June 14, 2000
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
13 and 40 weeks ended April 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.
When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)", "will",
"may", "anticipate(s)" and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially
from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to replenish revised forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various disclosures made by the Company in its periodic
reports on Forms 10-K, 10-Q, and 8-K filed with the Securities Exchange Commission that advise interested parties
of the factors which effect the Company's business.
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 defined in Footnote 6 to the accompanying financial statements), 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.
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. Real estate development and real estate working capital is funded
primarily through construction financing facilities established for major real estate development projects, a $58
million term loan facility established through Resort Properties (the "Resort Properties Term Facility")
and net proceeds from the sale of real estate developed for sale after required construction loan repayments. 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 April 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 $304.2 million.
Resort Liquidity. The Company has established a $165 million senior credit facility (the "Senior Credit Facility")
consisting of a $100 million revolving portion and a $65 million term portion. As of June 2, 2000, total borrowings
under the revolving credit were $42.4 million and $7.6 million of availability was allocated to cover outstanding
letters of credit. The revolving portion of the Senior Credit Facility matures on May 30, 2004, and the term portion
matures on May 31, 2006.
The maximum availability under the revolving portion of the Senior Credit Facility reduces over its term by certain
prescribed amounts. The term portion of the Senior Credit Facility amortizes in five annual installments of $650,000
payable on May 31 of each year, commencing May 31, 2000, with the remaining portion of the principal due in two
substantially equal installments on May 31, 2005 and May 31, 2006. As of June 2, 2000, the outstanding balance
of the term portion has been reduced by $650,000 to $64.4 million. In addition, the Senior Credit Facility requires
mandatory prepayment of the term portion and a mandatory reduction in the availability under the revolving portion
of an amount equal to 50% of Consolidated Excess Cash Flows (as defined in the credit agreement) during any period
in which the Excess Cash Flow Leverage Ratio (as defined in the credit agreement) exceeds 3.50 to 1. In no event,
however, will such mandatory prepayments reduce the revolving portion of the facility below $74.8 million. Management
does not presently expect to generate Consolidated Excess Cash Flows 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 secured 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 portion of the facility is subject to
an annual 30-day clean down requirement, which period must include April 30 of each year, during which the sum
of the outstanding principal balance and letter of credit exposure shall not exceed $25 million for fiscal 2000
and $35 million for each fiscal year thereafter. The Company successfully completed the 30-day clean down requirement
for fiscal 2000 on April 30, 2000.
The Senior Credit Facility contains restrictions on the payment of dividends by the Company on its common stock.
Those restrictions prohibit the payment of dividends in excess of 50% of the Restricted Subsidiaries' consolidated
net income after April 25, 1999, and further prohibit the payment of dividends under any circumstances when the
effect of such payment would be to cause the Restricted Subsidiaries' debt to EBITDA ratio (as defined within the
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 during fiscal 2001 or fiscal 2002.
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 second and third fiscal quarters
and on a prospective basis, (iii) established minimum quarterly EBITDA levels starting with the Company's third
quarter of fiscal 2000 through the second quarter of fiscal 2002, and (iv) established monthly restrictions on
the maximum amount outstanding under the revolving portion of the Senior Credit Facility for the period from May
1 through December 3, 2000. The Company exceeded its required minimum EBITDA level of $60 million under the Credit
Facility Amendment for the third fiscal quarter of 2000 and the Company successfully fulfilled the maximum usage
requirement for the monthly period ended June 4, 2000. 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'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.
Management believes that its current capital resources, along with anticipated results from operations, will be
sufficient to fund non-real estate operating and maintenance capital needs at the Company's resorts for the foreseeable
future.
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.
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 17.75% per annum (payable monthly in arrears), and matures on June 30, 2001. As of June 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 April 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
$304.2 million. The Resort Properties Term Facility is non-recourse to the Parent 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. It may be necessary for one or more of
the terms of the Resort Properties Term Facility to be altered in order to syndicate the facility, and such alterations
could be material and adverse to the Company. As of June 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 June 2, 2000, the amount outstanding under the Textron Facility was $93.5 million. The Textron Facility matures
on September 24, 2002 and bears interest at the rate of prime plus 2.5% per annum, or a current rate of 11.5%.
