Item 3
Legal Proceedings
On April 22, 2003, we were sued in Utah state court by Westgate Resorts, Ltd. (“Westgate”) for breach of contract and other related claims arising from disputes involving two contracts between us and Westgate. Generally, Westgate has alleged that the Company has breached obligations to Westgate to construct certain infrastructure at The Canyons resort and provide marketing support for Westgate’s project. Westgate’s claim seeks specific performance of certain aspects of the two contracts. It is not currently feasible to quantify the damages being sought in this action. On May 13, 2003, we answered Westgate’s complaint and filed a counterclaim alleging, among other things, that Westgate was in default on a joint promotional agreement with the Company for failing to purchase approximately $2.0 million (now over $4.0 million) in lift tickets and that Westgate’s buildings at The Canyons
encroach upon land owned or controlled by the Company. Limited discovery has been taken in this matter and no timetable has been set for bringing the matter to trial.
In July 2003, the homeowners association of the Mount Snow Grand Summit Hotel filed a claim against Grand Summit for damages of $2.0 million for improper roof/insulation construction at that hotel. Grand Summit has filed an answer and a crossclaim against the architect and general contractor for the project. Discovery in this matter is at a very preliminary stage and no timetable has been set for bringing the matter to trial.
Each of our subsidiaries which operates resorts has claims pending and is regularly subject to personal injury claims related principally to skiing activities at the resort. Each of our operating companies maintains liability insurance that we consider adequate in order to insure against claims related to the usual and customary risks associated with the operation of a ski resort. We operate a captive insurance company authorized under the laws of the state of Vermont, which, until early fiscal 1999, provided liability and workers’ compensation coverage for our Vermont resorts. We do not currently use this insurance subsidiary to provide liability and workers’ compensation insurance coverage, but it is still responsible for future claims arising from insurable events which may have occurred while it provided this coverage. Our insurance subsidiary maintains cash reserves in amounts recommended by an independent actuarial firm and which we believe to be adequate to cover any such claims.
Item 4
Item 4
Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5
Item 5
Market for the Registrant’s Common Equity and Related Stockholder Matters.
Our common stock is currently traded on the Over The Counter Bulletin Board under the symbol “AESK”. Our Class A common stock is not listed on any exchange and is not publicly traded, but is convertible into our common stock. As of October 1, 2005, 31,738,183 shares of our common stock were issued and outstanding, of which 14,760,530 shares were Class A common stock held by one holder and 16,977,653 shares were common stock held by approximately 9,000 holders.
The following table lists, for the fiscal quarters indicated, the range of high and low closing prices of our common stock as reported on the Over the Counter Bulletin Board, as applicable.
American Skiing Company Common Stock (AESK)
Market Information
We have not declared or paid any cash dividends on our capital stock. We intend to retain earnings, to the extent that there are any, to reduce our debt and to support our capital improvement and growth strategies. We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of future dividends, if any, will be at the discretion of our board of directors after they take into account various factors, such as our financial condition, operating results, current and anticipated cash needs and plans for capital improvements and expansion. Each of the indentures governing our New Junior Subordinated Notes, our Resort Senior Credit Facility, and the terms of our Series C-1 Preferred Stock and Series C-2 Preferred Stock contain certain restrictive covenants that, among other things, limit the payment of dividends or the making of distributions on our equity
interests. See Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”.
Item 6
Item 6
Selected Financial Data
The following selected historical financial data has been derived from our consolidated financial statements as audited by KPMG LLP. This data, excluding consolidated statements of cash flows data, has been restated to reflect Heavenly as discontinued operations and also includes certain reclassifications to be consistent with the current year presentation.
(1) The historical data above does not reflect the financial position and results of operations for our Heavenly resort (Heavenly). The financial data for Heavenly is reflected as discontinued operations because Heavenly was sold during fiscal 2002.
(2) The historical data above includes the financial position and results of operations for the Haystack resort, which was part of the Mount Snow resort. The Haystack resort was sold in June 2005. The financial data for the Haystack resort is not reflected as discontinued operations as it does not meet the requirements in SFAS No. 144.
(3) Resort revenues represent all revenues, excluding revenues generated by the sale of real estate interests.
(4) During fiscal 2001, we recognized the following merger, restructuring, and asset impairment charges: a $52.0 million asset impairment charge related to the assets at our Steamboat resort that were previously classified as assets held for sale as of July 29, 2001; a $15.1 million asset impairment charge related to the assets at our Sugarbush resort that are classified as assets held for sale as of July 29, 2001; a $3.6 million charge related to our terminated merger with MeriStar Hotels and Resorts, Inc; $4.0 million in employee separation, legal, and financial consulting charges related to our strategic restructuring plan; and a $1.3 million impairment charge to net realizable value in the fourth quarter of fiscal 2001 to reduce the remaining units at the Attitash Grand Summit Hotel to their net realizable value. During fiscal 2002, we recognized the following merger, restructuring, and asset impairment charges: a $25.4 million asset impairment charge related to the assets at our Steamboat resort that were previously classified as held for sale as of July 29, 2001; a $38.7 million charge related to the remaining quartershare units at the Steamboat Grand Hotel and The Canyons Grand Summit Hotel; a $18.9 million charge related to land and land options at The Canyons; a $24.8 million charge related to master planning and real estate costs at The Canyons, Killington, Mount Snow, Sugarloaf/USA, Sunday River, and Steamboat; a $1.4 million charge related to a land option at Sunday River and certain resort fixed assets; $2.7 million in legal and financial consulting charges related to our strategic restructuring plan; offset by a $0.3 million gain to finalize the sale of Sugarbush. During fiscal 2003, we recognized the following merger, restructuring and asset impairment charges: a $1.2 million charge related to certain resort fixed assets and other assets; and $0.4 million in restructuring charges; offset by a $0.2 million reversal of a previous impairment charge determined not to be needed. During fiscal 2004, we recognized the following in merger, restructuring, and asset impairment charges: a $0.1 million restructuring charge. During fiscal 2005, we recognized no merger, restructuring, and asset impairment charges.
(5) For purposes of estimating skier visits, we assume that a season pass holder visits our resorts a number of times that approximates the average cost of a season pass divided by the average daily lift ticket price.
