American Skiing Company and Subsidiaries
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANG
E ACT OF 1934 FOR THE QUARTER ENDED JANUARY 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to____________.
--------------------------------
Commission File Number 1-13507
--------------------------------
American Skiing Company
(Exact name of registrant as specified in its charter)
Delaware 04-3373730
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 450
Bethel, Maine 04217
(Address of principal executive office)
(Zip Code)
(207) 824-8100
www.peaks.com
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock were 14,760,530 shares of Class A common stock, $.01 par value, and
15,662,543 shares of common stock, $.01 par value, as of March 14, 2000.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Operations (unaudited) for the 14
weeks ended January 30, 2000 and the 13 weeks ended
January 24, 1999 ....................................................3
Condensed Consolidated Statement of Operations (unaudited) for the 27
weeks ended January 30, 2000 and the 26 weeks ended
January 24, 1999 ....................................................4
Condensed Consolidated Balance Sheet as of January 30, 2000 (unaudited)
and July 25, 1999....................................................5
Condensed Consolidated Statement of Cash Flows (unaudited) for the 27
weeks ended January 30, 2000 and the 26 weeks ended January 24, 1999.6
Notes to (unaudited) Condensed Consolidated Financial Statements......7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General..............................................................11
Liquidity and Capital Resources......................................11
Changes in Results of Operations.....................................17
Forward-Looking Statements...........................................22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..............................................22
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................23
Item 5. Other Information...................................................24
Item 6. Exhibits and Reports on Form 8-K...................................25
Part I - Financial Information
Item 1 Financial Statements
Condensed Consolidated Statement of Operations
(In thousands, except share and per share amounts)
14 weeks ended 13 weeks ended
January 30, 2000 January 24, 1999
(unaudited)
Net revenues:
Resort $ 104,480 $ 103,205
Real estate 22,147 6,300
----------------- ----------------
Total net revenues 126,627 109,505
Operating expenses:
Resort 73,523 69,251
Real estate 22,486 7,865
Marketing, general and administrative 16,283 17,922
Depreciation and amortization 20,924 19,010
----------------- ----------------
Total operating expenses 133,216 114,048
----------------- ----------------
Loss from operations (6,589) (4,543)
Interest expense 9,164 10,139
----------------- ----------------
Loss before benefit from income taxes (15,753) (14,682)
Benefit from income taxes (5,948) (4,982)
----------------- ----------------
Loss before preferred stock dividends (9,805) (9,700)
Accretion of discount and dividends
accrued on mandatorily redeemable
preferred stock 5,319 1,079
----------------- ----------------
Net loss available to common
shareholders $ (15,124) $ (10,779)
================= ================
Accumulated deficit, beginning of period $ (60,265) $ (20,257)
Net loss available to common shareholders (15,124) (10,779)
----------------- ----------------
Accumulated deficit, end of period $ (75,389) $ (31,036)
================= ================
Basic and fully diluted loss per
common share (note 3)
Net loss available to common
shareholders $ (0.50) $ (0.36)
================= ================
Weighted average common shares
outstanding - basic and diluted 30,412,046 30,286,746
================= ================
See accompanying notes to (unaudited)
Condensed Consolidated Financial Statements.
3
Condensed Consolidated Statement of Operations
(In thousands, except share and per share amounts)
27 weeks ended 26 weeks ended
January 30, 2000 January 24, 1999
(unaudited)
Net revenues:
Resort $ 125,286 $ 123,516
Real estate 24,696 10,785
----------------- ----------------
Total net revenues 149,982 134,301
Operating expenses:
Resort 102,538 97,324
Real estate 25,770 11,905
Marketing, general and
administrative 27,036 28,748
Depreciation and amortization 24,126 21,719
----------------- ----------------
Total operating expenses 179,470 159,696
----------------- ----------------
Loss from operations (29,488) (25,395)
Interest expense 17,130 19,069
----------------- ----------------
Loss before benefit from income taxes (46,618) (44,464)
Benefit from income taxes (15,000) (15,555)
----------------- ----------------
Loss before extraordinary item and
accounting change (31,618) (28,909)
Extraordinary loss, net of tax
benefit of $396 (note 6) 621 --
Cumulative effect of change in
accounting principle, net of tax
benefit of $449 (note 2) 704 --
----------------- ----------------
Loss before preferred stock dividends (32,943) (28,909)
Accretion of discount and dividends
accrued on mandatorily redeemable
preferred stock 10,135 2,138
----------------- ----------------
Net loss available to common
shareholders $ (43,078) $ (31,047)
================= ================
Retained earnings (accumulated deficit),
beginning of period $ (32,311) $ 11
Net loss available to common shareholders (43,078) (31,047)
----------------- ----------------
Accumulated deficit, end of period $ (75,389) $ (31,036)
================= ================
Basic and fully diluted loss per common
share (note 3)
Loss from continuing operations $ (1.38) $ (1.03)
Extraordinary loss, net of taxes (0.02) --
Cumulative effect of change in
accounting principle, net of taxes (0.02) --
------------------ ----------------
Net loss available to common
shareholders $ (1.42) $ (1.03)
================= ================
Weighted average common shares
outstanding - basic and diluted 30,352,301 30,286,149
================= ================
See accompanying notes to (unaudited)
Condensed Consolidated Financial Statements.
4
Condensed Consolidated Balance Sheet
(In thousands, except share and per share amounts)
January 30, 2000 July 25, 1999
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 14,995 $ 9,003
Restricted cash 14,320 6,628
Accounts receivable 13,124 6,474
Inventory 13,933 10,837
Prepaid expenses 8,193 5,309
Deferred income taxes 4,279 4,273
----------------- ---------------
Total current assets 68,844 42,524
Property and equipment, net 515,033 529,154
Real estate developed for sale 281,994 207,745
Goodwill 75,698 76,672
Intangible assets 22,457 22,987
Deferred financing costs 11,010 9,279
Other assets 17,725 19,141
----------------- ---------------
Total assets $ 992,761 $ 907,502
================= ===============
Liabilities, Mandatorily Redeemable
Preferred Stock and Shareholders'
Equity
Current liabilities
Current portion of long-term debt $ 22,316 $ 61,555
Accounts payable and other current
liabilities 96,728 77,951
Deposits and deferred revenue 50,659 20,850
----------------- ---------------
Total current liabilities 169,703 160,356
Long-term debt, excluding current
portion 301,675 313,844
Subordinated notes and debentures,
excluding current portion 127,195 127,062
Other long-term liabilities 15,342 15,687
Deferred income taxes (5,784) 10,062
----------------- ---------------
Total liabilities 608,131 627,011
Mandatorily Redeemable 10 1/2%
Preferred Stock, par value of $1,000
per share; 40,000 shares authorized;
36,626 shares issued and outstanding;
including cumulative dividends
(redemption value of $46,216 and
$43,836, respectively) 46,216 43,836
Mandatorily Redeemable 8 1/2% Series B
Preferred Stock, par value of $1,000
per share; 150,000 shares authorized,
issued and outstanding; including
cumulative dividends (redemption value
of $157,059 and $0, respectively) 144,302 --
Shareholders' Equity
Common stock, Class A, par value of
$.01 per share; 15,000,000 shares
authorized; 14,760,530 issued and
outstanding 148 148
Commonstock, par value of $.01 per
share; 100,000,000 shares
authorized; 15,662,543 and 15,526,243
issued and outstanding, respectively 157 155
Additional paid-in capital 269,196 268,663
Accumulated deficit (75,389) (32,311)
----------------- --------------
Total shareholders' equity 194,112 236,655
================= ==============
Total liabilities, mandatorily redeemable
preferred stock and shareholders'
equity $ 992,761 $ 907,502
================= ==============
See accompanying notes to (unaudited)
Condensed Consolidated Financial Statements.