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, Attitash Bear Peak and The Canyons), 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 $220.3 million as of April 30, 2000, which comprise substantial assets of the Company). The Grand Summit Hotel
at The Canyons opened during the Company's third fiscal quarter, during which the Company received $40.6 million
in proceeds from the closing of pre-sales. Eighty percent of the net proceeds from the closings of those pre-sales
have been applied to the outstanding principal balance of the Textron Facility.
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. The Company received an additional $21.2 million
in proceeds from unit sale closings at this project in its third fiscal quarter. The proceeds of these unit sales
have been used to fully repay the Key Facility.
The Company's fiscal 2000 business plan anticipates the commencement of between one and three real estate projects
in the Summer of 2000. The projects presently under consideration for Summer 2000 commencement are: a Grand Summit
Hotel at Heavenly and townhomes at The Canyons and Sunday River. The timing and extent of these projects are subject
to factors which may be beyond the Company's control, including local and state permitting requirements, market
demand, the Company's cash flow requirements and the availability of external capital.
Due to construction delays and cost increases at the Company's Canyons and Steamboat Grand Summit Hotel projects,
real estate capital resources and liquidity are limited. While management believes Resort Properties' capital resources
and liquidity are currently adequate to complete the Steamboat project (the Canyons project has already been completed),
further delays or cost overruns, at the Steamboat project, could result in shortfalls in available capital and
delay completion of that project.
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 $165 million in skiing
related facilities since the beginning of fiscal 1998. As a result, and in keeping with restrictions imposed under
the Senior Credit Facility, 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,
exclusive of the $2.8 million of assets purchased in conjunction with the Oakhill Transaction, (of which $12.9
million had been expended as of April 30, 2000), plus such additional amounts as are expended on the Heavenly Gondola
project, on which construction has commenced and $4.6 million had been expended as of April 30, 2000. 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 $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, capital leases
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.
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 April 30, 2000, the
total assets that collateralized the Real Estate Facilities, and are included in the accompanying consolidated
balance sheet, totaled approximately $304.2 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 during fiscal 2001 and fiscal 2002.
Changes in Results of Operations
For the 13 weeks ended April 30, 2000 compared to the 13 weeks ended April 25,1999.
The Company's fiscal year 2000 consists of a fifty-three week reporting period compared to fifty-two weeks in fiscal
1999, with the additional week included in the Company's second fiscal quarter. Because the second quarter extended
one week later in fiscal 2000, the 13 week time period that comprises the current third fiscal quarter includes
one more week at the end of the ski season (the week ending April 30, 2000), during which time the Company usually
experiences operating losses, in the place of one week during the height of the ski season (the week ending January
30, 2000), during which time the Company usually generates significant resort revenues and operating profits. Therefore,
the results of the 13 weeks ended April 30, 2000 (January 31, 2000 to April 30, 2000) are not directly comparable
to the 13 weeks ended April 25, 1999 (January 24, 1999 to April 25, 1999). The following discussion and analysis
compares the results of resort operations in the current fiscal quarter to the comparable time period in the prior
year, as if the third quarter of fiscal 1999 went from February 1, 1999 to May 1, 1999 ("the Comparable Quarter").
The different weeks in quarter 3 of fiscal 2000 as compared to quarter 3 of fiscal 1999 is not considered to have
a material impact on the comparability of the results from real estate operations due to the intermittent nature
of the Company's real estate sales activity. Therefore, the timing of the weeks in the fiscal quarters is not addressed
separately in the discussion of the changes in results of real estate operations.
Resort Operations: Substantial natural snowfall at all resorts and in key market areas late in the Company's second
fiscal quarter revived sluggish early season skier traffic heading into the current third quarter. This momentum
continued into February, during which fresh snowfall and good weather for the Presidents Holiday weekend produced
three-day attendance records at almost all of the Company's resorts. Skier traffic (and operating results) continued
to be strong into March, but warm weather nation-wide and sustained rainfall in the East brought an early end to
the ski season and as a result April resort revenues and operating profits fell short of the prior year.
Resort revenues decreased slightly in the third fiscal quarter of 2000 compared to the third quarter of fiscal
1999, from $154.3 million to $149.9 million. However, when matched-up to the Comparable Quarter in fiscal 1999,
resort revenues actually increased by $6.7 million. $1.5 million of this increase is attributable to lodging, food
& beverage and retail revenues generated at the recently opened Sundial and Grand Summit Hotels at The Canyons.
