UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 27, 2003
or
o		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

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

None.

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $.01 par value

(Title of Each Class)

 

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 ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act.

Yes o No ý

 

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 the 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.  ý

 

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant on September 28, 2003, determined using the per share closing price thereof on the Over the Counter Bulletin Board, was approximately $3.6 million.  As of September 28, 2003, 31,738,183 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 27, 2003

 

American Skiing Company and Subsidiaries

 

Table of Contents

 

Part I
Item 1 and Item 2 Business and Properties		1
Item 3	Legal Proceedings	17
Item 4	Submission of Matters to a Vote of Security Holders		18
Part II
Item 5	Market for Registrant’s Common Equity and Related Shareholder 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	36
Item 8	Financial Statements and Supplementary Data	38
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
Item 9A	Controls and Procedures	39
Part III
Item 10	Directors and Executive Officers of the Registrant	39
Item 11	Executive Compensation	39
Item 12	Security Ownership of Certain Beneficial Owners and Management	39
Item 13	Certain Relationships and Related Transactions	39
Item 14	Controls and Procedures	39
Item 15	Audit Committee Financial Experts	39
Item 16	Principal Accountant Fees and Services	39
Part IV
Item 17	Exhibits, Financial Statement Schedules and Reports on Form 8-K	40
Signatures		46

 

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PART I

Items 1 and 2 - Business and Properties

 

American Skiing Company

 

Business Description

 

We are organized as a holding company and operate through various subsidiaries.  Refer to Note 2 - “Basis of Presentation” in the consolidated financial statements included in this report for a discussion of the general development of our business, our subsidiaries and predecessors.  We are one of the largest operators of alpine ski and snowboard resorts in the United States.  We develop, own and operate a range of hospitality-related businesses, including skier development programs, hotels, golf courses, restaurants and retail locations.  We also develop, market and operate ski-in/ski-out alpine villages, townhouses, condominiums, quarter and eighth share ownership hotels.  We manage our operations in two business segments, ski resort operations and mountainside real estate development.  For information by reportable segment refer to Note 16 - “Business Segment Information” in the consolidated financial statements included in this report.

 

Our revenues and net loss available to our common shareholders for the year ended July 27, 2003 (Fiscal 2003) were $264.5 million and $(82.0) million, respectively.  Resort segment revenues and real estate segment revenues for Fiscal 2003 were $251.6 million and $12.9 million, respectively.  For more information relating to our financial condition, see “Certain Considerations – Our business is substantially leveraged and we face a number of financial risks.”  Cash flows (used in) provided by operating activities, investing activities and financing activities for Fiscal 2003 were approximately $(8.0) million, $(4.6) million and $12.3 million, respectively.  Resort segment cash flows (used in) provided by operating activities, investing activities and financing activities for Fiscal 2003 were approximately $(5.9) million, $(4.3) million and $10.0 million, respectively.  Real estate segment cash flows (used in) provided by operating activities, investing activities and financing activities for Fiscal 2003 were approximately $(2.1) million, $(0.3) million and $2.3 million, respectively.

 

Our periodic and current reports are available on our website, www.peaks.com, free of charge as soon as is reasonably practicable after such materials are electronically filed with the Securities and Exchange Commission.

 

Resort Operations

 

Our resort business is generated primarily from our ownership and operation of seven ski resorts, several of which are among the largest in the United States.  During the 2002-03 ski season, we owned seven resorts which generated approximately 4.0 million skier visits, representing approximately 6.9% of total skier visits in the United States.  The following table summarizes certain key statistics of our resorts.

 

Resort, Location		Skiable Terrain (acres)		Vertical Drop (feet)		Trails		Total Lifts (high-speed)		Snowmaking Coverage		Ski Lodges		2002-03 Skier Visits (000s)
Killington/Pico, VT		1,182		3,050		200		31 (8	)	70	%	8		1,045
Sunday River, ME		660		2,340		127		18 (4	)	92	%	4		501
Mount Snow/Haystack, VT		757		1,700		145		23 (3	)	75	%	6		546
Sugarloaf/USA, ME		1,410		2,820		129		15 (2	)	92	%	2		355
Attitash Bear Peak, NH		280		1,750		70		12 (2	)	97	%	2		196
The Canyons, UT		3,500		3,190		144		16 (7	)	6	%	3		333
Steamboat, CO		2,939		3,668		142		20 (5	)	15	%	4		1,001
Total of resorts we currently own		10,728		18,518		957		135 (31	)			29		3,977

 

Resort Properties

 

Our resorts include several of the top resorts in the United States based on skier visits.  This includes Killington, the 5th largest resort in the United States and the largest resort in the northeast with over 1.0 million skier visits in the 2002-03 ski season, Steamboat, the 7th largest ski resort in the United States with over 1.0 million skier visits in the 2002-03 ski season, and Sunday River and Mount Snow, which together with Killington comprised 3 of the 4 largest resorts in the New England region of the United States during the 2002-03 ski season.

 

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The Canyons.  The Canyons ski resort, which is located in the Wasatch Range of the Rocky Mountains adjacent to Park City, Utah, is one of the most accessible destination resorts in the world, with the Salt Lake International Airport only 32 miles away via direct major state highway access.  The Canyons is adjacent to the Utah Winter Sports Park, which served as the venue for the ski jumping, bobsled and luge events in the 2002 Winter Olympic Games, and generated approximately 333,000 skier visits in the 2002-03 ski season.  The Canyons consists of 3,500 acres of skiable terrain and receives significant amounts of natural snow, averaging 306.6 inches annually over the past 7 seasons.  The Canyons is a year-round resort offering hiking, mountain biking and various other summer amenities.  The current master development plan for The Canyons includes entitlements for approximately 5 million square feet of development.  We believe that The Canyons continues to have significant growth potential due to its proximity to Salt Lake City and Park City, its undeveloped ski terrain, and its real estate development opportunities.

 

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 3,486 acres of land licensed under a special use permit issued by the United States Forest Service and 245 acres of private land which we own located at the base of the ski area.  Steamboat receives a significant amount of natural dry snow, averaging 330 inches annually over the past 10 ski seasons, and generated approximately 1.0 million skier visits during the 2002-03 ski season.  Steamboat is a year-round resort offering hiking, mountain biking and various other summer amenities.

 

Killington.  Killington, located in central Vermont, is the largest ski resort in the northeastern region of the United States and the fifth largest in the United States, generating approximately 1.0 million skier visits in 2002-03.  Killington is a seven-mountain resort consisting of 1,182 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.  Killington is a year-round resort offering complete golf amenities including an 18-hole championship golf course, a golf school, a driving range, mountain biking, hiking, water slides and an alpine slide.  The current master plan for the proposed Killington resort village development includes over 4,400 units in over 5.3 million square feet of total residential and commercial development.

 

Sunday River.  Sunday River, located in the western mountains of Maine and approximately a three-hour drive from Boston, is the fourth largest ski resort in the New England region of the United States with approximately 501,000 skier visits during the 2002-03 ski 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 approved development plans for a resort village at the Jordan Bowl Area (the most westerly peak), which eventually could include over 1,350 units and 1.1 million square feet of total development.  We recently entered into an agreement with an unrelated third party for the construction, development and operation of a golf course, designed by Robert Trent Jones, Jr., in the Jordan Bowl area that is expected to be completed during the summer of 2004.  We believe that, when completed, the golf course project will further enhance the value and attractiveness of the Sunday River resort as well as real estate development opportunities controlled by us.  Sunday River is a year-round resort offering mountain biking, hiking and various other summer amenities.

 

Mount Snow.  Mount Snow, located in West Dover, Vermont, is the third largest ski resort in the New England region of the United States with approximately 546,000 skier visits in 2002-03 and consists of 757 acres of skiable terrain.  Mount Snow is the southernmost of our eastern resorts.  A large percentage of the skier base for Mount Snow originates from Massachusetts, Connecticut and New York.  Mount Snow owns and operates an 18-hole championship golf course and is the headquarters of our “Original Golf School”, which consists of three golf schools located at various locations in the eastern United States.

 

Sugarloaf/USA.  Sugarloaf/USA is located in the Carrabassett Valley of Maine.  Sugarloaf/USA is a single mountain with a 4,237-foot summit and a 2,820-foot vertical drop.  During the 2002-03 ski season, Sugarloaf/USA generated approximately 355,000 skier visits.  Sugarloaf/USA offers one of the largest ski-in/ski-out base villages in the eastern United States, containing numerous restaurants, retail shops and lodging facilities, including a Grand Summit Hotel.  Sugarloaf/USA 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/USA has a broad market, including areas as distant as New York, New Jersey, Pennsylvania, Washington D.C. and Canada.  Sugarloaf/USA also leases and operates an 18-hole championship golf course which is designed by Robert Trent Jones, Jr. and is consistently rated as one of the top 100 public golf courses in the United States.

 

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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.  During the 2002-03 ski season, Attitash generated approximately 196,000 skier visits.  Attitash Bear Peak consists of 280 acres of skiable terrain and is located in the heart of the Mount Washington Valley which boasts over 200 factory outlet stores, hundreds of bars and restaurants and a large variety of lodging options, including a 143-room slopeside Grand Summit Hotel and Conference Center.  Attitash is a year-round resort offering mountain biking, a water park, alpine slide and various other summer amenities, and benefits from its close proximity to major metropolitan populations.

 

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 eight Grand Summit Hotels (two at Sunday River and one each at Killington, Attitash Bear Peak, Mount Snow, Sugarloaf/USA, The Canyons and Steamboat) and one whole-ownership condominium/hotel at The Canyons (the Sundial Lodge).  We also own smaller lodging properties, hotels and inns at our various resorts and manage these properties along with other properties owned by third parties.

 

Effective May 20, 2002, our real estate subsidiary, American Skiing Company Resort Properties Inc. (Resort Properties), was in default on its real estate credit facility (Real Estate Term Facility), with borrowings totaling $64.2 million as of July 27, 2003, due to its failure to make a mandatory principal payment.  Resort Properties is negotiating with its lenders to restructure this facility. Regardless of the outcome of the restructuring, we may lose control of assets pledged as collateral under the Real Estate Term Facility.  A substantial portion of our developable real estate, including substantially all of the developable residential real estate at The Canyons and Steamboat along with certain core village real estate at Killington, and the stock of our real estate development subsidiaries (including Grand Summit Resort Properties, Inc. (Grand Summit)) is pledged to Fleet National Bank (Fleet) and the lenders under the Real Estate Term Facility.  The commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are also pledged to Fleet and the lenders.  The Grand Summit unit inventory discussed above does not secure the Real Estate Term Facility, although the pledge of stock of Grand Summit to secure the Real Estate Term Facility means that we may lose control of the Grand Summit unit inventory to the lenders under the Real Estate Term Facility.  See “Certain Considerations – Our primary real estate development subsidiary is in payment default under its senior secured credit agreement, and our ability to achieve any future earnings from the real estate development assets held in that subsidiary may be significantly compromised.  In addition, our senior construction loan with our real estate hotel development subsidiary is in default.” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for further discussion of the status of our efforts to restructure this credit facility and the implications to us and to Resort Properties of the proposed restructuring.

 

The senior construction loan of Grand Summit (Senior Construction Loan) with Textron Financial Corporation (Textron) and certain other lenders, totaling $31.7 million as of July 27, 2003, was also in payment default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.  As a result, Grand Summit’s subordinated construction loan (Subordinated Construction Loan) with Textron, totaling $10.0 million as of July 27, 2003, also was in default.  We have not yet been advised by the lenders under the Senior Construction Loan and Subordinated Construction Loan whether they intend to accelerate the remaining balance due thereunder or exercise any of their other rights as a result of the defaults.  An amendment to the Senior Construction Loan delayed certain amortization deadlines from March 31, 2003 to June 29, 2003.  We paid $35,000 to the lenders for such amendment. An additional $175,000 is due and payable for our failure to reduce the loan balance to certain requirements at June 29, 2003.  As of July 27, 2003, this amount has been accrued for in accounts payable and other current liabilities.

 

In addition to the developable real estate discussed above, we also own substantial undeveloped real estate at various resorts which is not pledged as collateral to the lenders under the Real Estate Term Facility, the Senior Construction Loan and the Subordinated Construction Loan (the latter two loans collectively referred to herein as the Construction Loan Facility).

 

Leased or Otherwise Committed Properties

 

Our operations are wholly dependent upon our ownership or long-term control over the skiable terrain located within each resort.  The following summarizes certain non-owned real estate critical to ski operations at each

 

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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.  See “Certain Considerations” for additional discussion of our leases and forest service permits.

 

Sunday River 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.

 

Mount Snow 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 for an additional 30-year term at the option of Mount Snow if various 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 while there are no specific renewal provisions included in the lease, we anticipate that a renewal could be obtained.  Mount Snow also has the option to purchase the Town of Wilmington leased property and a right of first refusal in the event the lessor receives an offer for the leased property.

 

Attitash Bear Peak uses approximately 280 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 given conditions.  In addition, Attitash Bear Peak leases a portion of its parking facilities under a lease expiring December 31, 2014.

 

Killington leases approximately 1,100 acres from the State of Vermont.  A portion of that property constitutes a substantial amount of Killington’s 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 expire 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 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.

 

Sugarloaf/USA leases the Sugarloaf Golf Course from the Town of Carrabassett Valley, Maine pursuant to a lease dated November 16, 2000.  The lease term expires November 2023.  Sugarloaf/USA has an option to renew the lease for an additional 5-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.  Under the agreement, we pay a cost of 5.5% of the full capitalized cost of the development in the case of property that we retain for a certain  number of parcels as defined by the agreement and 11% of the full capitalized cost of the development for any remaining  parcels that we retain or intend to resell.  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.

 

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Steamboat uses approximately 3,486 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 can be added to the permitted area.

 

The United States 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 United States Forest Service over the opposition of the permit holder.

 

Resort Revenues

 

Our resort revenues are generated 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 44% of total resort operations revenue for Fiscal 2003.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in Item 7 of this report, for more information about the sources of our resort revenues for the last three fiscal years.

 

Lift Ticket Sales.  We manage the yield and features of our lift ticket programs and products in order to increase and maximize ticket revenues and operating margins.  Lift ticket programs include packages offered with accommodations in order to maximize total revenue.  We offer a wide variety of incentive-based lift ticket programs designed to maximize skier visits during non-peak periods, to attract specific market segments and to leverage the competitive advantage of our extensive resort network.

 

Food and Beverage.  We own and operate a substantial majority of the food and beverage facilities at our resorts, with the exception of the Sugarloaf/USA 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.  We directly or indirectly control the substantial majority of our on-mountain and base area food and beverage facilities, which we believe allows us to capture a larger proportion of guest spending.  We currently own and operate over 90 different food and beverage outlets.  We are considering a variety of performance enhancement opportunities to our food and beverage operations, including but not limited to, additional out-sourcing of these operations.

 

Retail Sales.  We own approximately 69 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.

 

Lodging and Property Management.  Our lodging and property management departments manage our properties as well as properties owned by third parties.  During the 2002-03 ski season, our lodging departments managed approximately 3,078 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. Our Guaranteed Learn to Ski Program was one of the first skier development programs to guarantee 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  ski equipment 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.

 

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Resort Operating Strategy

 

Our operating strategies include:

 

Multi-Resort Network.  Our network of resorts provides both geographic diversity and significant operating benefits.  We believe our geographic diversity:  (1) reduces the risks associated with unfavorable weather conditions and insulates us from economic slowdowns in any one particular region; (2) increases the accessibility and visibility of our network of resorts to the overall North American skier population; and (3) allows us to offer a wide range of mountain vacation alternatives.

 

We believe that owning multiple resorts also provides us with the opportunity to:

 

•                  Create one of the largest cross-marketing programs in the industry,

•                  Achieve efficiencies and economies of scale when goods and services are purchased,

•                  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,

•                  Establish performance benchmarks for operations across all of our resorts,

•                  Utilize specialized individuals and cross-resort teams at the corporate level as resources for our entire business, and

•                  Develop and implement consumer information and technology systems for application across all of our resorts.

 

Increase Revenues Per Skier.  We intend to continue to increase our revenues per skier by increasing our average revenues per ticket, expanding our revenue sources at each resort and enhancing the effects of our on-mountain marketing efforts.  To meet our goals, our approaches will include:  (1) streamlining and enhancing our one day and multi-day ticket packages to more closely align ticket programs to specific customer market segments; (2) offering multi-resort ticket products; and (3) introducing a variety of programs that offer packages of tickets with lodging and other services available at our resorts.  We also intend to continue to improve our product quality to diversify our revenue sources by expanding and enhancing our facilities and services in our retail, food and beverage, equipment rental, skier development, and lodging and property management operations.  In addition, we believe that our enhanced marketing capabilities and the 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 offer ticket products to our customers that are valid at many, if not all of our resorts.  Examples of these innovative programs are the All East Pass, which allows unlimited skiing at any of our five eastern resorts; the Ultimate 7 College Pass, which allows the full-time college student to ski at any of our seven ski resorts nation-wide; the mEticket, which is a flexible multi-day ticket valid at all seven of our resorts, with a sliding price schedule offering discounts based on the number of days purchased as well as a price break for purchasing early.  The mEticket program is a nation-wide program targeted at retaining skiers who ski six to twelve days each season, which our research indicates represents the majority of the ski population.  In addition, for the 2003-04 ski season, we are offering discounted season passes (restricted and unrestricted) for skiing privileges at Attitash Bear Peak and Sunday River resorts.  By giving guests an incentive to purchase their tickets for the year early in the ski season with the special values offered by the All East Pass, the Ultimate 7 College Pass, the mEticket program, and the Attitash/Sunday River Pass, we believe that we can encourage guests to ski more often and do the majority of their skiing at our resorts.

 

Increase brand awareness and customer loyalty.  Our marketing programs are designed to take advantage of and promote the strong brands and unique characteristics of each of our resorts, optimize cross-selling opportunities, and enhance our customer loyalty.  We have established joint marketing programs with major corporations such as Sprint, Mobil, Anheuser-Busch, American Express, Quaker Oats, Pepsi/Mountain Dew, Rossignol, Vermont Pure, Kodak, Starbucks, and Green Mountain Coffee Roasters.  We believe these joint marketing programs give us a high-quality image and strong market presence, as well as access to operational and marketing resources on both a regional and national basis.  We believe that our customer loyalty can be increased through guest service initiatives used to support brand differentiation and our continued industry leadership in the areas of snowmaking and snow grooming.

 

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Expand our sales and marketing efforts.  We have restructured and consolidated our sales operations so that they have a regional, rather than a resort-specific focus.  We have located our sales and marketing staff near major customers and customer bases, rather than at our resorts.  At the same time, we are directing more of our marketing resources toward advertising and customer promotions.  We have selected a single advertising agency to provide all of our advertising services nationwide, rather than relying on several regional agencies as we have done in the past.  We continue to focus on the expansion of our group sales activities in the convention and group business areas, as well as on the expansion of our off-season business.  For example, each of our resorts has at least one slopeside hotel which is managed by us and offers services year round, including conference space and food and beverage support for group bookings.

 

Continued focus on cost management.  We believe we have made significant progress in increasing the variability of our cost structure during the last two operating seasons, which allows us to more effectively adjust operation levels to in-season demand fluctuations.  We are further refining our seasonal staffing model to minimize our year-round and shoulder season cost structures.  We have also improved our ability to control the ramp-up and ramp-down of our resort operations during all phases of our resort operating season.  In addition, we are implementing or have recently implemented cost management plans related to healthcare, property/casualty insurance and mountain operations.

 

Expand Golf and Convention Business.  Sugarloaf/USA, Killington and Mount Snow all operate championship resort golf courses.  The Sugarloaf/USA course, designed by Robert Trent Jones, Jr., has been consistently rated as one of the top 100 public courses in the country according to a Golf Magazine survey.  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.  During Fiscal 2003, we entered into an agreement with an unrelated third party for the construction, development and operation of a golf course, designed by Robert Trent Jones, Jr., in the Jordan Bowl area at the Sunday River resort, the financing of which is being provided by the unrelated third party.  This golf course is expected to begin operations sometime during the summer of 2004.  Management believes that, when completed, the golf course project will further enhance the value and attractiveness of the Sunday River resort.  We also have opportunities to develop additional golf courses at The Canyons and possibly Attitash.  We are aggressively continuing to expand our in-season and off-season convention business by improving the quality, size and compensation systems of our sales and marketing staff.

 

Improve Hotel Occupancy and Operating Margins.  We have reorganized our eastern sales force to continue to achieve operating efficiencies and improved marketing strategies which will improve the occupancy levels and operating margins of our lodging properties.  We have also developed tools to assist us in our yield management, established committees among our hotels to ensure that “best practices” are used, and have created benchmarking templates against our competitors to assist us in identifying areas of improvement.

 

Real Estate Properties and Development Activities

 

Resort Companies

 

Within our resort companies, we have retained or acquired ownership of the front desk, retail space, restaurants and conference facilities, or “commercial core,” of hotels developed by some of our real estate subsidiaries.  We currently own and operate the commercial core of four Grand Summit Hotels (two at Sunday River and one each at Killington and Sugarloaf/USA).  We operate and manage the commercial cores of four hotels within our real estate companies (see below).  We also own or manage smaller lodging properties, hotels and inns at various resorts.

 

In addition to the developable real estate discussed below, we also own substantial undeveloped real estate at various resorts which is not pledged as collateral to the lenders under the Real Estate Term Facility and the Construction Loan Facility.

 

Real Estate Companies

 

The real estate subsidiaries develop mountainside real estate which complements the expansion of our on-mountain operations.  Real estate revenues are generated from the sale and leasing of interests in real estate

 

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development projects that we have constructed at our resorts and the sale to third parties of developable real estate at our resorts.

 

We currently own and operate the commercial core of four Grand Summit Hotels (one each at Steamboat, The Canyons, Mount Snow and Attitash Bear Peak) and one whole-ownership condominium/hotel at The Canyons (the Sundial Lodge).

 

Grand Summit Hotels.  Our primary real estate development activities in recent years have been the construction of Grand Summit Hotels at each of our resorts.  The Grand Summit Hotel is an interval ownership product which is a signature element of our resorts.  Each hotel is a condominium complex consisting of fully furnished residential and commercial units with a spacious atrium lobby, one or more restaurants, retail space, a grand ballroom, conference space, a health club with an outdoor heated pool (except Sugarloaf/USA) and other recreational amenities.  Residential units in the hotel are sold in quarter and eighth share interests.  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 quarter and eighth share units generates revenue for the real estate segment, and our resort segment generates a continuing revenue stream from operating the hotel’s retail, restaurant and conference facilities and from renting interval interests when not in use by their owners.

 

We have also developed a whole ownership condominium hotel at The Canyons (the Sundial Lodge) and townhouse projects at Sunday River.  We continue to develop and market to third parties development sites for townhomes, single family projects and whole ownership condominium hotels, most recently at our Killington, Steamboat, Mount Snow and Sugarloaf/USA resorts.

 

Local approvals for our resort village plans are at various stages of completion.

 

•                  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.  See “Certain Considerations – Our business is subject to heavy environmental and land use regulation” for additional discussion regarding the status of our master plan permits at The Canyons.  We have received a notice of non-compliance from the applicable governmental regulators and are working with them to resolve these matters of non-compliance.

 

•                  Killington:  The master plan for the Killington Resort Village was approved by local voters in the town of Killington in November 1999 and local and state permits were issued 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.

 

•                  Sunday River:  The resort village master plan for Jordan Bowl is complete.  Individual permits for projects will be required before beginning development.

 

Resort Properties is in default on its Real Estate Term Facility and is negotiating with its lenders to restructure this facility.  Our Construction Loan Facility is also in default.  See “Certain Considerations – Our primary real estate development subsidiary is in payment default under its senior secured credit agreement, and our ability to achieve any future earnings from the real estate development assets held in that subsidiary may be significantly compromised.  In addition, our senior construction loan with our real estate hotel development subsidiary is in default. “ and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for further discussion of the status of our efforts to restructure this credit facility and the implications to us and to Resort Properties of the proposed restructuring.

 

Alpine Resort Industry

 

The alpine resort industry achieved a record number of skier visits in two of the last three seasons.  During the 2002-03 ski season, approximately 490 ski areas in the United States generated approximately 57.6 million skier visits, an increase of 5.8% from the 2001-02 ski season and 0.4% from the 2000-01 ski season.  In the 2002-03 ski

 

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season, snowboarding continued to grow steadily, accounting for 29.5% of total skier visits in the United States, up from 28.1% in 2001-02.  In addition, since the 1999-2000 ski season, season pass sales have increased approximately 60%.

 

The alpine 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.  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 490 in 2003, 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 possible as smaller regional resorts are acquired by larger resort operators with more sophisticated management capabilities and increased availability of capital.