Item 7
Item 7
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
Certain statements under the heading Part I, Item 1 and Item 2 - “Business and Properties”, this heading Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are not based on historical facts, but rather reflect our current expectations concerning future results and events. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. We have tried, wherever possible, to identify such statements by using words such as “anticipate”, “assume”, “believe”, “expect”, “intend”, “plan”, and words and terms of similar substance in connection with any discussion of operating or financial performance. Such forward-looking statements involve a number of risks and uncertainties. In addition to factors discussed above, other factors that could cause actual results, performances, or achievements to differ materially from those projected include, but are not limited to, the following: changes in regional and national business and economic conditions affecting both our resort operating and real estate segments; competition and pricing pressures; negative impact on demand for our products resulting from terrorism and availability of air travel (including the effect of airline bankruptcies); failure to maintain improvements to resort operating performance at the covenant levels required by our Resort Senior Credit Facility; failure to meet amortization requirements of the Construction Loan Facility; adverse weather conditions regionally and nationally; changes in weather patterns resulting from global warming; seasonal business activity; significant changes in energy prices; changes to federal, state, and local regulations affecting both our resort operating and real estate segments; failure to renew land leases and forest service permits; failure to cure pending defaults under our ground lease at The Canyons resort and any resulting disruption in access to ski terrain at such resort; disruptions in water supply that would impact snowmaking operations; the loss of any of our executive officers or key operating personnel; and other factors listed from time to time in our documents we have filed with the Securities and Exchange Commission. We caution the reader that this list is not exhaustive. We operate in a changing business environment and new risks arise from time to time. The forward-looking statements included in this document are made only as of the date of this document and under Section 27A of the Securities Act and Section 21E of the Exchange Act, we do not have or undertake any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.
General
We are organized as a holding company and operate through various subsidiaries. We are one of the largest operators of alpine ski and snowboard resorts in the United States. We have a network of seven mountain resorts, geographically diversified across the Rocky Mountain and Northeast regions of the United States. We develop, own, and operate a range of hospitality-related businesses, including skier development programs, hotels, golf courses, restaurants, and retail locations. We also develop, market, and operate ski-in/ski-out alpine villages, townhomes, condominiums, and quarter and eighth share ownership hotels. We report our results of operations in two business segments, resort operations and real estate operations.
The Company’s fiscal year is a 52-week or 53-week period ending on the last Sunday of July. The periods ended July 27, 2003 and July 25, 2004 (fiscal 2003 and fiscal 2004, respectively) each consisted of 52 weeks while the period ended July 31, 2005 (fiscal 2005) consisted of 53 weeks. As compared to the prior year, this extra week of operations occurred during the summer of fiscal 2005 and resulted in the Company incurring $0.7 million in additional net expenses.
Our resort operating strategies include taking advantage of our multi-resort network, improving snowmaking capabilities at our Eastern resorts, increasing our revenue per skier, continuing to build brand awareness and customer loyalty, continuing to focus on cost management, expanding our golf and convention business, and capitalizing on real estate growth opportunities through joint ventures. Our fiscal 2005 results of operations were favorable as compared to the prior year due to significantly improved snow conditions at our Western resorts, a company-wide increase in our season pass revenues primarily as the result of the successful introduction of the All For One Pass at our Eastern resorts, revisions to our lift ticket pricing structure and comprehensive yield management at our resorts, reductions in our fixed cost structure, effective implementation of certain operational initiatives within our Food and Beverage business along with our Retail, Rental, and Repair business, and day-to-day management of peak season operating costs.
One of our financial objectives for fiscal 2005 was to restructure our resort debt facilities and preferred stock obligations to more closely align them with our long-term strategic objectives. During fiscal 2005, we entered into an agreement for a new $230 million Resort Senior Credit Facility, the proceeds of which were used to repay our prior resort senior credit facility and redeem our Senior Subordinated Notes. We also issued junior subordinated notes maturing in 2012 in the amount of $76.7 million in exchange for our Series A Preferred Stock. For further information about our existing indebtedness, including the new debt arrangements we entered into during fiscal 2005, see “Liquidity and Capital Resources - Resort Liquidity” below.
During fiscal 2004 and fiscal 2005, we successfully amended our real estate construction loan facilities. In addition, during fiscal 2004 an auction was held at The Canyons to sell substantially all of the remaining units at The Canyons Grand Summit Hotel, which resulted in a $10.8 million paydown of our real estate construction loan facilities. We also successfully restructured our real estate term facility (“Real Estate Term Facility”).
During June 2005, we completed the sale of certain of the assets of Mount Snow comprising the Haystack ski resort to Tyringham Ridge, Inc. (Buyer). The purchase price was $5.0 million, subject to certain customary adjustments. The agreement includes a two year right of first refusal in favor of the Buyer for certain developmental land owned by Mount Snow (but not used in its ski resort operations) known as the Howe Farm. Under the terms of the agreement, Mount Snow will continue to be allowed to withdraw water from sources at the Haystack resort after the closing in amounts which approximate Mount Snow’s historical use from this source. In addition, Mount Snow has a right of first refusal to reacquire the Haystack resort (not including certain developmental real estate assets) for 20-years following the date of closing. Net proceeds to us from the sale of the Haystack resort were used to reduce borrowings under the Resort Senior Credit Facility, including approximately $1.0 million paid to permanently reduce the amount of the First Lien Term Loan.
The following is our discussion and analysis of financial condition and results of operations for fiscal 2005. Please read this information in connection with our consolidated financial statements and related notes contained elsewhere in this report.
Liquidity and Capital Resources
We are a holding company whose only significant assets are the outstanding common stocks of our subsidiaries. Our only source of cash to pay our obligations is distributions from our subsidiaries.
Short-term. Our primary short-term liquidity needs for resort operations include funding seasonal working capital requirements, funding our fiscal 2006 and fiscal 2007 capital improvement programs, and servicing debt and other contractual obligations. Our primary short-term liquidity needs for real estate operations are funding costs relating to marketing and sales of our real estate development projects and servicing debt. Our cash requirements for ski-related and real estate development/sales activities are provided from separate sources.
Our primary source of liquidity for ski-related working capital and ski-related capital improvements are cash flows from operating activities of our non-real estate subsidiaries, proceeds from sales of non-operating assets (less any portion required to paydown debt under the Resort Senior Credit Facility), and borrowings under our Resort Senior Credit Facility. The total debt outstanding under our Resort Senior Credit Facility as of July 31, 2005 was approximately $202.8 million with approximately $24.0 million available for borrowing on that date (not including approximately $1.6 million in undrawn letters of credit issued under the Resort Senior Credit Facility). As of July 31, 2005, we were in compliance with all covenants of the Resort Senior Credit Facility.
Real estate development and real estate working capital are funded primarily through the Construction Loan Facility established for major real estate development projects and net proceeds from the sale of real estate developed for sale after required construction loan repayments. The Construction Loan Facility is without recourse to us and our resort operating subsidiaries and is collateralized by significant real estate assets of Resort Properties and its subsidiaries, including the assets and stock of Grand Summit, our primary hotel development subsidiary. As of July 31, 2005, the total debt outstanding under the Construction Loan Facility was approximately $22.4 million, and the carrying value of the total assets that collateralized the Construction Loan Facility and which are included in the accompanying consolidated balance sheet was approximately $44.7 million. On July 28, 2005, The Canyons and Attitash resort operating subsidiaries purchased from Grand Summit the respective commercial cores of their Grand Summit Hotels for $4.0 million. As of July 31, 2005, we were in compliance with all covenants of the Construction Loan Facility, as amended. See “Real Estate Liquidity - Construction Loan Facility” below.