5
Condensed Consolidated Statement of Cash Flows
(In thousands)
27 weeks ended 26 weeks ended
January 30, 2000 January 24, 1999
(unaudited)
Cash flows from operating activities
Net loss $ (32,943) $ (28,909)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 24,126 21,719
Amortization of discount on debt 182 164
Deferred income taxes (15,852) (15,555)
Stock compensation charge 262 514
Extraordinary loss 1,017 --
Cumulative effect of change in
accounting principle 1,153 --
(Gain)/loss from sale of assets (1,489) 24
Decrease (increase) in assets:
Restricted cash (7,692) (3,648)
Accounts receivable (6,095) (2,890)
Inventory (3,150) (6,639)
Prepaid expenses (3,197) 82
Real estate developed
for sale (75,584) (48,868)
Other assets 1,842 (3,341)
Increase (decrease) in liabilities:
Accounts payable and
other current liabilities 18,588 42,086
Deposits and deferred revenue 29,809 27,767
Other long-term liabilities 1,482 1,496
Other, net 27) --
----------------- ----------------
Net cash used in operating activities (67,568) (15,998)
----------------- ----------------
Cash flows from investing activities
Capital expenditures (14,751) (35,246)
Proceeds from sale of assets 9,987 1,740
Other, net (531) 476
----------------- ----------------
Net cash used in investing activities (5,295) (33,030)
----------------- ----------------
Cash flows from financing activities
Net proceeds from issuance of
mandatorily redeemable securities 136,547 --
Net repayment of Senior Credit
Facility (97,854) (5,837)
Proceeds from long-term debt 173 19,899
Proceeds from non-recourse real
estate debt 74,030 47,126
Repayment of long-term debt (5,263) (3,153)
Repayment of non-recourse real
estate debt (23,496) (5,214)
Deferred financing costs (3,724) (565)
Repayment of demand note,
Principal Shareholder (1,830) --
Proceeds from exercise of stock options 273 --
----------------- ----------------
Net cash provided by financing activities 78,855 52,256
----------------- ----------------
Net increase in cash and cash equivalents 5,992 3,228
Cash and cash equivalents, beginning of
period 9,003 15,370
----------------- ----------------
Cash and cash equivalents, end of period $ 14,995 $ 18,598
================= ================
See accompanying notes to (unaudited)
Condensed Consolidated Financial Statements.
6
Notes to (unaudited) Condensed Consolidated Financial Statements
1. General. American Skiing Company (the "Parent") is organized as a
holding company and operates through various subsidiaries (collectively, the
"Company"). The Company's fiscal year is a fifty-two week or fifty-three week
period ending on the last Sunday of July. Fiscal 2000 is a fifty-three week
reporting period with the second quarter consisting of 14 weeks and all other
quarters consisting of 13 weeks. Fiscal 1999 was a fifty-two week reporting
period with each quarter consisting of 13 weeks. The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results for interim periods are not indicative of the results expected
for the year due to the seasonal nature of the Company's business. The unaudited
condensed consolidated financial statements should be read in conjunction with
the following notes and the Company's consolidated financial statements in its
Form 10-K, filed with the Securities and Exchange Commission on October 23,
1999. Certain amounts in the prior year's unaudited condensed consolidated
financial statements and the audited financial statements as filed in the
Company's Form 10-K have been reclassified to conform to the current period
presentation.
2. Accounting Change. In the first quarter of fiscal 2000, the Company
changed its method of accounting for start-up costs in accordance with its
adoption of AICPA Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"). The change involved expensing all start-up
costs as incurred, rather than capitalizing and subsequently amortizing such
costs. The initial adoption of SOP 98-5 resulted in the write-off of $1.2
million of start-up costs that had previously been capitalized as of July 25,
1999. The net effect of the write-off of $704,000 (which is net of income tax
benefits of $449,000) has been expensed and reflected as a cumulative effect of
a change in accounting principle in the accompanying statement of operations for
the 27 weeks ended January 30, 2000.
3. Earnings (loss) per Common Share. Effective January 25, 1998, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share for public entities. Earnings (loss) per
common share for the 14 and 13 weeks, and the 27 and 26 weeks ending January 30,
2000 and January 24, 1999, respectively, were determined based on the following
data:
14 weeks ended 13 weeks ended 27 weeks ended 26 weeks ended
Jan. 30, 2000 Jan. 24, 1999 Jan. 30, 2000 Jan. 24, 1999
------------------- ------------------ ------------------- -------------------
(in thousands)
Loss
Loss before preferred stock dividends $ (9,805) $ (9,700) $ (31,618) $ (28,909)
and accretion and extraordinary items
Accretion of discount and dividends
accrued on mandatorily redeemable
preferred stock 5,319 1,079 10,135 2,138
------------------- ------------------ ------------------- -------------------
Loss before extraordinary items (15,124) (10,779) (41,753) (31,047)
Extraordinary loss, net of taxes -- -- 621 --
Cumulative effect of change in
accounting principle, net of taxes -- -- 704 --
=================== ================== =================== ==================
Net loss available to common
shareholders $ (15,124) $ (10,779) $ (43,078) $ (31,047)
=================== ================== =================== ==================
Basic and Diluted Shares
Total weighted average shares
outstanding 30,412 30,287 30,352 30,286
=================== ================== =================== ==================
7
The Company currently has outstanding 186,626 shares of convertible
preferred stock (represented by two separate classes) which are convertible into
shares of the Company's common stock. The common stock shares into which these
securities are convertible have not been included in the dilutive share
calculation as the impact of their inclusion would be anti-dilutive. The Company
also has 3,034,250 exercisable options outstanding to purchase shares of its
common stock under the Company's stock option plan as of January 30, 2000. These
shares are also excluded from the dilutive share calculation, as the impact of
their inclusion would also be anti-dilutive.
4. Income Taxes. The benefit from income taxes on loss is based on a
projected annual effective tax rate of 32.2%. The net deferred income tax asset
includes the tax benefit of cumulative net operating losses and other tax
attributes, net of the reduction in current income taxes payable resulting
principally from the excess of depreciation reported for income tax purposes
over that reported for financial reporting purposes. The effective rate includes
a $3.0 million valuation allowance established in the first quarter of fiscal
2000 relating to certain deferred tax assets for prior net operating losses. As
a result of the Series B Preferred Stock Transaction described in footnote 7,
the realization of the tax benefit from certain of the Company's net operating
losses and other tax attributes is dependent upon the occurrence of certain
future events. It is the judgment of the Company that a valuation allowance of
$3.0 million against its deferred tax assets for net operating losses and other
tax attributes is appropriate because it is more likely than not that the
benefit of such losses and attributes will not be realized. Based on facts known
at this time, the Company expects to substantially realize the benefit of the
remainder of its net operating losses and other tax attributes affected by the
Series B Preferred Stock Transaction.
5. Segment Information. The Company currently operates in two business
segments, Resorts and Real Estate. The Company's Resort revenues are derived
from a wide variety of sources including 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 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. Revenues
and operating profits for each of the two reporting segments are as follows:
14 weeks ended 13 weeks ended 26 weeks ended 27 weeks ended
Jan. 30, 2000 Jan. 24, 1999 Jan. 30, 2000 Jan. 24, 1999
------------------ ------------------ ------------------ -------------------
(in thousands)
Revenues:
Resorts $ 104,480 $ 103,205 $ 125,286 $ 123,516
Real Estate 22,147 6,300 24,696 10,785
------------------ ------------------ ------------------ -------------------
Total $ 126,627 $ 109,505 $ 149,982 $ 134,301
------------------ ------------------ ------------------ -------------------
Loss before benefit from income taxes
Resorts $ (13,148) $ (11,465) $ (41,238) $ (40,312)
Real Estate (2,605) (3,217) (5,380) (4,152)
------------------ ------------------ ------------------ -------------------
Total $ (15,753) $ (14,682) $ (46,618) $ (44,464)
------------------ ------------------ ------------------ -------------------
6. Long Term Debt. The Company established a senior credit facility on
November 12, 1997. On October 12, 1999, this senior credit facility was amended,
restated and consolidated from two sub-facilities totaling $215 million to a
single facility totaling $165 (the "Senior Credit Facility"). The Senior Credit
Facility consists of a revolving credit facility in the amount of $100 million
and a term facility in the amount of $65 million. The revolving portion of the
Senior Credit Facility matures on May 30, 2004, and the term portion matures on
May 31, 2006. In conjunction with the restructuring of the Senior Credit
Facility, the Company wrote-off a pro-rata portion of its existing deferred
financing costs in the amount of $1.0 million, or $0.6 million net of income
taxes, which is included in the accompanying Condensed Consolidated Statement of
Operations for the 27 weeks ended January 30, 2000 as an extraordinary loss.