Paid skier days of 1.8 million for the current quarter were consistent with the Comparable Quarter of fiscal 1999.
Resort revenues, exclusive of the $1.5 million from the new hotels at The Canyons, were up $5.2 million over the
Comparable Quarter in fiscal 1999 on similar paid skier days as a result of higher yields per paid skier day across
all resorts. These increased yields were due mainly to enhanced pricing on lift tickets, food & beverage and
lodging services.
The Resort segment generated a $37.9 million profit before income taxes and preferred dividends for the current
fiscal quarter, compared to a $37.8 million profit in the third quarter of fiscal 1999. However, Resort operating
profit before income taxes and preferred dividends actually increased by $6.5 million over the Comparable Quarter
in fiscal 1999. The $6.7 million increase in resort revenues noted above was offset by a $3.6 million increase
in resort operating costs, the majority of which (approximately $2.5 million) were related to the opening of the
two new hotels at The Canyons and pre-opening charges incurred for the Grand Summit Hotel at Steamboat, which is
currently under construction. The Company also experienced a $2.6 million reduction in resort interest expense
in the current quarter due to the reduced level of debt outstanding under the Company's senior credit facility
in fiscal 2000 resulting from the pay-down on that facility from the proceeds of the Series B Preferred Stock issuance.
Real Estate Operations: Real estate revenues increased by $62.9 million in the current quarter compared to fiscal
1999, from $10.3 million to $73.2 million. During its second fiscal quarter, the Company began delivering units
in the Sundial Lodge whole-ownership condominium hotel located at The Canyons resort in Park City, Utah. The delivery
of substantially all of the remaining units in the Sundial Lodge occurred in the Company's current third fiscal
quarter, accounting for $21.2 million of real estate revenues in the quarter. Also at The Canyons, the Company
commenced delivery of quartershare units in its new Grand Summit Hotel, contributing an additional $40.6 million
in revenues during the current quarter. Continuing sales of quartershare units of the existing Grand Summit Hotels
at the Company's Eastern resorts contributed $9.5 million in real estate revenues for the current quarter compared
to $8.3 million in the third quarter of fiscal 1999, an increase of $1.2 million. 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
95% sold-out, with the Grand Summit at Mount Snow over 65% and Attitash Bear Peak over 55% sold-out.
The Real Estate segment generated a profit before income taxes of $6.3 million for the third quarter of fiscal
2000, compared to a $0.6 million loss in the third quarter of fiscal 1999. The initial delivery of quartershare
units in the new Grand Summit Hotel at the Company's resort at The Canyons generated $13.3 million in pre-tax earnings
during the current quarter. Pre-tax profits form the sale of quartershare units in the existing Grand Summit Hotels
at the Company's Eastern resorts decreased by $0.8 million, from $3.8 million in the third quarter of fiscal 1999
to $3.0 million in the current quarter. The reduced profit margins on the sale of Eastern resort quartershare units
is attributed to additional costs incurred to up-fit the remaining units, as well as an aggressive pricing plan
implemented to accelerate final unit sales at Killington and Sunday River. Marketing, general and administrative
costs increased by $4.8 million in the current quarter compared to the third quarter of fiscal 1999, mainly due
to sales commissions and marketing activity related to unit sales at the Sundial Lodge and Grand Summit Hotel at
The Canyons.
Accretion of discount and dividends accrued on mandatorily redeemable preferred stock increased $4.2 million, from
$1.1 million for the third 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 40 weeks ended April 30, 2000 compared to the 39 weeks ended
April 25, 1999.
Resort Operations: Resort revenues decreased $2.6 million, or 1.0%, for the nine months ended April 30, 2000 compared
to the nine months ended April 25, 1999, from $277.8 million to $275.2 million. Paid skier days were down approximately
5.8% over the same period, from 3.2 million in fiscal 1999 to 3.0 million in fiscal 2000. This decrease was primarily
due to warm weather patterns in early November, a rainy Thanksgiving weekend in the East and a warm, dry December
nationwide. The December holiday week was also negatively impacted by the overall softness in the travel industry
due to Y2K concerns and the lack of natural snowfall in key market areas. Substantial natural snowfall at all resorts
and in key market areas late in the Company's second fiscal quarter revived sluggish early season skier traffic.