 

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 2002-03 ski season:

 

Geographic Region		2002-03 Total Skier Visits*		Percentage of Total Skier Visits		Skier Visits at Company Resorts		Company Regional Market Share		Company Resorts
		(in millions)				(in millions)
Northeast		14.0		24.3	%	2.6		18.6	%	Killington/Pico, Mount Snow/Haystack, Sunday River, Sugarloaf/USA, Attitash Bear Peak
Southeast		5.8		10.1	%	—		—
Midwest		8.1		14.1	%	—		—
Rocky Mountain		18.8		32.6	%	1.4		7.4	%	Steamboat, The Canyons
Pacific West		10.9		18.9	%	—		—
U.S. Overall		57.6		100.0	%	4.0		6.9	%

 

  (*) Source:  Kottke National End of Season Survey 2002/03 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 beverages 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 to approximately 29.5% of total skier visits in the 2002-03 ski season, a compounded annual growth rate since 1999-2000 of approximately 6.4%.  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 Sates.  These trends and developments include:

 

•                  The existence of approximately 66.7 million members of the “baby boom” generation who are now approaching the 40 to 59 year age group where discretionary income, personal wealth and pursuit of leisure activities are maximized,

•                  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,

•                  Advances in ski equipment technology, such as the development of parabolic skis which make skiing easier to learn and enjoy,

•                  The continued growth of snowboarding as a significant and enduring segment of the industry which in turn increases youth participation in alpine sports,

 

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•                  A greater focus on leisure and fitness in general, and

•                  Expanding demand for second home vacation real estate.

 

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 2.6 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 46% of its weekend skiers reside in the greater Boston metropolitan area.  Similar data collected at Killington and Mount Snow indicate that approximately 27% and 42%, respectively, of their weekend skiers reside in New York, with high concentrations from Pennsylvania, Connecticut, and New Jersey.  The Colorado and Utah ski markets are also highly competitive.

 

Employees and Labor Relations

 

We currently employ approximately 1,400 full-time, year-round employees supporting our resort and real estate operations, including corporate personnel.  At peak season last year, we employed approximately 8,000 employees.  Less than 1% of our employees are unionized.  We believe that we enjoy satisfactory 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, 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.

 

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, with the exception of our Development Agreement at The Canyons, where we have received a notice of non-compliance from the applicable governmental regulators and are working with them to resolve compliance issues.  See “Certain Considerations - Our business is subject to heavy environmental and land use regulation” for additional discussion regarding the status of our master plan permits at The Canyons.

 

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 less favorable terms.  Major expansions of any one or more resorts could require the filing of an environmental impact statement under

 

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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 continue to deploy solutions that improve guest service, create internal efficiency and enable more direct relationships between us and our guests.  We are implementing extensions to our central reservations software that will provide industry-leading integration between our web and call center vacation booking channels.

 

Snowmaking Systems and Technology.  We believe that we operate one of the largest consolidated snowmaking operations in the ski resort industry, with approximately 4,200 acres of snowmaking coverage.  Our proprietary snowmaking software program allows us to produce what we believe is some of the highest quality man-made snow in the industry.  Substantially 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, reducing the need for physical observations to make adjustments and ensuring that ideal snow quality is provided.  In addition, we are actively involved in testing and implementing new technologies to further improve the quality and efficiency of our snow-making operations.

 

CERTAIN CONSIDERATIONS

 

In addition to the other information contained in this Form 10-K, you should carefully consider the following matters 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 considerations and elsewhere in this Form 10-K.  See Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements”.

 

Our primary real estate development subsidiary is in payment default under its senior secured credit agreement, and our ability to achieve any future earnings from the real estate development assets held in that subsidiary may be significantly compromised.  In addition, our senior construction loan with our real estate hotel development subsidiary is in default.

 

On March 30, 2002, our real estate development subsidiary, Resort Properties, failed to make a mandatory principal payment of $3.75 million under its Real Estate Term Facility.  Resort Properties obtained a temporary waiver of this default.  Effective May 20, 2002, the temporary waiver was revoked and Resort Properties was in default on the facility.  On May 31, 2002, Resort Properties received written confirmation of the acceleration of the remaining principal and accrued interest balance.  As of July 27, 2003, principal, accrued interest, late charges and unpaid agent fees outstanding under the facility totaled $79.0 million.  We have been notified by the lenders under the facility that no additional borrowings will be permitted and that Resort Properties will not be given access to restricted cash accounts totaling approximately $0.6 million to satisfy its obligations.  On November 22, 2002, Resort Properties entered into a forbearance agreement with the lenders whereby the lenders agreed to not pursue additional foreclosure remedies and to cease publication of foreclosure notices for a 30-day period.  Although this 30-day period expired, management continues discussions with Fleet and the other lenders regarding a restructuring of this facility, and Fleet and the other lenders have not exercised any further foreclosure remedies since the expiration of the forbearance agreement.  Management’s ongoing restructuring efforts with the lenders are aimed towards a restructuring of the facility which will establish a new entity to hold Resort Properties’ real estate development assets.  The equity in the new entity is expected to be held by a combination of the lenders under the facility and Resort Properties.  The facility remains in default pending completion of these negotiations.  There can be no assurance that negotiations will be successfully completed, or the terms under which the payment defaults

 

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pending under the facility may be resolved, if at all.  Furthermore, regardless of the outcome of this proposed restructuring, we may lose control of assets pledged as collateral under the facility and future access to value creation from these real estate assets.  A substantial portion of our developable real estate, including substantially all of the developable residential real estate at The Canyons and Steamboat along with certain core village real estate at Killington, and the stock of our real estate development subsidiaries (including Grand Summit) is pledged under the Real Estate Term Facility.  The commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are also pledged under this facility.  The Grand Summit unit inventory does not secure the Real Estate Term Facility, although the pledge of stock of Grand Summit to secure the Real Estate Term Facility means that we may lose control of the Grand Summit unit inventory to the lenders under the Real Estate Term Facility.  As of July 27, 2003, the carrying value of the total assets that collateralized the Real Estate Term Facility was approximately $117.0 million.  This collateral includes $80.3 million of Grand Summit assets pledged under our $41.7 million Construction Loan Facility.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Real Estate Liquidity”.

 

The Senior Construction Loan of Grand Summit was also in payment default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.  In addition, the Senior Construction Loan further required that the loan be reduced to a maximum of $25.0 million by June 30, 2003.  As a result, Grand Summit was also in default under its $10.0 million Subordinated Construction Loan with Textron and various lenders.  As of July 27, 2003, $41.7 million was outstanding under the Construction Loan Facility that is made up of the Senior Construction Loan ($31.7 million as of July 27, 2003) and the Subordinated Construction Loan ($10.0 million as of July 27, 2003).  We have not yet been advised by the lenders under the Construction Loan Facility whether they intend to accelerate the remaining balance due thereunder or exercise any of their other rights as a result of the payment default. An amendment to this facility delayed such deadlines from March 31, 2003 to June 29, 2003.  We paid $35,000 to the lenders for such amendment.  An additional $175,000 was due and payable for our failure to reduce the loan balance to certain requirements at June 29, 2003.  As of July 27, 2003, this amount has been accrued in accounts payable and other current liabilities.

 

Pursuant to its terms, our Mandatorily Redeemable Convertible 10½% Series A Preferred Stock was redeemable on November 12, 2002 to the extent that there were legally available funds to effect such redemption. We did not redeem the Mandatorily Redeemable Convertible 10½% Series A Preferred Stock on that redemption date and can give no assurance that the necessary liquidity will be available to effect redemption in the future.  Any redemption of our Series A Preferred Stock could result in an event of default under some of our outstanding debt.

 

We have 36,626 shares of Mandatorily Redeemable Convertible 10½% Series A Preferred Stock (Series A Preferred Stock) outstanding, with an accreted value of approximately $66.7 million as of July 27, 2003.  Our  Series A Preferred Stock was redeemable on November 12, 2002 at an aggregate redemption price of approximately $61.9 million, to the extent that we had funds legally available for that redemption.  If our Series A Preferred Stock is not permitted to be redeemed because there are not legally available funds, we must redeem that number of shares of Series A Preferred Stock which we can lawfully redeem, and from time to time thereafter, as soon as funds are legally available, we must redeem shares of the Series A Preferred Stock until we have done so in full.  Prior to the November 12, 2002 redemption date, based on all relevant factors, our Board of Directors determined not to redeem any shares of stock on the redemption date.  On January 27, 2003, the holders of the Series A Preferred Stock demanded that we redeem all of the Series A Preferred Stock immediately and on April 8, 2003, the Series A Preferred Stockholders demanded pursuant to Delaware law to review certain records.  We will continue to assess our obligations with respect to the requirements of the redemption provisions of the Series A Preferred Stock.  Because the Series A Preferred Stock was not redeemed on November 12, 2002, the certificate of designation for the Series A Preferred Stock provides that the holders are entitled to elect two new members of our board of directors.  We have not yet been advised by the holders of the Series A Preferred Stock whether they intend to exercise their right to elect two directors at or prior to our next annual shareholders meeting or whether they intend to take any other action, including legal action, to seek to compel our redemption of the Series A Preferred Stock.  If the holders of the Series A Preferred Stock were to commence any litigation to compel us to redeem the Series A Preferred Stock, based on present facts and circumstances, we would vigorously contest that litigation.

 

We are not permitted to redeem our Series A Preferred Stock under the terms of our Resort Senior Credit

 

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Facility and the terms of the indenture governing our 12% senior subordinated notes (the Senior Subordinated Notes).  If any redemption occurs or the holders of our Series A Preferred Stock obtain and seek to enforce a final judgment against us that is not paid, discharged or stayed, this could result in an event of default under those debt instruments, and the lenders and holders of that debt could declare all amounts outstanding to be due and payable immediately.  If we are required to redeem all or any portion of our Series A Preferred Stock, either as a result of a court judgment or otherwise, we would have to consider seeking an amendment or waiver of the terms of the Resort Senior Credit Facility and the indenture governing the Senior Subordinated Notes, selling material assets or operations, refinancing our indebtedness and our Series A Preferred Stock, Seeking to raise additional debt or equity capital, delaying capital expenditures and other investments in our business and/or restructuring our indebtedness and preferred stock.  No assurance can be given that we would be successful in taking any of these steps or that we would have the necessary liquidity or assets to effect any redemption of our Series A Preferred Stock and any indebtedness required to be repaid.  As a result, any redemption of, or legal requirement to redeem, our Series A Preferred Stock could have a material adverse effect on us.

 

Our business is substantially leveraged and we face a number of financial risks.

 

We are highly leveraged.  As of September 28, 2003, we had $340.5 million of total indebtedness outstanding, including $106.6 million of secured indebtedness, as well as $308.4 million in redeemable preferred stock (liquidation value).

 

Our high level of debt affects our 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 and capital expenditures.  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 raise additional capital, borrow additional funds, make capital expenditures or sell our assets.  Failure to manage cash resources or an extraordinary demand for cash outside of our normal course of business could leave us with no cash availability.

 

Our ability to make scheduled payments or refinance our debt and preferred stock 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 flows and capital resources will be sufficient to pay our indebtedness.  If our operating results, cash flows 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.  We also could be forced to reduce or delay planned expansions and capital expenditures, sell assets, restructure or refinance our debt or seek additional equity capital.  In addition, further efforts by management to refinance and restructure our debt and redeemable preferred securities could be negatively impacted and result in less favorable terms.  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 cannot be deferred for extended periods without adversely affecting our competitive position and financial performance.

 

Continued improvement in our financial performance depends, in part, on our ability to maintain and improve the quality of our facilities, products and management resources and to engage in successful real estate development (either directly or through third parties).  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.  For example, the resort senior credit facility (Resort Senior Credit Facility) matures on April 15, 2006 for the revolving credit facility (Revolving Credit Facility), the tranche A term loan (Tranche A Term Loan), and the supplemental term loan (Supplemental Term Loan) portions, and June 15, 2006 for the tranche B term loan (Tranche B Term Loan) portion.  We must also retire or refinance our Senior Subordinated Notes in July 2006 and our 11.3025% convertible subordinated notes (the Junior Subordinated Notes) in August 2007.  Our preferred stock must be redeemed in accordance with its terms.  This includes our Series A Preferred Stock, which we did not redeem on November 12, 2002.  We do not expect that the necessary liquidity will be available from operations to effect such

 

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redemption in the foreseeable future.  This also includes our 12% Series C-1 convertible participating preferred stock (the Series C-1 Preferred Stock) which is mandatorily redeemable in July 2007, and our 15% Series C-2 preferred stock (the Series C-2 Preferred Stock) which is mandatorily redeemable in July 2007. There can be no assurance that we will be able to retire, redeem, or refinance our indebtedness and preferred stock in the foreseeable future.  Failure to do so could have a material adverse effect on our business.  See Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for a description of such payments.

 

Our business is highly seasonal and unfavorable weather conditions can adversely affect our business.

 

Ski resort operations are highly seasonal.  For Fiscal 2003, we realized approximately 87% of resort segment revenues and over 100% of resort segment operating income during the period from November through April.  In addition, a significant portion of resort segment revenues and approximately 21% of annual skier visits were generated during the Christmas and Presidents’ Day vacation weeks in Fiscal 2003.  Also, our resorts typically experience operating losses and negative cash flows for the period from May through November.  During the seven-month period from May through November 2002, for example, we had operating losses from resort segment operations aggregating $75.9 million and negative cash flows from resort segment operating activities aggregating $44.4 million.  These losses from resort segment operations included merger, restructuring and asset impairment charges of $20.3 million and write-off of deferred financing costs of $3.3 million.  There can be no assurance that we will be able to finance our capital requirements from external sources during the period from May through November.

 

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 and the early ski season snow conditions and skier perception of early ski season snow conditions influence the momentum and success of the overall ski season.  There is no way for us to predict future weather patterns or the impact that weather patterns may have on the results of operations or visitation.

 

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 (including direct flights by major airlines) 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 positions 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.

 

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 loss of ownership or control of significant portions of our developable real estate securing the Real Estate Term Facility, 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 of environmental compliance and remediation associated with new development, renovations 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 receipt by our real estate subsidiaries of adequate

 

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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. See Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

 

In addition, a material portion of our real estate development business is conducted within the interval ownership industry.  As a result, any changes affecting 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.

 

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.

 

Our development activities at The Canyons in Utah are governed by permits issued pursuant to a Development Agreement with local authorities.  The Development Agreement requires us to achieve certain performance benchmarks in order to remain in compliance with the Development Agreement and obtain additional permits.  We have not achieved certain of these performance benchmarks within the time frames required under the Development Agreement, and the local authorities have advised us that these failures potentially constitute defaults under the Development Agreement.  We are working with the local authorities to address these failures and reassess the appropriate timing for compliance with these performance benchmarks.  Our failure to satisfy local regulatory authorities with respect to these matters may result in our inability to obtain additional permits under the Development Agreement and could significantly adversely impact our ability to meet our business and revenue expansion goals at The Canyons.  Defaults under the Development Agreement could also subject us to risk of litigation with third parties whose development plans are adversely impacted by the delay or loss of permits under the Development Agreement by virtue of our failure to meet performance benchmarks.

 

A disruption in our water supply would impact our snowmaking capabilities and impact our operations.

 

Our operations 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 on our operations, or that important permits, licenses or agreements will not be cancelled or will be renewed on terms as favorable as the current terms.  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 financial condition and  result of operations.

 

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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 various key management and operational personnel.  The loss of the services of these 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 Resort Senior Credit Facility, the Real Estate Term Facility and other agreements governing the debt obligations of our subsidiaries contain contractual restrictions on the ability of our subsidiaries to make dividend payments or other distributions to us.  In addition, state law further restricts the payment of dividends or other distributions to us by our subsidiaries.  The breach of any of the provisions of the indebtedness of our subsidiaries could result in a default, which in turn could accelerate the maturity of our subsidiaries’ indebtedness.  If the maturity of any such indebtedness of our subsidiaries were accelerated, the indebtedness would be required to be paid in full before that subsidiary would be permitted to distribute any assets to us.  There can be no assurance that our assets or those of our subsidiaries would be sufficient to repay all of our outstanding debt.

 

Our business requires significant capital expenditures.  These expenditures do not, however, guarantee improved results.

 

Although we believe that capital expenditures above maintenance levels can be deferred to address cash flow or other constraints, these expenditures cannot be deferred for extended periods without adversely affecting our competitive position and financial performance.  Our financial performance depends, in part, on our ability to maintain and improve the quality of our facilities, products and management resources and to engage in successful real estate development (either directly or through third parties).  In addition, the Resort Senior Credit Facility limits the amount of non-real estate capital expenditures we can make.  To the extent that we are prohibited from making capital expenditures or are unable to obtain the funds to do so with cash generated from operations, or from borrowed funds or additional equity investments, our financial conditions and results of operations could be affected.

 

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 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 and to finance such activities through non-recourse debt.  We intend to finance resort capital improvements through internally generated funds 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 shareholders.

 

As a result of a shareholders’ agreement and the terms of the preferred stock held by Oak Hill Capital Partners, L.P. and certain related entities (Oak Hill), and Leslie B. Otten (Mr. Otten), the holder of all of the 14,760,530 shares of Class A common stock, and Oak Hill control a majority of our board of directors.  Mr. Otten and Oak Hill may have interests different from the interests of the holders of our common stock.

 

A significant portion of our ski resorts are operated under leases or forest service permits.

 

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, Mount Snow and Steamboat ski resorts is federal land that is used under the terms of permits with the United States Forest Service.  The permits give the United States Forest Service the right to review and comment on the location, design and construction of improvements in the permit area and on

 

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certain other operational matters.  The permits can also be terminated or modified by the United States 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.

 

Item 3
Legal Proceedings

 

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.  We believe that our liability for this Superfund site will not have a material adverse effect on our business or financial condition or results of operations or cash flows.

 

On January 24, 2002, we entered into an agreement with Triple Peaks, LLC for the sale of our Steamboat resort.  We later determined that the sale of our Heavenly resort more closely achieved our restructuring objectives and concluded that we would not proceed with the sale of our Steamboat resort.  On April 5, 2002, Triple Peaks, LLC filed a lawsuit against American Skiing Company in federal district court in Denver, alleging breach of contract resulting from our refusal to close on the proposed sale of our Steamboat resort.  The suit seeks both monetary damages resulting from the breach and specific performance of the contract.  On April 16, 2002, before we filed an answer to its complaint, Triple Peaks voluntarily dismissed its suit and re-filed a substantially identical complaint in Colorado state district court in Steamboat, also naming Steamboat Ski & Resort Corporation, American Skiing Company Resort Properties and Walton Pond Apartments, Inc. (each direct or indirect subsidiaries of American Skiing Company) as additional defendants.  On April 19, 2002, we filed a complaint seeking declaratory judgment against Triple Peaks in federal court in Denver seeking a declaration from that court that our damages under the contract for failure to close on the proposed sale are limited to $500,000.  On December 31, 2002, the Colorado state district court issued summary judgment in our favor and against Triple Peaks, confirming that the damages we owe Triple Peaks under the contract are limited to $500,000.  On January 26, 2003, we received notice that Triple Peaks had appealed the decision of the Colorado state district court.  That appeal is currently pending.  Subsequent to the issuance of the summary judgment order by the Colorado state district court, the companion federal court action was dismissed with prejudice at our request.

 

On January 3, 2003, American Skiing Company received arbitration demands from two former executive employees, Hernan Martinez and Peter Tomai.  Messrs. Martinez and Tomai each alleged that they resigned from their employment with us for “good reason” under the terms of their executive employment agreements with us, and that accordingly they are entitled to severance payments equal to one year’s salary ($300,000 and $225,000, respectively) and certain other severance benefits, including the maintenance of health insurance for six months following the termination of their employment.  We contested the existence of “good reason” for their termination of their employment and disputed our liability for the severance payments and other benefits.  Arbitrations were conducted in each of these matters in late June and early July 2003.  Subsequent to Fiscal 2003, we received notice of arbitrators’ judgment in our favor with regards to each of these matters.  These arbitration awards are final and non-appealable.

 

Each of our subsidiaries which operates resorts has claims pending and is regularly subject to personal injury claims related principally to skiing activities at the 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.

 

On April 22, 2003, we were sued in Utah state court by Westgate Resorts, Ltd. for breach of contract and other related claims arising from disputes involving two contracts between us (through two different subsidiaries,

 

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ASC Utah, Inc. and American Skiing Company Resort Properties, Inc.) and Westgate.  Generally, Westgate has alleged that ASC Utah and/or American Skiing Company Resort Properties, Inc. have breached obligations to Westgate to construct certain infrastructure at The Canyons resort and provide marketing support for Westgate’s project.  Westgate’s claim seeks specific performance of certain aspects of the two contracts.  It is not currently feasible to quantify the damages being sought in this action.  On May 13, 2003, we answered Westgate’s complaint and filed a counterclaim, alleging, among other things, that Westgate was in default on a joint promotional agreement with ASC Utah for failing to purchase approximately $2 million in lift tickets and that Westgate’s buildings at The Canyons encroach upon land owned or controlled by ASC Utah and/or American Skiing Company Resort Properties, Inc.  No discovery has been taken in this matter and no timetable has been set for bringing the matter to trial.

 

Item 4
Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

PART II

 

Item 5
Market for the Registrant’s Common Equity and Related Shareholder Matters.

 

Our common stock is currently traded on the Over The Counter Bulletin Board under the symbol “AESK”.  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 September 28, 2003, 31,738,183 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 16,977,653 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 closing prices of our common stock as reported on the Over the Counter Bulletin Board, as applicable.

 

American Skiing Company Common Stock (AESK)

 

 

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 reduce our debt and to support our capital improvement and growth strategies.  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 indentures governing our Senior Subordinated Notes, our Resort Senior Credit Facility and the terms of our Series A Preferred Stock, Series C-1 Preferred Stock and Series C-2 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”.

 

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Item 6
Selected Financial Data

 

The following selected historical financial data has been derived from our consolidated financial statements as audited by: (1) KPMG LLP, as of July 29, 2001, July 28, 2002, and July 27, 2003 and for the fiscal years ended July 30, 2000, July 29, 2001, July 28, 2002 and July 27, 2003; and (2) Arthur Andersen LLP, as of July 25, 1999 and July 30, 2000 and for the fiscal year ended July 25, 1999.  This data, excluding consolidated statements of cash flows data, has been restated to reflect Heavenly as discontinued operations and also includes certain reclassifications to be consistent with the current year presentation.

 

		Historical Year Ended (1)
		July 25, 1999			July 30, 2000			July 29, 2001			July 28, 2002			July 27, 2003
		(in thousands, except per share and per skier visit amounts)
Consolidated Statement of Operations Data:
Net revenues:
Resort (2)		$	239,954		$	240,226		$	275,686		$	243,842		$	251,638
Real estate		24,492			132,063			96,864			28,274			12,898
Total net revenues		264,446			372,289			372,550			272,116			264,536
Operating expenses:
Resort		164,878			170,156			187,715			166,968			168,010
Real estate		26,808			123,837			93,422			30,091			12,166
Marketing, general and administrative		47,936			46,903			49,011			46,699			49,645
Merger, restructuring and asset impairment charges (3)		—			—			76,015			111,608			1,451
Depreciation and amortization		34,547			35,493			34,941			26,238			27,513
Write-off of deferred financing costs		—			1,017			—			3,338			2,761
Total operating expenses		274,169			377,406			441,104			384,942			261,546
Loss from continuing operations before preferred stock dividends and cumulative effect of changes in accounting principles		(31,869		)	(33,743		)	(125,026		)	(167,578		)	(44,374		)
Accretion of discount and dividends on mandatorily redeemable preferred stock		(4,372		)	(20,994		)	(23,357		)	(32,791		)	(37,644		)
Net loss from continuing operations available to common shareholders before cumulative effect of changes in accounting principles		$	(36,241	)	$	(54,737	)	$	(148,383	)	$	(200,369	)	$	(82,018	)
Net loss available to common shareholders		$	(32,332	)	$	(52,452	)	$	(141,572	)	$	(206,710	)	$	(82,018	)
Basic and diluted net loss from continuing operations per share available to common shareholders		$	(1.20	)	$	(1.81	)	$	(4.86	)	$	(6.34	)	$	(2.59	)
Basic and diluted net loss per share available to common shareholders		$	(1.07	)	$	(1.73	)	$	(4.64	)	$	(6.54	)	$	(­­2.59	)
Balance Sheet Data:
Total assets		$	907,502		$	926,778		$	807,038		$	521,993		$	475,305
Long-term debt and redeemable preferred stock, including current maturities		543,740			634,723			638,620			582,096			639,048
Common shareholders’ equity (deficit)		236,655			185,497			44,826			(155,305		)	(237,295		)
Consolidated Statement of Cash Flows Data:
Cash flows provided by (used in) operating activities		$	(77,235	)	$	(43,891	)	$	44,576		$	(1,092	)	$	(7,999	)
Cash flows provided by (used in) investing activities		(37,486		)	(17,403		)	(23,390		)	94,683			(4,658		)
Cash flows provided by (used in) financing activities		108,354			62,376			(19,679		)	(98,259		)	12,329
Other Data:
Skier visits (000’s)(4)		4,157			4,109			4,430			3,756			3,977
Season pass holders (000’s)		40.2			43.2			46.1			39.4			44.1
Resort revenues per skier visit		$	57.72		$	58.46		$	62.23		$	64.92		$	63.27

 

(1)          The historical data above does not reflect the financial position or results of operations for Heavenly.  The financial data for Heavenly is reflected as discontinued operations because Heavenly was sold during Fiscal 2002.

