accompanying consolidated
balance sheets.
A portion of the proceeds from the Senior Credit Facility (See Note 7 -
Senior Credit Facility) were used to redeem all of the Company's outstanding
13.75% Subordinated Discount Notes ("Subordinated Notes"). The indenture
relating to the Subordinated Notes provided for a redemption price equal to
113.75% of the carrying value of the Subordinated Notes on the redemption date.
The Company recorded extraordinary losses before any benefit for income taxes in
Fiscal 1998 of approximately $4.3 million related to the prepayment of the
Subordinated Notes and $1.0 million related to the write-off of deferred
financing costs. These losses are included in the total extraordinary loss in
the accompanying consolidated statement of operations for the year ended July
26, 1998.
Other subordinated debentures owed by the Company at July 30, 2000 are
due as follows (in thousands):
Interest Principal
Year Rate Amount
------------------------------------
2001 8% $ 525
2002 8% 549
2003 8% 1,074
2004 8% 1,466
2010 8% 1,292
2012 6% 1,155
2013 6% 1,065
2015 6% 1,500
2016 6% 1,196
-----------
$ 9,822
===========
7. Senior Credit Facility
In connection with the Offering, the Company established a senior
credit facility on November 12, 1997 and repaid the indebtedness under the
Company's then existing credit facility. In connection with the repayment of the
old credit facility, the Company wrote-off deferred financing costs of $1.2
million and incurred prepayment penalties of $433,000. These amounts are
included in the total extraordinary loss in the accompanying consolidated
statement of operations for the year ended July 26, 1998.
On October 12, 1999, this senior credit facility was amended,
restated and consolidated from two sub-facilities totaling $215 million to a
single facility totaling $165 million (the "Senior Credit Facility"). The Senior
Credit Facility consists of a revolving credit facility in the amount of $100
million and a term facility in the amount of $65 million. The revolving portion
of the Senior Credit Facility matures on May 31, 2004, and the term portion
matures on May 31, 2006. The Senior Credit Facility is secured by substantially
all the assets of ASC and its subsidiaries, except the real estate development
subsidiaries, which are not borrowers under the Senior Credit Facility
(collectively, the borrowing subsidiaries are referred to as the "Restricted
Subsidiaries"). In conjunction with the restructuring of the Senior Credit
Facility, the Company wrote-off a pro-rata portion of its existing deferred
financing costs in the amount of $1.0 million, or $621,000 net of income taxes,
which is included in the accompanying consolidated statement of operations for
the year ended July 30, 2000 as an extraordinary loss.
At July 30, 2000, the revolving portion of the Senior Credit Facility
had outstanding borrowings of $53.7 million and the term portion of the Senior
Credit Facility had outstanding borrowings of $64.4 million, all of which were
under contracts which bear interest at the 30-day LIBOR rate plus an incremental
margin based on the Company's leverage (a margin of 3.5% for revolving advances
and 4.0% for term loan advances as of July 30, 2000, both being the maximum
possible margins under the facility). The Company has entered into two interest
rate swap agreements, with a total notional amount of $75 million, in connection
with the Senior Credit Facility which effectively swap a portion of the variable
interest rate borrowings to fixed rate borrowings. Under this arrangement, which
will terminate November 17, 2000, the Company receives the 30-day LIBOR rate and
pays a fixed rate of 5.68%. In effect, the first $75 million of borrowings under
the Senior Credit Facility are fixed at 5.68% plus the leverage-based margin and
all borrowings in excess of $75 million will bear a variable interest rate based
on either the 30-day LIBOR or the Fleet Boston base lending rate, plus
applicable margins based on the Company's leverage position. At July 30, 2000,
the Company had outstanding $43.1 million in excess of the $75 million in
fixed-rate borrowings under the revolving portion of the Senior Credit Facility
which currently bears interest at the rate of 10.27% (30-day LIBOR rate of 6.77%
plus a leverage-based margin of 3.5%).
Both the revolving and term portions of the Senior Credit Facility
accrue interest daily and pay interest quarterly, in arrears. At July 30, 2000,
accrued interest for the revolving and term portions of the Senior Credit
Facility was $1.1 million and $1.7 million, respectively.
The Senior Credit Facility contains affirmative, negative and financial
covenants customary for this type of credit facility, including maintenance of
certain financial ratios. The revolving portion of the Senior Credit Facility is
subject to an annual 30-day clean-down requirement, which period must include
April 30 of each year, during which the sum of the outstanding principal balance
and letter of credit exposure under the revolving portion of the facility is not
permitted to exceed $25 million for fiscal 2000 and $35 million for each fiscal
year thereafter. The Company successfully complied with the clean-down
requirement for fiscal 2000.
The Senior Credit Facility contains restrictions on the payment of
dividends by the Company on its common stock. Those restrictions prohibit the
payment of dividends in excess of 50% of the Restricted Subsidiaries'
consolidated net income after April 25, 1999, and further prohibit the payment
of dividends under any circumstances when the effect of such payment would be to
cause the Restricted Subsidiaries' debt to EBITDA ratio (as defined within the
credit agreement) to exceed 4.0 to 1.0.