8
The Senior Credit Facility contains affirmative, negative and financial
covenants customary for this type of credit facility, including maintenance of
certain financial ratios. The Senior Credit Facility is collateralized by
substantially all the assets of the Company, except its real estate development
subsidiaries, which are not borrowers under the Senior Credit Facility
(collectively, the borrowing subsidiaries are referred to as the "Restricted
Subsidiaries"). The revolving facility is subject to an annual 30-day clean down
requirement, which period must include April 30 of each year, during which the
sum of the outstanding principal balance and letter of credit exposure shall not
exceed $25 million for fiscal 2000 and $35 million for each fiscal year
thereafter.
The Senior Credit Facility contains restrictions on the payment of
dividends by the Company on its common stock. Those restrictions prohibit the
payment of dividends in excess of 50% of the Restricted Subsidiaries'
consolidated net income after April 25, 1999, and further prohibit the payment
of dividends under any circumstances when the effect of such payment would be to
cause the Restricted Subsidiaries' debt to EBITDA ratio (as defined within the
credit agreement) to exceed 4.0 to 1. Based upon these restrictions (as well as
additional restrictions discussed below), the Company does not expect to pay
cash dividends on its common stock, 10.5% Senior Preferred Stock or Series B
Senior Preferred Stock in the foreseeable future.
The maximum availability under the revolving facility will reduce over
the term of the Senior Credit Facility by certain prescribed amounts. The term
facility amortizes at an annual rate of approximately 1.0% of the principal
amount for the first four years with the remaining portion of the principal due
in two substantially equal installments in years five and six. The Senior Credit
Facility requires mandatory prepayment of the term facility and a mandatory
reduction in the availability under the revolving facility of an amount equal to
50% of the Restricted Subsidiaries' excess cash flows during any period in which
the ratio of the Restricted Subsidiaries' total senior debt to EBITDA exceeds
3.50 to 1. In no event, however, will such mandatory prepayments reduce the
revolving facility commitment below $74.8 million. Management does not presently
expect to generate excess cash flows, as defined in the Senior Credit Facility,
during fiscal 2000 or fiscal 2001.
The Senior Credit Facility also places a maximum level of non-real
estate capital expenditures of $20 million for fiscal 2000 and $13 million for
fiscal 2001 (exclusive of certain capital expenditures in connection with the
sale of the Series B Preferred Stock). Following fiscal 2001, annual resort
capital expenditures (exclusive of real estate capital expenditures) are capped
at the lesser of (i) $35 million or (ii) the total of the Restricted
Subsidiaries' consolidated EBITDA (as defined therein) for the four fiscal
quarters ended in April of the previous fiscal year less consolidated debt
service for the same period. In addition to the foregoing amounts, the Company
is permitted to and expects to make capital expenditures of up to $30 million
for the purchase and construction of a new gondola at its Heavenly resort in
Lake Tahoe, Nevada, which the Company currently plans to construct during the
2000 and 2001 fiscal years.
The Company entered into an amendment to the Senior Credit Facility
effective March 6, 2000 (the "Credit Facility Amendment") which significantly
modifies the covenant requirements for the current quarter and on a prospective
basis. The Credit Facility Amendment requires the following minimum quarterly
EBITDA levels starting with the Company's third quarter of fiscal 2000:
Fiscal Quarter Minimum EBITDA
2000 Quarter 3 $60,000,000
2000 Quarter 4 ($20,000,000)
2001 Quarter 1 ($20,000,000)
2001 Quarter 2 $20,000,000
2001 Quarter 3 $65,000,000
2001 Quarter 4 ($20,000,000)
2002 Quarter 1 ($20,000,000)
2002 Quarter 2 $22,000,000
9
7. Series B Preferred Stock Transaction. Pursuant to a Preferred Stock
Subscription Agreement (the "Series B Agreement") dated July 9, 1999, the
Company sold 150,000 shares of its 8.5% Series B Convertible Participating
Preferred Stock ("Series B Preferred Stock") on August 9, 1999 to Oak Hill
Capital Partners, L.P. and certain related entities ("Oak Hill") for $150
million. The Company used approximately $129 million of the proceeds to reduce
indebtedness under its Senior Credit Facility, approximately $30 million of
which ultimately will be reborrowed and invested in the Company's principal real
estate development subsidiary, American Skiing Company Resort Properties, Inc.,
("Resort Properties"), $26.6 million of which had been reborrowed and invested
in Resort Properties as of January 30, 2000. The remainder of the proceeds were
used to (1) pay approximately $16 million in fees and expenses in connection
with the Series B Preferred Stock sale (approximately $13 million) and related
transactions (approximately $3 million), and (2) acquire from the Company's
principal shareholder certain strategic assets and to repay a demand note issued
by a subsidiary of the Company to the Company's principal shareholder, in the
aggregate amount of $5.4 million.
The Series B Preferred Stock is convertible into shares of the Company's
common stock at an initial conversion price of $5.25 per share of common stock.
The initial conversion price is subject to an antidilution adjustment. Assuming
all shares of the Series B Preferred Stock are converted into the Company's
common stock at the initial (and current) conversion price, Oak Hill would own
approximately 49.6% of the Company's outstanding common stock and Class A common
stock as of January 30, 2000. Oak Hill is entitled to vote its shares of Series
B Preferred Stock on matters (other than the election of Directors) as if its
shares were converted into the Company's common stock. In addition, Oak Hill as
the holder of Series B Preferred Stock has class voting rights to elect
Directors to the Company's Board of Directors. Furthermore, under the Series B
Agreement, Oak Hill and the Chairman and Chief Executive Officer of the Company,
Leslie B. Otten, have agreed to use best efforts and to vote their shares in
order to ensure that each of them is able to appoint up to four Directors to the
Board (depending on their shareholdings). Therefore, under the Series B
Agreement and the Company's certificate of incorporation, Oak Hill and Mr. Otten
together elect eight of the eleven members of the Company's Board.
Dividends on the Series B Preferred Stock are payable at the rate of 8.5%
per year. For the first five years, the Company may accrete and compound
dividends payable to the liquidation price instead of paying cash dividends, in
which case the dividend rate will increase to 9.5% after January 31, 2001, and
to 10.5% after January 31, 2002. The Series B Agreement requires dividends to be
paid in cash after July 31, 2004. The dividend rate will revert back to 8.5% at
the time the Company begins paying the dividend in cash. If the Company elects
to accrue dividends on the Series B Preferred Stock to the liquidation price for
the first five years, and thereafter pay all dividends in cash when due,
assuming no intervening stock issuances or repurchases by the Company, the
Series B Preferred Stock would be convertible into 60.4% of the Company's common
stock after the fifth anniversary of its issuance. The Company is currently
accruing dividends on the Series B Preferred Stock at an effective rate of 9.7%,
with the assumption that dividends will not be paid in cash until the fifth
anniversary of the issuance.
10
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following is management's discussion and analysis of financial
condition and results of operations for the 14 and 27 weeks ended January 30,
2000. As you read the material below, we urge you to carefully consider our
Consolidated Financial Statements and related notes contained elsewhere in this
report and the audited financial statements and related notes contained in our
Form 10-K filed with the Securities and Exchange Commission on October 23, 1999.
The Oak Hill Transaction. On August 9, 1999, the Company consummated
the sale of 150,000 shares of its Series B Convertible Exchangeable Preferred
Stock (the "Series B Preferred Stock") to Oak Hill Capital Partners, L.P. and
certain related entities ("Oak Hill"). The Company realized gross proceeds of
$150 million on the Series B Preferred Stock sale. The Company used $128.6
million of the proceeds to reduce indebtedness under its Senior Credit Facility
(as described below), approximately $30 million of which has been reborrowed and
invested in the Company's principal real estate development subsidiary, American
Skiing Company Resort Properties, Inc., ("Resort Properties"). The remainder of
the proceeds were used to (1) pay approximately $16 million in fees and expenses
in connection with the Series B Preferred Stock sale (approximately $13 million)
and related transactions (approximately $3 million), and (2) acquire from the
Company's principal shareholder certain strategic assets and to repay a demand
note issued by a subsidiary of the Company to the Company's principal
shareholder, in the aggregate amount of $5.4 million. As a result of these
transactions, management believes that its current capital resources are
sufficient both to fund operations at its resorts and to complete those real
estate projects which are currently under construction. As more fully discussed
below, the Company's ability to commence and complete new real estate
development projects will be dependent upon the Company's ability to raise
additional capital and Resort Properties' ability to obtain additional
non-recourse financing.