Resort Liquidity. We entered into agreements dated November 24, 2004 with Credit Suisse First Boston (CSFB), GE Capital, and other lenders whereby the lenders have provided a $230.0 million Resort Senior Credit Facility consisting of a revolving credit facility and two term loan facilities. The proceeds of the Resort Senior Credit Facility were used to refinance our prior resort senior credit facility and redeem our Senior Subordinated Notes as well as to pay fees and expenses related to the transaction. The Resort Senior Credit Facility consists of the following:
• Revolving Facility - $40.0 million, including letter of credit (L/C) availability of up to $6.0 million. The amount of availability under this facility is correspondingly reduced by the amount of each L/C issued.
• First Lien Term Loan - $85.0 million borrowed on the funding date of November 24, 2004.
• Second Lien Term Loan - $105.0 million borrowed on the funding date of November 24, 2004.
The Revolving Facility and First Lien Term Loan are provided under a single credit agreement (the “First Lien Credit Agreement”), mature in November 2010 and bear interest, at our option, either at a rate equal to the prime rate, as publicly quoted in The Wall Street Journal, plus 3.5% or at a rate equal to LIBOR (as defined) plus 4.5%, payable quarterly (9.75% based on the prime rate for the Revolving Facility and 8.0% based on the LIBOR rate for the First Lien Term Loan as of July 31, 2005). The First Lien Term Loan requires 23 quarterly principal payments of $212,500 beginning on January 15, 2005 and a final payment of $80.1 million in November 2010. The Revolving Facility is comprised of two sub-facilities, each in the amount of $20.0 million and each with separate fees for the unused portion of the facilities in the amounts of 1.0% and 4.5% per annum, respectively. The Second Lien Term Loan is provided under a separate credit agreement (the “Second Lien Credit Agreement”), matures in November 2011, bears interest at a rate equal to the prime rate, as publicly quoted in The Wall Street Journal, plus
7.0% or at a rate equal to LIBOR (as defined) plus 8.0% (11.5% as of July 31, 2005 based on the LIBOR rate), payable quarterly, and principal is due upon maturity.
The Revolving Facility and the First Lien Term Loan obligations under the First Lien Credit Agreement and the related guarantees are secured by a first-priority security interest in substantially all of the our assets, other than assets held by Grand Summit, and our obligations under the Second Lien Credit Agreement and the Company’s subsidiaries’ obligations under the related guarantees are secured by a second-priority security interest in the same assets. Collateral matters between the lenders under the First Lien Credit Agreement and the lenders under the Second Lien Credit Agreement are governed by an intercreditor agreement.
The Resort Senior Credit Facility contains affirmative, negative, and financial covenants customary for this type of credit facility, which includes maintaining a minimum level of EBITDA (as defined), limiting our capital expenditures, requiring us to maintain a minimum ratio of appraised asset value to debt, and requiring us to have a zero balance on the Revolving Credit Facility (excluding L/Cs) on April 1 of each year. The Resort Senior Credit Facility also contains events of default customary for such financings, including but not limited to non-payment of amounts when due; violation of covenants; cross default and cross acceleration with respect to other material debt; change of control; dissolution; insolvency; bankruptcy events; and material judgments. Some of these events of default allow for grace periods or are qualified by materiality concepts. The Resort Senior Credit Facility requires us to offer to prepay portions of the loans with proceeds of certain material asset sales and recovery events, certain proceeds of debt, 50% of excess cash flow, and proceeds from the issuance of capital stock. The Resort Senior Credit Facility also restricts our ability to pay cash dividends on or redeem our common or preferred stock.
On May 16, 2005, the Company entered into a 6-month LIBOR contract at 3.49% for a notional loan amount of $188.2 million, which expires on November 15, 2005. Pursuant to the requirements of the Resort Senior Credit Facility, on May 23, 2005, we entered into an interest rate swap agreement for 50% of the First Lien Term Loan and the Second Lien Term Loan for a notional amount of $95.0 million. Under the swap agreement, during the period from May 16, 2005 to November 15, 2005, we pay 4.16% and receive the 6-month LIBOR rate. During the period from November 16, 2005 to May 15, 2008, we pay 4.16% and receive the 3-month LIBOR rate. As a result of entering into this interest rate swap agreement, we have fixed the cash-pay rate on the notional amount until the maturity of the swap agreement in May 2008.
In conjunction with the Resort Senior Credit Facility, we closed a tender offer and repurchased $118.5 million of the $120.0 million principal amount of outstanding Senior Subordinated Notes. The total consideration payable in connection with the offer was $120.4 million ($118.5 million in principal and $1.9 million in a redemption premium) plus accrued interest of $5.1 million for the tendered Senior Subordinated Notes. We also called for redemption on November 24, 2004 of all the remaining $1.5 million in principal amount of outstanding Senior Subordinated Notes which were redeemed and paid in January 2005.
In addition, as part of the refinancing, we entered into an Exchange Agreement with the holder of our Series A Preferred Stock and issued $76.7 million of new junior subordinated notes (New Junior Subordinated Notes) due 2012 to the holder of our Series A Preferred Stock in exchange for all outstanding shares of Series A Preferred Stock. The New Junior Subordinated Notes accrue interest at a rate of 11.25% upon issuance, gradually increasing to a rate of 13.0% in 2012. However, interest is added to the principal outstanding on January 1 of each year. On January 1, 2005, $0.9 million of interest was added to the principal outstanding. No principal or interest payments are required to be made on the New Junior Subordinated Notes until maturity. The New Junior Subordinated Notes are subordinated to all of our other debt obligations and all trade payables incurred in the ordinary course of our business. None of our subsidiaries are obligated on the New Junior Subordinated Notes, and none of our assets serve as collateral for repayment of the New Junior Subordinated Notes. The indenture governing the New Junior Subordinated Notes also restricts us from paying cash dividends or making other distributions to our shareholders, subject to certain limited exceptions.
As part of the refinancing, the indenture for our 11.3025% junior subordinated notes (Junior Subordinated Notes) was amended to extend the maturity to May 2012.
As of September 30, 2005, we had $26.2 million, $83.2 million, and $105.0 million of principal outstanding under the Revolving Facility, First Lien Term Loan, and Second Lien Term Loan portions of the Resort Senior Credit Facility, respectively. Furthermore, as of September 30, 2005, we had $1.6 million in outstanding L/Cs with $12.3 million available for additional borrowings under the Revolving Facility. We currently anticipate that the remaining borrowing capacity under the Resort Senior Credit Facility will be sufficient to meet our working capital needs for our resort operations through the end of fiscal 2006.
We are required to bring the Revolving Credit Facility to a zero balance (excluding outstanding letters of credit) on April 1 of each year, and we met this requirement on April 1, 2005. We were in compliance with all other financial covenants of the Resort Senior Credit Facility through the end of fiscal 2005.