 

(2)          Resort revenues represent all revenues, excluding revenues generated by the sale of real estate interests.

 

(3)          During Fiscal 2001, we recognized the following merger, restructuring and asset impairment charges: a $52.0 million asset impairment charge related to the assets at our Steamboat resort that were previously classified as assets held for sale as of July 29, 2001; a $15.1 million asset impairment charge related to the assets at our Sugarbush resort that are classified as assets held for sale as of July 29, 2001; a $3.6 million charge related to our terminated merger with Meristar Hotels and Resorts, Inc; $4.0 million in employee separation, legal and financial consulting charges related to our strategic restructuring plan; and a $1.3 million impairment

 

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charge to net realizable value in the fourth quarter of Fiscal 2001 on the remaining units at the Attitash Grand Summit Hotel.  During Fiscal 2002, we recognized the following merger, restructuring and asset impairment charges: a $25.4 million asset impairment charge related to the assets at our Steamboat resort that were previously classified as held for sale as of July 29, 2001; a $38.7 million charge related to the remaining quartershare units at the Steamboat Grand Hotel and The Canyons Grand Summit Hotel; a $18.9 million charge related to land and land options at The Canyons; a $24.8 million charge related to master planning and real estate costs at The Canyons, Killington, Mount Snow, Sugarloaf/USA, Sunday River and Steamboat; a $1.4 million charge related to a land option at Sunday River and certain resort fixed assets; $2.7 million in legal and financial consulting charges related to our strategic restructuring plan; offset by a $0.3 million gain to finalize the sale of Sugarbush.  During Fiscal 2003, we recognized the following merger, restructuring and asset impairment charges: a $1.2 million charge related to certain resort fixed assets and other assets; $0.4 million charges related to restructuring charges; offset by a $0.2 million reversal of a previous impairment charge determined not to be needed.

 

(4)          For purposes of estimating skier visits, we assume that a season pass holder visits our resorts a number of times that approximates the average cost of a season pass divided by the average daily lift ticket price.

 

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Item 7
Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

Forward-Looking Statements

 

Certain statements under the heading Part I, Item 1 and Item 2 – “Business and Properties”, this heading Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events.  Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements.  We have tried, wherever possible, to identify such statements by using words such as “anticipate”, “assume”, “believe”, “expect”, “intend”, “plan”, and words and terms of similar substance in connection with any discussion of operating or financial performance.  Such forward-looking statements involve a number of risks and uncertainties.  In addition to factors discussed above, other factors that could cause actual results, performances or achievements to differ materially from those projected include, but are not limited to, the following: changes in regional and national business and economic conditions affecting both our resort operating and real estate segments; any redemption of our legal requirement to redeem our Series A Preferred Stock competition and pricing pressures; negative impact on demand for our products resulting from terrorism and availability of air travel (including the effect of airline bankruptcies); the payment defaults under our Real Estate Term Facility and the Construction Loan Facility and their respective effects on the results and operations of our real estate segment; any redemption of or legal requirement to redeem our Series A Preferred Stock; failure to maintain improvements to resort operating performance at the covenant levels required by our Resort Senior Credit Facility; the possibility of domestic terrorist activities and their respective effects on the ski, golf, resort, leisure and travel industries; failure of on-mountain improvements and other capital expenditures to generate incremental revenue; adverse weather conditions regionally and nationally; seasonal business activity; changes to federal, state and local regulations affecting both our resort operating and real estate segments; failure to renew land leases and forest service permits; disruptions in water supply that would impact snowmaking operations; the loss of any of our executive officers or key operating personnel; and other factors listed from time to time in our documents we have filed with the Securities and Exchange Commission.  We caution the reader that this list is not exhaustive.  We operate in a changing business environment and new risks arise from time to time.  The forward-looking statements included in this document are made only as of the date of this document and under Section 27A of the Securities Act and Section 21E of the Exchange Act, we do not have or undertake any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

 

General

 

The following is our discussion and analysis of financial condition and results of operations for the fiscal year ended July 27, 2003.  Please read this information in connection with our consolidated financial statements and related notes contained elsewhere in this report.

 

Real Estate Credit Agreement Defaults. On March 30, 2002, our real estate development subsidiary, Resort Properties, failed to make a mandatory principal payment of $3.75 million under its Real Estate Term Facility with Fleet National Bank and certain other lenders.  See “- Liquidity and Capital Resources – Real Estate Liquidity – Real Estate Term Facility” below for a discussion of the status of our efforts to restructure the Real Estate Term Facility.

 

As of July 27, 2003, our hotel development subsidiary was also in default under its Construction Loan Facility with Textron and certain other lenders, resulting from the failure to pay down the Senior Construction Loan to $30 million by June 29, 2003.  See “— Liquidity and Capital Resources — Real Estate Liquidity — Construction Loan Facility” below for a discussion of the terms of the March 2003 amendment to the Construction Loan Facility and the current status of the facility.

 

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Liquidity and Capital Resources

 

We are a holding company whose only significant assets are the outstanding common stocks of our subsidiaries.  Our only source of cash to pay our obligations is distributions from our subsidiaries.

 

Short-Term.  Our primary short-term liquidity needs involve funding seasonal working capital requirements, marketing and selling real estate development projects, funding our Fiscal 2004 capital improvement program and servicing our debt.  Our cash requirements for ski-related and real estate development/sales activities are provided from separate sources.

 

As described below, we entered into the Resort Senior Credit Facility on February 14, 2003 and used our initial borrowings to refinance the prior resort senior credit facility.  Our primary source of liquidity for ski-related working capital and ski-related capital improvements are cash flows from operations of our non-real estate subsidiaries and borrowings under our Resort Senior Credit Facility.  The total debt outstanding under our Resort Senior Credit Facility as of July 27, 2003 was approximately $77.8 million, with approximately $9.3 million available for borrowing on such date.

 

Real estate development and real estate working capital was funded primarily through the Construction Loan Facility established for major real estate development projects and net proceeds from the sale of real estate developed for sale after required construction loan repayments.  The Construction Loan Facility is without recourse to us and our resort operating subsidiaries and is collateralized by significant real estate assets of Resort Properties and its subsidiaries, including the assets and stock of Grand Summit, our primary hotel development subsidiary.  As of July 27, 2003, the Construction Loan Facility is in default due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million at June 29, 2003 as required under the terms of the agreement.  As of July 27, 2003, the carrying value of the total assets that collateralized the Construction Loan Facility and which are included in the accompanying consolidated balance sheet was approximately $80.3 million.  The total debt outstanding under the Construction Loan Facility as of July 27, 2003 was approximately $41.7 million.  See “Real Estate Liquidity – Real Estate Term Facility” below.

 

Resort Liquidity.  As part of our comprehensive strategic plan to restructure our debt, we entered into an agreement dated February 14, 2003 with General Electric Capital Corporation (GE Capital) and CapitalSource Finance LLC (CapitalSource) whereby GE Capital and CapitalSource provided the new $91.5 million senior secured loan facility (Resort Senior Credit Facility).  The Resort Senior Credit Facility replaced our prior resort senior credit facility and is secured by substantially all of our holding company assets, excluding the stock of Resort Properties and other real estate subsidiaries, and the assets of our resort operating subsidiaries.  Resort Properties and its subsidiaries are not guarantors of the Resort Senior Credit Facility nor are their assets pledged as collateral under the Resort Senior Credit Facility.  The prior resort senior credit facility was repaid in full on February 18, 2003.

 

The Resort Senior Credit Facility consists of the following:

 

•                  Revolving Credit Facility - $40.0 million, including letter of credit (L/C) availability of up to $5.0 million.  The amount of availability under the Revolving Credit Facility will be correspondingly reduced by the amount of each L/C issued.  As of July 27, 2003, we had approximately $26.6 million borrowed on this facility and approximately $4.1 million of outstanding L/Cs.

 

•                  Tranche A Term Loan -  $25.0 million borrowed as of July 27, 2003, $0 availability;

 

•                  Supplemental Term Loan - $6.2 million borrowed as of July 27, 2003, $0 availability; and

 

•                  Tranche B Term Loan -  $20.0 million borrowed as of July 27, 2003, $0 availability.

 

The Revolving Credit Facility, Tranche A Term Loan, and Supplemental Term Loan portions of the Resort Senior Credit Facility mature on April 15, 2006 and bear interest at JPMorgan Chase Bank’s prime rate plus 3.25%, payable monthly (7.25% as of July 27, 2003).  The Supplemental Term Loan required a principal payment of approximately $342,000 on July 15, 2003 and requires  payments of approximately $1.0 million on January 15 and July 15 of each year, with a final payment of approximately $1.0 million on April 15, 2006.  The Tranche B Term Loan matures on June 15, 2006 and bears interest at JPMorgan Chase Bank’s prime rate plus 5.0%, payable monthly

 

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(12.25% as of July 27, 2003) with an interest rate floor of 12.25%.  The Resort Senior Credit Facility contains affirmative, negative and financial covenants customary for this type of credit facility, which includes maintaining a minimum level of EBITDA, as defined, places a limit on our capital expenditures and contains an asset monetization covenant which requires us to refinance the facility or sell assets sufficient to retire the facility on or prior to December 31, 2005.  The financial covenants of the Resort Senior Credit Facility also restrict our ability to pay cash dividends on or redeem our common and preferred stock.

 

As of September 28, 2003, we had $30.4 million, $25.0 million, $6.2 million and $20.0 million of principal outstanding under the Revolving Credit Facility, Tranche A Term Loan, Supplemental Term Loan and Tranche B Term Loan portions of the Resort Senior Credit Facility, respectively.  Furthermore, as of September 28, 2003 we had approximately $4.1 million in outstanding L/Cs with approximately $5.5 million available for future borrowings under the Revolving Credit Facility.  We currently anticipate that the remaining borrowing capacity under the Resort Senior Credit Facility will be sufficient to meet our working capital needs through the end of Fiscal 2004.

 

  Our significant debt levels affect our liquidity.  As a result of our highly leveraged position, we 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 significantly limited, outside of any availability under the Resort Senior Credit Facility.  Furthermore, our Resort Senior Credit Facility and the indenture governing our Senior Subordinated Notes 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.

 

Real Estate Liquidity.  To fund working capital and fund its real estate development plan, Resort Properties relied on the net proceeds from the sale of real estate developed for sale, the Real Estate Term Facility and the Construction Loan Facility.  A substantial portion of our developable real estate and the commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are pledged to the lenders under the Real Estate Term Facility.

 

Real Estate Term Facility:  Effective May 20, 2002, Resort Properties was in default on its Real Estate Term Facility due to its failure to make a mandatory principal payment of $3.75 million and the indebtedness was accelerated on May 31, 2002.  As a result, all indebtedness under the facility is currently due and payable.

 

The Real Estate Term Facility is comprised of three tranches, each with separate interest rates and maturity dates as follows:

 

•                  Tranche A is a revolving facility with a current maximum principal amount of $17.0 million which bears interest at a variable rate equal to the Fleet National Bank Base Rate plus 2.0% (payable monthly in arrears).  As a result of the default, the default interest rate on Tranche A is the Fleet National Bank Base Rate plus 6.0% (10.0% as of July 27, 2003).  Prior to the default, mandatory principal reductions were required in certain prescribed percentages ranging from 50% to 75% of net proceeds from any future sales of undeveloped parcels.  Prior to the default, the remaining principal amount outstanding under Tranche A was scheduled to be paid in full on June 30, 2003.

 

•                  Tranche B is a term loan facility that has a maximum principal amount of $25 million, bears interest at a fixed rate of 18% per annum (10% per annum is payable monthly in arrears and the remaining 8% per annum accrues, is added to the principal balance of Tranche B and bears interest at 18% per annum, compounded annually).  As a result of the default, the default interest rate on Tranche B is 29% per annum.  Mandatory principal payments on Tranche B of $10 million were due on each of December 31, 2003 and June 30, 2004.  Prior to the default, the remaining $5 million of principal and all accrued and unpaid interest on Tranche B was scheduled to be paid in full on December 31, 2004.

 

•                  Tranche C is a term loan facility that has a maximum principal amount of $12 million, bears interest at an effective rate of 29% per annum and, prior to the default, was scheduled to mature on December 31, 2005.  As a result of the default, the default interest rate on Tranche C is 29% per annum.  Interest accrues, is added to the principal balance of Tranche C and is compounded semi-annually.

 

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On March 30, 2002, our real estate subsidiary, Resort Properties, failed to make a mandatory principal payment of $3.75 million under its Real Estate Term Facility.  Resort Properties obtained a temporary waiver of this default on April 2, 2002. Effective May 20, 2002, the temporary waiver was revoked and Resort Properties was in default on the facility.  On May 31, 2002, the lenders accelerated the due date of the entire remaining principal and accrued interest under the facility.  On November 22, 2002, Resort Properties entered into a forbearance agreement with the lenders whereby the lenders agreed to not pursue additional foreclosure remedies and to cease publication of foreclosure notices for a 30-day period. Although this 30-day period expired, management continues discussions with Fleet and the other lenders regarding a restructuring of this facility, and Fleet and the other lenders have not exercised any further foreclosure remedies since the expiration of the forbearance agreement.  Management’s ongoing restructuring efforts with the lenders are aimed towards a restructuring of the facility which will establish a new entity to hold Resort Properties’ real estate development assets.  The equity in the new entity is expected to be held by a combination of the lenders under the facility and Resort Properties.  The facility remains in default pending completion of these negotiations.

 

There is no assurance that negotiations will be successfully completed, or the terms under which the payment defaults pending under the Real Estate Term Facility may be resolved, if at all.  Furthermore, regardless of the outcome of this proposed restructuring, we may lose control of assets pledged as collateral under the facility and future access to value creation from these real estate assets. A substantial portion of our developable real estate, including substantially all of the developable residential real estate at The Canyons and Steamboat along with certain core village real estate at Killington, and the stock of our real estate development subsidiaries (including Grand Summit) is pledged to Fleet and the lenders under the facility.  The commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are also pledged to Fleet and the lenders.  The Grand Summit unit inventory does not secure the Real Estate Term Facility, although the pledge of the stock of Grand Summit to secure the Real Estate Term Facility means that we may lose control of the Grand Summit unit inventory to the lenders under the Real Estate Term Facility.  Other remedies available to the lenders include, but are not limited to, setoff of cash collateral amounts in Resort Properties’ name held at Fleet in the amount of approximately $0.6 million, foreclosure of real and personal property owned by Resort Properties and pledged to the lenders (including all of the capital stock of Grand Summit), and other customary secured creditor remedies.  As of July 27, 2003, the carrying value of the total assets that collateralized the Real Estate Term Facility was approximately $117.0 million.  This collateral includes $80.3 million of Grand Summit assets pledged under our Construction Loan Facility.  See “Certain Considerations – Our primary real estate development subsidiary is in payment default under its senior secured credit agreement, and our ability to achieve any future earnings from the real estate development assets held in that subsidiary may be significantly compromised.  In addition, our senior construction loan with our real estate hotel development subsidiary is in default.”

 

As of July 27, 2003, the principal balances outstanding, including accrued and unpaid interest, under Tranches A, B and C of the Real Estate Term Facility were $19.5 million, $38.1 million, and $21.4 million, respectively.

 

As of September 28, 2003, the principal balances outstanding, including accrued and unpaid interest, under Tranches A, B and C of the Real Estate Term Facility were $19.8 million, $39.3 million, and $22.5 million, respectively.

 

Construction Loan Facility:  We conduct substantially all of our real estate development through subsidiaries, each of which is a wholly owned subsidiary of Resort Properties.  Grand Summit owns our existing Grand Summit Hotel projects at Steamboat, The Canyons and Attitash Bear Peak, which are primarily financed through the $110 million Senior Construction Loan.  Due to construction delays and cost increases at the Steamboat Grand Hotel project, on July 25, 2000, Grand Summit entered into the $10 million Subordinated Construction Loan.  Together they comprise the Construction Loan Facility.  We used the Construction Loan Facility solely for the purpose of funding the completion of the Steamboat Grand Hotel.  The Construction Loan Facility is without recourse to us and our resort operating subsidiaries and is collateralized by significant real estate assets of Resort Properties and its subsidiaries, including the assets and stock of Grand Summit, our primary hotel development subsidiary.

 

The Senior Construction Loan of Grand Summit was also in payment default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.  In addition, the Senior Construction Loan further required that the loan be reduced

 

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to a maximum of $25.0 million by June 30, 2003.  As a result, the Subordinated Construction Loan also was in default.  We have not yet been advised by the lenders under the Senior Construction Loan and the Subordinated Construction Loan whether they intend to accelerate the remaining balance due thereunder or exercise any of their other rights as a result of the defaults.  An amendment to the Senior Construction Loan delayed certain amortization deadlines from March 31, 2003 to June 29, 2003.  We paid $35,000 to the lenders for such amendment. An additional $175,000 was due and payable because of our failure to reduce the loan balance to certain requirements at June 29, 2003.  As of July 27, 2003, this amount has been accrued  in accounts payable and other current liabilities.

 

As of July 27, 2003, the amount outstanding under the Senior Construction Loan was $31.7 million and there were no borrowings available under this facility.  The principal is payable incrementally as quarter and eighth share sales are closed based on a predetermined per unit amount, which approximates between 70% and 80% of the net proceeds of each closing.  Mortgages against the commercial core units and unsold unit inventory at the Grand Summit Hotels at The Canyons and Steamboat, a promissory note from the Steamboat Homeowners Association secured by the Steamboat Grand Summit hotel parking garage, and the commercial core unit at Attitash Bear Park collateralize the Senior Construction Loan, which is subject to covenants, representations and warranties customary for this type of construction facility.  The Senior Construction Loan is non-recourse to us and our resort operating subsidiaries (although it is collateralized by substantial assets of Grand Summit, having a total book value of $80.3 million as of July 27, 2003, which in turn comprise substantial assets of our business).  The maturity date for funds advanced under the Steamboat portion of the Senior Construction Loan is May 31, 2004.  The principal balance outstanding under the Steamboat portion of the Senior Construction Loan was approximately $31.7 million as of July 27, 2003 and had an interest rate on funds advanced of prime plus 3.5%, with a floor of 9.0% (9.0% as of July 27, 2003).  The Canyons portion of the Senior Construction Loan was repaid during March 2003.

 

The Subordinated Construction Loan bears interest at a fixed rate of 20% per annum, payable monthly in arrears, provided that only 50% of the amount of this 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 Construction Loan or the Senior Construction Loan, automatically be deferred until the final payment date.  The maturity date for funds advanced under the Subordinated Construction Loan is September 30, 2004.  The principal balance outstanding under the Subordinated Construction Loan was approximately $10.0 million as of July 27, 2003.  The Subordinated Construction Loan is secured by the same collateral which secures the Senior Construction Loan.

 

As of September 28, 2003, the amount outstanding under the Senior Construction Loan was $31.2 million and there were no borrowings available under this facility.  As of September 28, 2003, the amount outstanding under the Subordinated Construction Loan was $10.0 million and there were no borrowings available under this facility.

 

Series A Preferred Stock Redemption.  We have 36,626 shares of Series A Preferred Stock outstanding, with an accreted value of approximately $66.7 million as of July 27, 2003.  The Series A Preferred Stock was redeemable on November 12, 2002 at an aggregate redemption price of approximately $62 million, to the extent that we had funds legally available for that redemption.  If the Series A Preferred Stock is not permitted to be redeemed because there are not legally available funds, we must redeem that number of shares of Series A Preferred Stock which we can lawfully redeem, and from time to time thereafter, as soon as funds are legally available, we must redeem shares of our Series A Preferred Stock until we have done so in full.  Prior to the November 12, 2002 redemption date, based on all relevant factors, our Board of Directors determined not to redeem any shares of stock on the redemption date.  On January 27, 2003, the holders of the Series A Preferred Stock demanded that we redeem all of the Series A Preferred Stock immediately and on April 8, 2003, the Series A Preferred Stockholders demanded pursuant to Delaware law to review certain of our records.  We will continue to assess our obligations with respect to the requirements of the redemption provisions of our Series A Preferred Stock.  Because the Series A Preferred Stock was not redeemed on November 12, 2002, the certificate of designation for the Series A Preferred Stock provides that the holders are entitled to elect two new members of our board of directors.  We have not yet been advised by the holders of the Series A Preferred Stock whether they intend to exercise their right to elect two directors at or prior to our next annual shareholders meeting or whether they intend to take any other action, including legal action, to seek to compel our redemption of the Series A Preferred Stock.  If the holders of the Series A Preferred Stock were to commence any litigation to compel us to redeem the Series A Preferred Stock, based on present facts and circumstances, we would vigorously contest that litigation.  If we are required to redeem all or any portion of the Series A Preferred Stock, it could have a material adverse effect on our business, results of operations and financial condition.

 

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Long-Term.  Our primary long-term liquidity needs are to fund skiing-related capital improvements at certain of our resorts.  With respect to capital needs, we have invested over $175 million in skiing-related facilities since the beginning of Fiscal 1998, excluding investments made at Heavenly and Sugarbush (which were sold in Fiscal 2002).  As a result, and in keeping with restrictions imposed under the Resort Senior Credit Facility, we expect our resort capital programs for the next several fiscal years will be more limited in size.

 

For each of Fiscal 2004 and 2005, we anticipate our annual maintenance capital needs to be approximately $8.5 million.  There is a considerable degree of flexibility in the timing and, to a lesser degree, scope of our capital improvement program.  Although we can defer specific capital expenditures for extended periods, continued growth of skier visits, revenues and profitability will require continued capital investment in on-mountain improvements.

 

We finance on-mountain capital improvements through resort cash flows, capital leases and our Resort 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 flows from each season’s resort operations and future borrowing availability and covenant restrictions under the Resort Senior Credit Facility.  The Resort Senior Credit Facility places a maximum level of non-real estate capital expenditures for Fiscal 2004 at $8.5 million, with the ability to increase this amount in the future if certain conditions are met.  We believe that these capital expenditure amounts will be sufficient to meet our non-real estate capital improvement needs for Fiscal 2004.

 

Contractual Obligations

 

Our noncancelable, minimum contractual obligations as of July 27, 2003 were as follows (in thousands):

 

					Payments due by period
Obligation		Total			Less than 1 Year			1 to 3 Years			After 3 years
Resort long-term debt and capital lease obligations		$	92,548		$	32,359		$	54,554		$	5,635
Real estate long-term debt		108,756			108,756			—			—
Subordinated notes and debentures		143,011			1,466			120,000			21,545
Mandatorily Redeemable 10 ½% Series A Preferred Stock		66,663			66,663			—			—
Mandatorily Redeemable 12% Series C-1 Preferred Stock		50,105			—			—			50,105
Mandatorily Redeemable 15% Series C-2 Preferred Stock		184,621			—			—			184,621
Operating leases		18,967			5,476			5,321			8,170
The Canyons land options obligation		2,000			2,000			—			—
Obligation to build ski lifts at The Canyons		2,000			—			2,000			—
Total		$	668,671		$	216,720		$	181,875		$	270,076

 

The operation of a substantial portion of our resort activities are dependent upon leased real estate.  Aggregate lease commitments under noncancelable operating leases are included in the table above.  As of July 27, 2003, approximately $108.8 million (not including an unamortized original issue discount of approximately $2.5 million) of the real estate long-term debt, which does not include accrued and unpaid interest, was in default.  This amount includes the Senior Construction Loan and the Subordinated Construction Loan, which were in default as of June 29, 2003 due to failure to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to

 

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make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods.  Areas where significant judgments are made include, but are not limited to: allowances for doubtful accounts, long-lived asset valuations and useful lives, inventory valuation reserves, and deferred income tax asset valuation allowances.  Actual results could differ materially from these estimates.  The following are our critical accounting policies:

 

Property and Equipment

Property and equipment are carried at cost, net of accumulated depreciation and impairment charges. 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 held under capital lease obligations are amortized over the shorter of their useful lives or their respective lease lives.  Due to the seasonality of our business, we record a full year of depreciation relating to our resort operating assets during the second and third quarters of our fiscal year.

 

Goodwill and Other Intangible Assets

During Fiscal 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142) and were required to evaluate our existing intangible assets and goodwill in a transitional impairment analysis.  As a result of the transitional impairment analysis, we recorded an impairment loss of $18.7 million representing 100% of our goodwill.  This loss was recorded as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for Fiscal 2002.  Furthermore, as prescribed in SFAS No. 142, certain indefinite-lived intangible assets, including trademarks, are no longer amortized but are subject to annual impairment assessments.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.  Definite-lived intangible assets continue to be amortized on a straight-line basis over their estimated useful lives of 16 to 20 years, and assessed for impairment utilizing guidance provided by SFAS No. 144.