Liquidity and Capital Resources
Short-Term. The Company's primary short-term liquidity needs are
funding seasonal working capital requirements, continuing and completing real
estate development projects presently under construction, funding its fiscal
2000 capital improvement program and servicing indebtedness. Cash requirements
for ski-related and real estate development activities are provided by separate
sources. The Company's primary sources of liquidity for ski-related working
capital and ski-related capital improvements are cash flow from operations of
its non-real estate subsidiaries and borrowings under the Senior Credit Facility
(as hereinafter defined). Real estate development and real estate working
capital is funded primarily through construction financing facilities
established for major real estate development projects and through a $58 million
term loan facility established through Resort Properties (the "Resort Properties
Term Facility"). These construction financing facilities and Resort Properties
Term Facility (collectively, the "Real Estate Facilities") are without recourse
to the Company and its resort operating subsidiaries. The Real Estate Facilities
are collateralized by significant real estate assets of Resort Properties and
its subsidiaries, including, without limitation, the assets and stock of Grand
Summit Resort Properties, Inc. ("GSRP"), the Company's primary hotel development
subsidiary. As of January 30, 2000, the book value of the total assets that
collateralized the Real Estate Facilities, and are included in the accompanying
consolidated balance sheet, were approximately $324.7 million.
Resort Liquidity. The Company has established a $165 million senior
credit facility (the "Senior Credit Facility") consisting of a $100 million
revolving portion ($75.9 million of which was available for borrowings at March
2, 2000) and a $65 million term portion. The revolving portion of the Senior
Credit Facility matures on May 30, 2004, and the term portion matures on May 31,
2006.
11
The maximum availability under the revolving facility will reduce over
the term of the Senior Credit Facility by certain prescribed amounts. Starting
on May 31, 2000, the term facility amortizes at an annual rate of approximately
1.0% of the principal amount for the first four years with the remaining portion
of the principal due in two substantially equal installments in years five and
six. In addition, the Senior Credit Facility requires mandatory prepayment of
the term facility and a mandatory reduction in the availability under the
revolving facility of an amount equal to 50% of the Restricted Subsidiaries' (as
defined below) excess cash flows during any period in which the ratio of the
Restricted Subsidiaries' total senior debt to EBITDA exceeds 3.50 to 1. In no
event, however, will such mandatory prepayments reduce the revolving facility
commitment below $74.8 million. Management does not presently expect to generate
excess cash flows, as defined in the Senior Credit Facility, during fiscal 2000
or fiscal 2001.
The Senior Credit Facility contains affirmative, negative and financial
covenants customary for this type of credit facility, including maintenance of
certain financial ratios. The Senior Credit Facility is collateralized by
substantially all the assets of the Company, except those of its real estate
development subsidiaries (consisting of Resort Properties and its subsidiaries
which are not borrowers under the Senior Credit Facility) (collectively, the
borrowing subsidiaries are referred to as the "Restricted Subsidiaries"). The
revolving facility is subject to an annual 30-day clean down requirement, which
period must include April 30 of each year, during which the sum of the
outstanding principal balance and letter of credit exposure shall not exceed $25
million for fiscal 2000 and $35 million for each fiscal year thereafter. As of
March 2, 2000, the Company had $16.5 million outstanding under the revolving
credit facility and had $7.6 million in letter of credit exposure.
The Senior Credit Facility contains restrictions on the payment of
dividends by the Company on its common stock. Those restrictions prohibit the
payment of dividends in excess of 50% of the Restricted Subsidiaries'
consolidated net income after April 25, 1999, and further prohibit the payment
of dividends under any circumstances when the effect of such payment would be to
cause the Restricted Subsidiaries' debt to EBITDA ratio (as defined within the
Senior Credit Facility) to exceed 4.0 to 1. Based upon these restrictions (as
well as additional restrictions discussed below), the Company does not expect
that it will be able to pay cash dividends on its common stock, 10.5% Senior
Preferred Stock or Series B Senior Preferred Stock in the foreseeable future.
12
Due to the adverse weather conditions in the eastern United States,
Utah and the Sierra Nevadas during the Company's second fiscal quarter of 2000,
and its effect on the Company's second quarter revenue, EBITDA and net income,
the Company entered into an amendment to the Senior Credit Facility on March 6,
2000 (the "Credit Facility Amendment") which (i) suspended the Company's second
quarter financial covenant requirements, (ii) significantly modified the
financial covenant requirements of the Senior Credit Facility for the Company's
current quarter and on a prospective basis, and (iii) established minimum
quarterly EBITDA levels starting with the Company's third quarter of fiscal 2000
through the second quarter of fiscal 2002. Based upon historical operations,
management presently anticipates that the Company will be able to meet the
financial covenants of the Senior Credit Facility, as amended by the Credit
Facility Amendment. Failure to meet one or more of these covenants could result
in an event of default under the Senior Credit Facility. In the event that such
default were not waived by the lenders holding a majority of the debt under the
Senior Credit Facility, such default would also constitute defaults under one or
more of the Textron Facility, the Resort Properties Term Loan, and the Indenture
(each as hereinafter defined), the consequences of which would likely be
material and adverse to the Company.
The Credit Facility Amendment also places a maximum level of non-real
estate capital expenditures of $20 million for fiscal 2000 and $13 million for
fiscal 2001 (exclusive of certain capital expenditures in connection with the
sale of Series B Preferred Stock during the first quarter of fiscal 2000).
Following fiscal 2001, annual resort capital expenditures (exclusive of real
estate capital expenditures) are capped at the lesser of (i) $35 million or (ii)
the total of the Restricted Subsidiaries' consolidated EBITDA (as defined
therein) for the four fiscal quarters ended in April of the previous fiscal year
less consolidated debt service for the same period. In addition to the foregoing
amounts, the Company is permitted to and expects to make capital expenditures of
up to $30 million for the purchase and construction of a new gondola at its
Heavenly resort in Lake Tahoe, Nevada, which the Company currently plans to
construct during the 2000 and 2001 fiscal years. The Company is currently
evaluating proposals to establish a separate capital lease facility to finance a
portion of the costs of the construction of the Heavenly gondola.
The Company's liquidity is significantly affected by its high leverage.
As a result of its leveraged position, the Company will have significant cash
requirements to service interest and principal payments on its debt.
Consequently, cash availability for working capital needs, capital expenditures
and acquisitions is limited, outside of the availability under the Senior Credit
Facility. Furthermore, the Senior Credit Facility and the Indenture each contain
significant restrictions on the ability of the Company and its subsidiaries to
obtain additional sources of capital and may affect the Company's 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.
Under the Indenture related to the 12% Senior Subordinated Notes, due
2006 (the "Indenture"), the Company is prohibited from paying cash dividends or
making other distributions to its shareholders, except under certain
circumstances (which are not currently applicable and are not anticipated to be
applicable in the foreseeable future).
Real Estate Liquidity: Funding of working capital for Resort Properties
and its fiscal 2000 real estate development program is provided by the Resort
Properties Term Facility and net proceeds from the sale of real estate developed
for sale after required construction loan repayments.
13
The Resort Properties Term Facility has a maximum principal amount of
$58 million (reduced by a reserve for interest payments), bears interest at a
variable rate equal to Fleet National Bank's base rate plus 8.25%, or a current
rate of 17.0% per annum (payable monthly in arrears), and matures on June 30,
2001. As of March 2, 2000, the Resort Properties Term Facility was fully drawn
with $53.9 million outstanding and a $4.1 million interest reserve. The Resort
Properties Term Facility is collateralized by security interests in, and
mortgages on, substantially all of Resort Properties' assets, which primarily
consist of undeveloped real property and the stock of its real estate
development subsidiaries (including GSRP). As of January 30, 2000, the book
value of the total assets that collateralized the Resort Properties Term
Facility, and are included in the accompanying consolidated balance sheet, was
approximately $324.7 million. The Resort Properties Term Facility is
non-recourse to the Company and its resort operating subsidiaries.