The maximum availability under the revolving portion of the Senior
Credit Facility reduces over its term by certain prescribed amounts. The term
portion of the Senior Credit Facility amortizes in five annual installments of
$650,000 payable on May 31 of each year, commencing May 31, 2000, with the
remaining portion of the principal due in two substantially equal installments
on May 31, 2005 and May 31, 2006. In addition, the Senior Credit Facility
requires mandatory prepayment of the term portion and a mandatory reduction in
the availability under the revolving portion of an amount equal to 50% of
Consolidated Excess Cash Flows (as defined in the credit agreement) during any
period in which the Excess Cash Flow Leverage Ratio (as defined in the credit
agreement) exceeds 3.50 to 1. In no event, however, will such mandatory
prepayments reduce the revolving portion of the facility below $74.8 million.
The Senior Credit Facility also places a maximum level of non-real
estate capital expenditures of $20 million for fiscal 2000 and $13 million for
fiscal 2001 (exclusive of certain capital expenditures in connection with the
sale of the Series B Preferred Stock). Following fiscal 2001, annual resort
capital expenditures (exclusive of real estate capital expenditures) are capped
at the lesser of (i) $35 million or (ii) the total of the Restricted
Subsidiaries' consolidated EBITDA (as defined therein) for the four fiscal
quarters ended in April of the previous fiscal year less consolidated debt
service for the same period. In addition to the foregoing amounts, the Company
is permitted to and expects to make capital expenditures of up to $30 million
for the purchase and construction of a new gondola at its Heavenly resort in
Lake Tahoe, Nevada.
The Company entered into an amendment to the Senior Credit Facility
effective March 6, 2000 (the "Credit Facility Amendment") which significantly
modified the covenant requirements, effective as of the end of the second
quarter of fiscal 2000. The Credit Facility Amendment requires the following
minimum quarterly EBITDA levels:
Fiscal Quarter Minimum EBITDA
-------------------------------------------------
2000 Quarter 4 ($20,000,000)
2001 Quarter 1 ($20,000,000)
2001 Quarter 2 $20,000,000
2001 Quarter 3 $65,000,000
2001 Quarter 4 ($20,000,000)
2002 Quarter 1 ($20,000,000)
2002 Quarter 2 $22,000,000
The Credit Facility Amendment also places restrictions on the maximum
amount outstanding (excluding letters of credit) under the revolving portion of
the Senior Credit Facility for the period from May 1 through December 3, 2000,
after which time these restrictions will not recur in future periods. During
this period, revolving credit advances shall not exceed the following amounts at
any time during the indicated monthly periods:
Monthly Period Ending Maximum Revolver Balance
July 30, 2000 $60,000,000
September 3, 2000 $70,000,000
October 1, 2000 $80,000,000
October 29, 2000 $85,000,000
December 3, 2000 $90,000,000
8. Income Taxes
The provision (benefit) for income taxes charged to continuing
operations was as follows (in thousands):
Year ended
------------- ------------- -------------
July 26, July 25, July 30,
1998 1999 2000
------------- ------------- -------------
Current tax provision
Federal $ - $ - $ -
State - - -
Deferred tax provision (benefit)
Federal 580 (11,939) (7,728)
State (1,354) (3,118) 1,923
------------- ------------- -------------
Total benefit $ (774) $ (15,057) $ (5,805)
============= ============= =============
Deferred income taxes reflect the tax impact of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that a
benefit will be realized. Deferred tax expense (benefit) represents the change
in the net deferred tax asset or liability balance.
Deferred tax liabilities (assets) are comprised of the following at
July 25, 1999 and July 30, 2000 (in thousands):
July 25, 1999 July 30, 2000
-------------- -------------
Property and equipment basis differential $ 53,814 $ 57,407
Other 640 1,002
-------------- -------------
Gross deferred tax liabilities 54,454 58,409
Tax loss and credit carryforwards (30,887) (57,272)
Capitalized costs (1,856) (3,849)
Deferred revenue and contracts (10,536) (2,506)
Stock compensation charge (3,112) (1,740)
Reserves and accruals (4,239) (4,390)
Other (661) -
-------------- -------------
Gross deferred tax assets (51,291) (69,757)
Valuation allowance 2,626 9,982
-------------- -------------
Net deferred tax liability (asset) $ 5,789 $ (1,366)
============== =============
The provision (benefit) for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory income tax rate
of 35% to income (loss) before provision (benefit) for income taxes,
extraordinary loss and cumulative effect of change in accounting principle as a
result of the following differences (in thousands):
Year ended
-------------- ------------- -------------
July 26, 1998 July 25, 1999 July 30, 2000
-------------- ------------- -------------
Income tax benefit at the statutory U.S. tax rates $ (1,080) $ (15,052) $ (12,578)
Increase (decrease) in rates resulting from:
State taxes, net (1,354) (3,118) 1,923
Change in valuation allowance 250 - 3,000
Stock option compensation 1,019 1,623 761
Nondeductible items 634 848 498
Other (243) 642 591
-------------- ------------- -------------
Income tax benefit at the effective tax rates $ (774) $ (15,057) $ (5,805)
============== ============= =============
At July 30, 2000, the Company has federal net operating loss ("NOL")
carryforwards of approximately $127.3 million which expire in varying amounts
though the year 2020, a federal capital loss carryover of approximately $2.9
million that expires in the years 2003 and 2004, and approximately $630,000 in
general business credit carryforwards which expire in varying amounts through
2020. Internal Revenue Code Section 382 limits the amount of NOL carryforwards
incurred before a change in ownership, as defined, that can be used annually
against income generated after the change in ownership. The Company experienced
a change in ownership both in November of 1997 as a result of the Offering and
in August of 1999 as a result of the Oak Hill Transaction. The use of
approximately $84.9 million of the federal NOL carryovers are subject to
limitation under Section 382 as a result of the Oak Hill Transaction. In
addition, approximately $27.3 million of the federal NOL carryforwards are
subject to an additional limitation under Section 382 as a result of the
Offering. Because of recent acquisitions, the limitation for both ownership
changes is required to be allocated to the various subsidiaries based on their
relative fair market values. In addition, certain subsidiaries have separate
pre-change in ownership losses, which are subject to additional annual
limitations as a result of previous changes in ownership.