 

Prior to the adoption of SFAS No. 142, goodwill, which represents the excess of the purchase price over the fair value of the net assets (including tax attributes and minority interest) acquired in purchase transactions, and other indefinite-lived intangibles were amortized on a straight-line basis over the expected periods to be benefited, up to 40 years.  Goodwill and other indefinite-lived intangibles were assessed for recoverability by determining whether the amortization of the carrying amounts over their remaining useful lives could be recovered through undiscounted future cash flows of the acquired operation or assets.

 

Long-Lived Assets

On July 30, 2001, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  Long-lived assets, such as property and equipment, and definite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.  Prior to the adoption of SFAS No. 144, we accounted for impairment of long-lived assets and long-lived assets to be disposed of in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.  During Fiscal 2002, we completed the sale of our Sugarbush resort and accounted for this sale under SFAS No. 121 and Accounting Principles Board Opinion No. 30 because the disposal activities relating to the sale of Sugarbush were initiated prior to our adoption of SFAS No. 144.

 

Revenue Recognition

Resort revenues include sales of lift tickets, tuition from ski schools, golf course and other recreational activities fees, sales from restaurants, bars and retail and rental shops, and lodging and property management fees (real estate rentals). Daily lift ticket revenue is recognized on the day of purchase. Lift ticket season pass revenue is recognized on a straight-line basis over the ski season, which is the second and third quarters of our fiscal year.  Our remaining resort revenues are generally recognized as the services are performed.  Real estate revenues are recognized under the full accrual method when title has been transferred, adequate initial and continuing investments are adequate to demonstrate a commitment to pay for the property and no continuing involvement exits. Amounts

 

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received from pre-sales of real estate are recorded as restricted cash and deposits and deferred revenue in the accompanying consolidated balance sheets until the earnings process is complete.

 

Seasonality

Our revenues are highly seasonal in nature.  For Fiscal 2003, we realized approximately 87% of resort segment revenues and over 100% of resort segment operating income during the period from November through April.  In addition, a significant portion of resort segment revenue and approximately 21% of annual skier visits were generated during the Christmas and Presidents’ Day vacation weeks in Fiscal 2003.  In addition, our resorts typically experience operating losses and negative cash flows for the period from May through November.

 

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 peak business periods could reduce 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.

 

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Results of Operations

 

Fiscal Year Ended July 27, 2003 (Fiscal 2003)
Versus Fiscal Year Ended July 28, 2002 (Fiscal 2002)

 

Resort Operations:

The components of resort operations for Fiscal 2002 and Fiscal 2003 are as follows.  Fiscal 2002 reflects the operations of Heavenly as discontinued operations due to its sale in May 2002.

 

									Increase/ (Decrease)
		Fiscal 2002				Fiscal 2003			Dollar			Percent
		(in millions, except skier visit and per skier visit amounts)
Revenue category:
Lift tickets		$		104.4		$	111.2		$	6.8		6.5	%
Food and beverage		35.6				36.7			1.1			3.1	%
Retail sales		25.1				25.7			0.6			2.4	%
Lodging and property		37.6				36.5			(1.1		)	-2.9	%
Skier development		20.1				21.1			1.0			5.0	%
Golf, summer activities and other		21.0				20.4			(0.6		)	-2.9	%
Total resort revenues		$	243.8			$	251.6		$	7.8		3.2	%
Cost of resort operations		$	167.0			$	168.0		$	1.0		0.6	%
Marketing, general and administrative		46.6				49.6			3.0			6.4	%
Merger, restructuring and asset impairment charges		47.9				1.6			(46.3		)	-96.7	%
Depreciation and amortization		25.1				25.8			0.7			2.8	%
Write-off of deferred financing costs		3.3				2.8			(0.5		)	-15.2	%
Interest expense		36.3				27.1			(9.2		)	-25.3	%
Total resort expenses		$	326.2			$	274.9		$	(51.3	)	-15.7	%
Loss from continuing resort operations		$	(82.4		)	$	(23.3	)	$	59.1		-71.7	%
Total Skier Visits (000’s)		3,756				3,977			221			5.9	%
Total resort revenue per skier visit		$	64.9			$	63.3		$	(1.6	)	-2.5	%

 

During the 2002-03 ski season, skier visits from our eastern resorts increased approximately 7.1% from approximately 2.5 million to 2.6 million, primarily as a result of our eastern resorts experiencing improved snowfall when compared to the prior season.  Skier visits from our western resorts increased 3.5% during the 2002-03 ski season, primarily as a result of the improved performance at The Canyons following the 2002 Winter Olympic Games in Fiscal 2002.  Over our entire resort network, total skier visits were up 5.9% from the 2001-02 ski season, excluding the skier visits from Heavenly.

 

Revenues for Fiscal 2003 were $251.6 million as compared to $243.8 million for Fiscal 2002, an increase of $7.8 million, or 3.2%.  Revenues from all of our ski-related lines of business were up between 2.4% and 6.5% over the prior year.  These increases resulted from a 5.9% increase in skier visits offset by a 2.5% decrease in revenue per skier visit.  Lodging revenues decreased by 2.9% due to a weakening economy which affected our conference sales business.

 

Our resort segment produced an $23.3 million operating loss in Fiscal 2003, compared to a $82.4 million operating loss in Fiscal 2002.  This $59.1 million decrease in the operating loss resulted primarily from the following:

 

(i)		$7.8 million increase in resort revenues;
(ii)		$7.5 million decrease in resort operating expenses (excluding merger, restructuring and asset impairment charges and write-off of deferred financing costs);
(iii)		$3.0 million increase in marketing, general and administrative expenses; and
(iv)		$46.8 million decrease in merger, restructuring and asset impairment charges and write-off of deferred financing costs.

 

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We incurred merger, restructuring and asset impairment charges for Fiscal 2003 and Fiscal 2002 related to our resort operations.  The $1.6 million of merger, restructuring and asset impairment charges for Fiscal 2003 includes:

 

(i)		$1.2 million of expenses related to the write-off of certain fixed assets and other assets; and
(ii)		$0.4 million in employee severance charges.

 

The $47.9 million of merger, restructuring and asset impairment charges for Fiscal 2002 includes:

 

(i)		$25.4 million impairment charge to record the estimated fair value of net assets held for sale at Steamboat, recorded in the second quarter of Fiscal 2002;
(ii)		$18.9 million impairment charge on land and the land options at The Canyons;
(iii)		$1.4 million impairment charge on certain corporate and Sunday River fixed assets and an option to purchase undeveloped land at Sunday River;
(iv)		$2.5 million of legal, consulting and financing costs incurred in connection with capital and debt restructuring; and
(v)		$(0.3) million of gain to finalize the sale of the Sugarbush resort.

 

Recent Trends:  Through September 28, 2003, our season pass sales for the 2003-04 ski season are approximately $2.7 million greater than at the same time last year.  Our hotel booking pace for the ski season is approximately $1.1 million behind the pace of our bookings at the same time last year.  We believe the decreased hotel booking pace is reflective of a general trend in the leisure industry toward late to last-minute customer booking patterns.

 

Real Estate Operations:

The components of real estate operations are as follows:

 

								Increase/ (Decrease)
		Fiscal 2002			Fiscal 2003			Dollar			Percent
		(in millions)
Total real estate revenues		$	28.3		$	12.9		$	(15.4	)	-54.4	%
Cost of real estate operations		30.1			12.2			(17.9		)	-59.5	%
Merger, restructuring and asset impairment charges		63.7			(0.2		)	(63.9		)	-100.3	%
Depreciation and amortization		1.1			1.7			0.6			54.5	%
Interest expense		18.5			20.3			1.8			9.7	%
Total real estate expenses		113.4			34.0			(79.4		)	-70.0	%
Loss from real estate operations		$	(85.1	)	$	(21.1	)	$	64.0		-75.2	%

 

Real estate revenues decreased by $15.4 million in Fiscal 2003 compared to Fiscal 2002, from $28.3 million to $12.9 million.  Real estate revenues by project (in millions) are as follows:

 

		Fiscal 2002			Fiscal 2003			Increase/ (Decrease)
Steamboat Grand		$	7.1		$	3.2		$	(3.9	)
The Canyons Grand Summit		8.5			5.0			(3.5		)
Eastern properties		7.9			0.0			(7.9		)
Land sales		3.8			3.7			(0.1		)
Other revenues		1.0			1.0			—
Total		$	28.3		$	12.9		$	(15.4	)

 

Steamboat Grand:  During Fiscal 2003, we realized $3.2 million in revenues from sales of units, compared to $7.1 during Fiscal 2002.  This decrease of $3.9 million was primarily the result of the continued disruptions

 

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related to our real estate restructuring as well as continued economic uncertainty.  As of the end of Fiscal 2003, the Steamboat Grand was approximately 54% sold.

 

The Canyons: During Fiscal 2002 and 2003, we realized $8.5 million and $5.0 million, respectively, in ongoing sales of units at The Canyons Grand Summit Hotel.  This decrease also relates to the continued disruptions related to our real estate restructuring as well as continued economic uncertainty.  As of the end of Fiscal 2003, the Grand Summit Hotel at The Canyons was approximately 77% sold.

 

Eastern Properties:  Revenues from sales at our eastern properties in Fiscal 2003 were down $7.9 million from Fiscal 2002 as our projects in the east were almost completely sold out as of the end of Fiscal 2002.

 

Our real estate segment generated a loss before income taxes of $21.1 million in Fiscal 2003, compared to a loss before income taxes of $85.1 million in Fiscal 2002.  This $64.0 million decrease in loss before income taxes results from the net effect of the following:

 

(i)		$15.4 million decrease in revenues;
(ii)		$17.9 million decrease in cost of operations;
(iii)		$63.9 million decrease in restructuring and asset impairment charges;
(iv)		$1.8 million increase in real estate interest expense; and
(v)		$0.6 million increase in real estate depreciation.

 

We incurred restructuring and asset impairment charges for Fiscal 2003 and Fiscal 2002 related to our real estate segment.  The $(0.2) million reversal of restructuring and asset impairment charges during Fiscal 2003 was due to an impairment charge that was subsequently determined not to be needed.

 

The $63.7 million of restructuring and asset impairment charges during Fiscal 2002 related to our real estate segment is comprised of:

 

(i)		$38.7 million of impairment charges to record the estimated fair value of the remaining quarter and eighth share inventory at Steamboat and The Canyons;
(ii)		$24.8 million of impairment charges on master planning and real estate costs at The Canyons, Killington, Mount Snow, Sugarloaf/USA, Sunday River and Steamboat; and
(iii)		$0.2 million of legal, consulting and financing restructuring costs.

 

The $1.8 million increase in real estate interest expense during Fiscal 2003 when compared to Fiscal 2002 was primarily due to the increase in the amount of debt outstanding to Fleet and the indebtedness accruing interest at default rates all year.

 

Recent Trends:  Sales volumes at our Grand Summit properties at Steamboat and The Canyons continue to decrease.  We believe that this is primarily related to the continuing disruptions related to our real estate restructuring efforts, as well as weak economic conditions.

 

Benefit from income taxes.  The benefit from income taxes was $0 in Fiscal 2002 and Fiscal 2003.  We believe it is more likely than not that we will not realize income tax benefits from operating losses in the foreseeable future.

 

Cumulative effect of a change in accounting principle.  During Fiscal 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 applies to goodwill and intangible assts acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired.  As a result of the adoption of SFAS No. 142, we recorded an impairment charge of $18.7 million, which was recorded as a cumulative effect of a change in accounting principle in the accompanying Fiscal 2002 consolidated statement of operations.

 

Accretion of discount and dividends accrued on mandatorily redeemable preferred stock.  The dividends on mandatorily redeemable preferred stock increased $4.8 million, from $32.8 million for Fiscal 2002 to $37.6 million for Fiscal 2003.  This increase is attributable to the compounding effect of accruing dividends on the value of the preferred shares.

 

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Fiscal Year Ended July 28, 2002 (Fiscal 2002)
Versus Fiscal Year Ended July 29, 2001 (Fiscal 2001)

 

Resort Operations:

The components of resort operations for Fiscal 2001 and Fiscal 2002 are as follows.  Both years reflect the operations of Heavenly as discontinued operations due to its sale in May 2002.

 

								Increase/ (Decrease)
		Fiscal 2001			Fiscal 2002			Dollar			Percent
		(in millions, except skier visit and per skier visit amounts)
Revenue category:
Lift tickets		$	119.3		$	104.4		$	(14.9	)	-12.5	%
Food and beverage		39.7			35.6			(4.1		)	-10.3	%
Retail sales		29.8			25.1			(4.7		)	-15.8	%
Lodging and property		40.8			37.6			(3.2		)	-7.8	%
Skier development		22.4			20.1			(2.3		)	-10.3	%
Golf, summer activities and other		23.7			21.0			(2.7		)	-11.4	%
Total resort revenues		$	275.7		$	243.8		$	(31.9	)	-11.6	%
Cost of resort operations		$	187.7		$	167.0		$	(20.7	)	-11.0	%
Marketing, general and administrative		49.0			46.6			(2.4		)	-4.9	%
Merger, restructuring and asset impairment charges		71.3			47.9			(23.4		)	-32.8	%
Depreciation and amortization		32.9			25.1			(7.8		)	-23.7	%
Write-off of deferred financing costs		—			3.3			3.3			N/A
Interest expense		28.7			36.3			7.6			26.5	%
Total resort expenses		$	369.6		$	326.2		$	(43.4	)	-11.7	%
Loss from continuing resort operations		$	(93.9	)	$	(82.4	)	$	11.5		-12.2	%
Total Skier Visits (000’s)		4,430			3,756			(674		)	-15.2	%
Total resort revenue per skier visit		$	62.2		$	64.9		$	2.7		4.3	%

 

During the 2001-02 ski season, our eastern resorts experienced reduced snowfall and mild temperatures when compared to the prior season.  In addition, the events of September 11^th and the continued softening of the resort sector economy further contributed to reduced skier visits from the previous year.  Skier visits for our eastern resorts in the 2001-02 ski season decreased 10.8% from approximately 2.8 million to 2.5 million.  The weakening resort sector economy, travel concerns following the events of September 11^th, low early season snow fall and the temporary negative impact from the 2002 Winter Olympic Games at The Canyons negatively impacted demand at our western resorts, which are more heavily reliant on destination visits.  These negative factors were partially offset by continued growth of skier visits at The Canyons in the non-Olympic periods with overall western skier visits being down approximately 1.3% from the prior year.  Over our entire resort network, total skier visits were down 7.7% from the 2000-01 ski season, excluding the skier visits from Heavenly and Sugarbush.

 

Revenues for Fiscal 2002 were $243.8 million as compared to $275.7 million for Fiscal 2001, a decrease of $31.9 million, or 11.6%.  Sugarbush was sold on September 28, 2001 and its results of operations are included in our statements of operations through that date.  Excluding results from Sugarbush, revenues for Fiscal 2002 were $243.1 million as compared to $258.6 million in Fiscal 2001, a decrease of $15.5 million, or 6.0%.  Excluding Sugarbush, revenues from all of our ski-related lines of business were down between 5.1% and 10.4% over the prior year, with the exception of lodging revenues which were down 2.6%.  These decreases resulted from a 7.7% decrease in skier visits offset by a 1.9% increase in revenue per skier visit.  Lodging revenues did not decrease as significantly as we have continued to strengthen our non-ski season conference business and because of the further maturing of the Steamboat Grand and the two hotels at The Canyons.

 

Our resort segment produced a $82.4 million operating loss in Fiscal 2002, compared to a $93.9 million operating loss in Fiscal 2001.  This $11.5 million decrease in the operating loss resulted primarily from the following:

 

(i)		$15.5 million decrease in resort revenues resulting from decreased skier visits;
(ii)		$8.9 million decrease in resort operating expenses;

 

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(iii)		$0.3 million decrease in marketing, general and administrative expenses;
(iv)		$20.1 million decrease in merger, restructuring and asset impairment charges and write-off of deferred financing costs;
(v)		$5.9 million decrease in depreciation:
(vi)		$7.6 million increase in interest expense; and
(vii)		$0.6 million decrease in operating income from Sugarbush, which was sold  in September 2001.

 

We incurred merger, restructuring and asset impairment charges for Fiscal 2002 and Fiscal 2001 related to our resort operations.  The $47.9 million of merger, restructuring and asset impairment charges for Fiscal 2002 includes:

 

(i)		$25.4 million impairment charge to record the estimated fair value of net assets held for sale at Steamboat, recorded in the second quarter of Fiscal 2002;
(ii)		$18.9 million impairment charge on land and the land options at The Canyons;
(iii)		$1.4 million impairment charge on certain corporate and Sunday River fixed assets and an option to purchase undeveloped land at Sunday River;
(iv)		$2.5 million of legal, consulting and financing costs incurred in connection with capital and debt restructuring; and
(v)		$(0.3) million of gain to finalize the sale of the Sugarbush resort.

 

The $71.3 million of merger, restructuring and asset impairment charges for Fiscal 2001 related to our resort operations includes:

 

(i)		$50.0 million impairment charge to record the estimated fair value of net assets held for sale at Steamboat, recorded in the fourth quarter of Fiscal 2001;
(ii)		$14.0 million impairment of assets held for sale at Sugarbush resulting from the agreement to sell Sugarbush to Summit Ventures, Inc.;
(iii)		$3.6 million of expenses incurred in connection with the terminated merger with Meristar Hotels and Resorts; and
(iv)		$3.7 million in employee severance and restructuring charges.

 

Real Estate Operations:

The components of real estate operations are as follows:

 

								Increase/ (Decrease)
		Fiscal 2001			Fiscal 2002			Dollar			Percent
		(in millions)
Total real estate revenues		$	96.9		$	28.3		$	(68.6	)	-70.8	%
Cost of real estate operations		93.5			30.1			(63.4		)	-67.8	%
Merger, restructuring and asset impairment charges		4.7			63.7			59.0			1,255.3	%
Depreciation and amortization		2.0			1.1			(0.9		)	-45.0	%
Interest expense		27.8			18.5			(9.3		)	-33.5	%
Total real estate expenses		128.0			113.4			(14.6		)	-11.4	%
Loss from real estate operations		$	(31.1	)	$	(85.1	)	$	(54.0	)	173.6	%

 

Real estate revenues decreased by $68.6 million in Fiscal 2002 compared to Fiscal 2001, from $96.9 million to $28.3 million.  Real estate revenues by project (in millions) are as follows:

 

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		Fiscal 2001			Fiscal 2002			Increase/ (Decrease)
Steamboat Grand		$	37.5		$	7.1		$	(30.4	)
The Canyons Grand Summit		21.7			8.5			(13.2		)
Sundial Lodge		1.7			—			(1.7		)
Eastern properties		12.5			7.9			(4.6		)
Land sales		22.2			3.8			(18.4		)
Other revenues		1.3			1.0			(0.3		)
Total		$	96.9		$	28.3		$	(68.6	)

 

Steamboat Grand:  During Fiscal 2001, we began closing on the sale of quartershare units in the new Steamboat Grand, adjacent to Steamboat in Colorado.  We realized $37.5 million in revenues from closings of units for Fiscal 2001, much of which was the result of pre-sale activities during the construction and development period.  During the fourth quarter of Fiscal 2001, disputes with the general contractor resulted in mechanics liens being placed on the Steamboat Grand, which caused a temporary halt in unit closings beginning in early May 2001.  We were able to negotiate a settlement with the general contractor that became effective in Fiscal 2002.  During Fiscal 2002, we resumed selling the quartershare units and realized $7.1 million in revenues from closings of units.  As of the end of Fiscal 2002, the Steamboat Grand was approximately 50% sold.

 

The Canyons:  Both the Sundial Lodge and the Grand Summit Hotel at The Canyons in Park City, Utah were completed during Fiscal 2000.  During Fiscal 2001 and 2002, we realized $21.7 million and $8.5 million, respectively, in ongoing sales of quartershare units at The Canyons Grand Summit Hotel, and $1.7 million and none, respectively, from remaining units at the Sundial Lodge.  These decreases relate to the resort sector economic downturn during Fiscal 2002, the events of September 11^th and the stage of completion of these facilities.  As of the end of Fiscal 2002, the Sundial Lodge was 100% sold and the Grand Summit Hotel at The Canyons was approximately 74% sold.

 

Eastern Properties:  Revenues from sales at our eastern properties in Fiscal 2002 were down $4.6 million from Fiscal 2001 as our projects at Killington and Sunday River were nearly completely sold as of the end of Fiscal 2001.  As of July 28, 2002, only one non-standard unit was remaining at the Jordan Grand, with that unit being sold in September 2002.  The Mount Snow, Attitash Bear Peak and Killington Grand Summit Hotels were also completely sold as of July 28, 2002 with $7.9 million in revenue being realized from Eastern unit sales in Fiscal 2002.

 

Land Sales: During Fiscal 2002, land sales decreased by $18.4 million due to the depressed market for development land.  During Fiscal 2002, land sales were limited to the sale of the Heavenly base parcel in conjunction with the sale of the resort for $2.4 million, land at the Sugarloaf/USA resort for $1.0 million and various smaller sales.

 

During Fiscal 2001, we realized revenue from the sale of three separate development parcels, as follows:

 

(i)		In August 2000, we sold our option rights to certain real estate in the South Lake Tahoe Redevelopment District to Marriott Ownership Resorts, Inc. for $8.5 million;
(ii)		In May 2001 we sold our 85% ownership interest in Heavenly Resort Properties, LLC, the entity that controls the development rights for the Heavenly Grand Summit quartershare hotel adjacent to our Heavenly resort in South Lake Tahoe, CA, to Marriott Vacation Club International for $11.2 million (excluding future participation revenues we anticipate receiving in Fiscal 2003).  Marriott has commenced construction on this hotel and expects it to open during the 2002-03 ski season; and
(iii)		In July 2001, we sold a development parcel at Central Park Plaza in the vicinity of our Steamboat ski resort for $2.5 million.

 

Our real estate segment generated a loss before income taxes of $85.1 million in Fiscal 2002, compared to a loss before income taxes of $31.1 million in Fiscal 2001.  This $54.0 million increase in loss before income taxes results from the net effect of the following:

 

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(i)		$68.6 million decrease in real estate revenues;
(ii)		$63.4 million decrease in cost of real estate operations;
(iii)		$59.0 million increase in restructuring and asset impairment charges;
(iv)		$9.3 million decrease in real estate interest expense; and
(v)		$0.9 million decrease in real estate depreciation.

 

We incurred restructuring and asset impairment charges for Fiscal 2002 and Fiscal 2001 related to our real estate segment.  The $63.7 million of restructuring and asset impairment charges during Fiscal 2002 related to our real estate segment is comprised of:

 

(i)		$38.7 million impairment charge to record the estimated fair value of the remaining quartershare inventory at Steamboat and The Canyons;
(ii)		$24.8 million impairment charges on master planning and real estate costs at The Canyons, Killington, Mount Snow, Sugarloaf/USA, Sunday River and Steamboat;
(iii)		$0.2 million of legal, consulting and financing restructuring costs.

 

The $4.7 million of restructuring and asset impairment charges during Fiscal 2001 related to our real estate segment is comprised of:

 

(i)		$2.0 million of asset impairment charges related to undeveloped land at Steamboat ;
(ii)		$1.3 million impairment charge related to the remaining units at the Attitash Grand Summit Hotel project;
(iii)		$1.1 million write-off of remaining capitalized costs in connection with development of a Grand Summit Hotel at Sugarbush as a result of the sale of that resort; and
(iv)		$0.3 million in restructuring charges.

 

The $9.3 million decrease in real estate interest expense was primarily due to a reduction in the amount of debt outstanding during Fiscal 2002 when compared to Fiscal 2001.  Also, during Fiscal 2001, we capitalized $2.1 million of interest costs related to the final stages of construction at the Steamboat Grand compared to capitalizing $0 in Fiscal 2002.

 

Benefit from income taxes.  The benefit from income taxes was $0 in Fiscal 2001 and Fiscal 2002.  We believe it is more likely than not that we will not realize income tax benefits from operating losses in the foreseeable future.

 

Cumulative effect of a change in accounting principle.  During Fiscal 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired.  As a result of the adoption of SFAS No. 142, we recorded an impairment charge of $18.7 million, which has been recorded as a cumulative effect of a change in accounting principle in the accompanying Fiscal 2002 consolidated statement of operations.

 

The cumulative effect of a change in accounting principle of $2.5 million (net of $1.5 million tax provision) in Fiscal 2001 resulted from recording the fair value of non-hedging derivatives in the accompanying balance sheet in connection with our initial adoption of 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 No. 133 as amended).