In conjunction with the Resort Properties Term Facility, Resort
Properties entered into a syndication letter with Fleet National Bank (the
"Syndication Letter") pursuant to which Fleet National Bank agreed to syndicate
up to $43 million of the Resort Properties Term Facility. Under the terms of the
Syndication Letter, one or more of the terms of the Resort Properties Term
Facility (excepting certain terms such as the maturity date and commitment fee)
may be altered depending on the requirements for syndication of the facility.
However, no alteration of the terms of the facility may occur without the
consent of Resort Properties. Although Resort Properties expects the terms of
the Resort Properties Term Facility to remain substantially similar to those
discussed above, one or more of such terms could be altered in order to
syndicate the facility, and such alterations could be material and adverse to
the Company. As of March 1, 2000, Fleet National Bank was actively engaged in
syndicating the Resort Properties Term Facility. The Syndication Letter also
provides that, prior to syndication of at least $33 million of the Resort
Properties Term Facility, Fleet National Bank may at its option, require
repayment of the outstanding balance of the facility within 120 days of its
request for repayment by Resort Properties. If the syndication is unsuccessful
and Fleet National Bank were to require repayment, there can be no assurance
that the Company could secure replacement financing for the Resort Properties
Term Facility. The failure to secure replacement financing on terms similar to
those existing under the Resort Properties Term Facility could result in a
material adverse effect on the liquidity of Resort Properties and its
subsidiaries, including GSRP, and could also result in a default under the
Indenture and the Senior Credit Facility.
The Company runs substantially all of its real estate development
through single purpose subsidiaries, each of which is a wholly owned subsidiary
of Resort Properties. In its fourth fiscal quarter of 1998, the Company
commenced construction on three new hotel projects (two at The Canyons in Utah
and one at Steamboat in Colorado). Two of these new hotel projects are Grand
Summit Hotels that are being constructed by GSRP. The Grand Summit Hotels at The
Canyons and Steamboat are being financed through a $110 million construction
loan facility among GSRP and various lenders, including TFC Textron Financial,
the syndication agent and administrative agent, which closed on September 25,
1998 (the "Textron Facility").
As of March 2, 2000, the amount outstanding under the Textron Facility
was $99.3 million. The Textron Facility matures on September 24, 2002 and bears
interest at the rate of prime plus 2.5% per annum. The principal of the Textron
Facility is payable incrementally as quartershare sales are closed based on a
predetermined per unit amount, which approximates between 50% and 80% of the net
proceeds of each closing. The Textron Facility is collateralized by mortgages
against the project sites (including the completed Grand Summit Hotels at
Killington, Mt. Snow, Sunday River and Attitash Bear Peak), and is subject to
covenants, representations and warranties customary for this type of
construction facility. The Textron Facility is non-recourse to the Company and
its resort operating subsidiaries (although it is collateralized by substantial
assets of GSRP, having a total book value of $228.3 million as of January 30,
2000, which comprise substantial assets of the Company). The opening of the
Grand Summit Hotel at The Canyons was expected to occur during the Company's
second fiscal quarter, however, final construction advanced past the
quarter-end, and the opening was delayed until February 18, 2000. Approximately
56% of the units in this hotel have been pre-sold to date. Eighty percent of the
net proceeds from the closings of those pre-sales will be applied to pay down
the Textron Facility. These amounts will subsequently be available for
reborrowing (up to the maximum outstanding amount of $110 million) and used for
the completion of the Grand Summit Hotel at Steamboat.
14
The remaining hotel project commenced by the Company in 1998, the
Sundial Lodge project at The Canyons, was financed through (i) a $29 million
construction loan facility between Canyons Resort Properties, Inc., (a wholly
owned subsidiary of Resort Properties) and KeyBank, N.A. (the "Key Facility")
and (ii) an $8 million intercompany loan from Resort Properties. The Sundial
Lodge opened during the Company's second fiscal quarter, during which the
Company received $17.8 million in proceeds from the closing of pre-sales. This
project is fully sold out, with the sales of all remaining units expected to
close during the third fiscal quarter. As of March 13, 2000, the Key Facility
has been fully repaid from the proceeds of sales closed in the Company's third
fiscal quarter.
The Company's fiscal 2000 business plan anticipates the commencement of
several real estate projects in the Spring and Summer of 2000, including a Grand
Summit Hotel at Heavenly, a condominium hotel at The Canyons and townhomes at
The Canyons. The timing and extent of these projects are subject to factos which
may be beyond the Compnay's control, including local and state permitting
requirements, market demand, the Company's cash flow requirements and the
availability of external capital.
Long-Term. The Company's primary long-term liquidity needs are to fund
skiing related capital improvements at certain of its resorts and development of
its slope side real estate. The Company has invested over $145.5 million in
skiing related facilities in fiscal years 1998 and 1999 combined. As a result,
and in keeping with restrictions imposed under the Senior Credit Facility, the
Company expects its resort capital programs for the next several fiscal years
will be more limited in size. The Company's fiscal 2000 resort capital program
is estimated at approximately $20 million (of which $10.5 million had been
expended as of January 30, 2000), plus such additional amounts as are expended
on the Heavenly Gondola project. The Company's preliminary estimate of its
fiscal 2001 resort capital program is approximately $13 million.
The Company's largest long-term capital needs relate to: (i) certain
resort capital expenditure projects (including the Heavenly gondola for
approximately $25-30 million), (ii) the Company's real estate development
program, and (iii) repayment of the Company's Mandatorily Redeemable 10.5%
Preferred Stock (discussed below). For its 2001 and 2002 fiscal years, the
Company anticipates its annual maintenance capital needs to be approximately $12
million. There is a considerable degree of flexibility in the timing and, to a
lesser degree, scope of the Company's growth capital program. Although specific
capital expenditures can be deferred for extended periods, continued growth of
skier visits, revenues and profitability will require continued capital
investment in on-mountain improvements.
The Company's practice is to finance on-mountain capital improvements
through resort cash flow and its Senior Credit Facility. The size and scope of
the capital improvement program will generally be determined annually depending
upon the strategic importance and expected financial return of certain projects,
future availability of cash flow from each season's resort operations and future
borrowing availability and covenant restrictions under the Senior Credit
Facility. The Senior Credit Facility places a maximum level of non-real estate
capital expenditures for fiscal 2002 and beyond at the lesser of (i) $35 million
or (ii) the total of (a) the Restricted Subsidiaries' consolidated EBITDA (as
defined therein) for the four fiscal quarters ended in April of the previous
fiscal year less (b) consolidated debt service for the same period. In addition
to the foregoing amounts, the Company is permitted to and expects to make
capital expenditures of up to $30 million for the purchase and construction of a
new gondola at its Heavenly resort in Lake Tahoe, Nevada, which the Company
currently plans to construct during the 2000 and 2001 fiscal years. Management
believes that these capital expenditure amounts will be sufficient to meet the
Company's needs for non-real estate capital improvements for the near future.
15
The Company's business plan anticipates the development of Grand Summit
hotels, condominium hotels and townhouses at its resort villages at The Canyons,
Heavenly, Killington, Steamboat and Sunday River. The timing and extent of these
projects are subject to local and state permitting requirements which may be
beyond the Company's control, as well as to the Company's cash flow requirements
and availability of external capital. The Company's real estate development is
undertaken through the Company's real estate development subsidiary, Resort
Properties. Recourse on indebtedness incurred to finance this real estate
development is limited to Resort Properties and/or its subsidiaries (including
GSRP). Such indebtedness is generally collateralized by the projects financed
under the particular indebtedness, which, in some cases, constitutes a
significant portion of the assets of the Company. As of January 30, 2000, the
total assets that collateralized the Real Estate Facilities, and are included in
the accompanying consolidated balance sheet, totaled approximately $324.7
million. Resort Properties' seven existing development projects are currently
being funded by the Resort Properties Term Facility and the Textron Facility.