Subsequent changes in ownership could further affect the limitations in future
years.
In addition to the limitations under Section 382, approximately $6.8
million of the federal NOL carryovers are from separate return years, as defined
in the regulations to the Internal Revenue Code, of certain subsidiaries (or
sub-groups), and may only be used to offset each subsidiary's (or sub-group's)
contribution to consolidated taxable income in future years.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. During
fiscal 2000, the valuation allowance was increased by approximately $7.4
million, from $2.6 million at July 25, 1999 to $10.0 million at July 30, 2000.
As a result of the Oak Hill Transaction, the realization of the tax benefit of
certain of the Company's NOL carryovers and other tax attributes is dependent
upon the occurrence of certain future events. It is the judgement of management
that a valuation allowance of $3.0 million against its deferred tax assets for
NOL carryforwards and other tax attributes is appropriate because it is more
likely than not that the benefit of such losses and attributes will not be
realized. Based on facts known at this time, the Company expects to
substantially realize the benefit of the remainder of its NOLs and other tax
attributes affected by the Oak Hill Transaction. The remaining $4.4 million
increase in the valuation allowance primarily relates to the benefit of certain
state NOL carryovers. Based on the specific state rules for the use of these NOL
carryovers and the Company's operations in those states, the Company believes
that it is more likely than not that the benefits of such state NOL
carryforwards will not be realized. Management believes that the valuation
allowance of $10.0 million as of July 30, 2000 is appropriate based on the
change of ownership events and the resulting annual limitations and the
Company's business operations and plans.
9. Mandatorily Redeemable Securities
Series A Preferred Stock
Pursuant to a Securities Purchase Agreement (the "Series A Agreement")
dated July 2, 1997 (as amended July 16, 1997), the Company issued 17,500 shares
of its Series A 14% Exchangeable Preferred Stock (the "Series A Preferred
Stock") in a private offering to an institutional investor. The Company incurred
$1.1 million in expenses in connection with the issuance of the Preferred Stock.
Pursuant to the Series A Agreement, the Company issued $17.5 million
aggregate principal amount of its 14% Senior Exchangeable Notes Due 2002 (the
"Exchangeable Notes") on July 28, 1997 in a private offering to an institutional
investor. The Company incurred deferred financing costs totaling $1.1 million in
connection with the issuance of the Exchangeable Notes. The Exchangeable Notes
bore interest at a rate of 14% per annum and mature on July 28, 2002. Interest
on the Exchangeable Notes was payable in cash or additional Exchangeable Notes,
at the option of the Company.
On November 15, 1997, subsequent to the completion of the Offering,
each share of Series A Preferred Stock and the Exchangeable Notes were converted
into shares of Mandatorily Redeemable 10 1/2% Preferred Stock. The total number
of Mandatorily Redeemable 10 1/2% Preferred Stock shares issued in association
with the exchange were 36,626 and have a face value of $1,000 per share. The
carrying value of the Series A Preferred Stock and Exchangeable Notes just prior
to the conversion were $18.4 million and $18.2 million, respectively. The
Company incurred an extraordinary loss before income tax benefit of $1.0 million
upon the conversion of the Preferred Stock and Exchangeable Notes as a result of
the write-off of unamortized deferred financing costs relating to the
Exchangeable Notes.
Under the Series A Agreement, the Mandatorily Redeemable 10 1/2%
Preferred Stock shares are exchangeable at the option of the holder into shares
of the Company's Common Stock at a conversion price of $17.10 for each common
share. In the event the Mandatorily Redeemable 10 1/2% Preferred Stock is held
to the maturity date of November 15, 2002, the Company will be required to pay
the holder in cash the face value of $36.6 million plus cumulative dividends in
arrears.
In the event of a default, as defined in the Series A Agreement, there
shall be a mandatory redemption of the Mandatorily Redeemable 10 1/2% Preferred
Stock by the Company unless the holder of the stock elects instead to have
visitation rights to meetings of both the Board of Directors and Management
Committees until the event of default is cured.
The Mandatorily Redeemable 10 1/2% Preferred Stock ranks senior in
liquidation preference to all Common Stock and Class A Common Stock outstanding
at July 30, 2000 as well as any Common Stock and Class A Common Stock issued in
the future.