We have $15.5 million of other long-term debt as of July 31, 2005. This is comprised of $7.3 million of capital lease obligations which is secured debt and $8.2 million of notes payable with various lenders of which a portion is secured.
Our significant debt levels affect our liquidity. As a result of our highly leveraged position, we have significant cash requirements to service interest and principal payments on our debt. Consequently, cash availability for working capital needs, capital expenditures, and acquisitions is significantly limited, outside of any availability under the Resort Senior Credit Facility. Furthermore, our Resort Senior Credit Facility contains significant restrictions on our ability to obtain additional sources of capital and may affect our liquidity. These restrictions include restrictions on the sale of assets, restrictions on the incurrence of additional indebtedness, and restrictions on the issuance of preferred stock.
Real Estate Liquidity. To fund working capital and meet the amortization requirements of the Construction Loan Facility, Grand Summit Resort Properties relies on the net proceeds from the sale of real estate developed for sale, mortgage payment received for the Steamboat Grand Hotel parking facility, the lease of the commercial core at Steamboat to the resort company, and the revenues from short-term rental of unsold unit inventory.
Construction Loan Facility: We have historically conducted our real estate interval-ownership product development through Grand Summit, which is a wholly owned subsidiary of Resort Properties. Grand Summit owns our existing Grand Summit Hotel project at Steamboat, which is primarily financed through the $110.0 million Senior Construction Loan. Due to construction delays and cost increases at the Steamboat Grand Hotel project, on July 25, 2000, Grand Summit entered into the $10.0 million Subordinated Construction Loan, which was subsequently increased to $10.6 million. Together they comprise the Construction Loan Facility. We used the Construction Loan Facility primarily for the purpose of funding the completion of the Steamboat Grand Hotel. As of July 31, 2005, there are no future borrowings available under the Construction Loan Facility.
The outstanding principal amount under the Construction Loan Facility is payable incrementally as unit sales are closed based on a predetermined per unit amount, which approximates between 70% and 80% of the net proceeds of each closing. Mortgages against the commercial core unit at the Grand Summit Hotel at Steamboat, unsold unit inventory at the Steamboat Grand Hotel, and a promissory note from the Steamboat Homeowners Association secured by the Steamboat Grand Hotel parking garage collateralize the Senior Construction Loan. This facility is subject to covenants, representations, and warranties customary for this type of construction facility. The Senior Construction Loan is non-recourse to us and our subsidiaries other than Grand Summit. As of July 31, 2005, the carrying value of the total assets that collateralized the Senior Construction Loan was $44.7 million. The principal balance outstanding under the Senior Construction Loan was $11.8 million as of July 31, 2005 and had an interest rate on funds advanced of prime plus 3.5%, with a floor of 9.0% (9.75% as of July 31, 2005) and there were no borrowings available under this facility.
The Senior Construction Loan, as amended, must have the following maximum outstanding principal balances as of the following dates:
Grand Summit did not meet the required reduction of the Senior Construction Loan principal balance in effect at March 31, 2005. In April 2005, Grand Summit received a letter from the lenders waiving this default. Grand Summit continued discussions with the lenders under the Construction Loan Facility regarding the terms of the amortization requirements and entered into amended agreements for both the Senior Construction Loan and the Subordinated Construction Loan as of June 30, 2005. On July 28, 2005, The Canyons and Attitash resort operating subsidiaries purchased from Grand Summit the respective commercial cores of their Grand Summit Hotels for $4.0 million. Grand Summit met the maximum borrowing requirements under the amended Construction Loan Facility as of July 31, 2005.
On September 30, 2005 the outstanding balance of the Senior Construction Loan was $10.3 million, or $300,000 in excess of the maximum outstanding principal balance under the Senior Construction Loan. On September 30, 2005, Grand Summit received a letter from the lenders waiving the September 30, 2005 maximum outstanding principal balance.
The Subordinated Construction Loan bears interest at an annual fixed rate of 20%, payable monthly in arrears, provided that only 50% of the amount of this interest is due and payable in cash and the other 50% will, if no events of default exist under the Subordinated Construction Loan or the Senior Construction Loan, automatically be deferred until the final payment date. The Subordinated Construction Loan provides for a maximum borrowing capacity of $10.6 million. All $10.6 million had been borrowed under the Subordinated Construction Loan as of July 31, 2005. Accrued interest on the Subordinated Construction Loan as of July 31, 2005 was $4.3 million. The Subordinated Construction Loan is secured by the same collateral which secures the Senior Construction Loan.
The Subordinated Construction Loan, as amended, must have the following maximum outstanding principal balances as of the following dates:
As of September 30, 2005, the amount outstanding under the Senior Construction Loan was $10.3 million and there were no borrowings available under this facility. As of September 30, 2005, the amounts outstanding under the Subordinated Construction Loan were $10.6 million plus accrued interest of $4.5 million and there were no borrowings available under this facility.
There can be no assurance that Grand Summit will meet the future mandatory amortization requirements of the Senior Construction Loan or the Subordinated Construction Loan. If Grand Summit fails to meet those future mandatory amortization requirements, there can be no assurance that the lenders under those facilities will be willing to enter into a waiver or amendment in the future on terms acceptable to Grand Summit. Grand Summit is also engaged in efforts to refinance the Senior Construction Loan and Subordinated Construction Loan with different lenders in a restructured facility, but similarly there can be no assurance that a refinancing will be completed prior to the existing mandatory amortization dates. If Grand Summit is unable to obtain a waiver from the existing lenders or refinance the Construction Loan Facility, and Grand Summit does not meet the amortization requirements of the Senior Construction Loan or Subordinated Construction Loan, Grand Summit will be in payment default under the Construction Loan Facility and the lenders could commence enforcement actions against Grand Summit and the assets of Grand Summit which secure the Construction Loan Facility. The Senior Construction Loan is non-recourse to us and our subsidiaries other than Grand Summit.
Real Estate Term Facility: On May 14, 2004, Resort Properties restructured its Real Estate Term Facility from Fleet National Bank, Ski Partners, LLC, and Oak Hill Capital Partners. As a result of the restructuring, a new business venture called SP Land was created by Ski Partners, LLC, Resort Properties (an ASC subsidiary), and Killington, Ltd. (an ASC subsidiary). Certain developmental land parcels at the Killington resort and cash with a combined carrying value of approximately $2.2 million were transferred by Resort Properties and Killington into SP Land, together with all indebtedness, including related interest and fees, under the Real Estate Term Facility held by Fleet National Bank and Ski Partners, LLC (Tranche A and B of the Real Estate Term Facility) totaling $55.4 million. All of the remaining collateral for the Real Estate Term Facility, including all of the capital stock of Grand Summit, all developmental real estate at The Canyons, the commercial unit in the Grand Summit Hotel at Mount
Snow, and the Rams Head parking lot at the Killington resort, was released as security for the obligations under the Real Estate Term Facility. Collectively Killington and Resort Properties own 25% of the membership interests of SP Land. The remaining 75% of the membership interests in SP Land are owned by Ski Partners, LLC, together with a preferential interest in SP Land of approximately $37.2 million. In accordance with FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN No. 46R) and “The Equity Method of Accounting for Investment in Common Stock” (APB No. 18), SP Land is a variable interest entity and is accounted for on the equity method because it does not meet the requirements for consolidation.