The Company expects to undertake future real estate development
projects through special purpose subsidiaries with financing provided
principally on a non-recourse basis to the Company and its resort operating
subsidiaries. Although this financing is expected to be non-recourse to the
Company and its resort subsidiaries, it will likely be collateralized by
existing and future real estate projects of the Company that may constitute
significant assets of the Company. Required equity contributions for these
projects must be generated before those projects can be undertaken, and the
projects are subject to mandatory pre-sale requirements under the Resort
Properties Term Facility. Potential sources of equity contributions include
sales proceeds from existing real estate projects and assets, (to the extent not
applied to the repayment of indebtedness) and potential sales of equity or debt
interests in Resort Properties and/or its real estate development subsidiaries.
Financing commitments for future real estate development do not currently exist,
and no assurance can be given that they will be available on satisfactory terms.
The Company will be required to establish both equity sources and construction
facilities or other financing arrangements for these projects before undertaking
each development.
The Company issued $17.5 million of convertible preferred stock and
$17.5 million of convertible notes in July 1997 to fund development at The
Canyons. These securities were converted on November 12, 1997 into Mandatorily
Redeemable 10 1/2% Preferred Stock of the Company. The Mandatorily Redeemable 10
1/2% Preferred Stock is exchangeable at the option of the holder into shares of
the Company's common stock at a conversion price of $17.10 for each common
share. In the event that the Mandatorily Redeemable 10 1/2% Preferred Stock is
held to its maturity date of November 15, 2002, the Company will be required to
pay the holders the face value of $36.6 million plus an estimated $25.4 million
of dividends in arrears. So long as the Mandatorily Redeemable 10 1/2% Preferred
Stock remains outstanding, the Company may not pay any cash dividends on its
common stock or Series B Preferred Stock unless accrued and unpaid dividends on
the Mandatorily Redeemable 10 1/2% Preferred Stock have been paid in cash on the
most recent due date. Because the Company has been accruing unpaid dividends on
the Mandatorily Redeemable 10 1/2% Preferred Stock, the Company is not presently
able to pay cash dividends on its common stock or Series B Preferred Stock and
management does not expect that the Company will have this ability in the near
future.
16
Changes in Results of Operations
The Company's fiscal year 2000 consists of a fifty-three week reporting
period compared to fifty-two weeks in fiscal 1999, with the extra week added to
the current second fiscal quarter. Because the extra week falls within the
height of the ski season, during which time the Company generates the majority
of its resort revenues and operating profits, the results of the 14 and 27 weeks
ended January 30, 2000 are not directly comparable to the 13 and 26 weeks ended
January 24, 1999. The following discussion and analysis isolates the effect of
the extra week on the results of resort operations in the current fiscal year
and provides a more meaningful comparison to the prior year on a 13 and 26-week
basis. The additional week in the fiscal 2000 period is not considered to have a
material impact on the comparability of the quarterly results from real estate
operations due to the intermittent nature of the Company's real estate sales
activity. Therefore, the extra week is not addressed separately as part of the
changes in results of real estate operations.
For the 14 weeks ended January 30, 2000 compared to the
13 weeks ended January 24, 1999.
Resort Operations:
Resort revenues increased slightly in the second fiscal quarter of 2000
compared to the second quarter of fiscal 1999, from $103.2 million to $104.5
million. However, the extra week in the second quarter of fiscal 2000 (which
included 14 weeks compared to 13 weeks in the second quarter of fiscal 1999)
accounted for $13.7 million in additional resort revenues. After adjusting for
the extra week in fiscal 2000, resort revenues would have decreased by $12.4
million over a comparable 13-week period in fiscal 1999. Paid skier days of 1.2
million for the current quarter were comparable to the second quarter of 1999,
however, the extra week in the current quarter accounted for 170,000 additional
paid skier days in the fiscal 2000 period. The approximately 14% decrease in
paid skier days on a 13-week comparison resulted in comparable decreases in
resort revenues from all areas (lift tickets, food and beverage, retail, rental
and repair, skier development and lodging) and was primarily due to low skier
volume resulting from warm weather patterns in early November, a rainy
Thanksgiving weekend in the East and a warm, and a dry December nationwide. The
December Holiday week was negatively impacted by the overall softness in the
travel industry due to Y2K concerns, the lack of natural snowfall in key market
areas, and abnormally low amounts of available ski terrain at most of the
Company's resorts. The most significant decrease in paid skier days, and
consequently resort revenues, occurred at the Company's Heavenly resort at Lake
Tahoe, where paid skier days were down approximately 38% for the December
Holiday week and approximately 21% for the second quarter compared to fiscal
1999 (on a 13-week basis). The 61,000 decrease in paid skier days and resulting
$3.6 million reduction in resort revenues experienced at Heavenly for the
quarter accounted for approximately 35% and 29%, respectively of the
Company-wide decreases in those key attributes. While significant natural
snowfall occurred at all resorts, and in all key market areas, in mid to late
January, it came too late to impact the Martin Luther King Holiday Weekend in
January. This late-quarter snowfall did produce notable market momentum during
the last week of the quarter, which has carried over into early third quarter
performance.
17
The Resort segment generated a $13.1 million loss before benefit from
income taxes for the current fiscal quarter, compared to an $11.5 million loss
in the corresponding quarter of the prior year. The additional week in the
current quarter contributed approximately $3.0 million in pre-tax profit,
without which the resort segment would have had a $16.0 million pre-tax loss.
The resulting $4.5 million increase in the loss before tax benefits, on a
13-week comparison to the second quarter of fiscal 1999, resulted mainly from
the $12.4 million reduction in resort revenues referred to above, offset
partially by reductions in resort operating expenses and burdens of $3.0
million, marketing, general and administrative expenses of $3.1 million and
resort interest expense of approximately $2.1 million. The combined $6.1 million
reduction in operating costs and administrative expenses is net of a $0.9
million increase from costs incurred at the Canyons ($750k) and Steamboat
($150k) related to start-up activities for two new Grand Summit Hotels, which
are expected to open during the third (the Canyons) and fourth (Steamboat)
quarters of fiscal 2000. Exclusive of the hotel pre-opening charges, operating
costs and administrative expenses for the quarter actually decreased by a
combined $7.0 million from the second quarter of fiscal 1999 (on a 13-week
basis). The reduced operating expenses and burdens resulted from narrower scopes
of operations at most of the Company's resorts in the early part of the quarter
due to later than normal season openings and lower than normal snowfall amounts,
resulting in limited available terrain and operations. The reduction in
marketing, general and administrative expenses is derived mainly from several
abnormal charges incurred in the second quarter of fiscal 1999 that were not
repeated in the current quarter and due to decreased marketing expenses at most
of the Company's resorts. The fiscal 1999 charges included certain payroll
charges for severance pay and other benefits restructuring and stock
compensation charges related to the vesting of management stock options. The
reduction in interest expense was due to the reduced level of debt outstanding
under the Company's senior credit facility in fiscal 2000 resulting from the
paydown on that facility from the proceeds of the Series B Preferred Stock
issuance.
Real Estate Operations:
Real estate revenues increased by $15.8 million in the current quarter
compared to fiscal 1999, from $6.3 million to $22.1 million. During the current
fiscal quarter, the Company began delivering units in the first building of the
Sundial Lodge whole-ownership condominium hotel located at its Canyons resort in
Park City, Utah. The delivery of these units accounted for $17.8 million in real
estate revenues in the current quarter. The delivery of the remaining units in
the first building and all of the units in the second building of the Sundial
Lodge is expected to occur in the Company's upcoming third fiscal quarter, along
with the commencement of delivery of quartershare units in the new Grand Summit
Hotel at the Canyons. Continuing sales of quartershare units of the existing
Grand Summit Hotels at the Company's Eastern resorts contributed $3.6 million in
real estate revenues for the current quarter compared to $4.9 million in the
second quarter of fiscal 1999, a decrease of $1.3 million. Although sales of
these units has decreased when compared to the prior year, the overall sell-out
of these projects remains strong as both the Jordan Grand at Sunday River and
the Grand Summit at Killington are now over 80% sold-out, with the Grand Summit
at Mount Snow over 60% and Attitash Bear Peak over 50% sold-out. An additional
decrease in real estate revenues from the prior year is the result of $0.9
million in revenues recognized in the second quarter of fiscal 1999 from the
sale of townhouses at Sunday River resort. There were no comparable projects
offered for sale during the current quarter.