 

Accretion of discount and dividends accrued on mandatorily redeemable preferred stock.  The dividends on mandatorily redeemable preferred stock increased $9.4 million, from $23.4 million for Fiscal 2001 to $32.8 million for Fiscal 2002.  This increase is primarily attributable to the recapitalization that occurred during August 2001.  The compounding effect of accruing dividends on the value of the preferred shares contributed to the increase.  On August 31, 2001, the Series B Preferred Stock was stripped of all of its rights and preferences with the exception of the right to elect up to six directors in exchange for, among other things, two new series of Preferred Stock:  (i) $40 million face value of Series C-1 Preferred Stock, accruing dividends at the rate of 12% per annum; and (ii) $139.5 million face value of Series C-2 Preferred Stock accruing dividends at the rate of 15% per annum.

 

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Recently Issued Accounting Standards

 

In November 2002, the FASB issued FASB Interpretations (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34”.  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of FIN No. 45 are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.  We adopted FIN No. 45 effective for the interim period ended January 26, 2003.  The adoption of FIN No. 45 did not have an effect on our results of operations or financial position.

 

In January 2003, the FASB issued FASB Interpretations (FIN) No. 46, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51”.  This Interpretation addresses consolidation and reporting by business enterprises of variable interest entities.  All enterprises with variable interests in variable interest entities created after January 31, 2003, shall apply the provisions of this Interpretation to those entities immediately. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this Interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after December 13, 2003.  We adopted FIN No. 46 effective January 27, 2003.  The adoption of FIN No. 46 did not have an effect on our results of operations or financial position.

 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS No. 150).  SFAS No. 150 establishes standards for how financial instruments with characteristics of both liabilities and equity should be measured and classified and requires that an issuer classify a financial instrument that is within its scope as a liability.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  We adopted SFAS No. 150 effective July 28, 2003.  As a result of adopting SFAS No. 150, approximately $298.7 million will be reclassified to liabilities in the consolidated balance sheet in the first quarter of Fiscal 2004.  This represents the book value of all of the classes of preferred stock.  In addition, approximately $43.1 million of accretion of discount and dividends on the preferred stock in Fiscal 2004 will be included in interest expense, whereas previously it was reported as accretion of discount and dividends on mandatorily redeemable preferred stock.

 

Item 7A
Quantitative and Qualitative Disclosures about Market Risk

 

Our financial instruments do not subject us to material market risk exposures, except for risks related to interest rate fluctuations.  As of July 27, 2003, we had $126.3 million in floating interest rate long-term debt outstanding, including current portion.  As of July 27, 2003, we did not have any interest rate swap agreements in place which swapped variable interest rate borrowings to fixed interest rate borrowings.

 

The following sensitivity analysis presents the proforma impact on Fiscal 2003 annual interest expense resulting from a hypothetical 100 basis point increase in the U.S. Prime lending rate on each of our floating interest rate debt instruments (in thousands).

 

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Variable Rate Debt (principal only)		Balance Outstanding as of July 27, 2003			Average Balance Outstanding in FY 2003			Hypothetical Change in Rate Index		Effect on Interest Expense
Resort Senior Credit Facility		$	77,779		$	58,508		1.0	%	$	585
Real Estate Term Facility, Tranche A		16,800			16,800			1.0	%	168
Resort Properties Textron facility		31,718			33,631			1.0	%	336
Total variable rate debt		$	126,297		$	108,939		1.0	%	$	1,089

 

We believe that the hypothetical effects of a 100-basis point increase in the floating interest rates associated with our debt instruments would not be significant to our results of operations and cash flows.  The balance outstanding as of July 27, 2003 for Real Estate Term Facility Tranche A does not include approximately $2.7 million of accrued and unpaid interest.

 

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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 27, 2003.  In the opinion of our management, this information has been prepared on the same basis as the annual consolidated financial statements (See Item 17 – Exhibits, Financial Statement Schedules and Reports on Form 8-K) 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 quarters are not necessarily indicative of results that may be achieved for any future period.  Fiscal 2002 information includes the restatement of Heavenly to discontinued operations as previously reported in the Form 10-K for the fiscal year ended July 28, 2002 (amounts in thousands, except per share amounts):

 

 

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Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

 

Item 9A

Controls and Procedures

 

(a)                                Evaluation of disclosure controls and procedures.  Our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).  Based on that evaluation, these officers have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made to known to them, particularly during the period in which this report was being prepared.

 

(b)                               Changes in internal controls.  No change occurred in the Company’s internal controls concerning financial reporting during the quarter ended July 27, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.

 

PART III

 

Pursuant to General Instruction G of Form 10-K, the information contained in Part III of this report (Items 10, 11, 12, 13, 15 and 16) 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 25, 2003.  Item 14 is not applicable for Fiscal 2003.

 

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PART IV

 

Item 17

Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

 

(a)	Documents filed as part of this report:
1.		Index to financial statements,  financial statement schedules, and supplementary data, filed as part of this report:
		Independent Auditors’ Report
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Shareholders’ Equity (Deficit)
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
2.		Financial Statement Schedules:  All 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 American Skiing Company (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K for the report date of October 22, 1999).
3.2		Certificate of Designation of 12% Series C-1 Convertible Participating Preferred Stock of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K for the report date of September 4, 2001).
3.3		Certificate of Designation of 15% Series C-2 Preferred Stock of the Company (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K for the report date of September 4, 2001).
3.4		Certificate of Designation of Series D Participating Preferred Stock of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Form 8-K for the report date September 4, 2001).
3.5		Amended and Restated Bylaws of the Company Adopted July 10, 2001 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K for the report date of September 4, 2001).
3.6		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 8-K for the report date of October 6, 1999).
3.7		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 8-K 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 10-K for the report date of October 22, 1999).

 

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4.2		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).
4.3		Indenture relating to 11.3025% Convertible Subordinated Notes Due 2007 dated as of August 31, 2001 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K for the report date of September 4, 2001).
4.4		Specimen Certificate for Class A Common Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.4 to the Company’s Form 10-K for the report date of November 14, 2001).
4.5		Specimen Certificate for Series B Convertible Participating Preferred Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K for the report date of November 14, 2001).
4.6		Specimen Certificates for Series C-1 Preferred Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K for the report date of November 14, 2001).
4.7		Specimen Certificates for Series C-2 Preferred Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-K for the report date of November 14, 2001).
4.8		Specimen Certificates for Series D Preferred Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.8 to the Company’s Form 10-K for the report date of November 14, 2001).
4.9		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).
4.10		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).
4.11		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 8-K for the Report date of October 6, 1999).
4.12		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 8-K for the report date of October 6, 1999).
4.13		Fourth Supplemental Indenture dated as of October 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 8-K for the report date of October 6, 1999).
4.14		Fifth Supplemental Indenture dated as of April 19, 2002 among the Company, its subsidiaries party thereto, and The Bank of New York as Trustee (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K for the report date of April 23, 2002).
4.15		Acknowledgement of The Bank of New York as Trustee dated May 9, 2002 releasing Heavenly Valley, Limited Partnership from its guaranty under the Indenture dated as of June 28, 1996.
4.27		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 to Exhibit 10.1 to the Company’s Form 8-K for the report date August 2, 2000).

 

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4.28		First Amendment to Second Amended and Restated Credit Agreement among American Skiing Company Resort Properties, Inc. and Fleet National Bank, as agent for the Lenders dated August 20, 2001 (incorporated by reference to Exhibit 10.12 to the Company’s Form 10-K for the report date November 14, 2001).
4.30		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).
4.31		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).
4.32		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 (incorporated by reference to Exhibit 10.22 to the Company’s annual report on Form 10-K for the fiscal year ended July 25, 1999).
4.33		Third 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 January 2000 (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-K for the report date November 14, 2002).
4.34		Fourth 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 September 15, 2000 (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K for the report date November 14, 2002).
4.35		Fifth 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 August 20, 2001 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K for the report date November 14, 2002).
4.36		Sixth 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 August 29, 2002 (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K for the report date October 11, 2002).
4.37		Statement of Intention and Special Additional Financing Agreement dated July 25, 2000 between Grand Summit Resort Properties, Inc. and Textron Financial Corporation (incorporated by reference from the Registrant’s Form 10-K for the fiscal year ended July 30, 2000).
4.38		First Amendment Agreement to the Statement of Intention and Special Additional Financing Agreement between Grand Summit Resort Properties, Inc. and Textron Financial Corporation dated August 20, 2001 (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K for the report date November 14, 2002).
4.39		Second Amendment Agreement to the Statement of Intention and Special Additional Financing Agreement between Grand Summit Resort Properties, Inc. and Textron Financial Corporation dated as of August 29, 2002 (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K for the report date October 11, 2002).
4.40		$91,500,000 Credit Agreement dates as of February 14, 2003 among American Skiing Company, certain of its subsidiaries as borrowers, the lenders from time to time party thereto, and General Electric Capital Corporation, as Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K for the report date of February 14, 2003).

 

42

 

10.1		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).
10.2		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 8-K for the report date of July 9, 1999).
10.3		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 10-K for the report date of October 22, 1999).
10.4		Amendment to Stockholders Agreement dated July 31, 2000 among the Registrant, Oak Hill Capital Partners, L.P. and Leslie B. Otten (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K for the report date of July 31, 2000).
10.5		Securities Purchase Agreement dated July 31, 2000 among the Registrant, American Skiing Company Resort Properties, Inc. and Oak Hill Capital Partners, L.P. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K for the report date of July 31, 2000).
10.6		Securities Purchase Agreement dated as of July 15, 2001 among American Skiing Company, a Delaware corporation, Oak Hill Capital Partners, L.P., a Delaware limited partnership, and other entities identified in Annex A thereto (incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K for the report date of July 16, 2001).
10.7		Amendment No. 1 to Securities Purchase Agreement among American Skiing Company, a Delaware corporation, Oak Hill Capital Partners, L.P., a Delaware Limited partnership dated August 22, 2001 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K for the report date of August 31, 2001).
10.8		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).
10.9		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).
10.10		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).
10.11		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).
10.12		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).
10.13		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).

 

43

 

10.14		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).
10.17		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).
10.18		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).
10.19		$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).
10.20		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).
10.21		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).
10.22		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).
10.23		Lease/Option dated October 12, 2003, between John Blake and L.B.O. Holding, Inc.
10.24		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).
10.25		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).
10.27		Amended and Restated Lease Agreement between Sugarloaf Mountain Corporation and the Inhabitants of the Town of Carrabassett Valley, Maine, concerning the Sugarloaf Golf Course dated November 16, 2000 (incorporated by reference to Exhibit 10.35 to American Skiing Company’s Registration Statement on Form S-4, filed on January 9, 2001).
10.28		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).
10.29		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).
10.30		Stock Option Plan (incorporated by reference to Exhibit 10.89 to the Company’s Registration Statement on Form S-1, Registration No. 333-33483).

 

44

 

10.31		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).
10.32		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).
10.33		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).
10.35		Employment Agreement between the Registrant and William J. Fair dated May 17, 2000 (incorporated by reference to Exhibit 10.46 to the Company’s annual report for Fiscal Year ended July 30, 2000).
10.36		Executive Employment Agreement between the Registrant and Foster A. Stewart, Jr. dated as of July 31, 2001 (incorporated by reference to Exhibit 10.36 to the Company’s Form 10-K for the year ended July 28, 2002).
10.37		Executive Employment Agreement between the Registrant and Helen E. Wallace dated as of November 7, 2002 (incorporated by reference to Exhibit 10.37 to the Company’s Form 10-K for the year ended July 28, 2002).
10.38		Employment Letter between the Registrant and Franklin Carey dated July 21, 2003.
10.39		The Canyons Resort Village Management Agreement dated as of November 15, 1999 (incorporated by reference to Exhibit 2 to the Company’s Form 10-Q for the quarter ended October 24, 1999).
10.40		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 to Exhibit 3 to the Company’s Form 10-Q for the quarter ended October 24, 1999).
10.41		American Skiing Company Phantom Equity Plan dated as of December 1, 2001 (incorporated by reference to Exhibit 10.41 to the Company’s Form 10-K for the year ended July 28, 2002).
10.42		Form of Phantom Equity Plan Grant Agreement (Five Year Vesting Schedule) (incorporated by reference to Exhibit 10.42 to the Company’s Form 10-K for the year ended July 28, 2002).
10.43		Form of Phantom Equity Plan Grant Agreement (Four Year Vesting Schedule) (incorporated by reference to Exhibit 10.43 to the Company’s Form 10-K for the year ended July 28, 2002).
22.1		Subsidiaries of the Company.
23.2		Consent of KPMG LLP
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports filed on Form 8-K.

 

The Company filed a report on Form 8-K on June 13, 2003 announcing its results for the 13 and 39 weeks ended April 27, 2003.

 

45

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	American Skiing Company
Date:  October 27, 2003
	By:	/s/ William J. Fair
	William J. Fair
	President and Chief Executive Officer
	(Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated this 27^th day of October, 2003.

 

	By:	/s/ William J. Fair
	William J. Fair
	President and Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ Helen E. Wallace
	Helen E. Wallace
	Senior Vice President,
	Chief Financial Officer
	(Principal Financial Officer)
	(Principal Accounting Officer)
	By:	/s/ Leslie B. Otten
	Leslie B. Otten, Director
	By:	/s/ Gordon M. Gillies
	Gordon M. Gillies, Director
	By:	/s/ David Hawkes
	David Hawkes, Director

 

46

 

	By:	/s/ Edward V. Dardani
	Edward V. Dardani, 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:
	Paul Wachter, Director
	By:	/s/ Alexandra Hess
	Alexandra Hess, Director
	By:	/s/ Robert Branson
	Robert Branson, Director
	By:	/s/ William J. Fair
	William J. Fair, Director

 

47

 

Independent Auditors’ Report

 

To the Board of Directors and Shareholders of

American Skiing Company:

 

We have audited the accompanying consolidated balance sheets of American Skiing Company and subsidiaries as of July 27, 2003 and July 28, 2002 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the years in the three-year period ended July 27, 2003.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Skiing Company and subsidiaries as of July 27, 2003 and July 28, 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended July 27, 2003 in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets, in the fiscal year ended July 28, 2002 and as a result changed its method for accounting for goodwill and intangible assets.

 

 

//KPMG LLP//

 

Salt Lake City, Utah

October 6, 2003

 

F-1

 

American Skiing Company

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

		July 28, 2002			July 27, 2003
Assets
Current assets
Cash and cash equivalents		$	6,924		$	6,596
Restricted cash		2,925			3,829
Accounts receivable, net of allowance for doubtful accounts of $1,226 and $1,161, respectively		9,818			5,862
Inventory		4,057			3,653
Prepaid expenses		4,264			3,326
Deferred income taxes		6,167			7,300
Other current assets		—			978
Total current assets		34,155			31,544
Property and equipment, net		397,991			372,926
Real estate developed for sale		50,878			48,234
Intangible assets, net		7,115			7,058
Deferred financing costs, net		8,561			6,705
Other assets		23,293			8,838
Total assets		$	521,993		$	475,305
Liabilities, Mandatorily Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
Current liabilities
Current portion of long-term debt (Note 5)		$	103,495		$	138,610
Current portion of subordinated notes and debentures (Note 8)		1,074			1,466
Accounts payable and other current liabilities		52,182			53,058
Deposits and deferred revenue		8,533			9,723
Total current liabilities		165,284			202,857
Long-term debt, excluding current portion (Note 5)		76,855			60,178
Subordinated notes and debentures, excluding current portion (Note 8)		139,617			140,095
Other long-term liabilities		28,320			3,471
Deferred income taxes		6,167			7,300
Total liabilities		416,243			413,901
Commitments and contingencies (Note 18)
Mandatorily Redeemable Convertible 10½% Series A Preferred Stock par value of $0.01 per share; 40,000 shares authorized; 36,626 shares issued and outstanding, including cumulative dividends in arrears (redemption value of $60,032 and $66,663, respectively)		60,032			66,663
Mandatorily Redeemable 8½% Series B Preferred Stock 150,000 shares authorized, issued and outstanding (redemption value of $0)		—			—
Mandatorily Redeemable Convertible Participating 12% Series C-1 Preferred Stock par value of $0.01 per share; 40,000 shares authorized, issued and outstanding, including cumulative dividends (redemption value of $44,532 and $50,105, respectively)		43,884			49,520
Mandatorily Redeemable 15% nonvoting Series C-2 Preferred Stock par value of $0.01 per share; 139,453 shares authorized, issued and outstanding, including cumulative dividends (redemption value of $159,404 and $184,621, respectively)		157,139			182,516
Mandatorily Redeemable nonvoting Series D Participating Preferred Stock 5,000 shares authorized, no shares issued or outstanding		—			—
Shareholders’ Equity (Deficit)
Common stock, Class A, par value $.01 per share; 15,000,000 shares authorized; 14,760,530 issued and outstanding		148			148
Common stock, par value of $.01 per share; 100,000,000 shares authorized; 16,963,611 and 16,977,653 issued and outstanding, respectively		170			170
Additional paid-in capital		277,422			277,450
Accumulated deficit		(433,045		)	(515,063		)
Total shareholders’ equity (deficit)		(155,305		)	(237,295		)
Total liabilities, mandatorily redeemable preferred stock and shareholders’ equity (deficit)		$	521,993		$	475,305

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-2

 

American Skiing Company

Consolidated Statements of Operations

(in thousands, except per share amounts)

 

		Year Ended
		July 29, 2001			July 28, 2002			July 27, 2003
Net revenues:
Resort		$	275,686		$	243,842		$	251,638
Real estate		96,864			28,274			12,898
Total net revenues		372,550			272,116			264,536
Operating expenses:
Resort		187,715			166,968			168,010
Real estate		93,422			30,091			12,166
Marketing, general and administrative		49,011			46,699			49,645
Merger, restructuring and asset impairment charges		76,015			111,608			1,451
Depreciation and amortization		34,941			26,238			27,513
Write-off of deferred financing costs		—			3,338			2,761
Total operating expenses		441,104			384,942			261,546
Income (loss) from operations		(68,554		)	(112,826		)	2,990
Interest expense, net		56,472			54,752			47,364
Loss from continuing operations before benefit from income taxes and cumulative effects of change in accounting principle		(125,026		)	(167,578		)	(44,374		)
Benefit from income taxes		—			—			—
Loss from continuing operations before cumulative effects of change in accounting principle		(125,026		)	(167,578		)	(44,374		)
Income from discontinued operations of Heavenly resort		4,302			12,317			—
Loss before cumulative effects of change in accounting principle		(120,724		)	(155,261		)	(44,374		)
Cumulative effects of change in accounting principle (net of income taxes of $1,538 and $0, respectively)		2,509			(18,658		)	—
Net loss		(118,215		)	(173,919		)	(44,374		)
Accretion of discount and dividends on mandatorily redeemable preferred stock		(23,357		)	(32,791		)	(37,644		)
Net loss available to common shareholders		$	(141,572	)	$	(206,710	)	(82,018		)
Basic and diluted net loss per share:
Loss from continuing operations before cumulative effects of change in accounting principle		$	(4.86	)	$	(6.34	)	(2.59		)
Income from discontinued operations, net of taxes		0.14			0.39			—
Cumulative effects of change in accounting principle, net of taxes		0.08			(0.59		)	—
Net loss available to common shareholders		$	(4.64	)	$	(6.54	)	(2.59		)
Weighted average common shares outstanding		30,525			31,628			31,724

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-3

 

American Skiing Company

Consolidated Statements of Shareholders’ Equity (Deficit)

(in thousands, except share amounts)

 

		Class A Common stock					Common stock					Additional Paid-in capital			Accumulated Deficit
		Shares		Amount			Shares		Amount									Total
Balance as of July 30, 2000		14,760,530		$	148		15,708,633		$	157		$	269,955		$	(84,763	)	$	185,497
Exercise of Common Stock options		—		—			248,960		3			495			—			498
Amortization of deferred compensation		—		—			—		—			387			—			387
Other paid-in capital		—		—			—		—			16			—			16
Accretion of discount and issuance costs and dividends on mandatorily redeemable preferred stock		—		—			—		—			—			(23,357		)	(23,357		)
Net loss		—		—			—		—			—			(118,215		)	(118,215		)
Balance as of July 29, 2001		14,760,530		148			15,957,593		160			270,853			(226,335		)	44,826
Exercise of Common Stock options		—		—			6,018		—			12			—			12
Amortization of deferred compensation		—		—			—		—			69			—			69
Issuance of Common Stock		—		—			1,000,000		10			990			—			1,000
Extinguishment of warrants in connection with recapitalization		—		—			—		—			5,501			—			5,501
Other paid-in capital		—		—			—		—			(3		)	—			(3		)
Accretion of discount and issuance costs and dividends on mandatorily redeemable preferred stock		—		—			—		—			—			(32,791		)	(32,791		)
Net loss		—		—			—		—			—			(173,919		)	(173,919		)
Balance as of July 28, 2002		14,760,530		148			16,963,611		170			277,422			(433,045		)	(155,305		)
Exercise of Common Stock options		—		—			14,042		—			28			—			28
Accretion of discount and issuance costs and dividends on mandatorily redeemable preferred stock		—		—			—		—			—			(37,644		)	(37,644		)
Net loss		—		—			—		—			—			(44,374		)	(44,374		)
Balance as of July 27, 2003		14,760,530		$	148		16,977,653		$	170		$	277,450		$	(515,063	)	$	(237,295	)

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-4

 

American Skiing Company

Consolidated Statements of Cash Flows

(in thousands)

 

		Year Ended
		July 29, 2001			July 28, 2002			July 27, 2003
Cash flows from operating activities
Net loss		$	(118,215	)	$	(173,919	)	$	(44,374	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		43,896			32,962			27,513
Amortization of deferred financing costs		3,100			4,608			3,116
Amortization of discount on convertible debt		992			1,436			1,433
Non-cash interest on junior subordinated notes		—			1,283			1,554
Deferred income taxes		1,366			—			—
Stock compensation charge		387			69			—
Write-off of deferred financing costs		—			3,338			2,761
Cumulative effects of change in accounting principle		(4,047		)	18,658			—
(Gain) loss from sale / impairment of assets, net		66,746			115,264			(499		)
Decrease (increase) in assets:
Restricted cash		6,052			(1,553		)	(904		)
Accounts receivable, net		(7,539		)	5,897			3,956
Inventory		621			2,853			404
Prepaid expenses		2,757			1,071			938
Real estate developed for sale		48,639			19,901			5,709
Other assets		(3,988		)	(6,991		)	13,177
Increase (decrease) in liabilities:
Accounts payable and other current liabilities		(1,375		)	(21,741		)	876
Deposits and deferred revenue		(2,583		)	(4,814		)	1,190
Other long-term liabilities		7,767			586			(24,849		)
Net cash (used in) provided by operating activities		44,576			(1,092		)	(7,999		)
Cash flows from investing activities
Payments for purchases of businesses, net of cash acquired		(171		)	—			—
Capital expenditures		(23,842		)	(7,531		)	(7,084		)
Proceeds from sale of assets		623			102,214			2,426
Net cash (used in) provided by investing activities		(23,390		)	94,683			(4,658		)
Cash flows from financing activities
Proceeds from Resort Senior Credit Facility		139,122			106,913			143,801
Repayment of Resort Senior Credit Facility		(114,310		)	(190,141		)	(124,679		)
Proceeds from long-term debt		—			26,500			—
Repayment of long-term debt		(7,149		)	(26,660		)	(5,656		)
Proceeds from real estate debt		29,905			19,803			9,715
Repayment of real estate debt		(60,787		)	(35,478		)	(6,860		)
Payment of deferred financing costs		(8,968		)	(206		)	(4,020		)
Proceeds from issuance of common stock		—			1,000			—
Proceeds from issuance of warrants		2,000			—			—
Proceeds from exercise of stock options		498			12			28
Other, net		10			(2		)	—
Net cash (used in) provided by financing activities		(19,679		)	(98,259		)	12,329
Net (decrease) increase in cash and cash equivalents		1,507			(4,668		)	(328		)
Cash and cash equivalents, beginning of year		10,085			11,592			6,924
Cash and cash equivalents, end of year		$	11,592		$	6,924		$	6,596
Supplemental disclosures of cash flow information:
Cash paid for interest		$	54,385		$	54,499		$	42,970
Cash paid (refunded) for income taxes, net		(37		)	100			(15		)
Supplemental schedule of noncash investing and financing activities:
Non-cash transfer of real estate developed for sale to property and equipment		$	26,904		$	—		$	—
Accretion of discount and issuance costs and dividends on mandatorily redeemable preferred stock		23,357			32,791			37,644

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-5

 

American Skiing Company

Notes to Consolidated Financial Statements

 

1.             Business Environment and Management’s Plans

 

Existing Situation

 

American Skiing Company (ASC), a Delaware corporation, and its subsidiaries (collectively, the Company) have adopted a comprehensive strategic plan designed to improve financial performance and address the issues resulting from its significant debt levels and lack of liquidity.  The Company’s real estate development subsidiary, American Skiing Company Resort Properties, Inc. (Resort Properties) is in default under its senior credit facility (Real Estate Term Facility) with Fleet National Bank (Fleet) and certain other lenders.  These lenders have notified Resort Properties that they have accelerated the due date for all principal and interest to be due and payable immediately (see Note 7).  In addition, Resort Properties’ hotel development subsidiary, Grand Summit Resort Properties, Inc. (Grand Summit) is also in default under its senior construction loan facility (Senior Construction Loan Facility) with Textron Financial Corporation (Textron) and certain other lenders (see Note 7).  As a result, Grand Summit’s subordinated construction loan (Subordinated Construction Loan) with Textron is also in default.  The Company was required to redeem its Mandatorily Redeemable Convertible 10½% Series A Preferred Stock (Series A Preferred Stock) on November 12, 2002, to the extent that the Company had funds legally available for such redemption.  The Series A Preferred Stock was not redeemed on November 12, 2002 (see Note 9).