This momentum continued into February, during which fresh snowfall and good weather for the Presidents holiday
weekend produced three-day attendance records at almost all of the Company's resorts. Skier traffic continued to
be strong into March, but warm weather nation-wide and sustained rainfall in the East brought an early end to the
ski season and April revenues fell short of the prior year.
Revenues from lift ticket and retail sales were down a combined $5.3 million, or 3%, from the prior year due mainly
to the decrease in paid days for the year. Food and beverage and lodging services revenues were relatively flat
compared to the prior year, as revenues generated from the two new hotels at The Canyons offset the effect of the
decrease in skier days. Skier development revenues actually increased by $0.7 million, or 3%, in the fiscal 2000
period, as the Company continued to realize the benefits of its new skier development programs instituted in fiscal
1999 in conjunction with the opening of new Sprint Perfect Turn Discovery Centers at four of its Eastern resorts.
The Company also realized $1.6 million in net gains from the sale of non-strategic assets during the first quarter
of fiscal 2000.
The Resort segment generated a $3.3 million loss before income taxes for the nine months ended April 30, 2000,
compared to a $2.6 million pre-tax loss in the corresponding period of the prior year. This $0.7 million increase
in the year-to-date pre-tax loss is derived from (i) a $5.0 million decrease in resort earnings before interest,
taxes and depreciation, (ii) a $1.6 million increase in depreciation expense, and (iii) an offsetting $5.7 million
decrease in interest expense. The decrease in resort earnings before interest, taxes and depreciation is derived
from the net effect of (i) the $2.6 million decrease in resort revenues described above, (ii) a $5.5 million increase
in resort operating expenses due mainly to costs associated with the activities necessary to prepare for the openings
of the two new hotels at The Canyons and the Grand Summit Hotel at Steamboat, increased snowmaking and maintenance
costs, food and beverage and lodging costs and retail costs of goods sold, and (iii) a $3.2 million reduction in
marketing, general and administrative expenses. The increase in resort depreciation expense is due to the approximately
$19 million in capital expenditures made at the Company's resorts during fiscal 2000. The reduction in interest
expense in fiscal 2000 is 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 $76.7 million for the first nine months of fiscal 2000
compared to the same period in fiscal 1999, from $21.1 million to $97.8 million. The delivery of units in the Sundial
whole-ownership condominium hotel and the new Grand Summit Hotel at The Canyons accounted for $39.0 million and
$40.6 million, respectively, of real estate revenues in fiscal 2000. Slight decreases in real estate revenues are
derived from (i) $2.4 million of revenue recognized in fiscal 1999 from the sale of townhouses at Sunday River,
with no corresponding sales of townhouses at Sunday River in fiscal 2000 and (ii) a $0.7 million decrease in revenue
from quartershare unit sales at the existing Grand Summit Hotels at the Company's Eastern resorts.
The Real Estate segment generated a profit before income taxes of $0.9 million for the nine months ended April
30, 2000, compared to a $4.8 million pre-tax loss in the comparable period of fiscal 1999. The Company has realized
$13.3 million in pre-tax profit from the sale of units at the new Grand Summit Hotel at The Canyons resort for
the nine months ending April 30, 2000. Offsetting this increase was (i) a $4.1 million increase in sales and marketing
and administrative costs primarily related to unit sales at the Sundial Lodge and Grand Summit Hotel at The Canyons,
(ii) a $1.5 million decrease in gross profit from sales of Eastern Grand Summit quartershare units, (iii) a $2.0
million increase in real estate interest expense as a result of an increase in real estate related debt outstanding,
and (iv) certain non-recurring charges related to final settlement costs for construction of the Grand Summit Hotels
at Sunday River and Killington.
Provision for (benefit from) income taxes increased $3.3 million, from a benefit of $0.8 million in the first nine
months of fiscal 1999 to a provision of $2.5 million in the first nine months of fiscal 2000. The increase in the
provision 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,
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 nine 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 nine 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 $12.2 million from
$3.2 million for the first nine months of fiscal 1999 to $15.4 million for the first nine months of the current
fiscal year. This increase is primarily attributable to the additional accrual of dividends on 150,000 shares of
Series B Preferred Stock issued to Oak Hill in the first quarter of fiscal 2000. 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.
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.
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 is currently being recognized against interest expense on a straight-line basis prospectively
from the second fiscal quarter of 2000 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.