Series B Preferred Stock
Pursuant to a Preferred Stock Subscription Agreement (the "Series B
Agreement") dated July 9, 1999, the Company sold 150,000 shares of its 8.5%
Series B Convertible Participating Preferred Stock ("Series B Preferred Stock")
on August 9, 1999 to Oak Hill Capital Partners, L.P. and certain related
entities ("Oak Hill") for $150 million. The Company used approximately $129
million of the proceeds to reduce indebtedness under its Senior Credit Facility,
approximately $30 million of which has been reborrowed and invested in the
Company's principal real estate development subsidiary, Resort Properties. The
remainder of the proceeds were used to (1) pay approximately $16 million in fees
and expenses in connection with the Series B Preferred Stock sale (approximately
$13 million) and related transactions (approximately $3 million), and (2)
acquire from Mr. Otten certain strategic assets and to repay a demand note
issued by a subsidiary of the Company to Mr. Otten, in the aggregate amount of
$5.4 million.
The Series B Preferred Stock is convertible into shares of the Company's
common stock at an initial conversion price of $5.25 per share of common stock.
The initial conversion price is subject to an antidilution adjustment. Assuming
all shares of the Series B Preferred Stock are converted into the Company's
common stock at the initial (and current) conversion price, Oak Hill would own
approximately 50.0% of the Company's outstanding common stock and Class A common
stock as of July 30, 2000. Oak Hill is entitled to vote its shares of Series B
Preferred Stock on matters (other than the election of Directors) as if its
shares were converted into the Company's common stock. In addition, Oak Hill as
the holder of Series B Preferred Stock has class voting rights to elect
Directors to the Company's Board of Directors. Furthermore, under the Series B
Agreement, Oak Hill and the Chairman and Chief Executive Officer of the Company,
Mr. Otten, have agreed to use best efforts and to vote their shares in order to
ensure that each of them is able to appoint up to four Directors to the Board
(depending on their shareholdings). Therefore, under the Series B Agreement and
the Company's certificate of incorporation, Oak Hill and Mr. Otten together
elect eight of the eleven members of the Company's Board.
Dividends on the Series B Preferred Stock are payable at the rate of 8.5%
per year. For the first five years, the Company may accrete and compound
dividends payable to the liquidation price instead of paying cash dividends, in
which case the dividend rate will increase to 9.5% after January 31, 2001, and
to 10.5% after January 31, 2002. The Series B Agreement requires dividends to be
paid in cash after July 31, 2004. The dividend rate will revert back to 8.5% at
the time the Company begins paying the dividend in cash. If the Company elects
to accrue dividends on the Series B Preferred Stock to the liquidation price for
the first five years, and thereafter pay all dividends in cash when due,
assuming no intervening stock issuances or repurchases by the Company, the
Series B Preferred Stock would be convertible into 60.4% of the Company's common
stock after the fifth anniversary of its issuance. The Company is currently
accruing dividends on the Series B Preferred Stock at an effective rate of 9.7%,
with the assumption that dividends will not be paid in cash until the fifth
anniversary of the issuance.
The Stockholders' Agreement, dated August 9, 1999, was amended as of
July 31, 2000 (See Note 16 - Subsequent Events).
10. Related Party Transactions
Sunday River provided lodging management services for Ski Dorm, Inc.
("Ski Dorm"), a corporation previously owned by Mr. Otten and his mother, which
owns a ski dorm located near the Sunday River resort. During fiscal 1998 and
1999 payments by Ski Dorm to Sunday River totaled $2,000 and $65,000,
respectively.
After the consummation of the Series B Preferred Stock sale to Oak
Hill, the Company, through one of its subsidiaries, acquired or obtained rights
to acquire the following assets from entities owned or controlled by Mr. Otten:
o The land underlying the snowmaking ponds at the Sunday River
resort, together with all associated water rights, which were
previously leased by a subsidiary of the Company, for a
purchase price of $2.1 million.
o The Ski Dorm building and land underlying the Snow Cap Inn,
each located at the Sunday River resort, for an aggregate
purchase price of $679,000.
o Approximately 3,300 acres of undeveloped land at the Sunday
River resort, which was optioned to a subsidiary of the
Company for an initial payment of $650,000, which payment may
be applied to the purchase price. The purchase price is
$3,692,000, which is a 12% discount from the appraised value
of the land. The purchase price will be discounted by another
20% or 10% if the option is exercised within 12 and 24 months
of the option date, respectively. As of July 30, 2000, the
Company has not exercised its option to purchase the
undeveloped land.
In connection with the foregoing asset sale, the Company also repaid
the outstanding principal and accrued interest of a note from a subsidiary of
the Company payable to Mr. Otten totaling approximately $2.0 million. The note
was originally issued to Mr. Otten to cover certain tax liabilities generated
when the Company's subsidiary converted from a subchapter S corporation to a
subchapter C corporation.
Mr. Paul Wachter, a member of the Company's Board of Directors, is the
founder and Chief Executive Officer of Main Street Advisors. Main Street
Advisors, through Mr. Wacter, acted as one of the Company's investment bankers
in connection with the Series B Preferred Stock sale, for which it was paid a
fee of approximately $1.5 million.
On May 10, 2000, the Company, through one of its subsidiaries,
purchased two parcels of land adjacent to the Company's Sugarbush resort from
Sugarbush Land Holdings, Inc., a corporation controlled by Mr. Otten. The two
parcels, totaling approximately 128 acres, were purchased for an aggregate price
of approximately $589,000. The terms of the purchase, including the purchase
price, were reviewed and approved by the Executive Committee and Audit Committee
of the Company's Board of Directors.