In conjunction with the restructuring of the Real Estate Term Facility, the $25.0 million in debt from Resort Properties to Oak Hill Capital Partners and its affiliate, OHSF ASTC, LLC, (Tranche C of the Real Estate Term Facility) was contributed by Oak Hill to ASC as additional paid-in capital. This contribution was made for no additional consideration, and no equity was issued by ASC in return for the contribution. As a result of the transfer of the $55.4 million in indebtedness (including interest and fees) from Resort Properties to SP Land and the exchange of $25.0 million in debt from Oak Hill for additional paid-in capital of ASC, approximately $80.4 million in real estate debt and related accrued interest and fees are no longer obligations of ASC.
As part of the restructuring of the Real Estate Term Facility, Killington also contributed all of its interest in approximately 256 acres of developmental real estate with a carrying value of approximately $0.9 million into a joint venture entity called Cherry Knoll Associates, LLC (“Cherry Knoll”). Each of SP Land and Killington own 50% of the membership interests in Cherry Knoll. In addition, Killington maintains a preferential distribution interest in Cherry Knoll of $1.5 million. In accordance with FIN No. 46R and APB No. 18, Cherry Knoll is a variable interest entity and is accounted for on the equity method because it does not meet the requirements for consolidation.
Immediately following the restructuring of the Real Estate Term Facility, Resort Properties became a co-borrower under the Resort Senior Credit Facility and Resort Properties pledged its remaining assets as collateral security under the Resort Senior Credit Facility. These assets remain as collateral to the new Resort Senior Credit Facility entered into November 24, 2004.
Long-term. Our primary long-term liquidity needs are to fund skiing-related capital improvements at certain of our resorts. For fiscal 2005, our annual maintenance capital requirements (excluding capital expenditures of SS Associates, LLC) were $11.7 million. For each of fiscal 2006 and fiscal 2007, we anticipate our on-going capital spending to be approximately $15.5 million and $15.5 million, as allowed under our Resort Senior Credit Facility and excluding any contractually committed capital expenditures also allowed under our Resort Senior Credit Facility. There is a considerable degree of flexibility in the timing and, to a lesser degree, scope of our growth capital program. Although we can defer specific capital expenditures for extended periods, continued growth of skier visits, revenues, and profitability will require continued capital investment in on-mountain improvements.
We finance on-mountain capital improvements through resort cash flows, capital leases, proceeds from sales of non-operating assets, and our Resort Senior Credit Facility. The size and scope of the capital improvement program will generally be determined annually depending upon the strategic importance and expected financial return of certain projects, future availability of cash flows from each season’s resort operations, and future borrowing availability and covenant restrictions under the Resort Senior Credit Facility. The Resort Senior Credit Facility places a maximum level of non-real estate capital expenditures for fiscal 2006 and fiscal 2007 at $15.5 million each year, including assets purchased under capital leases, with the ability to increase this amount if certain conditions are met. During fiscal 2005, and as required under the terms of our Resort Senior Credit Facility, we converted certain types of lease agreements that we historically entered into as operating leases into terms that qualified them to be treated as capital leases. We believe that the capital expenditure limits under the Resort Senior Credit Facility will be sufficient to meet our non-real estate capital improvement needs for fiscal 2006 and fiscal 2007.
We closely monitor our operating results that impact our ability to meet the financial covenants under our Resort Senior Credit Facility. We take various actions to maintain compliance with our financial covenants, including selling non-core assets to increase revenues, and reducing our cost structure during the off-season and seasonal low-visitation at our resorts. In the event of a violation of the financial covenants under our Resort Senior Credit Facility, we would engage in a discussion with our lenders for a waiver of those covenants for the period in question. Due to the restrictions under our Resort Senior Credit Facility, we have limited access to alternate sources of funding.
We also have mandatorily redeemable convertible participating 12% preferred stock (Series C-1 Preferred Stock) with an accreted redeemable value of $63.6 million as of July 31, 2005 and mandatorily redeemable 15% non-voting preferred stock (Series C-2 Preferred Stock) with an accreted redeemable value of $248.3 million as of July 31, 2005 which mature in July 2007 to the extent that we have legally available funds to effect such redemption. We do not expect to redeem the Series C-1 Preferred Stock and the Series C-2 Preferred Stock prior to their final maturities. We can give no assurance that the necessary liquidity will be available to effect the redemption on a timely basis. In conjunction with the funding of the Resort Senior Credit Facility, the holders of the Series C-1 Preferred Stock and Series C-2 Preferred Stock (collectively, the Holders) agreed with the lenders under the Resort Senior Credit Facility that the Holders will not exercise any remedies as a result of the failure to redeem the Series C-1 Preferred Stock and the Series C-2 Preferred Stock prior to their final maturities, other than an increase of 2% in the accretion rate of the Series C-1 Preferred Stock and the appointment of additional seats on our Board of Directors.
Contractual Obligations
Our non-cancelable, minimum contractual obligations as of July 31, 2005 were as follows (in thousands):
The operation of a substantial portion of our resort activities are dependent upon leased real estate. The Company leases certain land and facilities used in the operations of its resorts under several operating lease arrangements that expire at various times from the year 2010 through the year 2060. The related lease payments are generally based on a percentage of revenues. Since these obligations are contingent on future revenues, they are not included in the table above. Such contingent rental payments totaled $4.6 million in fiscal 2005. In addition, the Company is subject to additional one-time payments ranging from $1.0 million to $3.0 million upon achievement of incremental annual skier visit levels. These amounts are not included in the table above since it is unknown as to the timing and probability of these payments.
Off-Balance Sheet Arrangements
Other than as set forth in the table above and our interest rate swap agreement described above under “Resort Liquidity”, we do not have any off-balance sheet transactions, arrangements, or obligations (including contingent obligations) that have, or are reasonably likely to have, a material current or future effect on our financial position, results of operations, business prospects, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments are made include, but are not limited to: allowances for doubtful accounts, long-lived asset valuations and useful lives, inventory valuation reserves, litigation and claims reserves, and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates. The following are our critical accounting policies:
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation and impairment charges. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives which range from 9 to 40 years for buildings, 3 to 12 years for machinery and equipment, 10 to 50 years for land improvements, and 5 to 30 years for lifts, lift lines, and trails. Assets held under capital lease obligations are amortized over the shorter of their useful lives or their respective lease lives, unless a bargain purchase option exists at the end of the lease in which case the assets are being depreciated over their estimated useful lives. Due to the seasonality of our business, we record a full year of depreciation relating to our resort operating assets during the second and third quarters of our fiscal year.