18
The Real Estate segment generated a loss before benefit from income
taxes of $2.6 million for the second quarter of fiscal 2000, compared to a $3.2
million loss in the second quarter of fiscal 1999. This $0.6 million decrease in
the real estate pre-tax loss was due primarily to a $1.5 million decrease in
general and administrative costs of real estate operations, which decreased from
$3.2 million in the second quarter of fiscal 1999 to $1.7 million in the current
quarter, due primarily from two one-time charges recognized in the fiscal 1999
period related to the Company's unsuccessful $300 million bond offering and the
postponement of the development of a Grand Summit Hotel at the Company's
Sugarbush resort. A slightly offsetting increase in the real estate pre-tax loss
was the result of (i) a $0.4 million decreases in gross profit from the sales of
quartershare units at the existing Eastern Grand Summit Hotels, from $1.4
million in the second quarter of fiscal 1999 to $1.0 million for the current
quarter, primarily due to the lower sales volume referred to above, and (ii) a
$0.4 million increase in real estate interest expense, from $1.4 million in the
second quarter of fiscal 1999 to $2.0 million in the current quarter, due to
increases in real estate debt associated with completion of construciton of
existing projects. The Company realized $17.8 million in revenues in the current
quarter from the initial delivery of units in the Sundial Lodge at the Canyons
resort and approximately $0.1 million in pre-tax profit.
Accretion of discount and dividends accrued on mandatorily redeemable
preferred stock increased $4.2 million, from $1.1 million for the second quarter
of fiscal 1999 to $5.3 million for the current quarter. This increase is
primarily attributable to the additional accrual of dividends on 150,000 shares
of 8 1/2% Series B Preferred Stock issued to Oak Hill in the first quarter of
fiscal 2000. The Company is currently accruing dividends on the Series B
Preferred Stock at an effective rate of 9.7%, with the assumption that dividends
will not be paid in cash until the fifth anniversary of the issuance, which will
cause the dividend rate to incrementally increase up to 10.5% by the end of the
fifth year.
Changes in Results of Operations
For the 27 weeks ended January 30, 2000 compared to the
26 weeks ended January 24, 1999.
Resort Operations:
Resort revenues increased $1.8 million for the six months ended January
30, 2000 compared to the six months ended January 24, 1999, from $123.5 million
to $125.3 million. However, after adjusting for the $13.7 million in additional
resort revenues realized in the extra week in the fiscal 2000 period, resort
revenues actually decreased by $11.9 million for the comparable 26-week period.
Slightly offsetting the $12.4 million decrease (on a 13-week basis) from the
second quarter described above was a $0.5 million increase in resort revenues
during the first fiscal quarter of 2000 compared to the same period in fiscal
1999. First quarter resort revenues included $1.6 million in net gains from the
sale of non-strategic assets. Excluding these net gains from asset sales,
recurring resort revenues actually decreased in the first quarter of fiscal 2000
by $1.1 million when compared to fiscal 1999. This decrease was mainly
attributable to (i) lower golf and summer revenues due to reduced summer
marketing programs, (ii) lower retail revenues due to aggressive pricing to
liquidate inventory, and (iii) the loss of rental income from commercial space
that the Company sold during the third and fourth quarters of fiscal 1999. These
decreases were slightly offset by increases in food and beverage and lodging
revenues mainly as a result of improved hotel operations.
The Resort segment generated a $41.2 million loss before benefit from
income taxes for the six months ended January 30, 2000, compared to a $40.3
million loss in the corresponding period of the prior year, or a $0.9 million
increase. However, after adjusting for the for $2.9 million in resort pre-tax
profit recognized in the extra week in the fiscal 2000 period, the resort loss
before income taxes actually increased by $3.8 million for the comparable
26-week period. Slightly offsetting the $4.5 million increase in the loss before
income tax benefits (on a 13-week basis) from the second quarter described
above, was a $0.7 million decrease in the pre-tax resort loss during the first
fiscal quarter of 2000 compared to the same period in fiscal 1999. After
adjusting for the $1.6 million in net gains from asset sales, the first quarter
pre-tax resort loss increased by $0.9 million compared to fiscal 1999. This
increase was derived from (i) the $1.1 million decrease in recurring resort
revenues described above, (ii) a $0.9 million increase in resort operating
expenses due mainly to increased maintenance costs, food and beverage and
lodging costs and retail costs of goods sold, (iii) a $0.1 million reduction in
marketing, general and administrative expenses, and (iv) a $0.5 million increase
in resort depreciation expense due to the increased depreciation associated with
recent capital expenditures made at the Company's resorts during the off-season
leading up to the 1999-2000 ski season. These increases in the resort pre-tax
19
loss were slightly offset by a $1.6 million reduction in interest expense in the
first quarter of fiscal 2000, due primarily to the reduced level of debt
outstanding under the Company's senior credit facility as a result of the
paydown on that facility from the proceeds of the Series B Preferred Stock
issuance.
Real Estate Operations:
Real estate revenues increased by $13.9 million for the first six
months of fiscal 2000 compared to the same period in fiscal 1999, from $10.8
million to $24.7 million. Slightly offsetting the $15.8 million increase in real
estate revenues in the second quarter was a $1.9 million decrease in the first
quarter compared to fiscal 1999, which was due to (i) a $0.7 million decrease in
revenue from quartershare unit sales at the existing Grand Summit Hotels at the
Company's Eastern resorts, and (ii) $1.0 million of revenue recognized in the
first quarter of fiscal 1999 from the sale of townhouses at Sunday River, with
no corresponding sales of townhouses at Sunday River in fiscal 2000.
The Real Estate segment generated a loss before benefit from income
taxes of $5.4 million for the six months ended January 30, 2000, compared to a
$4.2 million loss in the comparable period of fiscal 1999, or an increase of
$1.2 million. Offsetting the $0.6 million decrease in the real estate loss
before income taxes in the second quarter was a $1.8 million increase in the
first quarter compared to fiscal 1999, due primarily to (i) a $0.6 million
decrease in gross profit from the sales of Eastern Grand Summit quartershare
units, (ii) a $0.6 million increase in real estate interest expense as a result
of an increase in real estate related debt outstanding, and (iii) certain
non-recurring charges related to final settlement costs for construction of the
Grand Summit Hotels at Sunday River and Killington.
Benefit from income taxes decreased by $0.6 million, from $15.6 million
(an effective rate of 35.0%) in the first six months of fiscal 1999 to $15.0
million (an effective rate of 32.2%) in the first six months of fiscal 2000. The
decrease in the effective rate is due primarily to a $3.0 million valuation
allowance established in the first quarter of fiscal 2000 relating to certain
deferred tax assets for prior net operating losses. As a result of the Oak Hill
Transaction (see above), the realization of the tax benefit of certain of the
Company's net operating losses and other tax attributes is dependent upon the
occurrence of certain future events. It is the judgment of the Company that a
valuation allowance of $3.0 million against its deferred tax assets for net
operating losses and other tax attributes is appropriate because it is more
likely than not that the benefit of such losses and attributes will not be
realized. Based on facts known at this time, the Company expects to
substantially realize the benefit of the remainder of its net operating losses
and other tax attributes affected by the Oak Hill Transaction.
Extraordinary loss of $0.6 million (net of $0.4 million of tax benefits)
in the first six months of fiscal 2000 resulted from the pro-rata write-off of
certain existing deferred financing costs related to the Company's senior credit
facility. This write-off was due to the restructuring of the Senior Credit
Facility in connection with the permanent reduction in the availability of the
revolving portion and the pay down of the term portion of the facility from the
proceeds of the Series B Preferred Stock issuance.