In March, 2000, the Company, through one of its subsidiaries, sold
residential units at the Company's Sundial Lodge at The Canyons to Mr. Blaise
Carrig, Mr. Christopher Howard and Mr. Daniel Duquette. Mr. Carrig is President
of the Company's subsidiary which operates The Canyons. Mr. Howard is the
Company's Executive Vice President. Mr. Duquette is a member of the Company's
Board of Directors. Mr. Carrig and Mr. Howard each purchased one residential
unit in the Sundial Lodge for a purchase price of $201,000. Mr. Duquette
purchased one residential unit in the Sundial Lodge for a purchase price of
$345,000. The purchase price which Mr. Carrig, Mr. Howard and Mr. Duquette
purchased these units were the same as those at which the units (or units of
comparable size and finish) were offered for sale to the general public.
11. Commitments, Lease Contingencies and Contingent Liabilities
The Company leases certain land and facilities used in the operations
of its resorts under several operating lease arrangements. These lease
arrangements expire at various times from the year 2010 through the year 2060.
Lease payments are generally based on a percentage of revenues. Total rent
expense under these operating leases as recorded in resort operating expenses in
the accompanying consolidated statement of operations for 1998, 1999 and 2000
was $2.5 million, $2.6 million and $3.1 million, respectively.
Significant portions of the land underlying certain of the Company's
ski resorts are leased or subleased by the Company or used pursuant to renewable
permits or licenses. If any such lease, sublease, permit or license were to be
terminated or not renewed upon expiration, or renewed on terms materially less
favorable to the Company, the Company's ability to possess and use the land
subject thereto and any improvements thereon would be adversely affected,
perhaps making it impossible for the Company to operate the affected resort. A
substantial portion of the land constituting skiable terrain at Attitash Bear
Peak, Sugarbush, Mount Snow/Haystack and Steamboat is located on federal land
that is used under the terms of the permits with the United States Forest
Service (the "Forest Service"). Generally, under the terms of such permits, the
Forest Service has the right to review and comment on the location, design and
construction of improvements in the permit area and on many operational matters.
The permits can be terminated or modified by the Forest Service to serve the
public interest. A termination or modification of any of the Company's permits
could have a material adverse effect on the results of operations of the
Company. The Company does not anticipate any limitations, modifications, or
non-renewals which would adversely affect the Company's operations.
In connection with the purchase of The Canyons, the Company entered
into an operating lease arrangement with the seller for the lease of certain
land to be used in the operation of the resort and for future real estate
development. The arrangement provides for an initial lease term of 50 years,
with the option to extend for three additional 50-year periods for a fee of $1.0
million for each extension period. Lease payments are based on a percentage of
gross skiing and lodging revenues. The arrangement also provides for additional
one-time payments ranging from $250,000 to $3.0 million upon achievement of
annual skier visit level increases in 100,000 visit increments up to 1,000,000.
Total rent expense under this arrangement, as recorded in resort operating
expenses in the accompanying consolidated statement of operations for 1998, 1999
and 2000 was $473,000, $311,000, and $918,000, respectively. In addition, the
Company has the option to purchase parcels of land covered under the operating
lease for real estate development. Payments for these options total
approximately $19.5 million and are payable at various times and in varying
amounts, at the Company's discretion, through December 2001. The Company is not
required to make the option payments for all parcels of land in order to develop
and sell real estate on the land covered under the lease. Through July 30, 2000,
the Company has made $12.9 million of option payments, of which $3.6 million has
been allocated to the cost of parcels that have been purchased to date. The
remaining $9.3 million in option payments are included in other assets in the
accompanying consolidated balance sheet and will eventually be allocated to the
cost of future parcels purchased by the Company.
In addition to the leases described above, the Company is committed
under several operating and capital leases for various facilities, machinery and
equipment. Rent expense under all operating leases was $6.4 million, $6.1
million and $7.8 million for the years ended 1998, 1999 and 2000, respectively.
Future minimum lease payments for lease obligations at July 30, 2000
are as follows (in thousands):
Capital Operating
Leases leases
------------ ------------
2001 $ 8,949 $ 7,128
2002 8,864 6,366
2003 6,059 5,230
2004 10,898 4,140
2005 and thereafter 600 12,292
------------ ------------
Total payments 35,370 $ 35,156
============
Less interest (6,740)
------------
Present value of net minimum payments 28,630
Less current portion (6,454)
============
Long-term obligations $ 22,176
============
The Company currently has a Grand Summit Hotel under construction at
Steamboat. Total construction costs for this project are estimated to be $116
million and it is primarily being financed through a $110 million revolving
construction loan facility with TFC Textron and an additional $10 million bulge
facility, also with TFC Textron. The Company also has a $58 million term
facility with Fleet Boston that can be used for this project as well as general
and operating expenditures. As of July 30, 2000, the Company had $92.1 million
outstanding on the Textron facility, $2.6 million on the Textron Bulge facility
and the entire $58 million available under the Fleet Boston facility. The
Company estimates that as of July 30, 2000, approximately $17 million was
required to complete the Steamboat Grand Hotel. The additional funds will be
generated from the net proceeds of the sale of existing Grand Summit inventory.
On July 31, 2000 the Company Amended the Fleet Boston Facility (See Note 16 -
Subsequent Events).