 

Comprehensive Strategic Plan

 

The Company has undertaken a number of initiatives to improve its financial condition and ongoing operations.  These initiatives include the following key components:

 

•                  A comprehensive financial restructuring package, including amendments to its senior credit facilities, new capital infusion to enhance financial flexibility and refinancing of its resort senior credit facility (Resort Senior Credit Facility) to improve financial flexibility.

•                  Reorganization, staff reduction and performance enhancement programs designed to achieve operational cost savings and improve financial performance.

•                  Sale of Heavenly and Sugarbush resorts to reduce the debt of the Company.

•                  Strategic redeployment of management and capital resources to emphasize the integration and growth of resort village development and operations.

 

Management has completed several components of this plan, including restructuring certain of the Company’s most significant credit agreements, obtaining an additional capital infusion from Oak Hill Capital Partners, L.P., and certain related entities (Oak Hill) sale of the Heavenly and Sugarbush resorts, implementation of a staff reorganization plan to improve operational efficiencies and strategic redeployment of management.  The ultimate success of this comprehensive strategic plan is dependent on the execution of the remaining plan element, successfully restructuring the Real Estate Term Facility, Senior Construction Loan Facility, and Subordinated Construction Loan.

 

Actions in Progress

 

On March 30, 2002, Resort Properties failed to make a mandatory principal payment of $3.75 million under its Real Estate Term Facility.  Resort Properties obtained a temporary waiver of this default on April 2, 2002. Effective May 20, 2002, the temporary waiver was revoked and Resort Properties was in default on the facility.  On May 31, 2002, the lenders accelerated the due date of the entire remaining principal and accrued interest under the facility.  On November 22, 2002, Resort Properties entered into a forbearance agreement with the lenders whereby the lenders agreed to not pursue additional foreclosure remedies and to cease publication of foreclosure notices for a 30-day period.  Although this 30-day period expired, management continues discussions with Fleet and the other lenders regarding a restructuring of this facility, and Fleet and the other lenders have not exercised any further foreclosure remedies since the expiration of the forbearance agreement.  Management’s ongoing restructuring efforts with the lenders are aimed towards a restructuring of the facility which will establish a new entity to hold Resort Properties’ real estate development assets.  The equity in the new entity is expected to be held by a combination of

 

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the lenders under the facility and Resort Properties.  The facility remains in default pending completion of these negotiations.

 

The Senior Construction Loan Facility was also in payment default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance to required levels as defined under the terms of the agreement.  As a result, Grand Summit’s Subordinated Construction Loan is also in default.  We have not yet been advised by the lenders under the Senior Construction Loan and the Subordinated Construction Loan whether they intend to accelerate the remaining balance due thereunder or exercise any of their other rights as a result of the payment default.

 

There is no assurance that negotiations will be successfully completed, or that the terms under which the payment defaults pending under the Real Estate Term Facility, Senior Construction Loan, and Subordinated Construction Loan may be resolved, if at all.  Furthermore, regardless of the outcome of this proposed restructuring, the Company may lose control of assets pledged as collateral under the facility and future access to value creation from these real estate assets. A substantial portion of the Company’s developable real estate, including substantially all of the developable residential real estate at The Canyons and Steamboat along with certain core village real estate at Killington, and the stock of the Company’s real estate development subsidiaries (including Grand Summit) is pledged to Fleet and the lenders under the facility.  The commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are also pledged to Fleet and the lenders.  The Grand Summit unit inventory and the land at the Sunday River resort do not secure the Real Estate Term Facility, although the pledge of the stock of Grand Summit to secure the Real Estate Term Facility means that the Company may lose control of the Grand Summit unit inventory to the lenders under the Real Estate Term Facility.  Other remedies available to the lenders include, but are not limited to, setoff of cash collateral amounts in Resort Properties’ name held at Fleet in the amount of approximately $0.6 million, foreclosure of real and personal property owned by Resort Properties and pledged to the lenders (including all of the capital stock of Grand Summit), and other customary secured creditor remedies.  As of July 27, 2003, the carrying value of the total assets that collateralized the Real Estate Term Facility was approximately $117.0 million.  This collateral includes $80.3 million of Grand Summit assets pledged under the Company’s $41.7 million real estate Senior Construction Loan and the Subordinated Construction Loan (collectively the “Construction Loan Facility”).

 

2.             Basis of Presentation

 

ASC is organized as a holding company and operates through various subsidiaries. The Company owns and operates resort facilities, real estate development companies, golf courses, ski and golf schools, retail shops and other related companies.  The Company operates in two business segments, ski resort operations and mountainside real estate development (see Note 16).  ASC owned and operated the following ski resorts during Fiscal 2003: Sugarloaf/USA and Sunday River in Maine, Attitash Bear Peak in New Hampshire, Killington and Mount Snow in Vermont, The Canyons in Utah, and Steamboat Ski & Resort Corporation (Steamboat) in Colorado. During Fiscal 2002, ASC owned and operated Heavenly Valley Ski & Resort Corporation (Heavenly) in California/Nevada, which was sold in May 2002.  During Fiscal 2001, ASC also owned and operated the Sugarbush resort in Vermont, which was sold in September 2001. The results of Heavenly’s operations have been reflected as discontinued operations for Fiscal 2001 and Fiscal 2002.  The Company conducts its real estate development operations through its wholly owned subsidiary, Resort Properties, and Resort Properties’ subsidiaries, including Grand Summit and Canyons Resort Properties, Inc.

 

3.             Summary of Significant Accounting Principles

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of American Skiing Company and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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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 ended July 29, 2001, July 28, 2002 and July 27, 2003 (Fiscal 2001, Fiscal 2002 and Fiscal 2003, respectively) each consisted of fifty-two 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.  Cash equivalents totaled approximately $2.1 million and $1.4 million as of July 28, 2002 and July 27, 2003, respectively.

 

Restricted Cash

Restricted cash consists of deposits received and held in escrow related to pre-sales of real estate developed for sale, guest advance deposits for lodging reservations, and cash held in cash collateral accounts by lenders on behalf of the real estate companies.  The cash becomes available to the Company when the real estate units are sold,  the lodging services are provided, or upon approval of expenditures by lenders.

 

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market, and consists primarily of retail goods, food and beverage products.

 

Property and Equipment

Property and equipment are carried at cost, net of accumulated depreciation and impairment charges. 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 held under capital lease obligations 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 resort operating assets during the second and third quarters of the Company’s 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 has been developed to the point it is ready for sale.  The cost of sales for individual parcels of real estate or quarter and eighth share 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.

 

Goodwill and Other Intangible Assets

During the first quarter of Fiscal 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” and was required to evaluate its existing intangible assets and goodwill in a transitional impairment analysis.  As a result of the transitional impairment analysis, the Company recorded an impairment loss of $18.7 million representing 100% of its goodwill.  This loss was recorded as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for Fiscal 2002.  Furthermore, as prescribed in SFAS No. 142, certain indefinite-lived intangible assets, including trademarks, are no longer amortized but are subject to annual impairment assessments.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.  Definite-lived intangible assets continue to be amortized on a straight-line basis over their estimated useful lives of 16 to 20 years, and assessed for impairment utilizing guidance provided by SFAS No. 144.

 

Prior to the adoption of SFAS No. 142, goodwill, which represents the excess of the purchase price over the fair value of the net assets (including tax attributes and minority interest) acquired in purchase transactions, and other indefinite-lived intangibles were amortized on a straight-line basis over the expected periods to be benefited, up to 40 years. Goodwill and other indefinite-lived intangibles were assessed for recoverability by determining whether the amortization of the carrying amounts over their remaining useful lives could be recovered through undiscounted future cash flows of the acquired operation or assets.

 

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As of July 28, 2002 and July 27, 2003, acquired intangible assets (other than goodwill) relate entirely to the resort segment and consist of the following (in thousands):

 

 

Amortization expense related to goodwill and other intangible assets was approximately $2.4 million, $58,000, and $58,000 for Fiscal 2001, Fiscal 2002, and Fiscal 2003, respectively.  Future amortization expense related to definite-lived intangible assets is estimated to be approximately $58,000 for each of the next five fiscal years.

 

Had SFAS No. 142 been adopted prior to Fiscal 2002, loss before cumulative effects of changes in accounting principles and net loss available to common shareholders for Fiscal 2001 would have been the pro forma amount indicated below (dollar amounts in thousands):

 

 

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 on a straight-line basis over the respective original lives of the applicable issues. Amortization calculated on a straight-line basis is not materially different from amortization that would have resulted from using the effective interest method.  As of July 28, 2002 and July 27, 2003, deferred financing costs were $8.6 million and $6.7 million, respectively, net of accumulated amortization.  Amortization expense related to deferred financing costs, included in interest expense, was $3.1 million, $4.6 million and $3.1 million for Fiscal 2001, Fiscal 2002, and Fiscal 2003, respectively.  In connection with the early extinguishment of debt in Fiscal 2002 and Fiscal 2003, the Company recorded a write-off of deferred financing costs of approximately $3.3 million and $2.8 million, respectively, in the accompanying consolidated statements of operations.

 

Long-Lived Assets

On July 30, 2001, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  Long-lived assets, such as property and equipment, and definite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the

 

F-9

 

carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.  Prior to the adoption of SFAS No. 144, the Company accounted for impairment of long-lived assets and long-lived assets to be disposed of in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.  During Fiscal 2002, the Company completed the sale of its Sugarbush resort (see Note 19) and accounted for this sale under SFAS No. 121 and Accounting Principles Board Opinion No. 30 because the disposal activities relating to the sale of Sugarbush were initiated prior to the Company’s adoption of SFAS No. 144.

 

Revenue Recognition

Resort revenues include sales of lift tickets, tuition from ski schools, golf course and other recreational activities fees, sales from restaurants, bars and retail and rental shops, and lodging and property management fees (real estate rentals). Daily lift ticket revenue is recognized on the day of purchase.  Lift ticket season pass revenue is recognized on a straight-line basis over the ski season, which is the Company’s second and third quarters of its fiscal year.  The Company’s remaining resort revenues are generally recognized as the services are performed.  Real estate revenues are recognized under the full accrual method when title has been transferred, adequate initial and continuing investments are adequate to demonstrate a commitment to pay for the property and no continuing involvement exists.  Amounts received from pre-sales of real estate are recorded as restricted cash and deposits and deferred revenue in the accompanying consolidated balance sheets until the earnings process is complete.

 

Interest

Interest is expensed as incurred except when it is capitalized in connection with significant capital additions and real estate developed for sale. The amounts of interest capitalized are determined by applying actual interest rates to the borrowings required to finance the construction.  During Fiscal 2001, 2002, and 2003, the Company incurred total interest costs of $56.5 million, $54.8 million, and $47.4 million, respectively, of which $2.1 million, $0 million, and $0 million, respectively, have been capitalized to property and equipment and real estate developed for sale.

 

Employee Savings Plan

The Company has a 401(k) plan that allows non-highly compensated employees, as defined, to defer up to 100% of their income up to a maximum annual deferral of $12,000 if they are under 50 years old or $14,000 if they are 50 years or older as prescribed by the Internal Revenue Service and provides for the matching of participant contributions at the Company’s discretion.  For highly-compensated employees, as defined, the plan allows employees to defer up to 7.5% of their income.  The Company’s matching contributions to the 401(k) plan for Fiscal 2001, 2002, and 2003 were approximately $387,000, $307,000, and $267,000, respectively.

 

Advertising Costs

Advertising costs are expensed the first time the advertising takes place.  As of July 28, 2002 and July 27, 2003, advertising costs of approximately $0.2 million and $0.2 million, respectively, were recorded in prepaid expenses in the accompanying consolidated balance sheets.  Advertising expense for Fiscal 2001, 2002, and 2003 was approximately $7.9 million, $6.8 million, and $7.1 million, respectively.

 

Seasonality

The Company’s revenues are highly seasonal in nature.  For Fiscal 2003, we realized approximately 87% of resort segment revenues and over 100% of resort segment operating income during the period from November through April.  In addition, a significant portion of resort segment revenue and approximately 21% of annual skier visits were generated during the Christmas and Presidents’ Day vacation weeks in Fiscal 2003.  In addition, the Company’s resorts typically experience operating losses and negative cash flows for the period from May through November.

 

A high degree of seasonality in the Company’s revenues increases the impact of certain events on its operating results.  Adverse weather conditions, access route closures, equipment failures, and other developments of even moderate or limited duration occurring during peak business periods could reduce 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.

 

F-10

 

Earnings Per Share

Basic net income (loss) per common share (Basic EPS) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per common share (Diluted EPS) reflects the potential dilution that could occur if stock options or other contracts to issue common stock (such as Mandatorily Redeemable Preferred Stock) were exercised or converted into common stock.  In periods where losses are recorded, potentially dilutive securities would decrease the loss per share and therefore are not added to the weighted average shares outstanding.  For Fiscal 2001, 2002, and 2003, basic and diluted net loss per share are as follows:

 

 

The Company had outstanding 186,626, 76,626 and 76,626 shares of convertible preferred stock as of July 29, 2001, July 28, 2002, and July 27, 2003, respectively.  These shares are convertible into shares of the Company’s common stock (see Note 9).  If converted at their liquidation preferences as of July 29, 2001, July 28, 2002, and July 27, 2003, these convertible preferred shares would convert into 37,701,670, 39,136,243 and 43,950,901 shares of common stock, respectively.  However, the common stock shares into which these securities are convertible have not been included in the Diluted EPS calculation as the impact of their inclusion would be anti-dilutive.  The Company also has 4,590,297, 4,226,579 and 3,821,187 options outstanding to purchase shares of its common stock under the Company’s stock option plan as of July 29, 2001, July 28, 2002, and July 27, 2003, respectively.  These shares are also excluded from the Diluted EPS calculation as the impact of their inclusion would be anti-dilutive.

 

Stock Compensation

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 8,688,699 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.

 

F-11

 

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:

 

 

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 in Fiscal 1998 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 liability for this fixed tax bonus has been reduced to reflect $5.2 million in tax bonus payments made through July 27, 2003 in connection with options exercised.  The remaining $0.6 million tax bonus liability is reflected in accounts payable and other current liabilities in the accompanying consolidated balance sheet as of July 27, 2003.  The remainder of these original $2.00 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 2001, Fiscal 2002, and Fiscal 2003, the Company recognized $0.4 million, $0.1 million and $0 million, respectively, of stock compensation expense relating to these options.

 

The following table summarizes information about the stock options outstanding under the Stock Plan as of July 27, 2003:

 

 

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

 

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compensation expense for stock options is recognized for stock option awards granted to employees at or above fair market value.  In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of FAS 123” (SFAS No. 148).  This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and amends the disclosure requirements to SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company has adopted the disclosure-only provisions of SFAS No. 148.  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 No. 148, the Company’s net loss and loss per share would have been changed to the pro forma amounts indicated below (dollar amounts in thousands):

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

 

The weighted average grant date fair value for the options granted in Fiscal 2001 with an exercise price of $0.72 to $4.00 per share was $1.65 per share.

 

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 resort and real estate senior credit facilities and certain other debt instruments approximate their recorded values in all material respects, as determined by discounting future cash flows at current market interest rates as of July 27, 2003.  The fair value of the Company’s subordinated notes and interest rate swap agreements have 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, Convertible Subordinated Notes, other subordinated debentures and interest rate swap agreements as of July 28, 2002 and July 27, 2003 are presented below (in thousands):

 

F-13

 

 

Derivative Financial Instruments

All derivatives are recognized on the balance sheet at their fair values.  On the date the derivative contract is entered into, the Company designates the derivative as either a hedge of the fair value of a recognized asset or liability (“fair value” hedge), or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge).  During Fiscal 2003, the Company terminated its existing interest rate swap agreements in connection with the refinancing of its Resort Senior Credit Facility (see Note 6).

 

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”.  SFAS No. 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.

 

Use of Estimates

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

 

Reclassifications

Certain amounts in the prior years’ financial statements and related notes have been reclassified to conform to the Fiscal 2003 presentation.

 

Recently Issued Accounting Standards

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34”.  This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of FIN No. 45 are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company adopted FIN No. 45 effective for the interim period ended January 26, 2003.  The adoption of FIN No. 45 did not have an effect on the Company’s results of operations or financial position.

 

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51”.  This Interpretation addresses consolidation and reporting by business enterprises of variable interest entities.  All enterprises with variable interests in variable interest entities created after January 31, 2003, shall apply the provisions of this Interpretation to those entities immediately. A public entity with a variable interest in a variable interest entity created before February 1, 2003, shall apply the provisions of this Interpretation to that entity no later than the beginning of the first interim or annual reporting period beginning after December 13,

 

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2003.  The Company adopted FIN No. 46 effective January 27, 2003.  The adoption of FIN No. 46 did not have an effect on the Company’s results of operations or financial position.

 

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS No. 150).  SFAS No. 150 establishes standards for how financial instruments with characteristics of both liabilities and equity should be measured and classified and requires that an issuer classify a financial instrument that is within its scope as a liability.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  We adopted SFAS No. 150 effective July 28, 2003.  As a result of adopting SFAS No. 150, approximately $298.7 million will be reclassified to liabilities in the consolidated balance sheet in the first quarter of Fiscal 2004.  This represents the book value of all of the classes of preferred stock.  In addition, approximately $43.1 million of accretion of discount and dividends on the preferred stock in Fiscal 2004 will be included in interest expense, whereas previously it was reported as accretion of discount and dividends on mandatorily redeemable preferred stock.

 

4.                                      Property and Equipment

 

Property and equipment consists of the following (in thousands):

 

 

Property and equipment includes approximately $31.6 million and $31.2 million of machinery and equipment and lifts held under capital lease obligations as of July 28, 2002 and July 27, 2003, respectively.  As of July 28, 2002 and July 27, 2003, related accumulated amortization on property and equipment held under capital lease obligations was approximately $9.2 million and $10.8 million, respectively.  Total depreciation and amortization expense relating to all property and equipment was $32.3 million, $26.7 million, and $27.2 million for Fiscal 2001, Fiscal 2002, and Fiscal 2003, respectively.

 

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5.                                      Long-Term Debt

 

Long-term debt consists of (dollar amounts in thousands):

 

 

The carrying values of the above debt instruments approximate their fair values in all material respects, determined by discounting future cash flows at current market interest rates as of July 27, 2003.  As of July 27, 2003, the Company had letters of credit outstanding totaling approximately $4.1 million within the credit facility and $0.5 million issued outside the facility that is collateralized with cash.

 

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Long-term debt and subordinated notes and debentures (see Note 8) mature as follows (in thousands):

 

 

6.             Resort Senior Credit Facility

 

The Company entered into an agreement dated February 14, 2003 with General Electric Capital Corporation (GE Capital) and CapitalSource Finance LLC (CapitalSource) whereby GE Capital and CapitalSource have provided a $91.5 million senior secured loan facility (the Resort Senior Credit Facility) including a revolving credit facility (Revolving Credit Facility), tranche A term loan (Tranche A Term Loan), supplemental term loan (Supplemental Term Loan), and tranche B term loan (Tranche B Term Loan).  The Resort Senior Credit Facility replaced the Company’s prior resort senior credit facility and is secured by substantially all the assets of the Company (except for the stock of its real estate subsidiary) and the assets of its resort operating subsidiaries.  Resort Properties and its subsidiaries are not guarantors of the Resort Senior Credit Facility nor are their assets pledged as collateral under the Resort Senior Credit Facility.  The Resort Senior Credit Facility consists of the following:

 

•                  Revolving Credit Facility - $40.0 million, including letter of credit (L/C) availability of up to $5.0.  The amount of availability under the Revolving Credit Facility will be correspondingly reduced by the amount of each L/C issued.

 

•                  Tranche A Term Loan -  $25.0 million borrowed on the funding date of February 18, 2003.

 

•                  Supplemental Term Loan - $6.5 million borrowed on the funding date of February 18, 2003.

 

•                  Tranche B Term Loan -  $20.0 million borrowed on the funding date of February 18, 2003.

 

The Revolving Credit Facility, Tranche A Term Loan and Supplemental Term Loan portions of the Resort Senior Credit Facility mature on April 15, 2006 and bear interest at JPMorgan Chase Bank’s prime rate plus 3.25% payable monthly (7.25% as of July 27, 2003).  The Supplemental Term Loan also required a principal payment of approximately $342,000 on July 15, 2003, and requires payments of approximately $1.0 million on January 15 and July 15 of each year, and a final payment of approximately $1.0 million on April 15, 2006.  The Tranche B Term Loan matures on June 15, 2006 and bears interest at JPMorgan Chase Bank’s prime rate plus 5.0% payable monthly with an interest rate floor of 12.25% (12.25% as of July 27, 2003).  The Resort Senior Credit Facility contains affirmative, negative and financial covenants customary for this type of credit facility, requires the Company to have a zero balance on the Revolving Credit Facility on April 1 of each year prior to maturity, which includes maintaining a minimum level of EBITDA, as defined, places a limit on the Company’s capital expenditures and contains an asset monetization covenant which requires the Company to refinance the facility or sell assets sufficient to retire the facility on or prior to December 31, 2005.  The Resort Senior Credit Facility also restricts the Company’s ability to pay cash dividends on or redeem its common and preferred stock.  The Company was in compliance with all covenants related to the Resort Senior Credit Facility through July 27, 2003.

 

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The prior resort senior credit facility was repaid in full on February 18, 2003.  As of July 27, 2003, the Company had $26.6 million, $25.0 million, $6.2 million and $20.0 million of principal outstanding under the Revolving Credit Facility, Tranche A Term Loan, Supplemental Term Loan and Tranche B Term Loan portions of the Resort Senior Credit Facility, respectively.  Furthermore, as of July 27, 2003, the Company had $9.3 million available for future borrowings under the Revolving Credit Facility.  As of July 27, 2003, the Company had $4.1 million of L/C’s issued under the Resort Senior Credit Facility.

 

In conjunction with the restructuring of the prior resort senior credit facility during Fiscal 2002, the Company expensed a pro-rata portion of its existing deferred financing costs in the amount of $3.3 million.  In connection  with the refinancing of the prior resort senior credit facility during Fiscal 2003, the Company expensed its remaining deferred financing costs associated with this facility in the amount of $2.8 million.  These amounts are reflected in the accompanying consolidated statements of operations as a write-off of deferred financing costs.

 

7.             Real Estate Term Facility and Construction Loan Facility

 

Real Estate Term Facility

On July 31, 2000, the Company entered into a Second Amended and Restated Credit Agreement between Resort Properties, Fleet and the lenders party thereto (the Real Estate Term Facility).  This fully syndicated $73 million facility replaced Resort Properties’ previous un-syndicated $58 million real estate development term loan facility. The 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 Grand Summit).  Effective May 20, 2002, Resort Properties defaulted on the Real Estate Term Facility due to its failure to make a mandatory principal payment of $3.75 million.  As a result, all indebtedness under this facility is currently due and payable.  The Real Estate Term Facility is comprised of three tranches, each with separate interest rates and maturity dates as follows:

 

•		Tranche A is a revolving facility with a current maximum principal amount of $17.0 million and bears interest at a variable rate equal to the Fleet National Bank Base Rate plus 2.0%, payable monthly in arrears.  As a result of the default, the default interest rate on Tranche A is the Fleet National Bank Base Rate plus 6.0% (10.0% as of July 27, 2003).  Prior to the default, mandatory principal reductions were required in certain prescribed percentages ranging from 50% to 75% of net proceeds from any future sales of undeveloped parcels.  Prior to the default, the remaining principal was scheduled to be paid on June 30, 2003.
•		Tranche B is a term loan facility that has a maximum principal amount of $25 million, bears interest at a fixed rate of 18% per annum, of which 10% per annum is payable monthly in arrears.  The remaining 8% per annum accrues, is added to the principal balance of Tranche B and bears interest at 18%.  As a result of the default, the default interest rate on Tranche B is 29%.  Prior to the default, mandatory principal payments on Tranche B of $10 million were due on each of December 31, 2003 and June 30, 2004.  Prior to the default, the remaining $5 million principal and all accrued and unpaid interest on Tranche B was to mature on December 31, 2004.
•		Tranche C is a term loan facility that has a maximum principal amount of $12 million, bears interest at an effective rate of 29% per annum and, prior to the default, was scheduled to mature on December 31, 2005.  As a result of the default, the default interest rate on Tranche C is 29%.  Interest accrues and is added to the principal balance of Tranche C and is compounded semiannually.