Goodwill and Other Intangible Assets
As prescribed in Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, certain indefinite-lived intangible assets, including trademarks, are no longer amortized but are subject to annual impairment assessments. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Definite-lived intangible assets continue to be amortized on a straight-line basis over their estimated useful lives of 31 years, and assessed for impairment utilizing guidance provided by SFAS No. 144.
Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets, such as property and equipment, and definite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.
Revenue Recognition
Resort revenues include sales of lift tickets, skier development, golf course and other recreational activities fees, sales from restaurants, bars, and retail and rental shops, and lodging and property management fees (real estate rentals). Daily lift ticket revenue is recognized on the day of purchase. Lift ticket season pass revenue is recognized on a straight-line basis over the ski season, which is the second and third quarters of our fiscal year. Our remaining resort revenues are generally recognized as the services are performed. Real estate revenues are recognized under the full accrual method when title has been transferred, initial and continuing investments are adequate to demonstrate a commitment to pay for the property, and no continuing involvement exits. Amounts received from pre-sales of real estate are recorded as restricted cash and deposits and deferred revenue in the accompanying consolidated balance sheets until the earnings process is complete.
Seasonality
Our revenues are highly seasonal in nature. For fiscal 2005, we realized approximately 88% of resort segment revenues and over 100% of resort segment operating income during the period from mid-November through April. In addition, a significant portion of resort segment revenue and approximately 20% of annual skier visits were generated during the Christmas and Presidents’ Day vacation weeks in fiscal 2005. In addition, our resorts typically experience operating losses and negative cash flows for the period from May to mid-November.
A high degree of seasonality in our revenues increases the impact of certain events on our operating results. Adverse weather conditions, access route closures, equipment failures, and other developments of even moderate or limited duration occurring during peak business periods could reduce revenues. Adverse weather conditions can also increase power and other operating costs associated with snowmaking or could render snowmaking wholly or partially ineffective in maintaining quality skiing conditions. Furthermore, unfavorable weather conditions, regardless of actual skiing conditions, can result in decreased skier visits.
Results of Operations
Fiscal Year Ended July 31, 2005 (fiscal 2005)
Versus Fiscal Year Ended July 25, 2004 (fiscal 2004)
Resort Operations:
The components of resort operations for fiscal 2004 and fiscal 2005 are as follows:
During the 2004-05 ski season, skier visits at our Eastern resorts increased approximately 4.1% from approximately 2,510,000 to 2,612,000, primarily due to the successful introduction of the All For One Pass and strong spring snow conditions that helped to offset extreme negative weather conditions experienced during December and January. Skier visits at our Western resorts decreased slightly during the 2004-05 ski season from approximately 1,377,000 to approximately 1,375,000, due to slightly below normal snow conditions experienced at Steamboat for much of the season. Over our entire resort network, total skier visits were up 2.6% over the 2003-04 ski season from 3,887,000 to 3,987,000.
Percentage revenue increases outpaced the increase in skier visits with fiscal 2005 revenues totaling $267.3 million as compared to $250.7 million for fiscal 2004, an increase of $16.6 million, or 6.6%. Sales of the new All For One Pass at our Eastern resorts accounted for $6.3 million of a $6.6 million increase in season pass revenue. Comprehensive yield management programs at all resorts helped improve lift ticket revenues, resulting in a 2% increase in day ticket yield. Revenues from food and beverage and retail sales increased due to specific operational
initiatives implemented for both businesses throughout the year. Revenues from skier development increased as a result of expanded efforts company-wide to increase pre-sold business. Golf, summer activities, and other declined due to lower summer visits caused by a conscious decision by us to delay summer openings at most of our resorts to better match our expected guest visitation patterns and occasional poor weather on certain weekends during the summer of calendar 2005.
Our resort segment produced a $70.6 million operating loss in fiscal 2005, compared to a $66.6 million operating loss in fiscal 2004. This $4.0 million increase in the operating loss resulted primarily from the net effect of the following:
Decreases in revenues and increases in costs:
(i) $11.8 million increase in cost of resort operations and depreciation and amortization. This increase resulted from (a) the increase in cost of operations necessary to generate the increase in revenues, (b) replacing certain operating leases with capital leases and the resulting increased amortization costs, and (c) offset by savings resulting from effective management of day-to-day peak season costs and other cost containment initiatives;
(ii) $6.0 million increase in write-off of deferred financing costs as a result of the November 24, 2004 restructuring of our Resort Senior Credit Facility and the redeeming of our Senior Subordinated Notes;
(iii) $8.4 million increase in interest expense due primarily to increasing the size our Resort Senior Credit Facility during its restructuring, the increase in both LIBOR and Prime Rates over recent historical rates, and the issuance of the New Junior Subordinated Notes;
Offset by increases in revenues and decreases in costs:
(iv) $16.6 million increase in resort revenues;
(v) $4.4 million net decrease in marketing, general, and administrative expenses due to (a) non-recurrence of certain costs associated with the fiscal 2004 settlement of the Triple Peaks litigation, (b) decrease in marketing expenses, and (c) offset partially by increased expenses associated with compliance with the Sarbanes-Oxley Act;
(vi) $0.1 million decrease in merger, restructuring, and asset impairment charges; and
(vii) $1.1 million increase in other income due to the sale of the Haystack resort and an increase in fair value of the interest rate swap arrangement.
Recent Trends: Through October 16, 2005, both our western and eastern resorts season pass sales for the 2005-06 ski season are pacing slightly ahead of sales for same period last year. Our hotel lodging conference bookings at our western resorts for first quarter fiscal 2006 have been behind pace for the same period last year by 21%, however our hotel lodging conference bookings at our eastern resorts are pacing well ahead of last year by 22%. Overall, hotel lodging bookings for the ski season (our 2nd and 3rd quarters for fiscal 2006) are approximately $1.6 million or 13% ahead of our bookings at the same period last year led primarily by improved bookings at our western resorts offset slightly by an aggregate decrease in bookings at our eastern resorts.
Impacts from the 2005 hurricane season could include increases to, among other things, fuel, power and commodities costs and could impact travel patterns. At the present time, management has not seen a measurable impact from these factors on projected business levels for the 2005-2006 ski season.
Real Estate Operations:
The components of real estate operations for fiscal 2004 and fiscal 2005 are as follows:
Real estate revenues decreased by $24.2 million in fiscal 2005 compared to fiscal 2004, from $33.4 million to $9.2 million. The decrease is primarily due to the sale of three developmental land parcels at our Steamboat resort totaling $8.9 million and the sale of interval units at The Canyons Grand Summit Hotel totaling $11.5 million in fiscal 2004, for which comparable sales did not occur in fiscal 2005. Sales of units at the Steamboat Grand Hotel totaled $3.3 million in fiscal 2005 compared to $3.1 million in fiscal 2004. As of the end of fiscal 2005, 62% of the units at the Steamboat Grand Hotel have been sold. In addition to the fiscal 2005 real estate revenues discussed above, Resort Properties sold the commercial cores of The Canyons and Attitash Grand Summit Hotels to their respective resort operating subsidiaries for $4.0 million. This transaction is not included above because it eliminates in consolidation.