On July 22, 1998, the Company entered into an agreement with Marriott
Ownership Resorts, Inc. ("Marriott") for the future sale of land parcels at the
Company's Killington, Sunday River, The Canyons, Steamboat and Heavenly resorts
(the "Marriott Agreement"). Under the Marriott Agreement, Marriott has the right
to develop luxury vacation ownership properties at each of the five
aforementioned properties. In accordance with the Marriott Agreement, the
Company has granted to Marriott certain development and marketing rights at the
related resorts. In return, in the event that Marriott elects to develop
properties at the resorts, the Company will receive proceeds for the sale of the
land parcels and will receive a percentage of the Marriott sales of the luxury
vacation ownership properties. The Company has received a cash deposit of $1.6
million from Marriott relating to the future land sales, and because none of the
parcels have yet to be sold, the deposit is recorded as deposits and deferred
revenue in the accompanying consolidated balance sheet at July 25, 1999. In the
Fall of 1999, Marriott informed the Company that it would not be proceeding on a
timely basis with its developments at the Company's properties at The Canyons
and Sunday River. As a result, on March 6, 2000, the Company and Resort
Properties entered into an amendment (the "Amendment") to their July 22, 1998
Purchase and Development Agreement with Marriott. The Amendment eliminates the
Marriott Agreement's restrictions upon real estate at all the Company's resorts
other than Killington, Steamboat and Heavenly. The Company and Marriott are
obligated to negotiate site specific agreements for development projects at
those three remaining resorts during the 105-day period following March 30,
2000. In the event of successful negotiation, Marriott's exclusive timeshare
development rights at those three resorts will continue. If negotiations are not
successful, then Marriott's exclusive timeshare development rights will be
terminated. Under the Amendment, Marriott's right of first refusal has been
permanently eliminated and Resort Properties has refunded to Marriott $960,000
in previously advanced purchase price. Early in fiscal 2001, the Marriott
Agreement was terminated in connection with the sale to Marriott of certain land
option rights at Heavenly (See Note 16 - Subsequent Events).
The Killington resort has been identified by the U.S. Environmental
Protection Agency (the "EPA") as a potentially responsible party ("PRP") at two
sites pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"). Killington has entered into a
settlement agreement with the EPA at one of the sites, the Solvents Recovery
Service of New England Superfund site in Southington, Connecticut. Killington
rejected an offer to enter into a de minimis settlement with the EPA for the
other site, the PSC Resources Superfund site in Palmer, Massachusetts, on the
basis that Killington disputes its designation as a PRP. In addition, the
Company's Heavenly resort was designated as a PRP at a Superfund site in
Patterson, CA. The Company entered into a cash-out settlement agreement which
has been accepted by the EPA and funded as part of an overall settlement of the
site. The Company believes that its liability for these Superfund sites,
individually and in the aggregate, will not have a material adverse effect on
the business or financial condition of the Company or results of operations or
cash flows.
Certain claims, suits and complaints associated with the ordinary
course of business are pending or may arise against the Company, including all
of its direct and indirect subsidiaries. In the opinion of management, all
matters are adequately covered by insurance or, if not covered, are without
merit or are of such kind, or involve such amounts as would not have a material
effect on the financial position, results of operations or cash flows of the
Company if disposed of unfavorably.
12. Stock Option Plan
Effective August 1, 1997, the Company established a fixed stock option
plan, the American Skiing Company Stock Option Plan (the "Plan"), to provide for
the grant of incentive and non-qualified stock options for the purchase of up to
5,688,699 shares of the Company's common stock by officers, management employees
of the Company and its subsidiaries and other key persons (eligible for
nonqualified stock options only) as designated by the Options Committee. The
Options Committee, which is appointed by the Board of Directors, is responsible
for the Plan's administration. The Options Committee determines the term of each
option, option exercise price, number of shares for which each option is granted
and the rate at which each option is exercisable. Options granted under the Plan
generally expire ten years from the date of grant and vest either immediately or
over a five-year term. Incentive stock options shall not have an exercise price
less than the fair market value of the common stock at the date of grant.
Nonqualified stock options shall be granted at an exercise price as determined
by the Options Committee. The status of the Company's stock option plan is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
------------------------------------------------------------
Outstanding at July 27, 1997 - -
Granted 2,716,057 $14.01
Exercised (20,000) 2.00
------------------------------------------------------------
Outstanding at July 26, 1998 2,696,057 14.10
Granted 1,196,000 7.17
Exercised (1,221) 2.00
------------------------------------------------------------
Outstanding at July 25, 1999 3,890,836 11.97
Granted 2,660,000 2.70
Exercised (182,390) 2.00
Returned (2,325,127) 15.60
------------------------------------------------------------
Outstanding at July 30, 2000 4,043,319 $ 4.24
------------------------------------------------------------
During fiscal 1998, the Company granted nonqualified options under the
Plan to certain key members of management to purchase 672,010 shares of common
stock with an exercise price of $2.00 per share when the fair market value of
the stock was estimated to be $18.00 per share. The majority of these options
(511,530 shares) were granted to members of senior management and were 100%
vested on the date of grant. Accordingly, the Company recognized stock
compensation expense of $8.1 million relating to the grants based on the
intrinsic value of $16.00 per share. Under these senior management grant
agreements, the Company also agreed to pay the optionees a fixed tax "bonus" in
the aggregate of $5.8 million to provide for certain fixed tax liabilities that
the optionees will incur upon exercise. The remainder of these options (160,480
shares) were granted under the Plan to certain members of management and were
vested 20% on the date of grant and vest ratably to 100% over the following four
years. For fiscal 1998, 1999 and 2000, the Company recognized $500,000, $773,000
and $1.0 million, respectively, of stock compensation expense relating to these
options. The total stock compensation charge, including the tax bonus, of $14.3
million recorded in fiscal 1998 is reflected as Stock compensation charge, while
the $773,000 and $1.0 million recorded in fiscal 1999 and 2000, respectively, is
reflected as marketing, general and administrative costs in the accompanying
consolidated statement of operations. The liability for the fixed tax bonus to
be paid to the optionees has been reduced to reflect $1.9 million in tax bonus
payments made as of July 30, 2000 in connection with options exercised. The
remaining $3.9 million tax bonus liability is reflected in accounts payable and
other current liabilities in the accompanying consolidated balance sheet at July
30, 2000.