 

On March 30, 2002, Resort Properties failed to make a mandatory principal payment of $3.75 million under its Real Estate Term Facility.  Resort Properties obtained a temporary waiver of this default on April 2, 2002. Effective May 20, 2002, the temporary waiver was revoked and Resort Properties was in default on the facility.  On May 31, 2002, the lenders accelerated the due date of the entire remaining principal and accrued interest under the facility.  On November 22, 2002, Resort Properties entered into a forbearance agreement with the lenders whereby the lenders agreed to not pursue additional foreclosure remedies and to cease publication of foreclosure notices for a 30-day period. Although this 30-day period expired, management continues discussions with Fleet and the other lenders regarding a restructuring of this facility, and Fleet and the other lenders have not exercised any further

 

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foreclosure remedies since the expiration of the forbearance agreement.  Management’s ongoing restructuring efforts with the lenders are aimed towards a restructuring of the facility which will establish a new entity to hold Resort Properties’ real estate development assets.  The equity in the new entity is expected to be held by a combination of the lenders under the facility and Resort Properties.  The facility remains in default pending completion of these negotiations.

 

There is no assurance that negotiations will be successfully completed, or that the terms under which the payment defaults pending under the Real Estate Term Facility may be resolved, if at all.  Furthermore, regardless of the outcome of this proposed restructuring, the Company may lose control of assets pledged as collateral under the facility and future access to value creation from these real estate assets. A substantial portion of the Company’s developable real estate, including substantially all of the developable residential real estate at The Canyons and Steamboat along with certain core village real estate at Killington, and the stock of the Company’s real estate development subsidiaries (including Grand Summit) is pledged to Fleet and the lenders under the facility.  The commercial core units at the Sundial Lodge at The Canyons and the Mount Snow Grand Summit Hotel in Vermont are also pledged to Fleet and the lenders.  The Grand Summit unit inventory does not secure the Real Estate Term Facility, although the pledge of the stock of Grand Summit to secure the Real Estate Term Facility means that the Company may lose control of the Grand Summit unit inventory to the lenders under the Real Estate Term Facility.  Other remedies available to the lenders include, but are not limited to, setoff of cash collateral amounts in Resort Properties’ name held at Fleet in the amount of approximately $0.6 million, foreclosure of real and personal property owned by Resort Properties and pledged to the lenders (including all of the capital stock of the Company’s hotel development subsidiary, Grand Summit), and other customary secured creditor remedies.  As of July 27, 2003, the carrying value of the total assets that collateralized the Real Estate Term Facility was approximately $117.0 million.  This collateral includes $80.3 million of Grand Summit assets pledged under the Company’s real estate Construction Loan Facility.

 

As of July 27, 2003, the principal balances outstanding, including accrued and unpaid interest, under Tranches A, B and C of the Real Estate Term Facility were $19.5 million, $38.1 million, and $21.4 million, respectively.  As of July 27, 2003, the unamortized original issue discount on Tranche C was approximately $2.5 million.

 

Tranche C of the Real Estate Term Facility was purchased by Oak Hill and its associates.  In connection with this investment, the Company entered into a Securities Purchase Agreement with Oak Hill, dated July 31, 2000, pursuant to which the Company 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 if certain conditions could not be met by ASC; (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 the Resort Properties common stock) was $2 million.  Under the terms of the agreement, net share settlement was required.  The transaction was accounted for as debt issued with detachable warrants under Accounting Principles Board Opinion (APB) No. 14.  APB No. 14 requires that the portion of the proceeds allocable to the warrants should be accounted for as paid-in capital.  The allocation was based on the relative fair values of the two securities at the time of issuance.  Upon execution of the transaction, ASC recorded a $7.7 million long-term liability which represented the fair value of ASC’s obligation to issue the warrants (or the Resort Properties common stock).  As part of the July 15, 2001 securities purchase agreement (see Note 12), which closed on August 31, 2001, Oak Hill agreed to cancel its right to receive these warrants, which had an exercise price of $2.50 per share and ASC’s common stock was then trading at approximately $1 per share.  The warrants on that date had a fair value of approximately $2.2 million.  The $7.7 million long-term liability was removed from the books in connection with the recording of the issuance of the new 12% Series C-1 Convertible Participating Preferred Stock (Series C-1 Preferred Stock) and the 15% Series C-2 Preferred Stock (Series C-2 Preferred Stock).

 

Construction Loan Facility

The Company conducts substantially all of its real estate development through subsidiaries, each of which is a wholly owned subsidiary of Resort Properties.  Grand Summit owns the existing Grand Summit Hotel projects, which are primarily financed through a $110 million construction loan facility (Senior Construction Loan) among Grand Summit and various lenders, including Textron, the syndication and administrative agent. Due to construction delays and cost increases at the Steamboat Grand Hotel project, Grand Summit entered into a $10 million

 

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subordinated loan tranche with Textron (Subordinated Construction Loan) on July 25, 2000.  The Company used this facility solely for the purpose of funding the completion of the Steamboat Grand Hotel.

 

The Senior Construction Loan principal is payable incrementally as quarter and eighth share sales are closed based on a predetermined per unit amount, which approximates between 70% and 80% of the net proceeds of each closing. Mortgages against the commercial core units and unsold inventory at the Grand Summit Hotels at The Canyons and Steamboat, a promissory note from the Steamboat Homeowners Association secured by the Steamboat Grand Summit hotel parking garage, and the commercial core unit at Attitash Bear Peak collateralize the Senior Construction Loan, which is subject to covenants, representations and warranties customary for this type of construction facility. The Senior Construction Loan is non-recourse to the Company and its resort operating subsidiaries (although it is collateralized by substantial assets of Grand Summit, having a total book value of $80.3 million as of July 27, 2003, which in turn comprise substantial assets of the Company’s business).  The maturity date for funds advanced under the Senior Construction Loan, as amended, is May 31, 2004.  The principal balance outstanding under the Senior Construction Loan was approximately $31.7 million as of July 27, 2003 and had an interest rate on funds advanced of prime plus 3.5%, with a floor of 9.0% (9.0% as of July 27, 2003).  The maturity date for funds advanced under the Subordinated Construction Loan, as amended, is September 30, 2004 and the interest rate on funds advanced is 20%.

 

The Senior Construction Loan was also in default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.  In addition, the Senior Construction Loan further required that the loan be reduced to a maximum of $25.0 million by June 30, 2003.  As a result, the Subordinated Construction Loan also was in default.  The Company has not yet been advised by the lenders under the Senior Construction Loan and Subordinated Construction Loan whether they intend to accelerate the remaining balance due thereunder or exercise any of their other rights as a result of the defaults.  An amendment to the Senior Construction Loan delayed certain amortization deadlines from March 31, 2003 to June 29, 2003.  The Company paid $35,000 to the lenders for such amendment.  An additional $175,000 was due and payable for its failure to reduce the loan balance to certain requirements at June 29, 2003.  As of July 27, 2003, this amount has been accrued in accounts payable and other current liabilities.

 

The Company and Textron entered into the amendments to the Senior Construction Loan and the Subordinated Construction Loan.  The terms of the revised agreements waived all previous defaults, and relaxed mandatory principal amortization requirements.  As a result of the amendment to the Senior Construction Loan, the maturity date was extended from March 31, 2003 to May 31, 2004.  The release prices, as defined, on the Senior Construction Loan were also adjusted and the amendment allowed for future adjustments depending upon certain circumstances.  Upon the repayment of all indebtedness under the Senior Construction Loan, the Subordinated Construction Loan and all other fees, Textron will receive a fee equal to 25% of all gross proceeds of sales of quarter and eighth share units and commercial units occurring subsequent to repayment.  Grand Summit and the lenders also agreed to use their best efforts to enter into an escrow agreement pursuant to which the appropriate deed-in-lieu documentation in respect to the Senior Construction Loan and the Subordinated Construction Loan shall be placed in escrow.  Finally, the amendment to the Senior Construction Loan outlined the following maximum outstanding principal balances under the Senior Construction Loan as of the following dates:

 

 

As discussed previously, the Senior Construction Loan was in default as of June 29, 2003 due to the failure by Grand Summit to reduce the principal balance outstanding to a maximum of $30.0 million as required under the terms of the agreement.  In addition, the Senior Construction Loan further required that the loan be reduced to a maximum of $25.0 million by June 30, 2003.

 

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8.             Subordinated Notes and Debentures

 

12% Senior Subordinated Notes

The Company has issued $120.0 million of 12% Senior Subordinated Notes (Senior Subordinated Notes).  The Senior Subordinated Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company, including all borrowings of the Company under its Resort Senior Credit Facility (see Note 6). The Senior Subordinated Notes are fully and unconditionally guaranteed by ASC and all of its subsidiaries, with the exception of Ski Insurance, Killington West, Ltd., Uplands Water Company and Walton Pond Apartments, Inc.  The above listed subsidiaries that are not guarantors are individually and collectively immaterial to the Company’s balance sheet and results of operations.  The guarantor subsidiaries are wholly owned subsidiaries of ASC and the guarantees are full, unconditional, and joint and several.  ASC is a holding company with no significant independent assets or operations other than its interests in the subsidiaries.  Some of the guarantor subsidiaries are restricted in their ability to declare dividends or advance funds to ASC.  The Senior Subordinated Notes mature July 15, 2006, and are redeemable at the option of ASC, in whole or in part, at any time after July 15, 2001.  The Senior Subordinated Notes were issued with an original issue discount of $3.4 million.  As of July 27, 2003, the unamortized original issue discount was approximately $1.4 million.  Interest on the Senior Subordinated Notes is payable semi-annually on January 15 and July 15 of each year. Interest expense on the Senior Subordinated Notes amounted to $14.4 million in each of Fiscal 2001, Fiscal 2002, and Fiscal 2003.  The Company has the option to redeem the Senior Subordinated Notes at the following prices on the dates noted (expressed as a percentage of face value):

 

Through July 14, 2004		103.125	%
July 15, 2004 – July 14, 2005		101.563	%
Thereafter		100.000	%

 

The Senior Subordinated Notes are not subject to a cross-default resulting from a default by the Company’s real estate subsidiaries under certain debt which is non-recourse to the remainder of the Company, including the Real Estate Term Facility and the Construction Loan Facility.  Furthermore, neither a bankruptcy nor a judgment against any of the Company’s real estate development subsidiaries will constitute a default under the indenture.

 

The Company had previously entered into a series of non-cancelable interest rate swap agreements in connection with the Senior Subordinated Notes. These agreements were non-hedging swaps which are carried at their fair market value, with fluctuations recorded through interest expense, in accordance with SFAS No. 133.  In connection with the refinancing of the Company’s prior resort senior credit facility on February 18, 2003, the interest rate swap agreements were terminated with no significant gain or loss being incurred.

 

    11.3025% Junior Subordinated Notes

On July 15, 2001, the Company entered into a securities purchase agreement with Oak Hill Capital Partners L.P. to assist the Company in meeting its current financing needs (see Note 12).  Pursuant to the terms of the securities purchase agreement, which closed on August 31, 2001, the Company issued, and Oak Hill Capital Partners L.P. purchased, $12.5 million aggregate principal amount of Junior Subordinated Notes, which are convertible into shares of the Company’s Series D Participating Preferred Stock (Series D Preferred Stock).  These Junior Subordinated Notes are unsecured and bear interest at a rate of 11.3025%, which compounds annually and is due and payable at the maturity of the Junior Subordinated Notes in August 2007.  The proceeds of the Junior Subordinated Notes were used to fund short-term liquidity needs of Resort Properties by way of the purchase of certain real estate assets by ASC from Resort Properties.  As of July 27, 2003, the outstanding balance on the Junior Subordinated Notes was approximately $15.3 million.

 

Other Subordinated Debentures

Other subordinated debentures owed by the Company as of July 27, 2003 are unsecured and are due as follows (in thousands):

 

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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.  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.  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 10½% Preferred Stock. The total number of Mandatorily Redeemable 10½% Preferred Stock shares issued in association with the exchange was 36,626 and each share has a face value of $1,000 per share.  As of July 27, 2003, cumulative dividends in arrears totaled approximately $30.0 million.

 

Under the Series A Agreement, the Mandatorily Redeemable Convertible 10½% Series A 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.  The Series A Preferred Stock was redeemable on November 12, 2002 at an aggregate redemption price of approximately $61.9 million, which includes the face value of $36.6 million plus approximately $25.3 million of cumulative dividends in arrears, to the extent that the Company had funds legally available for that redemption.  If the Series A Preferred Stock is not permitted to be redeemed because there are not legally available funds, the Company must redeem that number of shares of Series A Preferred Stock which it can lawfully redeem, and from time to time thereafter, as soon as funds are legally available, the Company must redeem shares of the Series A Preferred Stock until it has done so in full.  Prior to the November 12, 2002 redemption date, based upon all relevant factors, the Company’s Board of Directors determined not to redeem any shares of stock on the redemption date.  On January 27, 2003, the holders of the Series A Preferred Stock demanded that the Company redeem all of the Series A Preferred Stock immediately and on April 8, 2003, the Series A Preferred Stockholders demanded pursuant to Delaware law to review certain records.  The Company will continue to assess its obligations with respect to the requirements of the redemption provisions of for its Series A Preferred Stock.  Because the Series A Preferred Stock was not redeemed on November 12, 2002, the certificate of designation for the Series A Preferred Stock provides that the holders are entitled to elect two new members of the Company’s board of directors.  The Company has not yet been advised by the holders of the Series A Preferred Stock whether they intend to exercise their right to elect two directors at or prior to the next annual shareholders meeting or whether they intend to take any other action, including legal action, to seek to compel our redemption of the Series A Preferred Stock.  If the holders of the Series A Preferred Stock were to commence any litigation to compel the Company to redeem the Series A Preferred Stock, based on present facts and circumstances, the Company would vigorously contest that litigation.  If the Company is required to redeem all or any portion of the Series A Preferred Stock, it could have a material adverse effect on its business, results of operations and financial condition.

 

The Mandatorily Redeemable 10½% Preferred Stock ranks senior in liquidation preference to all common stock and Class A common stock outstanding as of July 27, 2003 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

 

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Stock) on August 9, 1999 to Oak Hill for $150 million.

 

On August 31, 2001, in connection with a recapitalization transaction, the Series B Preferred Stock was stripped of all of its economic and governance rights and preferences, with the exception of its right to elect up to six directors.  The Company issued mandatorily redeemable Series C-1 and Series C-2 Preferred Stock with an aggregate initial face value of $179.5 million which was equal to the accrued liquidation preference of the Series B Preferred Stock immediately before being stripped of its right to such accrued liquidation preference (see Note 12).  The Series B Preferred Stock will lose its remaining rights upon redemption of the Series C-1 and C-2 Preferred Stock in July 2007.

 

Series C-1 and C-2 Preferred Stock

On July 15, 2001, the Company entered into a securities purchase agreement with Oak Hill to assist the Company in meeting its current financing needs.  Pursuant to the terms of the securities purchase agreement, which closed on August 31, 2001, the Company issued to Oak Hill two new series of Preferred Stock: (i) $40 million face value of Series C-1 Preferred Stock; and (ii) $139.5 million face value of Series C-2 Preferred Stock.  The initial face values of the Series C-1 Preferred Stock and Series C-2 Preferred Stock correspond to the accrued liquidation preference of the Series B Preferred Stock immediately before being stripped of its right to such accrued liquidation preference (see Note 12).  The Series C-1 Preferred Stock and Series C-2 Preferred Stock are entitled to annual preferred dividends of 12% and 15%, respectively.  At the Company’s option, dividends can either be paid in cash or in additional shares of preferred stock.  The Series C-1 Preferred Stock is convertible into common stock at a price of $1.25 per share, subject to adjustments.  The Series C-2 Preferred Stock is not convertible.  Both of the Series C-1 Preferred Stock and Series C-2 Preferred Stock are mandatorily redeemable and mature in July 2007.  As of July 27, 2003, cumulative dividends in arrears totaled approximately $10.1 million and $45.2 million for the Series C-1 Preferred Stock and Series C-2 Preferred Stock, respectively.

Series D Preferred Stock

The Company has authorized the issuance of 5,000 shares of $0.01 par value, non-voting Series D Participating Preferred Stock (Series D Preferred Stock).  As of July 27, 2003, no shares of Series D Preferred Stock have been issued.  The Series D Preferred Stock is junior in right of preference to the Series A, Series C-1 and Series C-2 Preferred Stock, is not entitled to preferred dividends and is redeemable at the option of the shareholder.

10.          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 stock 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 (other than directors elected by holders of the Company’s various classes of preferred stock) and holders of common stock will elect a class of directors that constitutes one-third of the Board of Directors (other than directors elected by holders of the Company’s various classes of preferred stock).  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.

 

11.          Dividend Restrictions and Stockholders Agreement

 

Dividend Restrictions

Borrowers under the Resort Senior Credit Facility, which include ASC, are restricted from paying cash dividends on any of their preferred or common stock.

 

Borrowers under the Real Estate Term Facility, which include Resort Properties and Resort Properties’ subsidiaries, including Grand Summit, are restricted from declaring dividends or advancing funds to ASC by any other method, unless specifically approved by these lenders.

 

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Under the indenture governing the Senior Subordinated Notes, ASC is prohibited from paying cash dividends or making other distributions to its shareholders.

 

Stockholders Agreement

The Company, Oak Hill and Mr. Otten entered into a Stockholders Agreement, dated as of August 6, 1999, amended on July 31, 2000 (as amended, the “Stockholders Agreement”), pursuant to which each of Mr. Otten and Oak Hill agreed to vote their capital stock of the Company so as to cause there to be:

 

•      Six directors of the Company nominated by Oak Hill, so long as Oak Hill owns 80% of the shares of common stock it owned as of July 30, 2000 on a fully diluted basis, such number of directors decreasing ratably with the percentage of Oak Hill’s ownership of the common stock on a fully diluted basis compared to such ownership as of July 30, 2000; and

•      Two directors of the Company nominated by Mr. Otten, so long as Mr. Otten owns 15% of the shares of common stock outstanding on a fully diluted basis, and one director so nominated, so long as Mr. Otten owns at least 5% of the shares of Common Stock outstanding on a fully diluted basis.

Oak Hill owns 80% of the shares of common stock it owned as of July 30, 2000, on a fully diluted basis, therefore, two of the four members of the Board of Directors to be elected by Mr. Otten, as sole owner of the Class A Common Stock pursuant to the terms of the Company’s certificate of incorporation will be chosen by Oak Hill and elected by Mr. Otten.

 

The Stockholders Agreement provides that, so long as Oak Hill owns at least 20% of the outstanding shares of common stock on a fully diluted basis, the affirmative vote of at least one Oak Hill director is required prior to the approval of (i) the Company’s annual budget, (ii) significant executive personnel decisions, (iii) material actions likely to have an impact of 5% or more on the Company’s consolidated revenues or earnings, amendments to the Company’s articles of incorporation or bylaws, (iv) any liquidation, reorganization or business combination of the Company, (v) the initiation of certain material litigation, and (vi) any material financing of the Company.

 

Under the Stockholders Agreement, Oak Hill and Mr. Otten have agreed not to dispose of their securities of the Company if, (i) as a result of such transfer, the transferee would own more than 10% of the outstanding shares of common stock of the Company (on a fully diluted basis), unless such transfer is approved by the Board of Directors (x) including a majority of the Common Directors, as defined, or (y) the public stockholders of the Company are given the opportunity to participate in such transfer on equivalent terms, (ii) the transferee is a competitor of the Company or any of its subsidiaries, unless such transfer is approved by the Board of Directors, or (iii) such transfer would materially disadvantage the business of the Company or any of its subsidiaries.  The Stockholders Agreement provides for additional customary transfer restrictions applicable to each of Mr. Otten and Oak Hill as well as standstill provisions applicable to Oak Hill.

 

The Stockholders Agreement provides that, upon the Company’s issuance of shares of common stock or securities convertible into common stock, Mr. Otten and Oak Hill will have the right to purchase at the same price and on the same terms, the number of shares of Common Stock or securities convertible into common stock necessary for each of them to maintain individually the same level of beneficial ownership of common stock of the Company on a fully diluted basis as it owned immediately prior to the issuance.  This anti-dilution provision is subject to customary exceptions.

 

12.          Recapitalization

 

Recapitalization

On July 15, 2001, the Company entered into a securities purchase agreement with Oak Hill to assist the Company in meeting its current financing needs.  The agreement closed on August 31, 2001 and included the following key terms:

 

•	The Company issued, and Oak Hill purchased, $12.5 million aggregate principal amount of Junior Subordinated Notes, which are convertible into shares of the Company’s Series D Preferred Stock;

 

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•	Oak Hill funded $2.5 million of the $3.5 million of availability remaining under Tranche C of the Real Estate Term Facility to facilitate amendments to that credit facility.  This was the final advance under Tranche C, as the maximum availability under this facility was reduced from $13 million to $12 million;
•	Oak Hill agreed to provide a guaranty for a $14 million equipment lease for the Heavenly gondola, which guaranty was released upon the sale of Heavenly.  The fair value of the lease guaranty was approximately $1.7 million;
•	Oak Hill purchased 1 million shares of the Company’s common stock for an aggregate purchase price of $1 million;
•	Oak Hill agreed to cancel an agreement to provide it with warrants for 6 million shares of the Company’s common stock or 15% of the common stock of Resort Properties, the fair value of which was $2.2 million on the date of the transaction (see Note 7);
•	The outstanding Series B Preferred Stock that was held by Oak Hill was stripped of all of its economic and governance rights and preferences, with the exception of the right to elect up to six directors in exchange for the items mentioned above and the Company issuing to Oak Hill two new series of Preferred Stock: (i) $40 million face value of Series C-1 Preferred Stock; and (ii) $139.5 million face value of Series C-2 Preferred Stock;
•	At Oak Hill’s option, and subject to the consent of the other lenders under the Real Estate Term Facility, Tranche C of the Real Estate Term Facility is exchangeable in whole or in part into indebtedness of the Company when permitted under the existing debt agreements.

 

The termination of the liquidation preference and other rights of the Series B Preferred Stock in exchange for the issuance of the Series C-1 and Series C-2 Preferred Stock was accounted for as a modification and recapitalization transaction in conjunction with the terms described above.  Accordingly, the carrying value of the Series B Preferred Stock of $172.1 million (net of $7.4 million unamortized discount) as of August 31, 2001 was removed and a corresponding amount recorded as Series C-1 Preferred Stock and Series C-2 Preferred Stock.  In addition, the fair values of the gondola lease guaranty of  $1.7 million and the warrant rights returned to the Company by Oak Hill of $2.2 million were added to the recorded value of the Series C-1 and Series C-2 Preferred Stock.  The gondola lease guaranty was accounted for as a prepaid lease cost that was amortized to lease expense based on the life of the gondola lease until the Heavenly resort was sold at which time the unamortized portion was written off.  The long-term liability related to the warrant rights was removed and the difference between its carrying value of $7.7 million and its fair value of $2.2 million was recorded as additional paid-in capital.  No gain or loss was recognized related to this recapitalization transaction.

 

13.      Merger, Restructuring and Asset Impairment Charges

 

During Fiscal 2001, Fiscal 2002 and Fiscal 2003, the Company recognized certain merger, restructuring and asset impairment charges as follows (in thousands):

 

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Merger and Asset Impairment Charges

We incurred $1.4 million of merger, restructuring and asset impairment charges for Fiscal 2003 that consisted of  $1.2 million of expenses related to the write-off of certain fixed assets and other assets in our resort segment, $0.4 million in employee severance charges in our resort segment, offset by the reversal of $0.2 million of impairment charges in our real estate segment that were determined not to be needed.

 

On May 20, 2002, Resort Properties defaulted on the Real Estate Term Facility due to its failure to make a mandatory principal payment of $3.75 million.  Until this time, Resort Properties had been able to obtain waivers or amendments to the Real Estate Term Facility whenever there were defaults.  However, given the combination of (1) extreme slow down in the resort sector economy and especially the slowdown in the real estate market, (2) the conservative lending environment, and (3) the negative terms of the Textron restructuring and the possible negative terms of the Fleet restructuring, management determined that a significant adverse change in the economic environment and in the business plans of the Company occurred in the fourth quarter of Fiscal 2002.  This adverse change affected the realizability of the Company’s long-lived assets and the Company recorded appropriate impairments.  In accordance with SFAS No. 144, the Company evaluated the carrying values of long-lived assets as of July 27, 2002.  In addition to the $25.4 million of asset impairments recorded on Steamboat fixed assets during the second quarter of Fiscal 2002 (as discussed below), approximately $83.5 million of asset impairments were recorded during the fourth quarter of Fiscal 2002 and are summarized as follows:

 

Real Estate Business Segment

•	$38.7 million for quarter and eighth share inventory at the Steamboat Grand Hotel and The Canyons Grand Summit Hotel based on expected future cash flows,
•	Approximately $24.8 million for master planning and real estate costs at The Canyons, Killington, Mount Snow, Sugarloaf/USA, Sunday River and Steamboat based on expected future cash flows.