Our real estate segment generated a loss before income taxes of $2.7 million in fiscal 2005, compared to income before income taxes of $38.1 million in fiscal 2004. This $40.8 million decrease results primarily from the net effect of the following:
Decreases in revenues and increases in costs:
(i) $23.1 million decrease in other income due to gain on extinguishment of debt in fiscal 2004 that was not repeated in fiscal 2005;
(ii) $25.5 million decrease in other income due to gain on transfer of assets associated with extinguishment of debt in fiscal 2004 that was not repeated in fiscal 2005;
(iii) $24.2 million decrease in revenues as explained above;
Offset by increases in revenues and decreases in costs:
(iv) $17.6 million decrease in cost of operations in cost of operations and depreciation and amortization. This resulted primarily from the decrease in revenues and the reduction in real estate sales staff due to the completion of sales of all units at The Canyons in fiscal 2004; and
(v) $14.4 million decrease in real estate interest expense due to the restructuring of our Real Estate Term Facility on May 14, 2004 and the paydown from the proceeds of the sales of all remaining units at The Canyons Grand Summit Hotel in 2004.
The gain on extinguishment of debt of approximately $23.1 million and the gain on transfer of assets associated with extinguishment of debt of approximately $25.5 million during fiscal 2004 were due to the restructuring of the Real Estate Term Facility. (See “Real Estate Term Facility “ above.)
Recent Trends: Unit sales volumes at our Grand Summit Hotel at Steamboat are slightly ahead of the pace of the prior year.
Benefit from income taxes. The benefit from income taxes was $0 in each of fiscal 2004 and fiscal 2005. We believe it is more likely than not that we will not realize income tax benefits from operating losses in the foreseeable future.
Results of Operations
Fiscal Year Ended July 25, 2004 (fiscal 2004)
Versus Fiscal Year Ended July 27, 2003 (fiscal 2003)
Resort Operations:
The components of resort operations for fiscal 2003 and fiscal 2004 are as follows:
During the 2003-04 ski season, skier visits at our Eastern resorts decreased approximately 5.0% from approximately 2,642,000 to 2,510,000, primarily due to extreme negative weather conditions, including three separate rain events over the Christmas holiday period, extreme cold and high winds during mid-winter weekends, and lack of natural snowfall throughout the winter. Skier visits at our Western resorts increased 3.1% during the 2003-04 ski season from approximately 1,335,000 to approximately 1,377,000, due to timely natural snowfall throughout the winter. Over our entire resort network, total skier visits were down 2.3% from the 2002-03 ski season from 3,977,000 to 3,887,000.
Despite a more substantial shortfall in skier visits, revenues for fiscal 2004 were $250.7 million, as compared to $251.6 million for fiscal 2003, a decrease of only $0.9 million, or 0.4%. Sales of the new discounted season pass at Attitash and Sunday River accounted for $3.0 million of a $3.5 million increase in season pass revenue. Revisions to the lift ticket pricing structure at Steamboat and comprehensive yield management programs at all resorts mitigated the impact of the decrease in lift ticket revenues, resulting in a 6.5% increase in day ticket yield. Revenues from food and beverage and retail sales decreased with the decrease in skier visits. However, revenues from skier development increased as a result of growth in destination business at our Western resorts and expanded efforts company-wide to increase pre-sold business. Golf, summer activities, and other declined due to lower summer visits caused by poor weather and a soft economy during the summer of calendar 2003.
Our resort segment produced a $66.6 million operating loss in fiscal 2004, compared to a $23.3 million operating loss in fiscal 2003. This $43.3 million increase in the operating loss resulted primarily from the net effect of the following:
Decreases in revenues and increases in costs:
(i) $0.9 million decrease in resort revenues as explained above;
(ii) $5.2 million increase in marketing, general, and administrative expenses due to costs associated with the settlement of the Triple Peaks litigation (see Footnote 16, “Commitment and Contingencies” in the attached Notes to Consolidated Financial Statements”) and other legal matters, increased expenses associated with compliance with the Sarbanes-Oxley Act, and continuation of building a corporate human resource group, offset by a decrease in marketing expenses;
(iii) $43.0 million increase in interest expense due primarily to approximately $43.1 million of accretion of discount and dividends on our mandatorily redeemable preferred stock for fiscal 2004 being classified as interest expense due to the adoption of SFAS No. 150, whereas in the prior year it was classified as accretion of discount and dividends on mandatorily redeemable preferred stock;
Offset by increases in revenues and decreases in costs:
(iv) $1.5 million decrease in cost of resort operations and depreciation and amortization due to reductions in our fixed cost structure undertaken prior to the beginning of the ski season, effective management of the ramp-up and ramp-down of seasonal operations, and day-to-day management of peak season operating costs (excluding merger, restructuring, and asset impairment charges and write-off of deferred financing costs);
(v) $1.5 million decrease in merger, restructuring, and asset impairment charges as explained below; and
(vi) $2.8 million decrease in write-off of deferred financing costs as a result of the Resort Senior Credit Facility replacing a previously existing senior credit facility during the current year.
We incurred merger, restructuring and asset impairment charges for fiscal 2004 and fiscal 2003 related to our resort operations. The $0.1 million of merger, restructuring and asset impairment charges for fiscal 2004 is for employee severance charges. The $1.6 million of merger, restructuring, and asset impairment charges for fiscal 2003 includes:
(i) $1.2 million of expenses related to the write-off of certain fixed assets and other assets; and
(ii) $0.4 million in employee severance charges.
Real Estate Operations:
The components of real estate operations for fiscal 2003 and fiscal 2004 are as follows:
Real estate revenues increased by $20.5 million in fiscal 2004 compared to fiscal 2003, from $12.9 million to $33.4 million. The increase is primarily due to the sale of three developmental land parcels at our Steamboat resort for $8.9 million, and an increase of $11.5 million in unit sales at The Canyons Grand Summit Hotel due to an
auction in February 2004 in which the Company sold all of the remaining units except for one. As of the end of fiscal 2004, 58% of the units at the Steamboat Grand Hotel were sold.
Our real estate segment generated income before income taxes of $38.1 million in fiscal 2004, compared to a loss before income taxes of $21.1 million in fiscal 2003. This $59.2 million increase results primarily from the net effect of the following:
Increases in revenues and decreases in costs:
(i) $20.5 million increase in revenues;
(ii) $23.1 million increase in other income due to gain on extinguishment of debt as explained below;
(iii) $25.5 million increase in other income due to gain on transfer of assets associated with extinguishment of debt as explained below;
(iv) $2.8 million decrease in real estate interest expense due to the restructuring of our Real Estate Term Facility on May 14, 2004;
Offset by decreases in revenues and increases in costs:
(vi) $12.5 million increase in cost of operations due to an increase in revenues; and
(vii) $1.5 million increase in merger, restructuring, and asset impairment charges as explained below.