The following table summarizes information about the stock options
outstanding under the Stock Plan at July 30, 2000:
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Outstanding Life (in Exercise Exercisable Exercise
Prices @ 7/30/00 years) Price @ 7/30/00 Price
---------------------------------------------------------------------------
$2 - $5 3,000,869 9.0 $2.58 768,713 $ 2.32
6 - 10 851,600 8.0 7.11 400,400 7.12
11 - 15 22,500 7.0 14.19 22,500 14.19
16 - 18 168,350 8.0 18.00 168,350 18.00
---------------------------------------------------------------------------
$2 - $18 4,043,319 8.7 $4.24 1,359,963 $5.87
---------------------------------------------------------------------------
The Company continues to account for stock-based compensation using the
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", under which no compensation expense for stock
options is recognized for stock option awards granted to employees at or above
fair market value. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Had stock compensation expense been determined based
on the fair value at the grant dates for awards granted under the Company's
stock option plan, consistent with the provisions of SFAS 123, the Company's net
loss and loss per share would have been changed to the pro forma amounts
indicated below (dollar amounts in thousands):
Fiscal Years Ended 1998 1999 2000
---------------------------------------------------------------------------------
Net Loss
As reported $ (12,294) $ (32,322) $ (52,452)
Pro forma (27,562) (32,691) (39,904)
Basic and diluted net loss
per common share
As reported $ (0.48) $ (1.07) $ (1.73)
Pro forma (1.07) (1.08) (1.31)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following weighted average assumptions:
Fiscal Years Ended 1998 1999 2000
--------------------------------------------------------------------------------
Expected life 10 yrs 10 yrs 10 yrs
Risk-free interest rate 5.6% 6.0% 6.5%
Volatility 47.1% 68.4% 93.9%
Dividend yield - - -
The weighted average grant date fair value for the options granted in
fiscal 1998 with an exercise price of $2.00 per share was $16.92 per share. The
weighted average grant date fair value for the options granted in fiscal 1998
with an exercise price of $14.19 to $18.00 per share was $11.92 per share. The
weighted average grant date fair value for the options granted in fiscal 1999
with an exercise price of $4.00 to $8.75 per share was $5.71 per share. The
weighted average grant date fair value for the options granted in fiscal 2000
with an exercise price of $2.00 to $3.00 per share was $2.26 per share.
13. Capital Stock
The Company has two classes of Common Stock outstanding, Class A
Common Stock and Common Stock. The rights and preferences of holders of Class A
Common Sock and Common Stock are substantially identical, except that, while any
Class A Common Stock is outstanding, holders of Class A Common Stock will elect
a class of directors that constitutes two-thirds of the Board of Directors and
holders of Common Stock will elect a class of directors that constitutes
one-third of the Board of Directors. Each share of Class A Common Stock will be
convertible into one share of Common Stock (i) at the option of the holder at
any time, (ii) automatically upon transfer to any person that is not an
affiliate of Mr. Otten and (iii) automatically if, at any time, the number of
shares of Class A Common Stock outstanding represents less than 20% of
outstanding shares of Common Stock and Class A Common Stock. Mr. Otten holds
100% of the Class A Common Stock, representing approximately 51% of the combined
voting power of all outstanding shares of Common Stock and Class A Common Stock.