 

Resort Business Segment

•	Approximately $18.9 million for land and land options at The Canyons based on appraisals and expected future cash flows,
•	Approximately $1.4 million for certain resort fixed assets and a land option at Sunday River based on expected realizability,
•	Approximately ($0.3) million gain to finalize the sale of Sugarbush.

 

During the first quarter of Fiscal 2002, the Company entered into a non-binding letter of intent to sell its Steamboat resort in Steamboat Springs, Colorado.  In accordance with SFAS No. 121, the Company recognized a $52.0 million impairment loss on the net assets held for sale as of July 29, 2001.  An additional $25.4 million impairment charge was recorded in the second quarter of Fiscal 2002 based on modifications from preliminary

 

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estimates to the final proposed purchase and sale agreement.  The Company withdrew from the sale of Steamboat on March 26, 2002.

 

In the first quarter of Fiscal 2002, the Company finalized its sale of its Sugarbush resort in Warren, Vermont.  In accordance with SFAS No. 121, the Company recognized a $15.1 impairment loss on these assets as of July 29, 2001.  Upon completion of the sale of Sugarbush on September 28, 2001, the Company recorded a gain of approximately $272,000 which was reflected as an offset to the previously recorded impairment charges.

 

On December 8, 2000, the Company and MeriStar Hotels & Resorts, Inc. (‘‘MeriStar’’) entered into a merger agreement (the ‘‘Merger Agreement’’) whereby a wholly owned subsidiary of the Company, ASC Merger Sub, Inc., would have merged with and into MeriStar (the ‘‘MeriStar Merger’’). The Boards of each of the Company and MeriStar met separately on March 22, 2001 and voted to terminate the proposed merger due to changes in economic conditions and the combined companies’ inability to effect the capital markets transactions required to consummate the merger.  The companies each executed a letter terminating their existing Merger Agreement without liability to the other.  The Company recorded a $3.6 million charge in the third quarter of Fiscal 2001 for the costs incurred in conjunction with the terminated MeriStar Merger.  This $3.6 million charge included $2.5 million in legal, accounting and other consultation and professional services rendered in conjunction with the proposed merger, $0.8 million in fees paid to lenders related to the Company’s application for a new senior credit facility that would have been established for the surviving merged enterprise, and $0.3 million in fees incurred for the preparation and distribution of a consent solicitation statement seeking the approval of the proposed merger from the holders of the Company’s Notes.

 

The Attitash Bear Peak Grand Summit Hotel had realized slower absorption in the market than previously anticipated, and 40% of the units remained unsold as of July 29, 2001.  As a result, the Company instituted programs to bring about a complete sell-out of the units during Fiscal 2002.  In accordance with SFAS No. 121, the Company recognized a $1.3 million impairment charge to recognize the net realizable value of the remaining quartershare units in the fourth quarter of Fiscal 2001.  The remaining units were sold during Fiscal 2002.

 

Restructuring Charges

On May 30, 2001, the Company initiated a comprehensive strategic plan to improve its capital structure and enhance future operating performance.  The plan included the following key components:

 

•		Strategic redeployment of management and capital resources to emphasize the integration and growth of resort village development and operations.
•		Intent to sell the Steamboat resort and use the net proceeds to reduce the debt of the Company.
•		Reorganization, staff reduction and performance enhancement programs to achieve operational cost savings and improve financial performance.
•		A comprehensive financial restructuring package, including amendments to senior credit facilities and an anticipated new capital infusion to enhance financial flexibility.

 

During Fiscal 2001, the Company incurred $4.0 million in charges related to the implementation of its comprehensive strategic plan.  Of this amount, $2.8 million represents amounts paid for employee separation costs related to the termination of employees throughout the Company including several senior management positions.  As of July 29, 2001, all planned employee terminations had been completed.  These terminations and restructurings consisted of converting 160 full-time, year-round positions to seasonal positions and the elimination of approximately 70 full-time, year-round positions.  The remaining $1.2 million consisted mainly of legal and financial consulting costs incurred in connection with evaluating capital restructuring alternatives, including amendments to the Company’s credit facilities and the recapitalization of the Company (see Note 12).  All of the amounts recognized in Fiscal 2001 were paid or accrued for services rendered prior to July 29, 2001.

 

During Fiscal 2002, the Company incurred $2.7 million in charges related to the implementation of its comprehensive strategic plan.  These costs consisted mainly of legal, consulting and financing costs incurred in connection with its resort and real estate credit facility amendments.  All of the amounts recognized during Fiscal 2002 were paid or accrued for services rendered prior to July 28, 2002.

 

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Each of the amounts for Fiscal 2001 and Fiscal 2002 are included in merger, restructuring and asset impairment charges in the accompanying consolidated statements of operations.

 

14.      Income Taxes

 

The (provision) benefit for income taxes charged to operations was as follows (in thousands):

 

 

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 No. 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 as of July 28, 2002 and July 27, 2003 (in thousands):

 

 

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, cumulative effect of change in accounting principle and income from discontinued operations as a result of the following differences (in thousands):

 

		Fiscal 2001			Fiscal 2002			Fiscal 2003
Income tax benefit at the statutory U.S. tax rates		$	43,759		$	58,652		$	15,531
Increase (decrease) in rates resulting from:
State taxes, net		4,166			10,416			3,054
Change in valuation allowance		(47,182		)	(67,732		)	(17,061		)
Stock option compensation		—			(163		)	—
Nondeductible items		(350		)	(360		)	(1,461		)
Other		(393		)	(813		)	(63		)
Income tax benefit at the effective tax rates		$	—		$	—		$	—

 

As of July 27, 2003, the Company has federal net operating loss (NOL) carryforwards of approximately $275 million which expire in varying amounts though Fiscal 2023, and approximately $1 million in general

 

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business credit carryforwards which expire in varying amounts through Fiscal 2022.  The utilization of all or some of these losses and carryforwards will be limited pursuant to Internal Revenue Code Section 382 as a result of ownership changes.

 

Management has concluded that it is more likely than not that the Company will not have sufficient taxable income of an appropriate character within the carryback and carryforward period permitted by current law to allow for the utilization of certain carryforwards and other tax attributes generating the net deferred tax asset.  Therefore, a valuation allowance of $124.9 million and $142.0 million has been established to reduce the deferred tax assets as of July 28, 2002 and July 27, 2003, respectively.

 

15.      Cumulative Effect of Change in Accounting Principle

 

During Fiscal 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”.  SFAS No. 142 applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired.  As a result of the adoption of SFAS No. 142, the Company recorded a goodwill impairment loss of $18.7 million, which has been recorded as a cumulative effect of change in accounting principle in the accompanying consolidated statement of operations for Fiscal 2002.

 

In accordance with SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133,” the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,” (collectively, SFAS No. 133, as amended) effective July 31, 2000.  These standards were adopted as of the beginning of Fiscal 2001 as a cumulative effect of a change in accounting principle.

 

SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value.  Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that the Company formally document, designate and assess the effectiveness of transactions that receive hedge accounting.  SFAS No. 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 changes in the fair value of the hedged item attributable to the hedged risk, be recognized currently in operations in the same accounting period.  SFAS No. 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 operations in the same period or periods during which the hedged forecasted transaction affects operations.  The ineffective portion of a derivative’s change in fair value is recognized currently through operations regardless of whether the instrument is designated as a hedge.

 

The Company had five interest rate swap contracts outstanding at the time of adoption. Two of these contracts were designated as cash flow hedges, and were subsequently terminated by the floating rate payer on November 17, 2000.  Upon adoption, the fair value of these swaps were recorded as an asset on the balance sheet with a corresponding credit to other comprehensive income.  The cancellation of these swaps effectively resulted in a reversal of the amounts recognized upon adoption.

 

The Company entered into three other interest rate swap agreements that did not qualify for hedge accounting under SFAS No. 133, as amended.  As of July 30, 2000, the Company had $8.6 million 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 statement of operations.  Upon adoption, the fair values of these swaps were recorded as an asset and a liability with a corresponding entry to cumulative effect of a change in accounting principle in operations; and the amount recorded in other long term liabilities was recognized through a cumulative effect of a change in accounting principle in operations.  For Fiscal 2001, Fiscal 2002 and Fiscal 2003 (through the date terminated, see Note 8), the subsequent change in the fair value of the swaps of $0.9 million, $1.3 million and $0.4 million, respectively, was recorded as interest expense in the

 

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accompanying consolidated statements of operations.  The net effect of the cumulative change in accounting principle was derived as follows (in thousands):

 

 

The Company has no embedded derivatives under SFAS No. 133, as amended.

 

16.      Business Segment Information

 

The Company has classified its operations into two business segments, resorts and real estate.  Revenues at each of the resorts are derived from the same lines of business which include lift ticket sales, food and beverage, retail sales including rental and repair, skier development, lodging and property management, golf, other summer activities and miscellaneous revenue sources.  The performance of the resorts is evaluated on the same basis of profit or loss.  Additionally, each of the resorts has historically produced similar margins and attracts the same class of customer.  Based on the similarities of the operations at each of the resorts, the Company has concluded that the resorts satisfy the aggregation criteria set forth in SFAS No. 131.

 

The Company’s real estate revenues are derived from the sale and leasing of interests in real estate development projects undertaken by the Company at its resorts and the sale of other real property interests.  The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies.  Data by segment is as follows (in thousands):

 

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Capital expenditures for the Company’s real estate segment include the net change in real estate held for sale and real estate operating expenses for the periods presented.  A reconciliation of the totals reported for the operating segments to the totals reported in the consolidated financial statements is as follows:

 

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17.      Related Party Transactions

 

Tranche C of the Real Estate Term Facility was purchased by Oak Hill on July 31, 2001 (see Note 7).  The Company paid a $375,000 financing fee to Oak Hill in connection with this $13 million investment.  The Real Estate Term Facility and the related Securities Purchase Agreement with Oak Hill were restructured during the first quarter of Fiscal 2002.

 

During Fiscal 2001, the Company paid $150,000 each to Mr. Paul Wachter and Mr. David Hawkes, both of whom are members of the Company’s Board of Directors, for their participation in the Special Committee that was formed to evaluate the proposed merger between the Company and Meristar Hotels and Resorts, Inc.  The Company also reimbursed Oak Hill a total amount of $137,000 for its professional and other fees incurred in connection with the proposed Meristar Merger.

 

On March 28, 2001, Mr. Otten resigned as the Company’s Chairman and Chief Executive Officer.  Mr. Otten is still a major shareholder of the Company and is a member of the Company’s Board of Directors.  As part of his separation agreement, the Company paid Mr. Otten and his executive assistant their salaries and medical benefits for two years.  These amounts totaled approximately $480,000 on an annual basis.  In addition, the Company granted Mr. Otten the use of Company office space for up to two years and the Company also transferred ownership of one of its vehicles (valued at approximately $20,000) to Mr. Otten at no charge.

 

In April, 2003, the Company engaged in a transaction with Mr. Otten at the Company’s Sunday River resort wherein the Company granted to Mr. Otten certain easements necessary for him to develop a restaurant near the resort in exchange for the grant by Mr. Otten of certain parking and access easements beneficial to the resort.  This transaction was reviewed and approved by the Audit Committee of the Company’s Board of Directors.

 

Mr. Wachter is the founder and Chief Executive Officer of Main Street Advisors.  Main Street Advisors, through Mr. Wachter, acted as one of the Company’s investment bankers in connection with the marketing of the Steamboat and Heavenly resorts for sale.  Main Street Advisors is entitled to a percentage-based fee in the event of the sale of any significant asset of the Company, other than the Sugarbush resort and certain undeveloped real estate properties.  During Fiscal 2001, Fiscal 2002, and Fiscal 2003, the Company paid Main Street Advisors $0, $1.1 million and $0, respectively, in connection with these services.

 

18.      Commitments and Contingencies

 

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 statements of operations for Fiscal 2001, 2002, and 2003 was $4.3 million, $4.2 million, and $4.2 million, respectively.

 

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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.  A substantial portion of the land constituting skiable terrain at Attitash Bear Peak, Mount Snow 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.  The Company does not anticipate any limitations, modifications, or non-renewals which would adversely affect the Company’s operations.

 

Killington leases certain land from the State of Vermont.  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 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.

 

Sunday River 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 Company is also 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.

 

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 statements of operations for Fiscal 2001, 2002, and 2003 was $1.4 million, $1.2 million, and $1.2 million, 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 $19.4 million and were payable at various times and in varying amounts through May 2003.  Through July 27, 2003, the Company has made $17.4 million of option payments.  The remaining $2.0 million in option payments have been accrued in other current liabilities in the accompanying consolidated balance sheet as of July 27, 2003 as the Company has entered into a non-cancelable agreement to make these payments.

 

The ski development rights for approximately 3,000 acres of skiable terrain that the Company has targeted for development at The Canyons 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 Company executed an amendment to this lease which provided that these ski development rights be acquired in fee by The Canyons by April 2003.  In Fiscal 2003, the Company paid approximately $5.0 million for the acquisition of these development rights.  This agreement will also require the Company to build two lifts over the next three years for an estimated total cost of approximately $2.0 million.

 

The Company has entered into an agreement with a third party land owner at The Canyons resort for an exchange of development properties which will include an obligation of the Company to complete certain road and utility infrastructure on the subject parcels.  The estimated cost of the portion of this infrastructure for which the

 

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Company is responsible is $0.8 million.  In addition, the Company is required to provide culinary water rights, which the Company owns, to the third party owner.

 

The Company’s development activities at The Canyons in Utah are governed by permits issued pursuant to a Development Agreement with local authorities.  The Development Agreement requires the Company to achieve certain performance benchmarks in order to remain in compliance with the Development Agreement and obtain additional permits.  The Company has not achieved certain of these performance benchmarks within the time frames required under the Development Agreement, and the local authorities have advised management that these failures potentially constitute defaults under the Development Agreement.  Management is working with the local authorities to address these failures and reassess the appropriate timing for compliance with these performance benchmarks.

 

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 $9.8 million, $10.3 million, and $9.3 million for Fiscal 2001, 2002, and 2003, respectively.

 

Future minimum lease payments for lease obligations, exclusive of contingent skier visit payments, as of July 27, 2003 are as follows (in thousands):

 

 

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.  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, financial condition, results of operations or liquidity of the Company.

 

In connection with its Real Estate Term Facility, the Company is obligated to pay a contingent fee to the lenders in the event there exists unsold quarter and eighth share inventory after the Construction Loan Facility and Tranches A and B of the Real Estate Term Facility have been repaid.  This contingent fee would be equal to 0.7168% of the revenues realized on the sales of the remaining units.  Based on current projections of future sales of the remaining units, management believes that the probability of making such a payment is remote.  Therefore, no liability has been recorded in the accompanying consolidated balance sheets.

 

In connection with its membership in the Resort Village Management Association (RVMA) at The Canyons, the Company is obligated to fund $3 million of the estimated $18 million in construction costs for a golf course to be built at The Canyons.  Part or all of this obligation may be satisfied by various capital improvements which would benefit the resort as well as the golf course.  Since the method of satisfying this obligation as well as the

 

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ultimate construction of the golf course is contingent upon the RVMA being able to obtain sufficient funding, no liability has been recorded in the accompanying consolidated balance sheets for the $3 million obligation.

 

On January 24, 2002, the Company entered into an agreement with Triple Peaks, LLC (Triple Peaks) for the sale of the Company’s Steamboat resort.  Management later determined that the sale of the Company’s Heavenly resort more closely achieved its restructuring objectives and concluded that the Company would not proceed with the sale of the Steamboat resort.  On April 5, 2002, Triple Peaks filed a lawsuit against American Skiing Company in federal district court in Denver, alleging breach of contract resulting from its refusal to close on the proposed sale of the Steamboat resort.  The suit seeks both monetary damages resulting from the breach and specific performance of the contract.  On April 16, 2002, before the Company filed an answer to its complaint, Triple Peaks voluntarily dismissed its suit and re-filed a substantially identical complaint in Colorado state district court in Steamboat, also naming Steamboat Ski & Resort Corporation, American Skiing Company Resort Properties and Walton Pond Apartments, Inc.  (each direct or indirect subsidiaries of American Skiing Company) as additional defendants.  On April 19, 2002, the Company filed a complaint seeking declaratory judgment against Triple Peaks in federal court in Denver seeking a declaration from that court that the damages under the contract for failure to close on the proposed sale are limited to $500,000.  On December 31, 2002, the Colorado state district court issued summary judgment in the Company’s favor and against Triple Peaks, confirming that the damages owed Triple Peaks under the contract are limited to $500,000.  This judgment was subject to a 45-day appeal period.  On January 26, 2003, the Company received notice that Triple Peaks had appealed the decision of the Colorado state district court.  Subsequent to the issuance of the summary judgment order by the Colorado state district court, the companion federal court action was dismissed with prejudice at the Company’s request.

 

On January 3, 2003, American Skiing Company received arbitration demands from two former executive employees, Hernan Martinez and Peter Tomai.  Messrs. Martinez and Tomai each alleged that they resigned from their employment with us for “good reason” under the terms of their executive employment agreements with us, and that accordingly they are entitled to severance payments equal to one year’s salary ($300,000 and $225,000, respectively) and certain other severance benefits, including the maintenance of health insurance for six months following the termination of their employment.  We contested the existence of “good reason” for their termination of their employment and disputed our liability for the severance payments and other benefits.  Arbitrations were conducted in each of these matters in late June and early July 2003.  In September 2003, we received notice of judgment in our favor with regards to each of these matters.  These arbitration awards are final and non-appealable.

 

On April 22, 2003, we were sued in Utah state court by Westgate Resorts, Ltd. for breach of contract and other related claims arising from disputes involving two contracts between us (through two different subsidiaries, ASC Utah, Inc. and American Skiing Company Resort Properties, Inc.) and Westgate.  Generally, Westgate has alleged that ASC Utah and/or American Skiing Company Resort Properties, Inc. have breached obligations to Westgate to construct certain infrastructure at The Canyons resort and provide marketing support for Westgate’s project.  Westgate’s claim seeks specific performance of certain aspects of the two contracts.  It is not currently feasible to quantify the damages being sought in this action.  On May 13, 2003, we answered Westgate’s complaint and filed a counterclaim, alleging, among other things, that Westgate was in default on a joint promotional agreement with ASC Utah for failing to purchase approximately $2 million in lift tickets and that Westgate’s buildings at The Canyons encroach upon land owned or controlled by ASC Utah and/or American Skiing Company Resort Properties, Inc.  No discovery has been taken in this matter and no timetable has been set for bringing the matter to trial.

 

The Company has issued approximately $4.1 million of letters of credit within the Resort Senior Credit Facility.  The Company has issued a letter of credit for $0.3 million related to certain workers compensation obligations outside of the Resort Senior Credit Facility.  This letter of credit is secured by certain cash deposits of one of the Company’s wholly owned subsidiaries.  In addition, we also have approximately $0.2 million of letters of credit issued through financial institutions outside of the Resort Senior Credit Facility.

 

ASC has established the American Skiing Company Phantom Equity Plan (the “LTIP”).  Certain of ASC’s Executive Officers participate in this plan.  Participants are entitled to a payment on awards granted under the LTIP, to the extent vested upon a Valuation Event or in certain cases upon termination of employment.  The amount of any awards are based ultimately on the Equity Value, as defined, obtained through a Valuation Event.  A Valuation Event is any of the following:  (i) a sale or disposition of a significant Company operation or property as determined by the

 

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Board; (ii) a merger, consolidation or similar event of the Company other than one (A) in which the Company is the surviving entity or (B) where no Change in Control has occurred; (iii) a public offering of equity securities by the Company that yields net proceeds to the Company in excess of $50 million; or (iv) a Change in Control, as defined.  The LTIP was ratified by the Company’s Board of Directors on March 6, 2003.  In conjunction with the ratification of the LTIP, the Company recorded an expense of $0.4 million and also recorded approximately $0.2 million for the period of adoption to the end of Fiscal 2003.

 

The Company has entered into employment agreements with three of its executive officers.  These employment agreements provide for guaranteed annual base salaries ranging from $214,000 to $259,000 per person.  The employment agreements also provide for contingent annual bonuses ranging from 30% to 75% of annual base salaries, involuntary termination benefits, termination benefits resulting from a change in control of the Company, LTIP participation levels and, in certain cases, benefits where the termination of employment was voluntary.  These agreements also provide for certain benefits in the event of the death of the executive.

 

The Company entered into a comprehensive management consulting agreement beginning in Fiscal 2002 with Interstate Hotels & Resorts, Inc., under which Interstate was supporting the management and operations of the Company’s lodging and property management division.  The agreement was for a 5-year term ending on July 30, 2006.  However, at either party’s option, this agreement could be terminated during the 60-day period commencing on July 30, 2003.  The Company gave notice to Interstate in August 2003 that it was terminating the consulting agreement.  The agreement provides for a basic fee of $0.6 million per year as well as an incentive fee determined and paid in accordance with the agreement.  The Company has made accruals at levels they deem appropriate in accounts payable and other current liabilities for incentive fees as of July 27, 2003.

 

Certain claims, suits and complaints in 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 liquidity of the Company if disposed of unfavorably.

 

19.      Assets/Liabilities Held For Sale and Discontinued Operations

 

    Heavenly Sale

On May 9, 2002, the Company completed the sale of Heavenly to Vail Resorts, Inc. (Vail).  Management determined that the sale of Heavenly more closely achieved the Company’s restructuring objectives and resulted in a significantly higher asset valuation than the previously announced Steamboat sale transaction.  As a result, management concluded that the Company would not proceed with the sale of the Steamboat resort.  Total consideration for the sale of Heavenly was $104.9 million, which was comprised of a $102.0 million sales price, less $2.4 million in purchase price adjustments, plus $5.3 million of current liabilities assumed by Vail.  Vail also assumed $2.8 million in capital lease obligations leaving $96.8 million in net proceeds after assumption of the capital lease obligations.  At closing, the Company paid $1.8 million in costs related to the sale with net proceeds after transaction costs of $95.0 million.

 

The Company paid fees and accrued interest totaling $2.8 million related to the prior resort senior credit facility out of the sales proceeds and an early prepayment penalty associated with the retirement of a term loan, including accrued interest.  After these payments, the Company made reductions to its outstanding debt of the following amounts:

 

 

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In connection with the completion of the sale of Heavenly, the availability under the revolving portion of the prior resort senior credit facility was reduced from $94.6 million to $52.1 million.  After prepayment penalties of $0.7 million and the total debt reduction of $87.5 million, the remaining proceeds from the sale of $4 million were deposited into a temporary cash account.  In conjunction with the repayment of the Heavenly capital lease, the guaranty provided by Oak Hill to secure that loan was released.

 

The sale of Heavenly has been accounted for in accordance with SFAS No. 144.  In accordance with SFAS No. 144, the results of operations for Heavenly for Fiscal 2001 and Fiscal 2002 have been removed from continuing operations and classified as discontinued operations.  The gain on sale of Heavenly was $2.9 million which is included in income from discontinued operations in the accompanying consolidated statement of operations for Fiscal 2002.  Revenues applicable to the operations of Heavenly were $53.0 million and $51.6 million for Fiscal 2001 and 2002, respectively.

 

    Sugarbush Sale

On September 28, 2001, the Company finalized the sale of its Sugarbush resort in Warren, Vermont to Summit Ventures NE, Inc. This sale generated net proceeds of $5.2 million that were used by the Company to permanently pay down the revolving and term portions of its prior resort senior credit facility, on a pro-rata basis, in accordance with the mandatory prepayment requirements of the facility.

 

The sale of the Sugarbush resort was accounted for in accordance with SFAS No. 121 and APB No. 30, since the disposal activities were initiated prior to the Company’s adoption of SFAS No. 144.  In accordance with SFAS No. 121, the carrying value of the net assets for Sugarbush that were subject to sale were reclassified as assets held for sale.  The assets held for sale were reduced to their estimated fair value based on the estimated selling price less costs to sell, resulting in an impairment charge of $15.1 million, which is included in merger, restructuring and asset impairment charges in the accompanying consolidated statement of operations for Fiscal 2001.

 

Summary resort segment operating results for Sugarbush, excluding the $15.1 million asset impairment charge in Fiscal 2001, are as follows (in thousands):

 

 

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20.      Quarterly Financial Information (Unaudited)

 

Following is a summary of unaudited quarterly information.  All amounts are in thousands, except per share amounts.

 

 

Certain items related to merger, restructuring and impairment charges recorded during Fiscal 2002 are material to the results of the quarterly information above.  These charges are discussed in Note 13.  Certain amounts in the prior year's quarterly financial information have been reclassified to conform to the Fiscal 2003 presentation.

 

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