The gain on extinguishment of debt of approximately $23.1 million and the gain on transfer of assets associated with extinguishment of debt of approximately $25.5 million during fiscal 2004 were due to the restructuring of the Real Estate Term Facility (see “Real Estate Term Facility” above).
The $(0.2) million reversal of restructuring and asset impairment charges during fiscal 2003 was due to an impairment charge taken in fiscal 2002 that was subsequently determined not to be needed.
Benefit from income taxes. The benefit from income taxes was $0 in each of fiscal 2003 and fiscal 2004. We believe it is more likely than not that we will not realize income tax benefits from operating losses in the foreseeable future.
Accretion of discount and dividends accrued on mandatorily redeemable preferred stock. The dividends on mandatorily redeemable preferred stock for fiscal 2003 were $37.6 million. For fiscal 2004, accretion of discount and dividends on mandatorily redeemable preferred stock of $43.1 million is not recorded as accretion of discount and dividends on mandatorily redeemable preferred stock but has been included in interest expense due to the adoption of SFAS No. 150. This increase of the accretion is attributable to the compounding effect of accruing dividends on the value of the preferred shares.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires the measurement of all employee share-based compensation arrangements to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. Further, the adoption of SFAS No. 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements.
As permitted by SFAS No. 123, the Company currently accounts for stock-based compensation using the method prescribed in APB No. 25, under which no compensation expense for stock options is recognized for stock option awards granted to employees at or above fair value. However, the effect of expensing stock options on the results of operations using a Black-Scholes option-pricing model is presented above. The accounting provisions of SFAS No. 123R are effective beginning the first quarter of the Company’s fiscal 2006, at which time pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition.
SFAS No. 123R permits public companies to adopt its requirements using one of two methods; “modified prospective” method and “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No.123R for all new awards and for awards modified, repurchased, or canceled after the effective date, and (b) for all awards
granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. The “modified retrospective” method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company plans to adopt SFAS No. 123R using the modified prospective method. Accordingly, the adoption of SFAS No. 123R’s fair value method will have a de minimus impact on the Company’s operating expenses for fiscal 2006 as only 2,000 stock options remain unvested as of July 31, 2005.
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions” - an amendment of FASB Statements No. 66 and 67. This statement amends SFAS No. 66 “Accounting for Sales of Real Estate” and SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects” to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-share transactions. The accounting for those operations and costs is subject to the guidance of Statement of Position (“SOP”) 04-2, which provides guidance on the seller’s accounting for real estate time-sharing transactions. The FASB, however, does not change the revenue guidance in SFAS No. 66. SFAS No. 152 is effective beginning the first quarter of the Company’s fiscal 2006. Management anticipates that the company’s adoption of SFAS No. 152 in fiscal 2006 will not have a material impact on the Company’s consolidated financial position, liquidity or results of operations
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - an Amendment of APB Opinion No. 29”. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for the Company’s fiscal year ending July 30, 2006. Management anticipates that the company’s adoption of SFAS No. 153 in fiscal 2006 will not have a material impact on the Company’s consolidated financial position, liquidity or results of operations.
In March 2005, the FASB issued FIN. 47, “Accounting for Conditional Asset Retirement Obligations”. FIN No. 47 clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143 “Accounting for Asset Retirement Obligations”. SFAS No.143 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. SFAS No.143 requires an entity to recognize the fair value of a legal obligation to perform asset retirement activities when the obligation is incurred. FIN No. 47 further clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation. Management has determined that FIN No. 47’s conditional asset retirement obligation relates solely to the Company’s U.S. Forest Services long-term leases at Attitash, Mount Snow, and Steamboat but the related obligations are not currently reasonably estimatable and are not conditional on a future event. The accounting provisions of FIN No. 47 are effective beginning the first quarter of the Company’s fiscal 2006.
Item 7A
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
The Company’s financial instruments do not subject it to material market risk exposures, except for risks related to interest rate fluctuations. As of July 31, 2005, we have an interest rate swap agreement in place which swapped variable interest rate borrowings to fixed interest rate borrowings in the notional amount of $95 million. Under the swap agreement, during the period from May 16, 2005 to November 15, 2005, we pay 4.16% and receive the 6-month LIBOR rate. During the period from November 16, 2005 to May 15, 2008, we pay 4.16% and receive the 3-month LIBOR rate. As a result of entering into this interest rate swap agreement, we have fixed the cash-pay rate on the notional amount until the maturity of the swap agreement in May 2008. The agreement is adjusted to fair value at the end of each reporting period. During the year ended July 31, 2005, the Company recognized $314,405 of other income from market value adjustments to this agreement.
As of July 31, 2005 including the impact of the swap agreement, we had $119.6 million, or approximately 35% of our outstanding debt, in floating interest rate long-term debt instruments. Had we fully drawn on our Revolving Credit Facility, approximately 39% of our debt would be in floating interest rate debt instruments. The
following sensitivity analysis presents the pro forma impact on fiscal 2005 annual interest expense and cash flows resulting from hypothetical basis point increases in the U.S. prime lending rate (6.25% as of July 31, 2005) on each of our floating interest rate debt instruments (in thousands).
(1) Average Balance of Revolving Credit Facility, First Lien Term Loan and the Second Lien Term Loan determined for period new loans have been outstanding November 24, 2005 through July 31, 2005 (includes only the new Resort Senior Credit Facility).
(2) Pro forma impact calculated after giving effect to interest rate swap.
Item
Financial Statements and Supplementary Data
Selected Quarter Operating Results
The following table presents certain unaudited quarterly financial information for the eight quarters ended July 31, 2005. In the opinion of our management, this information has been prepared on the same basis as the annual consolidated financial statements (See Item 17 - Exhibits, Financial Statement Schedules and Reports on Form 8-K) appearing elsewhere in this Form 10-K and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial results set forth herein. We have adopted Emerging Issues Task Force Issue No. 03-06, “Participating Securities and the Two Class Method Under FAS No. 128, Earnings Per Share.” The Series C-1 Preferred Stock is a participating security because it may participate in dividends with common stock. Accordingly, net income is allocated to each security based on the ratio of the number of shares if-converted to the total number of shares. In periods when a net loss is incurred, the net loss is not allocated to the Series C-1 Preferred Stock as it does not have a contractual obligation to share in the losses of the Company and the impact of inclusion would be anti-dilutive. Results of operations for any quarters are not necessarily indicative of results that may be achieved for any future period or any full fiscal year (amounts in thousands, except per share amounts):
Item
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A