14. Business Segment Information
The Company currently operates in two business segments, Resorts and
Real Estate. The two segments are managed differently because they offer
different products and services and require different marketing strategies. Each
segment also has distinctly separate capital structures. The Resort segment
operates nine ski resorts and all of their related activities (lift ticket
sales, retail, food & beverage, skier development, lodging services, golf and
other summer activities). The Real Estate segment develops mountainside real
estate properties at the Company's ski resorts. Data by segment is as follows:
July 26, 1998 July 25, 1999 July 30, 2000
-------------- -------------- --------------
Net revenues:
Resorts $ 277,574 $ 292,558 $ 292,077
Real estate 60,992 24,492 132,063
-------------- -------------- --------------
$ 338,566 $ 317,050 $ 424,140
============== ============== ==============
Income (loss) before income taxes
Resorts $ (17,286) $ (33,371) $ (31,409)
Real estate 14,200 (9,636) (4,529)
-------------- -------------- --------------
$ (3,086) $ (43,007) $ (35,938)
============== ============== ==============
Depreciation and amortization:
Resorts $ 37,580 $ 43,226 $ 45,759
Real estate 385 976 1,269
-------------- -------------- --------------
$ 37,965 $ 44,202 $ 47,028
============== ============== ==============
Capital expenditures:
Resorts $ 92,998 $ 52,465 $ 27,229
Real estate 93,255 153,106 166,879
-------------- -------------- --------------
$ 186,253 $ 205,571 $ 194,108
============== ============== ==============
Identifiable assets:
Resorts $ 560,219 $ 538,131
Real estate 247,338 291,754
-------------- --------------
$ 807,557 $ 829,885
============== ==============
15 Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly information (amounts in
thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ------------ ----------- ----------
Year ended July 30, 2000:
Net sales $ 23,355 $ 126,627 $ 223,095 $ 51,063
Income (loss) from operations (22,899) (6,589) 52,641 (23,185)
Income (loss) before preferred stock dividends (21,813) (9,805) 26,783 (25,298)
Net income (loss) available to common shareholders (27,954) (15,124) 21,464 (30,838)
Basic income (loss) per share:
Net income (loss) available to common shareholders $ (0.92) $ (0.50) $ 0.71 $ (1.01)
Weighted average shares outstanding 30,287 30,412 30,423 30,448
Fully diluted income (loss) per share:
Net income (loss) available to common shareholders $ (0.92) $ (0.50) $ 0.42 $ (1.01)
Weighted average shares outstanding 30,287 30,412 60,268 30,448
Year ended July 25, 1999
Net sales $ 24,796 $109,505 $164,641 $ 18,108
Income (loss) from operations (20,852) (4,543) 47,264 (25,494)
Income (loss) before preferred stock dividends (19,209) (9,700) 22,333 (21,374)
Net income (loss) available to common shareholders (20,268) (10,779) 21,237 (22,512)
Basic income (loss) per share:
Net income (loss) available to common shareholders $ (0.67) $ (0.36) $ 0.70 $ (0.74)
Weighted average shares outstanding 30,286 30,287 30,287 30,287
Fully diluted income (loss) per share:
Net income (loss) available to common shareholders $ (0.67) $ (0.36) $ 0.69 $ (0.74)
Weighted average shares outstanding 30,286 30,287 30,630 30,287
16 Subsequent Events
Real Estate Debt Agreement
On July 31, 2000, the Company entered into a Second Amended and Restated
Credit Agreement between Resort Properties, Fleet National Bank and the lenders
party thereto (the "Amended Real Estate Term Facility"). This fully syndicated
$73 million facility replaces Resort Properties' previous un-syndicated $58
million Real Estate development term loan facility. The Amended Real Estate Term
Facility is collateralized by security interests in, and mortgages on,
substantially all of Resort Properties' assets, which primarily consist of
undeveloped real property and the stock of its real estate development
subsidiaries (including GSRP).
The Amended Real Estate Term Facility is comprised of three tranches,
each with separate interest rates and maturity dates. Tranche A has a maximum
principal amount of $35 million, bears interest at a variable rate equal to the
Fleet National Bank's Base Rate plus 8.25% (payable monthly in arrears) and
matures on December 31, 2002. Tranche B has a maximum principal amount of $25
million, bears interest at a fixed rate of 25% per annum and matures on December
31, 2003. Interest calculated at 18% per annum for Tranche B will be payable
monthly in arrears. The remaining 7% per annum will accrue, be added to the
principal balance of Tranche B and will bear interest at 25% per annum,
compounded annually. Tranche C has a maximum principal amount of $13 million,
bears interest at an effective rate of 25% per annum and matures on December 31,
2005. Interest will accrue, be added to the principal balance of Tranche C and
will compound semi-annually.
Tranche C of the Amended Real Estate Term Facility was purchased by Oak
Hill Capital Partners, L.P. In connection with this $13 million investment, the
Company entered into a Securities Purchase Agreement with Oak Hill, dated as of
July 31, 2000, pursuant to which the Company has agreed to either (i) issue
warrants to Oak Hill for 6,000,000 shares of ASC common stock with an exercise
price of $2.50 per share or (ii) issue to Oak Hill common stock in Resort
Properties representing approximately 15% of the voting interest in Resort
Properties. The purchase price of the warrants (or Resort Properties common
stock, as applicable) was $2 million.
In addition, the Series B Agreement, dated August 9, 1999, was amended
as of July 31, 2000 to provide, among other things: (i) that Oak Hill will have
the right to elect six members of the Company's Board of Directors, provided
that Oak Hill maintains certain ownership levels; (ii) that Mr. Otten will have
the right to elect two members to the Board, provided that he maintains certain
ownership levels; and (iii) that Mr. Otten will have the right to serve on the
executive committee of the Board and on the boards of directors of material
subsidiaries of ASC. As of July 31, 2000, Oak Hill would own 54.9% of the
67,546,455 shares of common stock of the Company that would be outstanding if
all the shares of the Series B Preferred Stock were converted and if all of the
Warrants were exercised.
Sale of Option Rights
On September 26, 2000, the Company entered into a purchase and sale
agreement to sell its option rights to a parcel of real estate in the south Lake
Tahoe Redevelopment District to Marriott for $8.5 million. Pursuant to the terms
of the purchase and sale agreement, Resort Properties will receive $4.09 million
in cash proceeds on October 17, apply a previously received $320,000 deposit and
will receive an additional $4.09 million from Marriott on January 15, 2001.
Also, as part of the purchase and sale agreement the existing Development
Agreement among the Company, Resort Properties and Marriott dated July 22, 1998
will be terminated.