Cumulative effect of a change in accounting principle of $0.7 million (net
of $0.4 million tax benefit) in the first six months of fiscal 2000 resulted
from the write-off of certain capitalized start-up costs relating to the
Company's hotel and retail operations and the opening of the Canyons resort in
fiscal 1998. The accounting change was due to the Company's adoption of AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities". SOP
98-5 requires the expensing of all start-up costs as incurred, rather than
capitalizing and subsequently amortizing such costs. Initial adoption of this
SOP should be reported as a cumulative effective of a change in accounting
principles. Current start-up costs are being expensed as incurred and are
reflected in their appropriate expense classifications
Accretion of discount and dividends accrued on mandatorily redeemable
preferred stock increased $8.0 million from $2.1 million for the first six
months of fiscal 1999 to $10.1 million for the first six months of the current
fiscal year. This increase is primarily attributable to the additional accrual
20
of dividends on 150,000 shares of 8 1/2% Series B Preferred Stock issued to Oak
Hill in the first quarter of fiscal 2000. The Company is currently accruing
dividends on the Series B Preferred Stock at an effective rate of 9.7%, with the
assumption that dividends will not be paid in cash until the fifth anniversary
of the issuance.
21
Forward-Looking Statements
Certain information contained herein includes forward-looking
statements, the realization of which may be impacted by the factors discussed
below. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (the "Act").
This report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, uncertainty as to future financial
results; substantial leverage of the Company; the capital intensive nature of
development of the Company's ski resorts; rapid and substantial growth that
could place a significant strain on the Company's management, employees and
operations; uncertainties associated with fully syndicating the Resort
Properties Term Facility; uncertainties associated with obtaining additional
financing for future real estate projects and to undertake future capital
improvements; demand for and costs associated with real estate development;
changes in market conditions affecting the interval ownership industry;
regulation of marketing and sales of the Company's quartershare interests;
seasonality of resort revenues; fluctuations in operating results; dependence on
favorable weather conditions; the discretionary nature of consumers' spending
for skiing, destination vacations and resort real estate; regional and national
economic conditions; laws and regulations relating to the Company's land use,
development, environmental compliance and permitting obligations; termination,
renewal or extension terms of the Company's leases and United States Forest
Service permits; industry competition; the adequacy of water supply at the
Company's properties; and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission. These risks could
cause the Company's actual results for fiscal year 2000 and beyond to differ
materially from those expressed in any forward looking statements made by, or on
behalf of, the Company. The foregoing list of factors should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the date hereof or the effectiveness of said Act.
Item 3
Quantitative and Qualitative Disclosures about Market Risk
As of July 25, 1999, the Company had entered into two non-cancellable
interest rate swap agreements to be used as a cash flow hedge against the
interest payments on the Company's $120 million 12% Senior Subordinated Notes,
due 2006 (the "Notes"). The notional amount of both agreements was $120 million.
The first swap agreement matures on July 15, 2001. With respect to this swap
agreement, the Company receives interest at a rate of 12% per annum and pays
interest at a variable rate based on the six month LIBOR rate. The second swap
agreement expires July 15, 2006 (after increasing its notional amount to $127.5
million on July 15, 2001) and requires the Company to pay interest at a rate of
9.01% per annum and receive interest at a variable rate, also based on the six
month LIBOR rate. The two variable portions of the swap agreements offset each
other until July 15, 2001, thus eliminating any interest rate risk to the
Company until that date, and the Company effectively pays interest at a rate of
9.01% on the Notes until that date. Under the scenario in effect at the end of
fiscal 1999, the Company would be exposed to interest rate risk from July 16,
2001 until July 15, 2006 under the second swap agreement. However, this master
swap agreement includes an option for the Company to enter into a new swap
agreement on July 16, 2001 to replace the expiring agreement.
22
During the second quarter of fiscal 2000 the Company entered into a
third swap agreement which will take effect on July 16, 2001, after the
expiration of the first agreement. This third swap agreement will have a
notional amount of $127.5 million and will require the Company to pay interest
at a variable rate, based on the six month LIBOR rate, and to receive interest
at a fixed rate of 7.40%. Going forward from that date, the Company will
continue to pay interest at a fixed rate of 9.01% per annum and receive interest
at a variable rate on the existing second swap agreement. As a result of
entering into this new third swap agreement, the Company has eliminated the
interest rate risk that would have existed at July 15, 2001 when the first swap
agreement expires, and has fully executed its cash flow hedge by fixing the cash
pay rate on the Notes until their maturity in July 2006. The net effect of the
three swap agreements will result in a $2.1 million interest savings to the
Company over the life of the agreements. This amount will be recognized against
interest expense on a straight-line basis prospectively from the current fiscal
quarter until July 2006.
There have been no material changes (other than those noted above) in
information relating to market risk since the Company's disclosure included in
Item 7A of Form 10-K as filed with the Securities and Exchange Commission on
October 23, 1999.
Part II - Other Information
Item 4
Submission of Matters to a Vote of Security Holders.
(c) On December 16, 1999, the Company held its annual meeting for the
purpose of electing its Board of Directors and ratifying the appointment of
Arthur Andersen L.L.P. as independent accountants of the Company. Shareholder
votes on these matters were solicited via proxy statement dated November 15,
1999. Directors were elected separately by the holders of the Company's common
stock, Class A common stock, and Series B Preferred Stock. The following were
the results of the votes on the foregoing matters:
23
(i) Election of Directors:
Nominee Director Votes For Votes Abstentions Broker
Type Against Non-votes
Leslie B. Otten Class A 14,760,530 -- -- --
Christopher E. Howard Class A 14,760,530 -- -- --
Paul Wachter Common 13,389,000 67,320 -- --
Gordon M. Gillies Class A 14,760,530 -- -- --
Daniel Duquette Class A 14,760,530 -- -- --
Bradford E. Bernstein Preferred 150,000 -- -- --
Steven B. Gruber Preferred 150,000 -- -- --
William Janes Preferred 150,000 -- -- --
J. Taylor Crandall Preferred 150,000 -- -- --
Paul Whetsell Common 13,388,130 68,190 -- --
David Hawkes Common 13,382,350 73,970 -- --
(ii) Ratification of appointment of independent accountants
(votes of preferred stock holders on this matter are counted on as
"as-if-converted" basis):
Votes For Votes Against Abstentions Broker Non-votes
59,956,486 39,966 11,400 --
Item 5
Other Information.
In the Fall of 1999, Marriott Ownership Resorts, Inc. ("Marriott")
informed the Company that it would not be proceeding on a timely basis with its
developments at the Company's properties at The Canyons and Sunday River. As a
result, on March 6, 2000, the Company and Resort Properties entered into an
amendment (the "Amendment") to their July 28, 1998 Purchase and Development
Agreement with Marriott. A copy of the Amendment is included as an Exhibit to
this filing and reference is made to the actual text of the Amendment for a
comprehensive description of the changes effected by the Amendment. In summary,
the Amendment eliminates the Purchase and Development Agreement's restrictions
upon real estate at all the Company's resorts other than Killington, Steamboat
and Heavenly. The Company and Marriott are obligated to negotiate site specific
agreements for development projects at those three remaining resorts during the
105-day period following March 10, 2000. In the event of successful negotiation,
Marriott's exclusive timeshare development rights at those three resorts will
continue. If negotiations are not successful, then Marriott's exclusive
timeshare development rights will be terminated. Under the Amendment, Marriott's
right of first refusal has been permanently eliminated and Resort Properties has
refunded to Marriott $960,000 in previously advanced purchase price.
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Item 6
Exhibits and Reports on Form 8-K
a) Exhibits
Included herewith is the Financial Data Schedule submitted as Exhibit
27 in accordance with Item 601(c) of Regulation S-K. Also included are the
following material agreements entered into in the Company's second fiscal
quarter of 2000.
Exhibit No. Description
1. Omnibus First Amendment to Purchase and Development Agreement dated
March 6, 2000 among Marriott Ownership Resorts, Inc., American Skiing
Company and American Skiing Company Resort Properties, Inc.
2. First Amendment to Amended, Restated and Consolidated Credit Agreement
dated March 6, 2000, among American Skiing Company, certain of its
subsidiaries, Fleet National Bank, as Agent, and certain lenders party
thereto.
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the second quarter of
fiscal 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 14, 2000 /s/ Christopher E. Howard
- ------------------------------- -----------------------------
Christopher E. Howard
Executive Vice President
(Duly Authorized Officer)
Date: March 14, 2000 /s/ Mark J. Miller
- ------------------------------- -----------------------------
Mark J. Miller
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
25